On last night’s RTE News at 9, David Murphy (fresh from an interview with the Minister for Finance) reported his understanding of the government’s thinking on the banks as follows:
It’s had a good long hard look at the two main banks, AIB and Bank of Ireland, and it’s clear AIB has an awful lot of problems and the government may well end up owning 70% of AIB. It did look at nationalising it, I think, and the situation is that if it does go down that road, other lenders in other countries, some of them won’t even lend to banks which are owned by governments. And for that reason, it’s ruled out nationalising AIB.
I am highly sceptical of this line of reasoning. It is possible that there are financial institutions out there who will (a) Lend directly to the Irish government and (b) Lend to a 70% state-owned bank with a government liability guarantee, and yet who will somehow refuse to consider (c) Lending indirectly to the Irish government via a loan to a 100% state-owned bank.
However, while the existence of such financial institutions is possible, I have considerable trouble understanding the rationale for such a position. It would be great if the government could point us in the direction of a few of these foreign investors who have adopted this position. That said, however, even if these nationalisation-averse investors exist, one still has to reckon that most of those willing to undertake lending of form (a) and (b) will still be willing to undertake (c).
One possible rationale for this line of thinking is that the government are worried that full nationalisation of the major banks will lead to sovereign debt markets refusing to lend to the Irish government altogether, either directly or indirectly through its state-owned banks, perhaps because of concerns about the full extent of the liabilities being taken on.
The problem with this argument, however, is that it ignores two things. First, it ignores that we are where we are. There is essentially no difference between the contingent liabilities associated with nationalisation and those associated with 70% state ownership coupled with a liability guarantee. Second, it ignores the fact that, one way or another, the banks have to be recapitalised and overpayment via NAMA (the only way that AIB can remain 30% privately owned) will leave the state in a worse fiscal position, making it more likely that we will have a sovereign default.
I suppose it’s pretty easy to find a banker with an ideological slant who’ll tell you he’ll never lend to a nationalised bank. But that’s a different thing altogether from it actually being the case that nationalised banks won’t get external funds. Here I’ll turn the microphone over again to those dangerous radicals, the IMF
Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed. While permanent public ownership of core banking institutions would be undesirable from a number of perspectives, there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.
54 replies on “Access to Funds for Nationalised Banks”
This is a canard. Or maybe a shibboleth. Anyhow, I have yet to see any evidence whatsoever that lenders would differentiate negativly between a de facto and de jure nationalised bank. None. Zip.
David Murphy trotting this out does not give me any great confidence that he would be a good rep for George whatever his name was, nice fella?
Yeah, that line of reasoning (canard) is hard to swallow!
Bogus is the word that comes to mind. Presumably there is actual evidence out there on what happens to bank borrowing after nationalisation, for example Northern Rock?
Northern Rock goes on. I think the minister and the Dept of Finance, as they have done for months now, are (deliberately?) confusing liquidity with capital funding. Why they do this is beyond me. If they have any evidence, they should put it on the table. In this case, and may Popper forgive me, I take absence of evidence as evidence of absence.
I just had a look at the Northern Rock Annual Report and Accounts for 2008.
Compared to 2007 loans from the government are well down and deposits from banks are significantly up as are customer accounts.
Edgar : you and your “facts”…..:)
I agree with the analysis and comments above. I wonder is the unarticulated concern with nationalisation perhaps a belief that it is somehow equivalent to expropriation, and that the Government would be unable to refrain from abusive conduct once the banks are in public ownership? The ‘no nationalisation’ policy might, in this view, help avoid any unwelcome and unmerited comparisons by capital markets and the press with, eg, the Hugo Chavez-type characters of this world.
The Central Bank have hit on a brilliant new form of raising funds. On their website, you can purchase a 10 euro coin for 36 euro and a 20 euro coin for 55 euro. They even do a deal – you can get both for 90 euro. This seems foolproof to me – very little downside risk. All we need is to offload a few billion of the twin-sets and we’ll be back to the good old days.
rp : if that is the case then we are truly in the land of white rabbits, giant mushrooms and talking marine life. The implication would be that the government cant trust itself.
As the banker in the room working for a foreign bank, let me give you my view on it – there’s some truth in what the government is saying, but they’re also probably misrepresenting the situation somewhat.
For instance, at this moment in time, we don’t have credit lines available to either Northern Rock, Bradford&Bingley, or Anglo Irish Bank, with these lines being pulled around the time of the nationalisations of these banks. Despite the fact that nationalisation has at least stabilised their situations, there’s no chance of them getting those credit lines back anytime soon either. However, i’d characterise those nationalisation events as chronic and lifesaving, events which took place to stave off an immediate and total collapse. As such, people immediately stopped doing business with them and have simply not re-engaged them yet, or perhaps never will.
