The IMF versus the 20 Economists?

The Irish Times reports that in today’s Dail debate on the IMF Article 4 report, the Taoiseach said the following

The Opposition has claimed many times that no independent economist supports the Government’s approach to the banks. The IMF is independent, and more expert in advising on banking problems than most commentators, and it supports our approach.

So how out of line is the IMF’s position on banking with other economists who the government has consistently criticised, such as the signatories of the 20 guys Irish Times piece?

Let’s start with the 20 guys. Legend already has it that these economists “oppose NAMA”.  What they actually said was the following:

Nationalisation can still involve a Nama, if the Government believes that reprivatisation of the banks would proceed best if certain of the most toxic and compromised assets have to be taken off the bank books altogether rather than just written down to market price.

What about the IMF?  The Article 4 report states:

Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … 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.”

As regards NAMA, the world and its aunt now knows that the crucial operational issue is the price that the government pays for assets.  One of the reasons the 20 guys piece recommended NAMA working in conjunction with nationalisation related to this issue:

By contrast, nationalisation per se requires no such controversial asset-pricing process … However, the valuation process in this case would cease to be controversial, as the Government would own both the Nama and the banks, so the price would hardly matter.

On this issue, here’s the IMF:

Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus preserving the political legitimacy of the initiative. The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities.

Yet despite the similarity in positions, the 20 guys are hopeless ivory tower eejits and the IMF are wise and experienced supporters of the government.

One aspect of the IMF’s comments that the government has focused on is the language that nationalisation “could become necessary” whereas people they are disagreeing with are explicitly recommending nationalisation. 

Well let’s look at the circumstances under which the IMF recommend nationalisation.  They say that  “Where the size of its impaired assets renders a bank critically  undercapitalized or insolvent, the only real option may be temporary nationalization.” 

Being the IMF, they are unwilling to list any specific institution.  However, they do state that the losses faced by the banks through the end of 2010 could be about €35 billion.  Given that the total non-government Tier 1 capital of our two major banks is about €20 billion, it’s highly unlikely that losses on the scale envisaged by the IMF would mean anything other than the “undercapitalisation or insolvency” scenario which they argue should lead to nationalisation.

To conclude, it is my opinion that the IMF’s recommendations to the government in relation to banking are essentially the same as those of the 20 economists who signed the IT piece.  The 20 guys also backed the use of a NAMA and so they and the IMF can be seen as being in favour of an asset management agency to clean up the banks.  To the extent that the 20 guys and the IMF see the upcoming losses as wiping out the equity capital of our major banks and thus requiring nationalisation, they are critics of the government. Any other assessment is just spin.

52 replies on “The IMF versus the 20 Economists?”


On RTE Radio 1 yesterday, you agreed with the interviewer that the IMF supported the position of the 20 economists – and the Labour Party – on nationalisation of the banks.

Since your letter arguing for temporary nationalisation was first published the Labour Party has latched on to it as representing “the support of twenty eminent economists” for their position.

The Labour Party, as set out in the terms of their Dail motion of 12 May last, is opposed to the establishment of NAMA, which it has characterised as ‘An Bord Bailout’ for FF friendly developers and bankers. The party is also opposed to the ‘good bank’ alternative mechanism proposed by Fine Gael. Instead it favours so-called ‘temporary nationalisation’ of all the financial institutions covered by the original September 30th guarantee, i.e. the entire Irish owned financial system including the building societies, without any limitation on the operation of ‘temporary’.

The Government is against going for immediate temporary nationalisation of AIB and BoI for a variety of reasons that it has spelt out, including the rather obvious possibility that nationalisation may not be necessary for both of these institutions and immediate temporary nationalisation would do more harm than good. At no stage of the debate has it explicity ruled out the possibility that nationalisation may become necessary in conjunction with the NAMA process, particularly in the case of AIB where it envisages the State may end up with 75% of the shareholding, but it holds to its view that nationalisation must be taken only as a last resort. Thus the difference between your position, the IMF position and the Government position is mainly about timing of nationalisation, not the requirement for an asset management agency per se.. Since the Government must take a broader range of factors affecting Ireland’s reputation abroad etc. into account in making its decisions than twenty economists are required to do then it’s entitled to make its own judgement on what is the best course of action in the short term. Equally, you and your colleagues are entitled to argue that your course of action may be the better alternative. You may be right, and they may be wrong, or vice versa.

Where it all gets a bit murky is when political parties such as Labour consistently misrepresent your position as wholly endorsing their preferred strategy, which is very far removed from what either the IMF or you and your colleagues are proposing. Either they don’t understand your position or they are wilfully misusing it for their own political purposes.

If so, the Labour Party are the ones engaged in ‘spin’ and from a political perspective until someone shouts ‘stop’ they would be very foolish to do otherwise – it works wonderfully on the doorsteps and the airwaves to be able to say that 20 of the country’s most eminent economists support their opposition to ‘bailing out banks and developers’ when there is no fear of being contradicted by any of the 20 economists.

Instead of dissociating yourself and your colleagues from that spin, you have publicly endorsed it in yesterday’s radio interview. If you have no problem with you and your colleagues being cast in the role of economic ayatollahs to the Labour Party, then that’s fine, though what that does to your credibility and integrity is another day’s work. Otherwise, it’s way past time for another letter to the Irish Times clarifying that you do not subscribe to their policy.

veronica. You must then have missed my numerous byblow comments on how politicians hijack economic ideas.

