On last night’s Prime Time, when asked about nationalisation, Peter Bacon warned that the government would have to buy the privately-held shares and said “they can’t expropriate shareholders’ value.” On the face of it, there isn’t too much to discuss here. I have advocated that the government should purchase the shares at their closing listed stock market value. Indeed, I don’t know any advocate of nationalisation who has suggested “expropriating” valuable shares from those that hold them.
The reason I’m writing about this, however, is that a couple of other people have also mentioned to me lately that they think this legal concern about expropriation is, in fact, the “real reason” why the government is reluctant to nationalise. “Real reasons” according to this line of thinking, are reasons so important that you don’t talk about them to the public.
The obvious response to this is to point out that the government have already nationalised Anglo and appointed an assessor to provide fair compensation for the shareholders, with the legislation nationalising Anglo providing very little room for shareholders to challenge the assessor’s ruling. The precedent here is Northern Rock, where the appointment of an assessor appears to be heading towards the shareholders getting zero.
My preferred approach here would be as follows:
- The government stops denying the scale of the problem and signals strongly that it fully expects NAMA will only purchase the bad assets of the banks at a very steep discount. I would prefer that the hints in the NAMA FAQ document that asset transfer may be compulsory be withdrawn. In other words, the government should make it clear that it is willing to buy the loans at a fair market value and the banks can take it or leave it, without any legally-dubious mandatory purchases that could then be challenged later.
- With expectations of a NAMA-funded bailout dashed, the share prices of the banks will then tumble. At that point, the government can pay the shareholders the value of these shares and appoint an assessor to decide if any higher level of payment is warranted.
I’m not a legal expert but, given the Anglo and NR precedents, I find it hard to see how this approach would lead to legal problems. Still, I’d be interested to hear the legal opinions of those who fully understand these things.
31 replies on “Expropriation?”
Go read Article 43.2.2. This gives the State all the legal muscle it needs to ‘seize’ Private Property.
Brian P
What bank workers decided to strike? What if they won’t go to work until such time as they get state employee style benefits in a nationalised bank? Don’t worry about precedent, just say they did it anyway. The unions in the financial institutions are there for the benefit of their workers and they will want certain terms in any transfer.
If I was a union rep or shop-steward I would be making damn sure there was a contingency plan there for any movement in ownership, we didn’t have that issue with Anglo as they are a non union house, but nobody has addressed the situation with the other banks which are. Think we’re in a mess now? This is the promised land by comparison to what could come down the line. I can tell you very openly that bank/financial institution workers are every bit as unhappy as bus drivers.
Outside of the academic elements of the ‘nationalise or not’ argument, does anybody have thoughts on any unforeseen consequences that might arise?
Firstly, congrats on the level of discourse here. It’s uniquely enlightening, and badly needed.
Can someone please explain something to me.
Given that the banks are not just broke, but spectacularly insolvent to the tune of tens of billions of euros, why do the shareholders have any equity left at all?
Not an expert either, but when a company bids for another company, this mechanism kicks in that when they cross a certain threshold, all remaining shares will change hands.
This may not apply to “the government”, but it would hold if, say, ESB would bid for BoI.
I don’t think concern about expropriation is the “real reason” the Government is against nationalisation. I commented on this site about “Legitimate Expectation” that there are forces which tend to raise legal objections to bolster their arguments with legal concerns. I said “legitimate expectations” was a spurious argument. “Expropriation” is not the “real reason” but it is not a spurious issue either because there is a constitutional protection which the Oireachtas could not override.
Brian Woods is over-stating the State’s powers under Article 43.2.2 . It is clear that Article 43 is based on the idea of a “natural right” to private property which supercedes man-made law. Article 43.2.2 is an exception to this powerful principle and therefore has been interpreted narrowly (e.g. the rent restriction laws).
I am sure the State could justify a law expropriating the banks but the shareholders would have to be adequately compensated and it would be naive to think this would simply be their share prices on a given day. That’s why a an Assessor will be appointed to assess whether compensation should be paid and, if so, the fair and reasonable amount payable as such compensation.
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Article 43
1. 1° The State acknowledges that man, in virtue of his rational being, has the natural right, antecedent to positive law, to the private ownership of external goods.
2° The State accordingly guarantees to pass no law attempting to abolish the right of private ownership or the general right to transfer, bequeath, and inherit property.