The situations with AIB and BoI are different, as nationalisation has been mooted for quite a while and wouldn’t come as anywhere near as much of a shock as the previous examples. As such, international banks may take such a nationalisation much more in their stride and still extend credit to the irish banks being taken over by the state.
However, @ Edgar, i’d guess that the vast majority of the increase in bank loans to Northern Rock have come from within the UK financial system, no doubt at the behest of the UK Treasury, FSA and Bank of England, in the same way that Irish banks were encouraged to lend to other Irish banks back in September/October (ie Irish Perm – Anglo Irish). I’d assume that international lending to Northern Rock is still at extremely low levels.
Thanks for the update. However, i am almost sure that I am missing something here: WHY would banks not extend credit lines to a nationalised entity? What is the inherent enhanced credit or liquidity risk that would be represented by nationalisation?
Brian: Indeed. However, on your last point, it is not unknown for Governments to delegate decision making to non-majoritarian institutions on the grounds that constraining its own discretion is appropriate viz. the literature on central bank independence, the creation of independent utility regulators, debates in the US for constitutional amendments for balanced budgets etc etc. In essence, the underlying motivation for this type of delegation is often nothing more than a tacit acknowledgement that, as you put it, the Government can’t trust itself.
To Brian’s question of Eoin, I used to work for a large international bank though I no longer do. We are in a time where the supply of bank capital is far less than the demand for it but leave that aside. Banks don’t necessarily behave generally or allocate resources specifically any more wisely than the rest of us. During the BSE crisis, most of us immediately switched off red meat even though the incremental risks were not a great deal more than of being struck by lightning, simply because it was a cost free option. Banks switch off credit lines just like that (as Tommy Cooper used to say) on rumour, gossip, whatever, not on the basis of studied rational analysis. Why bank Anglo when you don’t have to? Now, if it gets to the point where they become awash with capital again, who knows.
But I fully agree with substantive case made by yourself and Karl. The government’s line is asserted rather than arguing and David Murphy’s limp parrotting of it doesn’t do him great credit. He ain’t know George Lee.
Thanks. Indeed, Mr Rationality is not at home to callers the last few months. However, its an interesting conundrum : provide liquidity to a state owned entity or to a non , and f so at what price? There should be SOME differential in price if there is a perception, no matter how flawed in origins, of the state owned being more risky. Is that your experience?
I agree with all that, but to add one more thing -specialism, what Porter called ‘differentiation’. GE Money’s mortgages operation wouldn’t give a hospital consultant (or another person in a high-salary, permanent position) a mortgage for a starter home. They could, but they wouldn’t, because it isn’t the sort of business they can meaningfully compete on. Why get involved in a market where you don’t have competitive advantage or strategic focus?
This is a commercial issue, it doesn’t have much to do with the economics or risk of the transaction.
Likewise, an organization that lends money to private sector banks may not want to lend money to governments (which is effectively what you are doing when you lend to a state bank). It could, but it wouldn’t because it’s simply not the business it is in and it wouldn’t really be competitive at it. The nationalized bank would be better going down the road and talking to someone who specialized in lending to government institutions.
I do not spend my days lending billions of euros so I cannot say whether this idea of differentiation is true in practice, though from anecdotes, I think it is. If it is true, it does not support David Murphy’s and the government’s theory.
A good point but one that im not sure holds up. It would be true were the nature of the business to change fundementally on nationalisation.
With Interbank lending or any lending, you want to get your money back. I can’t see any reason to have a blanket ban on lending to state owned banks. Yes, you need to assess the risks, but this is the case for all lending.
This is an extract from Moody’s Credit Opinion on Northern Rock Apr 09:
– Northern Rock benefits from temporary government ownership
– Successful implementation of a fundamental legal and capital restructuring plan, possibly into split institutions
– Re-establishing a viable franchise which could lead to privatization in the future
– Increasing lending in the UK retail and corporate markets following the intended £3 billion capital injection by the government
– Returning to profitability and internal capital generation capability
– Liquidity and funding issues in the context of government ownership remain uncertain
My view is that nationalisation is a positive if the government gives a precise plan to the market (and if necessary, some covenants). Correct me if I’m wrong, but on the night of the guarantee wasn’t it rumoured that BOI and AIB wanted Anglo to be nationalised as it couldn’t access funds privately(?).
For Northern Rock, its funding model won’t work in the future. Even if securitisation comes back, no bank could ever rely on it so heavily in the future. So unless the UK government gives a precise plan, potential lenders will remain cautious. The liquidity and funding issues that Moody’s list as credit challenges are uncertainties surrounding a potential re-privatisation.