Veronica, did you read Morgan Kelly’s article in the IT yesterday. It bloody well is the An Bord Bailout for bankers and developers.

PS: Why is the possibility rather obvious that nationalisation may not be needed for Irish banks. All informed observers agree that Irish banks are utterly and completely insolvent. Have you read the IMF report?

Veronica – do you work for FF? Also, you said “At no stage of the debate has it explicity ruled out the possibility that nationalisation may become necessary in conjunction with the NAMA process”. What you seem to be saying is the equivalent of ‘lying by ommission’. They didn’t say they wouldn’t in the debate so that’s alright then? That is not the impression the government are giving to the public at large. The current impression appears to be “Nationalisation? Over my dead body, regardless of what might be the best thing to do”.


I’ve been a member of the Labour Party for more than 25 years and worked as an advisor to the Minister for Labour and the Public Service in the 1983-87 FG-Labour government.

That was a government in a period of economic crisis which made many mistakes in not facing up to the economic issues which the country faced, but had at least another agenda of social liberalisation on which it tried to deliver, including the introduction of civil divorce and opposition to the insertion of a nut-job abortion ban wording in the Irish Constitution. While it failed on both of these issues, it did succeed in abolishing the stigma of illegitimacy for children born outside marraige and a few other progressive changes for the good of our society.

Loyalty to the Labour Party does not blind me to its woefully incoherent and flawed policy on the resolution of the public finances and the banking crises. I make no apologies to anyone for decrying a policy that amounts to opposition to everything and playing the populist card – the sort of thing one would typically expect and normally get from Fianna Fail in opposition – as an alternative to even acknowledging the painful realities of what needs to be done in the interests of the welfare of all citizens of this country. And I don’t much care if people don’t like my calling it for what it is. If I think Labour’s policy in this area is wrong and is misleading the public for the purpose of short term political gain, then I will say so, irrespective of any personal cost to myself.

On the specific point you raise above about nationalisation in conjunction with NAMA, speaking in the Dail yesterday the Taoiseach stated:

“The IMF sees nationalisation as possibly necessary in certain situations. The Government believes it is important, where possible, for the banking sector to have a market presence and to operate in line with market disciplines. ”

And the Minister for the Environment, John Gormley said: “The IMF executive board supports the authorities’ efforts to restructure the financial sector, including the decision to establish the National Asset Management Agency, NAMA. While it states that nationalisation may be required, it does not advocate this as a solution. To clarify, the Government has never ruled out nationalisation of banks but has consistently said this is an option it would rather avoid. ”

THe Minister for Finance is also on record in just about every public statement he has made on setting this out as the government’s position. So the possibility of nationalisation of with one of the main banks is far from ‘over my dead body’ as an option, as you suggest, but then people only hear what they want to hear, don’t they?

@ garo

Morgan Kelly is entitled to his view – there’s another thread on his article on which I think all the good and bad points of his analysis are being thrashed out. He gets some things right and other woefully wrong, it appears. Extremists of any kind don’t float my boat, I’m afraid, they’re just boring.

@Brian Lucey

Yes, I’ve seen your comments on politicians hijacking economic ideas. I guess it would be very disappointing to economists if their views and perspectives on issues were entirely ignored by the political class – it would also not be in any of our best interests either, I would contend. However, there’s a bit of a difference in what the LP are at as regards claiming the endorsement of 20 eministent economists for their wholesale nationalisation policy and what the 20 eminent economists have actually been arguing for. I stand over my view that the said economists should dissociate themselves from the LP’s manipulation of their position.

nicely partisan piece! i went to the bother of reading the IMF document and while there is a single paragraph touting nationalisation there are many more in support of the actions taken by the state so far. you failed to mention the reason for nationalisation being a risk in the eyes of the state, and the risk to the taxpayer in owning the banks is as big or even bigger than keeping them off the national balance sheet, has anglo taught us all nothing?

now that the state own anglo you’d expect lots of job losses, cleaning up, have they come? erm… no. not a single act of efficiency, rather they are paying out above the odds to attract depositors and getting record bailouts. nationalising more than 2/3’s of our banking system and thinking it will work out is a joke. The IMF article also states that getting private ownership back rapidly is vital, given the precedent set by Anglo i think its safe to say that multiplying that out would be a disaster.

why not start a thread about the ‘other’ issue in the IMF document that is being conveniently kept quiet by the 20 eminent state employees who have nothing to lose (ie: pension values etc.) if the banks get nationalised?

in particular that of public spending, the IMF document actually skirts around the issue of bank nationalisation in comparison to its damning indictment on the state of our public finances.

there’s an elephant in the room, it is only the groupthink that prevents you all from seeing it.

I just wish we’d actually do something rather than yak yak yak. If the world is genuinely coming out of recession we’re still sitting on a banking system that is moribund. Nothing has actually happened apart from pouring money in while other countries are well on the way to sorting out their banks and will be ready for the upturn.

We on the other hand will have created a great big organisation called Nama who will be fighting with banks over the valuation of assets and developers presumably using legal routes to prevent them from taking over good assets. Good money for lawyers I suppose, they’ll need it now the tribunals are winding down.

karl d. Well, it didnt take you long to get ad hominum again. Yeah, its our featherbedded state pensions that are causing us to become radical nationalisation advocates. Well spotted.

