While the government’s approach to the banking crisis is struggling to get much support from economists outside the pay of the Department of Finance or financial institutions, they’re doing much better with opinion columnists. The Sunday Tribune’s Shane Coleman is the latest to join the pro-NAMA opinion columnist brigade. Coleman promotes NAMA as the “least worst option”. Most of the article is about the evils of nationalisation.
Let’s take a look at the arguments put forward.
The first relates to a direct cost of nationalisation. Coleman writes:
The state would have to pay in the region of €5bn to shareholders of AIB and Bank of Ireland.
This is simply wrong. The current market value of €5 billion is based on the assumption that long-term economic value purchases by NAMA will keep losses down. A simple announcement that the government is not planning to proceed with long-term economic value pricing would likely see the share prices collapse to well below €1 billion, as they were in February before Peter Bacon appeared on the horizon.
Also, when banks are nationalised, there are lots of ways to compensate shareholders apart from paying them the last share price. These include appointing an independent valuer (as in Northern Rock and Anglo) or perhaps giving the shareholders a stake in an asset management company set up to take on their bad assets (as in Honohan’s NAMA 2.0). So the €5 billion figure is just not correct.
Coleman then strays into Baconian equivalence territory:
And that would be before the state did anything about the toxic loans because – and this point has been lost – nationalisation would do nothing to address the balance sheets of the banks.
I can just hear the dulcet tones of Peter Bacon now “There are losses. Nationalising doesn’t change that fact.” Well, yes but what it does change is the distribution of those losses. Deliberately paying over the odds to avoid the losses exceeding equity falling on the bank shareholders just pushes the overpayment as an additional cost on to the taxpayer. In all honesty, and with all respects to Shane, I think that is the point that usually gets lost.
Coleman then says that
The nationalised banks’ ability to lend would be further hit by the fact that they would immediately have to pay off many of their bondholders, because the terms of those bonds explicitly require repayment in the event of a bank being nationalised. Anglo Irish Bank, for example, lost €1.6bn in funds when it was nationalised.
I am not aware of a common clause in bank bonds stating that the bonds need to be repaid in the event of nationalisation, nor would there have been much reason for such clauses to have been written into most of these bonds, which were issued mainly during boom times. And Coleman’s figures for Anglo appear to confirm that this is not a particularly important factor. Anglo’s most recent report shows that it has total liabilities of €88 billion in March 2009, including €19 billion in debt securities, so the €1.6 billion cited by Coleman was a pretty minor component.
The article then moves into its apocalyptic scaremongering section. Coleman informs us that
if we want to hang up a sign to the world saying ‘Ireland is the new Iceland’, the best way to do that is to nationalise AIB and Bank of Ireland.
This is the old line about “the signal it would send to the world.” Because, of course, as we all know, the world is currently under the impression that these banks are in great shape and not at all dependent on government life support. Perhaps Shane thought this was good tough opinion column stuff but to my ears, it sounds eerily reminiscent of something Brian Cowen would say in one of his crankier Dail moments.
Then we get the “bank bonds are basically government bonds” shtick.
The government would be asking to borrow many billions of euros – as it needs to do over the coming years – from the very funds and institutions the Irish banks would be burning. Let’s get real.
Get real indeed. No matter how often respected bond analysts, such as Ciaran O’Hagan, explain that this argument is bogus, it still seems to be favoured by opinion journalists.
Coleman then refers to something called NAMA’s “charging system” and how this means “NAMA will certainly wash his face”. What “charging system”? Is this what getting real is about? Inventing new sources of revenue for NAMA?
Finally, Coleman tells us the legislation will
include claw-back measures, such as staggered payments to the banks for the loans and a possible bank levy if the ‘haircut’ proves over-optimistic. That will happen.
Despite the certainty implied here, we have actually been definitively told that a bank levy will not be included in the legislation. A flag about the idea of a staggered payment is being raised this weekend. Let’s see.
If these arguments represent the official thinking on NAMA, then they’re a pretty depressing insight.