Issues such as government interference in lending policies are subordinate to re-privatisation risks.
Eoin, I think it’s perfectly reasonable for credit lines being withdrawn when a bank is possibly facing collapse or an emergency nationalisation has occurred. Do you have credit lines with any state banks?
Your post reminded me of KfW’s €350m transfer to Lehman the day they went bust. http://www.guardian.co.uk/business/2008/sep/19/europeanbanks.lehmanbrothers . I suspect a lot of banks double-checked their procedures after that.
I think we should nationalise everything, the govt. clearly do a better job than private industry, and if we do that then we’ll all be protected as tax payers from any wrong ever happening on any front… oh wait… that was already tried and failed (a quick tear shed for communism).
Alan Blinder of Princeton/ former Fed Reserve/ former adviser to several presidents (democratic mainly too!) had the US take on why nationalisation is not a magic pill
Granted, Ireland is different. Apart from that, why not get existing shareholders to put in more capital? Or look at non Govt. funded options? Has been further rounds of finance raising in the Irish banks via public stock issuance? Shareholders might surprise you, they might offer to put in more money than be wiped out. Why does the state HAVE to be the buyer? As a taxpayer I have a real issue with removing market mechanisms, it only ensures that like Anglo, it will haemorrhage as meaningful responsibility is removed from the remaining people there.
I can tell you that people i know working there have a very different attitude now that it’s state owned, guess how many have been let go? – assuming that there is some kind of cost reduction/efficiency planning happening? y’know, to give the taxpayer value?… erm… its around the zero mark. the other popular ‘zero’ in Anglo is actually 9 zero’s in a row with a 3 in front of it which is the new amount they’ll need to continue operations.
NAMA is stated as being a commercial entity, it will take the land/development deals (the most toxic parts) under management, remove uncertainty and if it doesn’t work out the banks have to pay, that’s a commercial deal on commercial terms and in the business world that holds water. The news alone of further bank nationalisation in Ireland would be devastating – and there are no metrics yet on the flow of information, only supposition after the fact.
We can talk until the cows come home about why there is no evidence to support the idea that further nationalisation would spark trouble for Ireland but that seems to be the message coming from the market, you can doubt the ability of a Bus to kill you, tell me all day that it tickles, I still won’t stand in front of one to find out.
The end result is that some of it won’t but in the mean time our banks can get healthy and start doing their job, which is to act as a money conduit, if the state get involved as owners & I believe those pipes will clog even more and be irreparable, show me an example of the Irish state running anything better than a private version of the same thing and you’ll find yourself quickly pondering the unanswerable.
The state owned bank might have no get out plan – for all the talk of it there has been no mention of an exit strategy for the pro-nationalisation crew – nor is there one for Anglo currently, so why have several nationalised banks if they are not quickly re-privatised? surely that is a waste and duplication of resources, so if you want to nationalise banks then do so and make one ‘Ireland bank’, of course that leads to a monopoly, but Ireland is actually pretty good at fostering those (eircom, ESB), then when privatisation comes along it’ll be a chop job (remember eircom IPO anybody?) or a long term semi-states constantly in need of life support (aer lingus anybody?).
keep the state out of banking, the harsh reality of it is (and sorry for being blunt) that the state are only good for emergency CPR of banks, Ireland doesn’t need more nationalised banks with no exit strategy, help the banks survive as is or let them fade. A return to capitalism wouldn’t be such a bad thing.
i suppose what im saying is that the word ‘nationalisation’ has far more negative conotations than positive ones, rightly or wrongly. It indicates failure and insolvency, even if the actual effect is to stabilise the institution. Like with Daire’s example of BSE, the immediate reaction is to pull the credit line and ask questions later. It’s a no-brainer decision for some credit controller in Munich or Milan to pull the credit lines once he sees a story about nationalisation. Where’s the downside to that decision for the foreign bank? Zero really, other than maybe hurting the relationship between the two banks, but thats a small price to pay in the current credit environment.
Of course you could lobby the foreign banks to reinstate the credit, but this takes time and effort, and of course someone at this stage might query whether they should be lending that amount of money at all to an Irish state in significant financial difficulty. The rule of thumb at the moment is that its far easier to keep existing lines in place than get new ones granted, even if both cases are of equal merit. New credit lines (which is what these would essentially be after they were pulled) undergo the fullest of scrutiny and require the fullest of justification, and as Daire said, who ‘needs’ to lend to Anglo or to the Irish govt.