“Extremists of any kind don’t float my boat, I’m afraid, they’re just boring.”

Eh, no. Extremists are frightening, deluded, blinkered and dangerous. Seldom boring.

In considering the policies proposed by Morgan Kelly and Brian Lenihan – which is the guy going for the extremist solution? The one who says the banks are insolvent and a certain logic flows from that? Or the one who says that banks must never, ever, ever in any circumstances, whatever the cost to the taxpayer, be allowed to fail?

brian L: you might be onto something there actually. of the all the economists working in every sector in all of Ireland there are surely many outside of academia/state employ who have PhD’s etc. and can come to terms with the concepts discussed & put forward in that petition.

But not one of them signed that declaration from what I can tell, so that means that the promoters of the petition didn’t feel that anybody in industry (specifically those within industry whom would have economics PhDs etc.) had a place in having a voice in such a document, or they didn’t want to include them as they might not agree, or nobody bothered to ask.

It’s one of the three, I assume you know.

It just seems kind of coincidental i guess? Maybe I’m seeing it wrong, if you can clarify it would be greatly appreciated.


Let me take your points a little out of order

1. What’s the IMF view on nationalisation?
You have quoted Minister Gormley as saying the that the IMF “does not advocate” nationalisation. Well, they say “Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization.” And they also say that the size of the losses are €35 billion. So, as is often the case with reports of this type, one needs to put two and two together to see what the real opinion is. Nationalisation “is the only real option” when losses are large and losses are large. This is as close to advocacy as the IMF will get on a delicate political issue.

2. Sequencing and Timing
I have recommended that the government should nationalise first and then introduce an asset management company (I have also discussed various ways of compensating shareholders as part of this process.) The IMF’s discussion of pricing also implies this approach. When they say “The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities” it is clear that they are describing a scenario in which banks are nationalised first and then the asset transfer takes place.

As for the timing of when this should happen, I would recommend it be done as soon as possible. I can’t imagine the IMF are in favour of continuing to delay but they don’t explicitly discuss this issue.

3. What’s the government’s position on nationalisation?
In terms of formal statements, the government moves the goalposts on this every so often. A few weeks ago, the Minister for Finance was telling people that the government had “decided against” it. Other times, it’s phrased more as a last option.

But let’s look a bit closer at the process that we’re engaged in. As you know, the government has sent out Ministers on many occasions to detail lots of reasons why nationalisation is A Very Bad Thing. I’m guessing you believe that the NAMA process could trigger losses large enough to lead to nationalisation. But the government controls the NAMA process. If the government says nationalisation is a bad thing that it doesn’t want to happen, then it can set the prices paid by NAMA to ensure that it doesn’t come to pass. Indeed, this is what pretty much every analyst that has looked closely at this believes—not just crazy radicals like me but investment bankers like Davy’s, JP Morgan, Dolmen etc.

4. Me on RTE
I was indeed a bit uncomfortable at getting tossed a question about the IMF agreeing with “me and the Labour Party” on the banks, since I have no affiliation with any political party and claim only to represent my own views. But this is the kind of thing that happens to you when you go on the radio. It was a wrap-up question with about 15 seconds to give an answer. And the key point we had been addressing was the IMF’s discussion of nationalisation, so given my take on this, I decided it was fair enough to express agreement. However, rather than be seen as “partisan” (thanks Karl D!) I used the remaining time to remind the interviewer that the IMF backed the government’s fiscal policy measures.

If indeed it is the case that the Labour Party opposes using an AMC in conjunction with nationalisation, then clearly they are not in full agreement with the various plans I have put forward. But to echo Brian, it’s hardly shocking that politicians will claim to have the full support of various “eminent” people. Nor do I worry that anyone thinks I have signed over my capacity for independent thought to the Labour Party, a party that I regularly criticise on issues like stimulus and job subsidies and whose rhetoric about An Board Bailout and the like is silly and unconstructive.

If NAMA purchased the banks loans at a steep discount shareholder equity would be completely absorbed.
As karl w says they could be given some form of upside in NAMA
possibly in the form of shares.

The next stage of the bank restructuring would be to force the bank bondholder to exchange some debt for equity. This would would have two big advantages. Firstly it would go a long way to recapitalizing the banks. Secondly, and this is crucial to many such as karl d, it would mean the banks still have a significant private stake.

So the banks remain partially owned, the initial cost to the state is reduced, the risk of mispricing the loans is greatly reduced, and goverment proportion of the bank recapitalization after be much lower post NAMA and most importantly the largest property company in the world would have a stake from private investors.

Since so much has been made of the risks of having the banks 100% public owned I’m surprised so little has been made of having the largest property company held entirely by the state.

karl d. Theres a fourth. But, fyi, only 2 persons asked either recused or refused. The clue to the 20 lies in their primary areas of research. For example, a priori, a labour economist migit well be expected 2 be less au fait with the underlying technical arguments than a finance person.
Tell me, do you really think its as simple as
‘fugit lads, sure weve state pensions, sod those who dont, lets ramp an argument for stripping the shareholders. Whaeddya say, you in?’
Genuinely interested to hear how you think professionals work.

@Veronica, Mr. Lenihan has obviously been telling porkies in the Dail then:
[quote]The Government will ensure AIB and Bank of Ireland are not nationalised and will proceed with a planned recapitalisation, the Minister for Finance told the Dáil this afternoon.