2. 1° The State recognises, however, that the exercise of the rights mentioned in the foregoing provisions of this Article ought, in civil society, to be regulated by the principles of social justice.
2° The State, accordingly, may as occasion requires delimit by law the exercise of the said rights with a view to reconciling their exercise with the exigencies of the common good.
Hi Karl,
Good post. It is very easy to blame the lawyers for everything, so we are very glad that bankers have displaced us temporarily as public enemy number one. It is one thing to say that there might be legal issues, it is quite another to say that they are insurmountable difficulties. In my view, there are indeed potential constitutional property rights issues with both nationalisation and NAMA, but in neither case are there insurmountable difficulties. There are probably fewer legal arguments around NAMA, so I suspect that the government is being unnecessarily risk-averse here, and has gone with the option with the smaller legal risk. Of course, we can’t be sure of that until the NAMA bill is published, and that keeps being pushed back, perhaps by the same legal risk-aversion. Either way, the government is going to have to take a decision which has consequences for property rights, and back that decision with legislation. Moreover, either way, in my view, the decision will annoy some with a property right, and that right-holder will consider the possibility of legal action. But, in my view, whilst the action is likely, its success is not.
All the best,
Eoin.
@Richard Tol. I think there has been some mis-representation or lack of understanding of how the government is building its share holding in the banks.
You are right to say that a company seeking to take over a publicly listed company has to make a formal offer for the all the shares of the company once their shareholding passes a certain level (30% under EU regs.) But this only seems to count went the company doing the taking over is purchasing the shares on the open market.
The government is not buying bank shares on the market (this would be pointless if the goal is to recapitalise the bank), in fact under current plans (for AIB) it is not purchasing ordinary voting shares at all. See http://tiny.cc/k7o0n (PDF) for the explanation. It is taking preference shares that are voting in certain circumstances and warrants on ordinary shares equaling 25% of the current issued share capital.
It is more than a little complicated, but it seems fair. If only the €3.5bn proposed was all that would be required..
By exercising the warrants the government would be diluting current shareholder’s holding by 33%. So, could be seen as repugnant to Article 43. But, the shareholders of AIB are having an EGM on Wednesday week where they get to vote on the proposal. If it is passed, then the shareholders have little room to complain about diluted rights.
Furthermore, the pref shares have a coupon of 8%. That’s €280m per annum. If the bank is not in a position to pay the coupon then the bank has to issue that value of ord shares to the government based on the average of the past 30 days market price. If AIBs position hasn’t improved in 12 months and has an average price in the 50c range, then one interest payment missed would leave the government with 40% of the ord shares.
I could go on, but this post is plenty long enough already. Suffice to say, in the case of a hostile take over there is plenty of legislation to protect shareholders. Specifically article (9) of the European Directive on takeovers http://tiny.cc/s94gh (PDF) states that “Member States should take the necessary steps to protect the holders of securities, in particular those with minority holdings, when control of their companies has been
acquired.” But in the case of the banks the shareholders get to vote their rights away, so while angry shareholders may view it as expropriation, it is more a case of backing the wrong horse.
@karl deeter
That is without question the weakest argument against nationalisation i’ve heard to date and with the amount of rubbish Bacon and the goverment are coming out with that is one hell of an achievement.
karl deeter asks:
“Outside of the academic elements of the ‘nationalise or not’ argument, does anybody have thoughts on any unforeseen consequences that might arise?”
The consequences are unforeseen because they can’t be foreseen.
@Calan: The consequences of doing nothing are ruinous. The collateral values are plummeting day-by day and the political inertia is ultimately going to cost the taxpayer more. An interesting article in IT this week by DTZ Sweden MD Agnetha Jacobsson revelealed that Denial in Sweden from 1990-1992 exacerbated the Property Crash to -50%.
My own argument all along has been if you’re moving from A to B it is infinitely better to get there sooner rather than later (sooner the recovery process can proceed).
@LorcanRK: Acquisition by stealth appears to be the order of the day. For what its worth my contact at AIB said 24hrs before the Board clean-out that Minister Lenihan met with senior directors at the bank and attempted to negotiate an 80% stock acquisition (leaving 20% free-float on ISE for ‘market surveillance’ purposes). They unanimously rejected this, the following day they ‘Retired’ next August!