In the event of nationalisation i would both hope and expect the NTMA/Central Bank/government to be lobbying BEFOREHAND the likes of the ECB, the Bundesbank, the Bank of Italy etc etc to make sure their private banks kept credit lines open to Ireland, but there’s no guarantee they would all necessarily agree. This would be even more the case in terms of banks outside the Eurozone or EU. I suppose it just represents one of the risks of a nationalisation, regardless of the rationality of it on deeper analysis.
@ Ahura – we’d have lots of limits with German state owned institutions, but probably less so with Spanish or Greek state owned ones. Given that the Irish state certainly isnt in anyone’s ‘good’ books, this would again hamper efforts to restore credit to nationalised banks.
Karl : a long post. Clearly however you didnt read my comments to Alan Ahearne in the times : heres a link in case you missed it
to rebut just one part of your argument (the one thats at the top of my screen )
“Dr Ahearne also critiques nationalisation for lacking a credible exit strategy.
We did, stating: “If nationalised the taxpayer stands to get a return on their equity investment after the banks have been sold into private hands in a few years’ time, and this would substantially reduce the underlying cost to the taxpayer.”
“Furthermore, nationalisation offers an opportunity, should the Government see such a need, to share directly with the taxpayers the upside in restoring banking sector health.”
Such an opportunity could involve a voucher-style reprivatisation of the banks and also ignores the fact that Nama is set up explicitly to act for a medium-term.
Again nationalisation is a superior option in that it is advocated as an explicitly temporary measure as opposed to a Nama-quango which has no sunset clause inbuilt.”
So “the pro-nationalisation crew” do have an “out”. So too for your other arguments
Tell me : do you have shares in any of the banks. I have some in AIB and Anglo, but thats irrelevant to my argument. Fess up…
As economists, we ought be able to devise some rationing / pricing system to prevent some commentators from running on too long and thius devaluing this otherwise very valuable Blog!
The business of Bank of Ireland might be the same post-nationalization, but the risk is fundamentally different. The job of the person managing the risk is not ultimately to look at the strength of the business but to look at the strength of the underlying owner and guarantor. If the owner/guarantor fails, the debt is likely to be in trouble, regardless of how strong the business is.
If a small firm were taken over by a large multinational plc, it would be the same. It would no longer go down to the local bank manager to fulfill its treasury needs or its borrowing needs. It makes more sense to manage these needs on a group basis. (I appreciate this is a bit of a simplification – there are counterexamples, such as semi-states raising debt.)
I read your article, as I am an interested follower of this story and of your views in particular too. I just don’t agree with you.
the ‘exit strategy’ while looking great on paper is a different matter when you consider nationalising over 2/3rds of the system.
you have disregarded as ‘holding no evidence’ the flow of information which is a part of the market we don’t have quant methods for, if there are further nationalisations it would likely be the kind of news that only furthers the problems the nation has, sentiment – more specifically – market sentiment has to be considered, i don’t feel market sentiment and ideals are matched with irish tax payer ideals, on that front i feel anybody who is pro-nationalisation forgets that we are a small wet rock out on the western fringe of europe and a hard market doesn’t forgive easily.
wiping shareholders now, until every other avenue has been considered not only ruins countless pension funds, personal savings here, but for international institutional shareholders it sets the stall out for the shape of finance in Ireland to come.
do you disagree with alan blinder on every point?
And as i fully disclose time after time, yes i own bank shares, i own lots different types of shares.
as for my points which you say lack argument, please, tell me which govt. run industries are better and more efficient than an existing private counterpart. Or how anglo won’t continue to haemorrhage, or that they have laid off staff to get efficient.
@PL Malone this particular post is for you, short on meaning, long on profundity QED 😉
@rp: “In essence, the underlying motivation for this type of delegation is often nothing more than a tacit acknowledgement that, as you put it, the Government can’t trust itself.”
Oh. I thought it was because they wanted to be able to blame someone else.
I must say this whole notion of so-called independent regulators, which sprang out of nowhere some time ago, seems to me to be a Bad Thing: you get people who are responsible neither to a “free market” (if any) nor to the will of the people. That leaves them to be batted around by the expensive lawyers hired by the supposedly regulated operators.
Anyway, I think there is much to be said for the Chavez approach.
@Karl Deeter: “the harsh reality of it is (and sorry for being blunt) that the state are only good for emergency CPR of banks, Ireland doesn’t need more nationalised banks with no exit strategy, help the banks survive as is or let them fade. A return to capitalism wouldn’t be such a bad thing.”