During a debate on legislation to provide for the nationalisation of Anglo Irish Bank, Brian Lenihan said the Government’s “firm intention is that both banks [AIB and Bank of Ireland] remain in private ownership”.[/quote]
Or perhaps we are suffering from the codology of our media that puts a positive spin on everything? My reading of the minister’s words is also that while he would bust a gut to keep the banks private, this is not the same as saying it will never happen.

My concern, however, is that the gut he is busting is not his own, but ours and our childrens. How expensive are the failed solutions going to be? The 7 bn in preference shares are already worthless, given the likely bank losses. Any more and you might as well burn it on Stephen’s Green as Mr. Kelly suggests…

@yoganmahew i read your post on the pin, replied too. when i say the IMF didn’t refer to nationalisation as a cure except for at one point i stand by it, you have confused bank restructuring, the type of assets that may be accepted, and pricing issues etc as all ‘nationalisation’ arguments, they aren’t. they are fundamentally different things.

you have also referred to the regulator needing to have power to seize banks the way the FDIC do, there is a difference between telling a person they should own a gun to that of advising them to go around shooting people.

@brian L: I know that one professional who has a career focused on banking is patrick honohan and i didn’t see his name on the petition.

I also know that there were no industry economists on there, specifically they were all from within academia, which doesn’t discount anybody’s knowledge or expertise, it does however, raise questions such as ‘why weren’t they?’, given that there are many economists who work within the banking/finance system who know it quite well, their opinion should count for something right?

@karl, the IMF would not be saying that we need speedy nationalisation/restructuring mechanisms if they didn’t think we needed it. All the paragraphs of the Banking section of the report build the case for nationalisation. It is a total hatchet job on government policy from the incredulous “the government has no estimates for the costs” to the final crescendo of the out and out call for nationalisation. It is a hatchet job on government policy.

karl d. Im on holidays so prob shouldnt be blogging.
Re ph. Best ask him.
Re composition, banking and other industry economists are hardly independent, i think we,ll agree.
I havent seen, btw, a single, not one, independent analyst go against the 20 analysis. Have you?

@Brian L: how can you say that anybody not working in academia is incapable of independent thinking?!

By that rationale, there are no independent analysts in all of industry and thus its rhetorical to ask if any have gone against the grain! They couldn’t be in industry and be independent at the same time (according to your hypothesis).

btw: yer missing some impressive rain here! It seems the economy and meteorology are in sync (at least for this weekend) lol.

@yoganmahew: if you want to read into the IMF doc that’s o.k., I’m only going on what was actually written in black and white

It appears that the position of the 20 Economists, the IMF and the Government can be accommodated within the statement that “NAMA is or may be necessary and Nationalisation is or may be necessary”. Morgan Kelly in his article says they are two sides of the one coin (and rails against that coin). The IMF and the German Institute for Economic Research (paper on bank restructuring linked by Patrick Honohan) agree that these are elements in the States “toolkit”. So now we know what everybody agrees on!

There appears to be disagreement as to the optimum timing and degree of Nationlisation and how it will affect (i) market confidence and (ii) NAMA asset valuation. The IMF and the German Institute for Economic Research think that asset valuation may be less risky for the tax-payer if carried out by a nationalised bank. It is to be noted however that the German Institute for Economic Research has in mind the near impossible valuation of complex toxic assets such as CDOs which are not a big issue in Ireland (afaik).

Does the Government really need the assistance of the bankers to value property assets in Ireland? Would the benefit of such help be offset by the perils of nationlisation? The IMF, the 20 Economists and the German Institute for Economic Research may be correct or the Government may be correct. We will never know as time will only test one solution. However, the increased contemplation of large-part and wholesale nationalisation gives one hope that the valuations will not be artificially high just for the sake of avoiding nationalisation.

As for the political mud-slinging, I think Karl Whelan should note that Brian Cowen was attacking the utterances of the opposition and not the 20 Economists when he said: “The Opposition has claimed many times that no independent economist supports the Government’s approach to the banks.” Karl Whelan acknowledges that political parties hijack, distort and mis-use people’s ideas. Brian Lucey says the same. I think they are both right and that the Taoiseach is entitled to attack the opposition for doing so.


I’ve always been puzzled as to how nationalisation of an entire bank solves the valuation problem relating to its distressed loans, given that the amount that will have to be ultimately paid for the entire bank (following some sort of compensation and judicial process) must in large part depend on a valuation of those assets.

While it may allow a non-contentious transfer of assets to a recovery vehicle, nationalisation may, in the end, just kick the valuation problem down the road for a few years into a judicial compensation process.

Any thoughts?


Hi Andrew,

I’m a little unsure as to what you’re asking but I think you’re referring to the question of compensating shareholders after the banks have been nationalised. On this, I’d offer the following thoughts:

1. If Northern Rock is the relevant precedent (shareholders get nothing up front with compensation getting kicked out to an independent valuer) then this process would be a slow one. Most likely, it would become clear by the time the valuer as made a decision that the losses were sufficient to wipe out the book value of equity. At this point, the exact valuation would no longer be relevant for shareholder compensation.