Preference shares may be counted as Tier 1 capital for adequacy purposes but it has always been viewed by common shareholders as ‘loan’ capital. It appears that the government stance has firmly moved into the Ordinary Share Capital camp. Ergo nationalisation is already well underway.
@LorcanRK
Thanks for that.
It seems to me that, if you are right, the government should be buying ordinary shares on the open market.
While this does not help to recapitalise the banks, it does nationalise them with legal hassle.
with legal hassle > without legal hassle
To deceive others it is often best to obscure and the law which is complex, is often used for this purpose.
We have established that the executive are up to something, albeit including doing nothing. They actually have all the figures which we do not, on just how insolvent the banking system is and will be as it will worsen…..
What about the BOI buying AIB? It is now clearly, the stronger suitor and the legal complexity concerning the court of directors and so forth protects BOI to a degree.
All banks are creatures of public policy as they are all essentially dependant upon the state for cash. What we are talking about is who will halve these banks in size to the new economy, and deal with the bad debts on their books.
Private property, in shares, is equal to money. Compensation can be calculated, but events will establish that it will be nil. The government can act by no longer tendering funds and triggering immediate default on cash flow needs. It has ample justification in view of their shocking recklessness. (Yes minister! Tongue firmly in cheek.)
The Unions are becoming more publicly prominent. What a useful scapegoat they are! What if cash flow falters to the degree that either bank starts to lay off workers….. A few mishaps in negotiations and oops!
It is just possible that the executive protest too much and wish to be forced into nationalization. That way all the little secrets stay that way!
We still need a functioning clearance system guys!
@Michael E
your right, don’t worry about the unions, I forgot that its only bus drivers and teachers who aren’t happy. Bankers are all happy campers, how could one even ponder such a thing?
@Lefournier,
Thanks for putting up the Article 43. I presume that any Act which would purport to seize private property (ie; the zombie banks) would be put to the Supreme Court. Be very interesting. How about a Debt Jubilee??
I am astonished by the lack of understanding being displayed about this crisis. It is catastrophic. We could, ‘seize-the-moment’, ourselves and watch our Standard of Living go -30%. Alternatively we ‘allow’ the politicians and the financials to create an even greater debt load, then literally steal Taxpayers money in an attempt to pay down the debt – this IS legal – right? But it is NOT legal to seize these financials before they bankrupt the State? If this latter happens our S-of-L will crash to – 50%.
Actually the financials should be thrown to the market wolves and the State set up its own banks; 3 No.: Commercial, Retail and Savings-and-Loan. Clean and controllable and Taxpayer is protected.
Please, I am not joking about this. The situation is dire. Credit increases arithmetically, debt exponentially! Where are the Goddam Mathematicians?
Try to get a debate going about a Debt Jubilee.
Brian P
I think the commercial operation of takeovers is being lost in the discussion of the legal minutiae.
The point of the 30 percent rule is actually to protect smaller shareholders. Otherwise, the smaller shareholders could be stranded in a minority situation where there was no longer a viable market for their shares.
The whole process of forcing an offer at a certain threshold is supposed to elicit a counter-bid, if there is any, to maximise the return to these shareholders.
The thing about having the right to buying out shareholders who don’t want to be bought out is an old legal one and well settled. There is no general constitutional prohibition on buying out minority shareholders at market value. Every so often someone comes up with a theory that there is. But there just isn’t.
There is no question of the government not being willing to pay market value for these banks. I cannot see that the government would have any problem with another party coming in to make a counterbid. If someone else, other than the State, were willing to come in and make a counterbid, this would be a very good sign, because it would mean that the private sector was willing to recapitalise the banks.
The problem is that the private sector is not willing to do this. That is why we have discussion of NAMA, nationalization and all the rest of it.
@karl deeter
I’m not saying it wouldn’t arise Karl. But asking taxpayers to give up 50% of the bank shares because there MAY be union issues is just nonsense.
The anti-nationalisation arguments are getting more and more hysterical and less and less credible. How soon before we hear that nationalising would unleash a plague of locusts o’er the land ?
http://www.reuters.com/article/lifestyleMolt/idUSTRE53N05S20090424?sp=true
Time to pawn the mattress?