You talk as though the banks had some sort of choice here, some sort of bargaining position. The bleeding things are not just pining for the fjords: they have passed on; they are no more; they have ceased to be, expired and gone to meet their makers; they are stiff, bereft of life, resting in peace. They have joined the bleedin’ choir invisibile. They are in short ex-banks, begging from the taxpayers. And beggars can’t be choosers.
As for what the state has done better than “private versions” have, Irish history suggests electricity generation and distribution, peat extraction, shipping, seaweed exploitation, provision of water and sewerage and others that a quick google will reveal to you.
shorter more focused sentences would help me understand and maybe even agree with your argument. Much of the time I simply cannot understand your point. Not being smart here just being confused….
Are you a shareholder?
we need an edit funtion on this….
I actually think, tbh, that its highly unlikely we can at a reasonable price, raise the funds for the NAMA/toxic loans plus the deficit. So, to some extent we are whistling past the graveyard. So to some extent the argument that its about the ultimate guarantee is the one that i support. I wonder however how long the govt will go on pretending that its business as usual to take a BL phrase.
Bottom line : we cant let em fail, we cant save em….
Karl D says NAMA will “remove uncertainty and if it doesn’t work out the banks have to pay”. Aren’t these two things contradictory? Either NAMA removes uncertainty or the downside risks are still on the banks (via the levy?). Either the post hoc levy idea is bullshit or NAMA won’t in fact remove any uncertainty, no?
“show me an example of the Irish state running anything better than a private version of the same thing”
RTE versus TV3? Pension provision (and income insurance in general) would be an interesting area to consider. Lots of non-fees secondary schools outperform fee-paying rivals if that counts. I think most people would think of the big public universities as “better” than the smaller private ones. I’m not sure that Eircom or Aer Lingus have been notably improved by privatisation. I certainly think the last five months of nationalised Anglo Irish have been better (i.e. less damaging) for the country than, say, the previous five months or years of private ownership.
@Brian Lucey. I fear the frustration of it all is starting to get you down…
(btw, former shareholder of BOI, former short-seller of Anglo)
I may be wrong here, but if the points above about nationalised banks having difficulty accessing interbank funds hold water then it can be a used as a strong argument against nationalisation.
But considering Mr. Trichet’s comments yesterday: (“The Governing Council has decided in principle that the Eurosystem will purchase euro-denominated covered bonds issued in the euro area. The detailed modalities will be announced after the Governing Council meeting of 4 June 2009.”) Do the banks now need the interbank market?
A covered bond is a bank issued asset backed bond, either backed by mortgages or government debt. They are different to asset backed securities because the covered bond assets remain on the banks consolidated balance sheet, and the issuing bank has the keep the assets backing the bond sufficiently high that they always 100% back the bond. If a mortgage that makes up part of the bond defaults then it has to be replaced by another one. The default risk remains with the bank.
So the bottom line may well be: we can’t let ’em fail, we can’t save them. But Mr. Trichet can..
The government by not mentioning BOI, seem to assume that it can survive.
It is trying to keep AIB going, by boosting it, perhaps to prepare for more capital raising.
BJG is correct, as usual.
Sell AIB buy BOI? Or just sell AIB?
The government appears to be unable to enunciate a clear policy, yet it must be clear that this is imperative.
Also it may be trying to prepare us for having to buy the banks by putting up feeble arguments and having shills post contrary arguments on blogs…..errr ooops! Vaccination in other words!
@brian j goggin: re – the state doing a better job
water distribution – no comparable private sector version in Ireland that i know of? apples and oranges
electricity – the same, ESB (distribution not generation) is still a monopoly, they own the infrastructure. so that’s apples and oranges again.
@brian lucey – yes i own bank shares, they are part of my overall investment in shares, but that is not the foundation for my belief in not nationalising banks.
simple question: do you think alan blinder was wrong in his article? link already posted, and in the irish context do you feel there is a coherent exit strategy possible if 2/3rds of the banking system is nationalised?
on disclosure: (of which i have been transparent) have you ever short sold a financial share? Or received income from advising same?
@james corcoran – NAMA remove uncertainty from the bank balance sheet, the levy (which I would say is 100% sure on at least some portion of the deals that go across) will be amortized, so it allows banks to clean up, then pay back over time with cashflow.
on private vs public, i’d wager that TV3 does a fine job if you prefer to watch RTE that’s your own taste as opposed to any evidence that TV3 are not standing the test of the market minus the kind of funding RTE have.
on pension provision: the state don’t do a better job where fair competition for pension funding exists (don’t forget that they tax you your whole life first) and this will become more evident as time passes, the pension time bomb is – to the average person on the street – going to be a bigger threat to their financial well being than this crisis perhaps, we will not have the money to provide for it in the future.