2. Northern Rock doesn’t have to be the precedent. If the NAMA process were to reveal that a large discount was to be applied, the share prices may fall so much that the government can make an offer based on market price without it costing too much and this may be the best option (a valuer could still be appointed afterwards.) Alternatively, the government could adopt Patrick Honohan’s proposal to deliberately underpay but give the shareholders some stake in any profits made by NAMA.

So, yes this is a complicating issue but not nearly as complicated as the upcoming process of NAMA buying assets from privately-owned banks.


Just to clarify, I wasn’t in any way claiming that the Taoiseach was “attacking” the 20 economists (though obviously other government representatives have done so on a number of occasions).


With respect, I think the question of how much compensation to pay to shareholders under nationalisation could be just as complicated, if not more so, than pricing distressed assets.

After all, any uncertainties regarding the true value of the entire bank primarily reflect the uncertainties regarding the value of the distressed assets.

It’s like saying that any uncertainty regarding the individual values of a pharma company’s key patents can be resolved by buying the whole company.

You suggest that this valuation challenge can be safely kicked to touch with nationalisation, as time will reveal the true value of the bank under some extended judicial compensation process. But on what legal basis can the State deny compensation to shareholders while it waits to find out how much it gets back from assets appropriated from them? Can they not argue that they would have recovered more if the loans had been left in the hands of hard-nosed private bankers rather than well meaning but less effectual public servants? This is simply not well thought through.

As an alternative, you then appear to concede the validity of the price discovery process to be operated by NAMA by saying that “if the NAMA were to reveal that a large discount was to be applied, the share prices may fall so much that the government can make an offer based on market price without it costing too much and this may be the best option”. But I had thought the unreliability of the NAMA price setting process was the very basis of your objection to NAMA without nationalisation.

Unfortunately, if we’re going the NAMA route, this administrative valuation problem for distressed assets has to be resolved at some stage, with or without nationalisation.

@karl D
“By that rationale, there are no independent analysts in all of industry and thus its rhetorical to ask if any have gone against the grain! They couldn’t be in industry and be independent at the same time (according to your hypothesis).”

Correct, almost by definition.
If you recieve part of your salary from any company within the financial industry you are not an independent finanacial analyist. How could one be?
It would take a level of benevolence that only the gods can aspire.
Going against the grain is different. No two financial entities interests are exactly the same so of course each ones experts disagree.
Also independent financial advisors that recieve varying levels of commissions/perks/etc. from different institutions are not independent.

The key point here is that if the IMF estimate of loan losses is 35billion, the banks are insovent and they will be nationalised. End of story. However there may be a problem with the IMF NUMBERS.
I am given to understand that i) their loan loss estimates are too high due to the use of mak to market on securities to derive loan loss projections. As spreads have narrowed these may come down. ii) they may have used 2008 as a base year for pre provision operating profits-possibly too low due to write-downs on mark to market assets and iii) they may have back out movements in value of own debt from regulatory capital when of course they were never included. As in any other excercise in forecasting it is just possible that doomsday numbers might be OTT.

BTW, the fact that no independent commentator has gone against the “Golden 20” should not be taken as gospel that the G20 are right. Presumably there were 20 medieval astonomers who toled Copernicus that he was wrong.

@Eamon Moran: I talk out against banks all the time on what I feel is sharp practice and my income is in part derived from the banking system, do you really think that everybody is so weak that for a few shekels they’d go against their own better instincts?

By not including industry economists (and there are plenty in the IFSC who don’t care whether or not irish banks are nationalised and indeed many might support the move) you are basically setting out a stall whereby you decided who’s commentary is and isn’t believable, at the same time academia suffers because they often feel nobody listens to them, it is the exclusion of practitioner experience that is partly to blame for this.

I harp on a bit about the difference between academics and practitioners, and my feelings are that they need to come together a bit more.

lastly – on one hand I’m told there are ‘no independent practitioners’ and on another that there is no need for ‘disparity between the two sides’…

clearly not in practice there isn’t folks.

‘not sure there are two sides’? … there seems to be when it comes to petitions!


As Joan Burton summed it up in her contribution to the Dail debate on the IMF on Friday last, government policy on the banking issue has only one objective:

“The purpose of public policy at his point in time is to offer a rescue package to the Fianna Fail Golden Circle.”

In her view, all the government’s proposals simply reflect: “the efforts of a politically well connected golden circle to push our government to take their losses on board. That is what the ill-fated September 30th guarantee was all about. That is the heart of the NAMA policy.”

When NAMA was first announced Ruairi Quinn welcomed the announcement in a TV interview. But in good democratic centralist tradition he has since recanted.

“Initially, the concept of NAMA had some attractions, “Quinn stated during the debate on Labour’s Dail motion on the banks on 12 May. “I supported it because we must get the toxic debt out of the way and return to normal banking operations. However, upon examination of the small detail, it seems the difficulty is that NAMA is supposed to take the book value of toxic debt, which is of the order of €90 billion, off the books of the banks such that the credit of the banks can be restored in the international markets, which is critical. The problem the Labour Party has with the NAMA proposal is in the detail rather than the concept…”

In the same debate Burton made it clear that there is no room for such equivocation:

“Crony capitalism may not be as overt as before but it has not gone away, it is still very much with us. Its influence can be seen in the set of attitudes that run through the National Asset Management Agency plan. What is good for the failed banks and the failed developers is deemed to be good for Ireland or so, at least, the Government appears to believe. The Minister said it bluntly himself when he described the NAMA as a bailout of the Irish economy. In other words he identifies the interests of the bankers and the developers with those of the State. The Minister for Finance faces a brutal public backlash if he proceeds with the NAMA in the manner he and Dr. Bacon have proposed. There is a huge loathing at the prospect of yet another bailout for the golden circle of Fianna Fáil’s developers and the bankers.”