I’m starting to believe the only reason the goverment is against nationalisation is the Irish banks willingness to buy all the Irish debt we want.
Would there be any restriction on the banks buying and repoing the bonds if they were nationalised?
Michael E. That’s a very naughty suggestion! Insider trading by Insiders!! Wonderful!!!
Prof Lucey. Hysterical comments? The situation is catastrophic. The financials are insolvent. They exist in a Market Economy? Yes/No? Throw them to the market wolves. Tough, but that’s the market. The State inaugurates 3 No.: financials; Commerical, Retail and Savings-and-Loan. Prostrate ourselves before ECB and get the readies – and, more importantly, get a new economic Paradigm (Permagrowth is finished). This means the taxpayer only has responsibility for what is actually borrowed – not those toxic assets held by the financials, which if marked-to-market would be priced at Zero!!! When will it sink in that the Irish taxpayer can no longer afford to pay! Wer’e broke! Or soon will be.
Brian P
Hopefully, the government is allowing time for the bankruptcies of GM and Chrysler in the US to take their natural course. Which of course means the current shareholders being almost totally wiped out (only left with 1% of the equity in ‘new’ GM) and, crucially, the bondholders being forced to convert their debt for equity.
This will prepare the ignorant Irish media and public for the idea of proper bankruptcies and bondholder haircuts. If it’s good enough for the US, it’s good enough for us.
The equity in the current banks is pretty crap anyway, so we shouldn’t be buying any of it at any price. Only after most or all of the current bondholder debt is written off will there be healthy banks with any valuable equity.
Restructuring of the Irish banks, with massive bondholder haircuts, is the only way to simultaneously have healthier banks and healthier state finances. For example, the deposit guarantee could be abolished and the equity that is owned by the state (maybe from converting its preference shares) might be worth something.
There is plenty of capital available in the banking system. There are plenty of liabilities that be be legally written off long before the current elite comes begging to the taxpayer.
@brian lucey
I would wager that the ‘nationalisation’ argument is a classic example of groupthink that has little or no industry support, and to talk academics on something that has real people on the end of it is an oversight, it doesn’t make one right or wrong but the reason for contemplating what union responses might be shows the glaring oversight that nobody here even considered it thus far, it is being dealt with on a numerical and conceptual basis, thus far the practical elements are getting hardly any attention. people unfortunately are not like equations, results are not always foreseeable.
Given the default slow-motion process of Irish policy making, full nationalisation may well be what is ultimately decided.
The short-term focus is on charming the bond markets and there may well be a reluctance to agree on nationalisation of the main banks now, because the comparison between Ireland and Iceland would become more potent.
So many issues point to the need for an election as the people who set the economy on fire cannot regain credibility now while a solution that gives poltroon politicians even more control, understandably raises concerns.
To me the banks have no intrinsic value beyond the call option on the govt bank guarantee scheme. Therefore, any remaining share value is not a property right of shareholders, but a relic of a piece of (ill-conceived) legislation which was intended to stave off the systemic risk of a total collapse.
This suggests that Karl’s two-step procedure might not be enough to really protect the taxpayer from the risk of overpaying for the remaining shares, since it leaves the banks with the (nasty) option of going broke and claiming on the guarantee scheme. So add step
1.5 The Government repeals the BGS legislation, signalling that bank stakeholders will receive nothing above the EU mandated 100k deposit guarantee.
Then, bring on the appointed assessors, who could not conceivably come to any conclusion other than that banks are only worth what someone is prepared to pay for them.
It is very difficult to see on what legal basis a shareholder could successfully challenge an expropriation scheme of the type provided for in respect of Anglo under the Anglo Irish Corporation Act, 2009. The scheme provides for the assessment of compensation by an independent assessor. The criteria to which the assessor is to have regard are set out under the Act. These include an assumption that no financial assistance, investment or
guarantee (other than the guarantee already provided under the Credit Institutions (Financial Support) Act 2008) would in future be provided to or made in Anglo Irish Bank, directly or indirectly, by the State.
The State is allowed considerable latitude, both under the European Convention and the Irish Constitution, as to the circumstances in which it can expropriate property rights, including shares. The Northern Rock scheme has been found to be compliant with the European Convention by the High Court of England and Wales: see SRM GLOBAL MASTER FUND LP v. THE COMMISSIONERS OF HER MAJESTY’S TREASURY [2009] EWHC 227 (Admin).