@pat donnelly – i hope you are not alluding to me as a ‘shill’, just because i disagree with the general consensus here.
The argument that private banks are better run than public ones isn’t valid karl. Even without full nationalisation the goverment could have majority stakes in all banks and possibly even 75% in AIB. The goverment will all ready be in control. To not be comparing apples and oranges you need to compare 100% publicly owned vs 75% banks are better run. The problem of goverment interfering in the banks is there with or without full nationalization.
Nationalisation just ensures that the taxpayer is properly compensated for the risks they are taking.
The argument that there would be no exit strategy for 100% nationalised banks vs 75% state owned banks is even less convincing. To exit the goverment can’t simply sell shares on the market it is always going to have arrange a placement or listing.
Disclosure is a completely irrelevant point. If the goverment chooses to nationalizes the banks the only way there will be less transparency if that is what they decide to do.
If we really want to keep a private equity stake in the banks to keep the goverment honest then the best way to achieve this is a debt for equity swap as part of the nationalization process.
“on private vs public, i’d wager that TV3 does a fine job if you prefer to watch RTE that’s your own taste as opposed to any evidence that TV3 are not standing the test of the market minus the kind of funding RTE have.”
I (like most people) think RTE is a better service than TV3, but I see that the challenge is seemingly no longer to find something done “better” in the public rather that the private sector but whether something “stands the test of the market” without public funding (an odd test given we’re really talking about private sector banking), or perhaps where there is “fair competition” (defined how I wonder?).
I think by narrowing the parameters by what would count as the state doing something better you may be constructing something of a tautology. If we take a public goods account of what the state does then by definition the state will tend to do things that are either not done at all or are underinvested in by the private sector.
In any case, to make an obvious point, the bar for the state to do a better job of the banks is incredibly low right now. The state could do an incredibly poor job of running them and still do better than the last few years under private ownership.
I do think Karl D has a point that advocates of nationalisation could do with a bit more thinking regarding the exit strategy. It’s important to remember that the world we will be reprivatising the banks into will be a different one to that of previous bank rescues eg US savings and loans, Sweden in the early 90s. Personally I’m not too concerned by the prospect of continuing with a partially state-owned banking system, but then I’m probably well to the left of most people around here…
Is it really worth debating this any further? It appears that the government has made up its mind. They’re politically in blood stepped so far that they can’t turn back. For better or worse the nationalisation appears not to be a possibility.
So, if we’re not satisfied with the current NAMA plan, can we not adjust it in some way so that the taxpayer can share the (potential) future health of the banks?
Scratch that part about it not being worth debating this any further. Of course it’s worth debating. What I meant was that it might be worth paying more attention at more realistic options…
Shorter Karl D: The state should hand over billions to bank shareholders like me and people should just stop whinging about the taxpayer getting a fair deal in return.
@karl whelan: that’s kind of a low shot? the point of me holding shares being the basis for being anti-nationalisation is a joke, i wouldn’t like to see kraft foods or BP nationalised either (despite holding shares in them and others).
I just think the practical elements of a solution – and i’ve said it several times before – are not in alignment with ‘taxpayer’ value for money. it’s not unique to ireland either, the taxpayer always loses in the end.
@james corcoran: ”The state could do an incredibly poor job of running them and still do better than the last few years under private ownership. ” …. that’s populism at best and untrue in practice.
HCL ‘homechoiceloan’ is a good example, brought in as a state lead financial solution in 2008 and already defunct in early 2009, a big waste of money, thankfully the 500m allocated to it won’t actually be used. The worst value for taxpayers seems to be via the things that are run by those that spend our tax money on our behalf, and if this waste bled through to financial services it would be a disaster.
Two possible reasons occur to me why money markets and other banks might be averse to lending to a nationalised bank in the current environment:
(1) As its stock market listing will be removed, perhaps there will be obligation on the bank to publish regular information on its performance. In extremis, market funders may have to wait six months after the end of a financial year before being able to update their knowledge on the balance sheet and capital position of the bank.
(2) Even if the bank is fully owned by the state, its owner will, legally, enjoy limited liability like the owner any other private company with limited liability. Lending to a state-owned bank is, legally, not the same as lending to the State. Admittedly, there would be significant reputational, if not legal, ramifications from the State allowing a state-owned bank to default on its obligations. This remains an important consideration when assessing what should be done with Anglo Irish Bank if, as seems more likely by the day, the bank proves to be insolvent.
as it is the annual reports are significantly late as in by the time they publish its too late to do much about anything significant in them. The second issue is important BUT we have extended a guarantee to the banks that makes lending to them the same (covered by) as the the state.