In his summary of how Labour’s nationalisation proposal would work, Eamon Gilmore stated:

“This avoids the requirement to value the bad loans in this highly uncertain environment. The State would take ownership of the loans and the banks. The process of writing down the bad loans would be vigorously pursued and the normal lending would be resumed. I would envisage that units would be established within the banks to deal with the bad loans. That would be sensible business practice. As many of the loans are likely to be syndicated, a clearing house mechanism may also be required to deal with them and to minimise the legal costs involved in dealing with them. If a developer owes money to a number of institutions, all owned by the State, it makes sense that they be dealt with on an integrated basis. Ultimately, there could be a transfer of outstanding loans to a clearing house, or transfer of loans between State-owned banks. This would be a transfer from one State-owned institution to another, removing the risk to the State of having to value the bad loans. Once the banks’ balance sheets had been cleaned up, the State would return the banks to the market. The return to the State from the resale of the banks would significantly offset the cost of bad loans that the State is required to pick up.”

When I first read this, it brought to mind that old Scrap Saturday sketch about Daisy the Cow, whose eartags and name changed depending on whether she was being transported to one side of the border with Northern Ireland or returned to the Republic teh following day. I guess it would be the something the same with developers’ loans. But since there’s obviously no cost to the taxpayer in moving the toxic debt about in this way through some sort of mobile ‘clearing house’, then it will be all OK.

However, a week later, Gilmore revealed in the Dail that he didn’t really understand the NAMA proposal, which was a bit worrying.

All joking aside, you are correct in your assumption that I personally have no problem with nationalisation per se. I have understood your proposal and there is a logic and substance to it. But I’ve also read FG’s proposal and can see some attractions in it also. I’ve come to the conclusion – and read some arguments on this site that support that conclusion – that the government would go the route you suggest in a shot, if there weren’t some compelling arguments of which it is aware which has persuaded it that it should not take that approach. So NAM first, nationalisation (possibly) later.

What I can’t do is buy into the Labour spokesperson’s gigantic conspiracy theory and that every action proposed by the government to resolve the banking situation is part of some ingenious plan cooked up between the banks, the developers and the two Brians that’s being rolled out since 29th September last. To be honest, I don’t think any of those people are smart enough to think up a criminal conspiracy of such magnitude. Cock up I can believe in…

@Peter Maguire,

I take your point that the mad, bad and dangerous may appear exciting, but inevitably they turn out to be really boring – because they’re like a stuck record. Everything they say becomes predictable in the end. They don’t allow for any opinion other than their own. And they never, ever change their minds. They’re always right. They bore me rigid with their certainty and one other thing I’ve always noticed – they’re really not ever interested in anyone other than themselves, so any conversation ends up being a trifle one-sided. Not the sort you want to get stuck with at a party!

“I talk out against banks all the time on what I feel is sharp practice and my income is in part derived from the banking system, do you really think that everybody is so weak that for a few shekels they’d go against their own better instincts?”
Yes, everyone has a price.
Maybe you do talk out against sharp practice in general or specificly for that matter against organisations you are not employed by. But if you publicly talk out against your own employer there is a line which you know you cant cross.
Most peoples better instincts would be not to risk their families security in order to say the right thing.

It just seems very obvious to me that public sector employees can be more independent.

Industry economists are used more on the media for corporate reasons.


I think you’re making the shareholder compensation thing more complicated than it is. There is plenty of legal precedent (NR and the legislation underlying the UK Special Resolution Regime) to deal with this issue effectively.

In relation to “I had thought the unreliability of the NAMA price setting process was the very basis of your objection to NAMA without nationalisation.” Pretty clearly, my objections to the NAMA pricing process are that the prices are likely to be too high. I will have no objection if the prices come in realistically low, though all the signs are that this will not happen (and the process seems unlikely to have mechanisms to prevent it.)

Finally, as for banking proposals that are not “fully thought through” the old adage about people in glasshouses comes to mind.

@eamon moran

I talk out about banks and my own industry too, as for my employer, if i am unhappy with practice there I hammer them too although i don’t need to do it in public because I can get the result internally (i work in operations).

and of all the industry economists -and there are a lot of them – they would surely speak out against each other right? I think an economist for Depfa (for instance) would happily give good opinion on INBS positive or negative if asked.

I don’t think people in industry can’t be independent, and furthermore, they are not even given the chance because their opinion is not sought, and given some of the answers here, it is clearly not valued either. written off before a response is possible.

Will that ever give economic thinking a unified front? I think not, not as long as one side sees itself as better than the other the divide and stagnancy will remain, you can dress that up however you like it but that is the underlying reality of the matter.

thinking public sector employees can be independent is equally as mythical, how many PS economists are calling for numbers to be cut in the public sector? philip lane is the only one i have heard actually say it in a clear cut manner thus far. Everybody in every sector has taboos and in as much as you’d say practitioners are not immune i’d equally wager nobody is.

@ karl D
Sorry I should not have said public sector. That was an error bourne out of haste. I should have said academics.