The High Court rejectd, in terms, an argument that the shareholders were entitled to any uplift which might arise as a result of the Government’s intervention:
“It is nothing to the point that the Government would not or might not in practice have refused to provide the necessary financial support or refused to continue it. That financial support was not provided or continued by reason of any private law duty owed to Northern Rock or to its shareholders. Nor, as we find, for reasons set out below, was it provided on the basis of any public law duty owed to them. It was provided in order to prevent serious damage to the banking and financial system in this country. Arguably, perhaps, it was also provided in order to avoid loss on the part of depositors. We do not see on what basis the shareholders of Northern Rock are entitled to greater compensation by reason of the performance of the public law function. The Government could, without being in breach of any private or public law duty owed to the shareholders, have withdrawn its financial support (and in particular the Bank of England could have called in its loans); if it had done so, the company would have gone immediately into administration, and the shares would have had the value that will be attributed to them under the Compensation Scheme.”
Surely bond-holders are not the people who should receive a “hair-cut”? It would seem to be against the interests of the government to chill investors to the prospect of lending money to banks, especially since the short-fall will end up coming from tax-payers in the form of recapitalisation (or worse, impact enough to result in further reduced lending and perpetuate frozen credit markets). The immediate gains in reduced liabilities couldn’t possibly outweigh the broader effect on the banks’ ability to raise capital..
Jonathan,
Forcing the current bondholders of the banks to give up most of their debt is actually vital to restoring confidence in the Irish banking system. It’s the easiest way to improve the banks’ balance sheet with minimal impact to the state/taxpayer. Both of these are good news and will help attract investors to Ireland, including Irish banks.
Businesses go bankrupt every day. And as long as the underlying business was healthy, people are happy to lend to the restructured business. It’s perfectly healthy and investors are always willing to invest to a new, healthier, business. There’s nothing very new or controversial about what I’m proposing. The bankruptcy laws may need to be improved, but the principle of allowing a failed business to fail, and allowing a healthy core business (with less debt) to rise again, is right and proper.
Aaron,
I don’t think the Irish government could actually force a debt-for-equity swap, even if they own the banks. I know that the US government don’t have a legitimate basis on which to force this to happen, and would in fact be effectively black-mailing bondholders. The Irish government doesn’t have this option. So I think this debate is moot? This just wouldn’t happen.
Also, attaching political risk to purchasing bank bonds doesn’t seem like the best way to incentivise lending?
Jonathan,
When a business goes bankrupt, the courts force debt-for-equity conversions. It’s an everyday occurence. The only question here is what we should do with our insolvent zombie banks that are only avoiding formal bankruptcy because of stupid market manipulation by the government.
We don’t need any further lending to our zombie banks. They are zombies because there was too much lending to them in the past. To have new banks which are healthy and ready to lend into the real economy, we need bankruptcy (or something very like it) as soon as possible. The new banks will find it easier to find financing once the current stupid bondholders have been wiped out.
The US and the UK do have the necessary powers for dealing with zombie banks. Between Chapter 11 and the FDIC’s powers, or the UK’s SRR (Special Resolution Regime), there is plenty of legislation available to unzombify the zombie banks. If the Irish law isn’t up to date, then shame on our TDs and Government for shirking their responsibilities. The legislation could be passed in short order. The US handling of GM is the correct approach and involves the bondholders being forced to give up most of their debt (on my last reading of the negotiation process).
SRR http://www.bankofengland.co.uk/financialstability/role/risk_reduction/srr/
GM: http://money.cnn.com/news/newsfeeds/articles/djf500/200905051702DOWJONESDJONLINE000648_FORTUNE5.htm
The scaremongering has to stop; the reality is that a swift aggressive bankruptcy process (if/when the current banks fail to roll over their debt) will be a win-win situation for the real economy and the state. The fools who lent to our crazy banks don’t deserve any sympathy. They wouldn’t have got sympathy and bailouts if the bank went bust in the boom, and we certainly can’t afford it in this bust, so we shouldn’t worry about the current bondholders.
Genuinely fixing the balance sheets of the banks (and of the state) is the soundest way to encourage lending to, and from, the banks. And it is only way to avoid the IMF or the EU doing it for us.