Today’s Irish Times lead story on potential interest from a Canadian bank in taking a stake in AIB raises some important issues. These are being well covered already in some comments at the end of the Carroll thread just below but I think they’re also worth hoisting up to the front page.
Most likely this story will receive a lot of coverage which will report it as implying that NAMA is “a good policy.” The Canadians will only be willing to invest once NAMA has taken AIB’s bad loans, so we’ll be told that this shows that NAMA is a good policy that is helping to get our banks back on a sound footing.
This is fine up to a point. However, what may got lost in this version of the story is that the potential Canadian interest doesn’t imply any specific endorsement of the NAMA as currently constructed. The presence of a huge amount of bad loans on AIB’s books, and a complex public debate about what to do about it, implies an enormous uncertainty about the future of the bank. And until that uncertainty is resolved, no private investor would be willing to acquire a large stake.
It should be remembered as well that the alternatives being proposed to the current NAMA legislation also involve dealing with these bad assets. For instance, the four-part plan that I proposed in April involved nationalising and then quickly transferring the bad assets to a government-owned asset management company.
In that article, I proposed that the government could fully re-capitalise the banks and then look to sell off equity stakes to the private sector. As with the current NAMA proposal, a key step in attracting the interest of private capital was the hiving off of the bad assets into an AMC. But of course, if this step was immediately successful in attracting interest from private investment, then there would be nothing to prevent the government negotiating with outside investors to have them jointly or fully recapitalise the banks.
I could also point to two advantages of the nationalise-and-NAMA approach in terms of getting private investment involved again. First, with nationalisation, the pricing process of transferring the assets would be far simpler than the excruciatingly complex process that NAMA has now set out on. Without doubt, the asset transfer would be achieved far faster than the schedule being outlined now for NAMA, with the top 50 developers having their loans transferred by the end of the year and the rest later, with the process rumbling on through next summer.
Second, the government is proposing that, at some point in the future, a levy related to NAMA’s losses may be imposed on the banks. This could act as a deterrent to some private investors (unless, of course, nods and winks are being used to indicate that the levy won’t be something to worry about.) In contrast, nationalisation-plus-NAMA would produce banks that do not have any future levy hanging over them. The idea of risk-sharing can be implemented via Patrick Honohan’s suggestion of giving the bank shareholders a stake in NAMA’s profits, should there be any.
I’m sure a contrary argument will be put, which is that private investors won’t want to purchase stakes in nationalised banks, perhaps because they won’t like the idea of having the Irish government as a business partner. However, if our Canadian friends are interested in buying the whole thing, then they could buy the whole nationalised bank also. And if they only want to buy a small stake, then it would seem likely that they’ve already signalled that they’re ok with having the Irish government as a partner for a while. Remember that the post-NAMA outlook being predicted by even those in favour of low haircuts is that AIB could still end up being 70 to 80 percent state-owned.
The other potential argument here is that the Canadians really want to keep the current shareholders involved in owning and managing the bank in the future. Personally, I couldn’t see why. In fact, it would probably be easier for the Canadians to avoid dealing with that crowd altogether.
To summarise, we need to be careful not to confuse correlation with causation. Involvement of private equity investment in our banks may be a good thing. But the fact that there may be a sequence of events in which first NAMA-with-overpayment happens first and private equity investment happens second, does not have to imply that NAMA-with-overpayment is the best policy available to us.