I would agree that nobody is immune, People from industry and academia have ideological biases (be they left or right wing) but I would stand by my opinion that on average it is likely that a financial opinion given by by an academic is less likely to be influanced by financial industry interests than that given by someone working for the financial industry.
I dont think that economic thining should have a unified front but I do think that more academics should be used in private media (ie not RTE)
Similarly people working for the department of finance are not likely to say they think Nationalisation is a good idea.
Privately owned media use a lot more industry experts as compared with academic experts, which is probobly why academics feel their opinions are not valued as much. Vincent Brownes show on tv3 is an exception.
BTW my are not supposed to be personal just general observations

What I would like to see is the private media using more academic opinions where possible but when there is an absence of this that industry experts give clearer accounts of their involvement in the financial industry and admit that they may have (dispite their best intentions) pecuniary biases.


I assure you that I’m very open to being persuaded that, in the context of NAMA and asset transfer, that nationalisation could be the superior option, particularly if the IMF’s prognosis about potential losses is credible.

And I agree that no proposal on the banking crisis has been fully thought through, including FG’s. But given that we’re now discussing nationalisation and NAMA, don’t be surprised if I ask some hard questions, and forgive me if they across as hostile!

If Northern Rock provides a good precedent about how nationalisation overcomes the problem of valuing a banks’ assets, including its distressed ones, I’d like to hear more about that process of determining shareholder compensation. Do you know of any references?

Also, what about the liquidity risk of nationalisation? Evidently the flight of market funding and deposits from Anglo Irish Bank has, if anything, accelerated since nationalisation. This seems somewhat counter-intuitive to me. given that one could have expected nationalisation to have reassured depositors and the markets. But for one reason or another it has not done so, perhaps because it signals to the markets that things are even worse that they already feared.

This has to be a huge risk of any proposal to nationalise either or both of the other two major banks.



A few different things are being mixed up:

1. Valuation of shares on Nationalisation. This is the Northern Rock scenario. The valuation has not been arrived at and there is litigation threatened in that case.

2. Valuation of assets as between NAMA and the banks.

2.1 If you value at the market value or the economic value then compensation does not arise once the banks participate in the process. This should be the case whether the bank has been nationalised or not once the bank is acting prudently and the transactions are conducted at an arm’s length basis. It is in this process that some commentators have suggested nationalisation may assist as it may encourage bankers to act openly and not to try to obtain a gain/advantage or profit in the transfer of assets.

2.2 If you deliberately initially value at an undervalue and force the banks to accept such valuation then you will have to pay compensation to the banks (or possibly to their shareholders if the banks are fully nationalised). Generally you will only do this when it is almost impossible to value the asset. The compensation would likely be ascertained when the asset has been sold and a real value has been discovered.

@ zhou_enlai

Does not the valuation of shares on nationalisation ultimately hinge on the value of assets, including the distressed assets (given that the liabilities of a bank are relatively clear)? Are not the two issues closely linked in this way?

In other words, won’t a compensation process for shareholders ultimately get bogged down in the same challenges that NAMA will face – what value to attribute to distressed assets?

There will be a range of competing possibilities facing a court:

(1) the most recent share price;
(2) the most recent audited book value;
(3) some investment bank estimate of the share price that would have to be paid to acquire the whole company (somewhere between the book value and the most recent share price on the day of nationalisation)
(4) some economist’s estimate of the “true value” of the assets of the bank given reasonable economic projections
(5) some estimate of the share price of the bank were it not for the fact that the Government had been providing other forms of support (e.g. guarantee for liabilities)

I don’t want to labour it, but my key point is that we should not characterise nationalisation as magically overcoming the valuation problem for distressed assets. It only kicks the problem down the road a bit.



Andrew – you successfully address your own ‘concern’ in your last entry:

‘some estimate of the share price of the bank were it not for the fact that the Government had been providing other forms of support (e.g. guarantee for liabilities)’

It’s surely obvious that without the guarantee these banks would already be gone with shareholders having received nothing – it’s difficult to understand therefore, your continuing concern about what ‘compensation’ they should receive in the event of nationalisation – the answer is clear: 0!

@Andrew McDonnell

“Does not the valuation of shares on nationalisation ultimately hinge on the value of assets, including the distressed assets (given that the liabilities of a bank are relatively clear)?”

Not necessarily. The value of shares may be wildly different to the valuation of the underlying assets. Shares are shares in a business. The valuation would most likely be ascertained after the banks were re-floated and taking account of the fact that the banks required recapitalisation. If recapitalisation (and consequent dilution of shareholders’ holdings) happens before nationalisation then it makes it all the simpler. My (very simplistic) view is that if (i) a bank were nationalised for €8bn and this gave the State 80% ownership and (ii) the bank was later nationalised and (iii) the bank was recapped by a further €10bn and (iii) the bank was later re-privatised for €5bn then the shareholders would be due 10% of that ((€8bn+€10bn):€2bn; 9:1) being €0.5bn. As you say, there are other options such as valuing the shares at pre nationlisation traded prices.

However, the valuation of assets gone to NAMA would not matter once the State had paid a defensible price for the assets. Personally, I think if it is proven that the banks were insolvent without the Guarantee and/or NAMA then the shareholders should get zilch. Any shareholder still hanging in is aware of the risks of nationalisation/collapse.