To date in this set of replies I havent seen a single rational reason as to why a bank that is nationalised is more a risk in interbank liquidity terms than one that is not. I suspect that there is none. So, the canard is being used by the Dept of Finance (hello to the watchers…..) to duck the issue. ….
@brian lucey: alan blinders article
gives many reasons as to why nationalisation is not a simple cure all.
I had also asked you if you felt his article was nonsense, and if you ever short sold a financial stock or earned any income from advising same? I’m trying to be straight to the point as requested! 🙂
a) No I have never sold short shares in anything, not gained income from advising same. I could, if I were bad minded, take umbrage at the inference that could be drawn from your repeated reiteration of this, that I in some way am trying to profit from “talking down” the banks. But, its sunday morning, the birdies are singing and the garden beckons….. Note Karl D that this implies an asymmetry in our utility functions: you stand to gain a great deal, by your own admission, from being long large positions in the banks. I dont really have much skin in the game and woul rather see the meager remnants of my portfolio wiped if that were to put the economy via the banking system back on a stable footing. So, lets leave personal utility aside and go to the meat of the matter.
b) Alan Blinders arguments are a curates egg. Some are good (but in the US context) and some not. Note that I do not, nor do I think any of the signatories to hte 20 letter nor any of those arguing for nationalisation think that Nationalisation is a “simple cure all”. Far from it. However, it is simpler and cheaper and less complex than NAMA. Today in the newspapers we see the emergence of legal challenges to NAMA, concerns about process therein, a benchmarking of the staff needs suggesting that by international norms it would require 700! specialist staff, concerns about on-selling in a liquidity constrained environment etc etc.
Blinder makes essentially about four arguments. Few are economic and most have in factbeen addressed by pro-nationalisation or anti-NAMA (not a one-to-one mapping you understand) commentators.
Bliner1 :Its unclear where to draw the line : I suggest, personally, that we take the lot. Thats doable here with 6, and not doable in the USA with 8500.
Blinder2 :There would be a domino effect on the market : well, not if we take them all.
Blinder3 : Its too hard to manage and its ugly sister its too easy to politically manipulate ; thats an issue, I agree, but not one that I think is insurmountable. At least, I retain enough trust that it should be doable.
Blinder4 :It would destroy confidence in the banking system and its unamerican ; well, as for confidence maybe or maybe not, its not ike there is a whole lot there. As for being unamerican, thats not for me to say : maybe Kevin O’Rourke can come in on the business history but I suspect that a state that has nationalised railroads, electrical utilities, s&l’s, aircraft manufacturers, and the private airport security and monitoring industry (the TSA…) can swallow a bank or two.
In sum Karl , nationalisation is a desperate measure. If I can paraphrase Winston Churchill, nationalisation is the worst way to deal with the toxic banks in ireland apart from the other way that is being proposed. Another churchill quote comes to mind as unasked for, un solicited an sure to be ignred advice to Brian C and Brian L : “Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen” , or even better the quotation by Bernard Berenson (which I came across via a Msc student looking at the art market, the modern version of which which BB was one of the founders of) ; its this “Consistency requires you to be as ignorant today as you were a year ago” . Substitute six months and contextualise it for the banking system and we have the cornerstone of policy making in this area
Postscript: the tribune says today (p2) that €10m was paid for “advice” on the banking crisis……I suspect that getting Dr’s Lucey, Whelan, Honohan et al for a few days would been cheaper and at least as productive. Oh well….
I think one of the reasons George Lee left RTE was that they were trying to sensor him. He recently commented on Morning Ireland that giving an opinion on a certain matter might loose him his job. David Murphy will be much easier to control.
Expect plenty of Pro government claptrap on six one and the news at nine.
As Michael Hennigan of finfacts has articulated, the manufacture of consent in this country is reaching alarming proportions.
To adapt a phrase ‘the first casualty of an economic depression is the truth’
I spoke today to the man who invented the term Zombie Bank, Ed Kane, of Boston College. He has been following the debate here a little, and considers the government position to be “regulatory gambling”. But sure, what would he know
“Edward J. Kane is the James F. Cleary Professor of Finance at Boston College. From 1972 to 1992 he held the Everett D. Reese Chair of Banking and Monetary Economics at Ohio State University. A founding member of the Shadow Financial Regulatory Committee, Kane rejoined the organization in 2005. He served for twelve years as a trustee and member of the finance committee of Teachers Insurance. Currently, he consults for the World Bank and is a senior fellow in the Federal Deposit Insurance Corporation’s Center for Financial Research. Kane has served as a consultant for numerous agencies, including the Federal Home Loan Bank Board, the IMF, various components of the Federal Reserve System, and three foreign central banks as well as the Congressional Budget Office, the Joint Economic Committee, and the Office of Technology Assessment of the U.S. Congress. He is a past president and fellow of the American Finance Association and a former Guggenheim fellow. He also served as president of the International Atlantic Economic Society and the North American Economics and Finance Association. Kane is a longtime research associate of the National Bureau of Economic Research. Besides authoring three books, he has published widely in professional journals and currently serves on eight editorial boards. He received a BS from Georgetown University and a PhD from the Massachusetts Institute of Technology. ”
Ed is coming here for a conference in June and will be keynote at the conference next year. By then we can see the full effects of the zombification of Irish banks. Dead men walking….