One must also remember that the banks (and not the shareholders) own the assets. The right to contest valuations resides with the banks. If the bank boards (nationalised or otherwise) are mandated to value the assets fairly then the shareholders will have no course of action against NAMA. It will be important that the banks co-operate and agree the valuations (or agree to the method of valuation by expert) as part of a commercial arrangement with NAMA/the State rather than as being subjected to a statutory mechanism. This will eliminate any scope for judicial review proceedings and will allow for the expert’s determination to be binding if accepted by the State.

If the banks refuse to agree and NAMA has to resort to an arbitration or CPO type valuation then there will be trouble as each decision will be open to judicial review by the banks. One would expect that will not be an issue as the banks will be asked to sign up to the process at the beginning (as they signed up to the Guarantee and as the UK banks signed up to recapitalisation). Those who preach nationalisation say the banks would not seek advantage if nationalised and would be much easier to deal with.

The Shareholders may have an action against the bank or its board if the valuations are agreed wrongly. However, this should not hamstring NAMA or other financial institutions. Furthermore the shareholders would have a very difficult time proving loss or damage given the value of assets. Taking on such a case with all its evidentiary difficulties and public policy problems would be madness. In any event, if they are not already suing the boards for their actions over the last 10 years then I think we are pretty safe on that score!!

The key thing would be that the method of valuation as between the banks and NAMA would be defensible and that the board could be said to have acted in the interests of the nationalised institution. This should not be difficult as nobody has it in mind to screw the banks as that only damages their ability to lend.

“There will be a range of competing possibilities facing a court:

(1) the most recent share price;
(2) the most recent audited book value;
(3) some investment bank estimate of the share price that would have to be paid to acquire the whole company (somewhere between the book value and the most recent share price on the day of nationalisation)
(4) some economist’s estimate of the “true value” of the assets of the bank given reasonable economic projections
(5) some estimate of the share price of the bank were it not for the fact that the Government had been providing other forms of support (e.g. guarantee for liabilities)”

I think you have left out their future price as determined by the markets adjusted for CPI! The Government has the right to choose between the range of possibilities. The Government can enact legislation to stipulate how the shares are to be valued. Once that legilation passes muster when sent to the Supreme Court by the President then we should be ok (there is a presumption of constitutionality which gives the Govt the edge). This is a lot cleaner than simply “kicking it down the road a bit”.

Also, it is worth noting that the State has to address a similar problem for Anglo shareholders so the work involved has to be undertaken in any event.

@ zhou_enlai
@ John Looby

Any judicial compensation process and / or new legislation on this issue will still have to respect constitutional property rights.

I wish I could be as confident as you that conservative Irish judges, with a history of fiercely defending private property against the “common weal”, won’t side with shareholders against the taxpayer/Government on this issue. I think we can at least agree that there will remain a degree of uncertainty regarding the ultimate cost of nationalisation.

But to be fair to the arguments presented by yourselves and karl, any court-determined over-payment for nationalisation will at least be more obvious to the general public than subsidised recapitalisation by stealth under NAMA.



I agree that the Courts must accept the constitutionality of the measures. However, I don’t think there is anything to fear from this the State is willing to compensate shareholders fairly (which may be not at all) and is willing to pay fair prices for the assets. The Courts can only decide between methods of valuations and will not decide the values themselves. The only cost risk I see would be possible entitlement of the shareholders to interest on the compensation at a high rate. Such a cost risk is miniscule to the risk which may be incurred by allowing the valuations to become a matter of debate and dispute now or at the time of transfer.


If only things were as simple as you make out. In a distressed market, the value of the assets will be less than the market with the result that the shareholders claim on the equity is wiped out. But if you as the government exercise your power to acquire these assets at a distressed or current market valuation, I will head to the High Court, armed with my discounted cash flow models to show try to establish that you are “stealing” my assets and infringing my constitutional right. If you subsequently dispose of these assets at a higher value than you bought them at, is not my case proven.

So if you nationalise the banks, wipe me out by paying a distressed price,I could hold you up in court for years and prevent you from restructuring the loan book on the basis that you can’t retructure what you don’t own.


“If NAMA purchased the banks loans at a steep discount shareholder equity would be completely absorbed.
As karl w says they could be given some form of upside in NAMA
possibly in the form of shares.

The next stage of the bank restructuring would be to force the bank bondholder to exchange some debt for equity. This would would have two big advantages. Firstly it would go a long way to recapitalizing the banks. Secondly, and this is crucial to many such as karl d, it would mean the banks still have a significant private stake. ”

From what I have read this seems to be the most sensible solution, at the end of the day both NAMA and nationalisation result in the tax payer taking the full brunt of the bailouts, whereas with this solution both the bondholder and the tax payer get screwed! 🙂

Is it true that the bondholders can’t be touched until the guarantee scheme is up??

@de roiste
there are 2 types of bond holders-senior and sub. Senior are part of the Guaratee and, I understand, rank parri passu with depositors. So therfore, loss absorption is problematic. As regard the sub debt holders, they are de facto absorbing losses at the mo through buy backs below par, coupon deferral etc. There is an ongoing debt equity swap underway. It it, limited in its capacity and is not a “silver Bullet”. The state is probably going to have to recap the banks. Indeed if it goes ahead with NAMA it should take a (majority) stake in the banks to insure against over paying.

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