For what it’s worth Krugman addressed one of Blinder’s points in a post at the time:
Publicly-listed banks usually produce, as far as I’m aware, quarterly or at least semi-annual trading statements, as well as regular updates on market-sensitive issues. Nationalised banks will be under no such obligation / expectation. Witness the silence from Anglo Irish since nationalisation.
Of course, you’re right that funders will not mind as long as the State Guarantee is continue. But that is a very important qualification and condition to your proposal. Through nationalisation with an extension of the guarantee, you are now explicitly making the tax-payer liable for all obligations of the banks, even those that do not mature until after the Guarantee expires.
This removes a valuable option for the country – that of engineering over the next 16 months (in the run-up to the expiration of the Guarantee) a situation where one or more of the guaranteed banks, including Anglo, is allowed to fail, with losses being shared by providers of capital and long-term funding.
That is a very valuable option to throw away.
Quarterly is required by the USA. In any case, thats a simple line to insert in the nationalisation bill
“banks will issue quarterly statements independently audited (hah!).” ESB and so on produce regular reports.
As for the option : yes, I agree. But the government have already thrown it away.
The option remains open to the current or a future Government to withdraw the Guarantee as scheduled in September 2010 and if appropriate to engineer a bankruptcy at that point (hopefully in the interim making sure that such a bankruptcy does not cause a system-wide panic). This option is very valuable and should not be thrown away through a hasty nationalisation.
Could I add non-economic reason for the reluctance to nationalise?
‘Tidied-up’ banks put back on the market after a period of nationalisation would have less staff/more automation. I heard on the media yesterday that the IBOA has had a big increase in recruitment. The gov would have to unload staff….. not a welcome prospect, especially as it would occur in the 2012 period, around the time of the next election.
i’ll go one further and suggest that a heavily IBOA’d banking sector may not be too supportive (ie veto) of ditching govt guaranteed pensions and job security, and returning to the private sector realities of life again.
Re IBOA : if we stuff up the banks (as we seem intent on doing) then they will have to face the same Wrath of (Strauss)-Kahn as the rest of the unions….
@ Brian Lucey
1. Can you please explain what you understand Ed Kane to have meant by using the term “regulatory gambling” in relation to the Irish Government’s plans?
No offence will be taken if you ignore the following points as I am not as up to speed on your position as I should be:
2. When you recommend “nationalisation” are you recommending (i) outright nationalisation where the state takes on all liabilities of the banks or are you recommending (ii) Anglo-style nationalisation where the State becomes the only shareholder in a limited liability company? Does option (ii) not at least give us the option of removing the Guarantee in a hurry and letting certain banks fail?
3. If we nationalised would we not need a NAMA anyway to detoxify the banks? In that context, is nationalisation not still an option after NAMA?
4. If we nationlise outright then isn’t it likely that institutional investors will demand an extension of the state guarantee to bering them bacnk on board. Isn’t there a danger that this will keep us on the liability hook for far longer than necessary? David McWilliams has said that the withdrawal of the Guarantee for certain institutions must go hand in hand with NAMA and recapitalisation. Is that not the clearest and quickest way out of the guarantee?
5. If we cannot regulate effectively then how can we have confidence that the state can run the banks without fear of personal influence and political pressures to increase lending being brought to bear? Who in the public service has the ability and numbers to manage such a mammoth task? What politicians would stand up to the public crying for the wrong types of lending when all the political parties have said they want to increase lending? Are we going to send the Dail into the desert for 40 weeks with Devil? I don’t think TDs of any hue will fare as well as Our Lord. It seems that you havea trust in the public service and in politicians to operate nationalised banks that is not shared by those very same people.
with that reference and the week thats in it, ur clearly a Trekkie…
@ brian lucy re IBOA and DSK, as he is referred to….
Rremember he was a socialist, at least until he was fired for a fake invoice scam….. Never did understand why Sarko backed him for the IMF job, but he they are now palsy….