Finding Foreign Capital for Irish Domestic Banks

It is obvious that the Irish banks will need very large amounts of new equity capital in the near future, given their NAMA-related loss crystallisation, along with prospective losses on their retained loan portfolios. This confirms the year-ago forecasts of Brian Lucey, Karl Whelen and others, and contradicts the contemporaneous claims of bank and government spokespersons that there would be no need for additional equity capital. It seems clear that the amount of new equity capital needed is equivalent to majority ownership (Lucey was quoted on Frontline stating that the newly issued equity might constitute 95% of total equity after issuance).

There are three ways to inject new equity capital into the two surviving[1] banks: 1) the government directly purchases more equity shares from the banks, 2) the banks try to raise the equity from existing shareholders using a rights offering, or 3) the banks accept a big block acquisition of equity capital from a large foreign institution probably a foreign bank. The Central Bank and Department of Finance should be pushing hard on the banks to use method 3, since this method is in the best interest of the Irish taxpayer and Irish economy.

It is standard best practice to rescue ailing banks via arranged takeovers by strong banks. For example, in the USA the Federal Deposit Insurance Corporation and Federal Reserve have very well-honed procedures and can arrange these forced-marriages quickly and smoothly. In the current Irish situation there are several big advantages over the other two methods:

1. It brings harsh market discipline to the banks. If using method 1 instead, the banks become majority state-owned, and the political biases in government policy might infect bank strategies even more strongly than at present. This is a serious concern. For example, recent government banking policies (liability guarantee, Anglo Irish non-closure, NAMA business plan, property price information suppression) have been very generous toward Irish property developers, at great expense to Irish taxpayers and the Irish economy. A foreign bank would not have these political biases – perhaps it could even strong-arm the government into releasing a property price register and also force the government to stop working through NAMA to prevent property prices from dropping to a market-clearing equilibrium. Method 2, an attempted rights offering, would leave the banks very weak and essentially wards of the state, and hence many of the same concerns apply.

2. A foreign block acquisition would provide market validation of the equity price for the Irish banks. By opening up its books to a foreign acquirer, and then accepting a fair offer for some or all of the shares of the bank, the bank provides a true picture of the state of the bank, and by extension a valuation guide for other Irish banks and building societies.

3. The implicit cost of the government liability guarantee, for any bank in foreign ownership, would fall to near-zero. The liability guarantee would be buffered by the big foreign bank’s large asset base.

The drawback to a foreign takeover is that domestic shareholders (?) would lose control of either or both of the two main banks. I think that this is a price that the Irish public should accept. The banks gambled recklessly with their legacy and lost the bet. Domestic ownership of the banks matters very little in a very open economy like Ireland’s.

[1] Anglo Irish (as Fintan O’Toole wittily stated) is “undead” rather than strictly “alive” — here I am focussing only on AIB and Bank of Ireland. I exclude the building societies to simplify the discussion.

40 replies on “Finding Foreign Capital for Irish Domestic Banks”

It appears most non-covered non-domestic banks are heading for the exit – if they haven’t left already. Why would a major foreign bank (or banks) take over AIB or BoI when government policies are setting the economy fair for a decade of stagnation?

No repossessions of residential, no busting of the politically connected, gazillions of unprofitable trackers…

The question is, how much would the state have to pay for someone to take them over?

Gregory,
The problem is that who will put money into Irish banks. The net worth of BoI and AIB is jointly near -20 billion (yes that’s negative). Why would any foreign bank put money in this pit? The way FDIC works is that it wipes out subordinate and other forms of debt as well as depositors above the threshold. Are you advocating the same here? If not, who is going to fill the huge gap between liabilities and assets? It looks unlikely that the EC is going to allow the government to fill more than a small portion of that gap through the NAMA overpayment. So why would anyone put any money in AIB and BoI?

@ Gregory,

I would like to refer you to my post over here:

http://www.irisheconomy.ie/index.php/2010/03/03/slide-11/#comment-38458

I actually spelled the authors name incorrectly – it should be David S. Isenberg, who was working for AT&T in 1997 when he first released his essay, The Rise of Stupid Networks.

I would be interested in getting your reaction, to an essay such as that. What I mean of course is, with bank-ing etc, substituted somehow for the infrastructure of communications. BOH.

@ Gregory Connor

OK Gregory – at least you have the decency to respond.

Blind faith in market_clearing equilibrium aside, and notwithstanding factural correctness, I don’t see this argument on the ‘white knight’ at the mo. I was perchance hoping for another miracle, or a ground-breaking first, from the environs of Pontifical Maynooth. Aside from the usual clarity of those abstract equations, this is more ‘blind faith’ than ‘realistic pragmatism’ – whether of the American or Kantian variety. We are on our own, with a lifeline to Europe and the Euro, and ‘only the state can act’ …….. problem is that the state isn’t acting pragmatically.

49 seconds to melt_down.

“and contradicts the contemporaneous claims of bank and government spokespersons that there would be no need for additional equity capital”

Was that claim actually made?!

I think that we all accept that we will have to pay over money towards recapitalisation and allow any large amount of private equity coming in to get a better deal, i.e., more shares per euro. That is if everything goes well!

I don’t know if anyone cares too much whether we own our own banks any more. I hope there will be an Anglo phoenix from the flames in a few years in any event.

The problem Greg is that there is no clear business proposition ; until and unless the banks are
a) cleaned of the toxic loans and
b) allowed to retain some assets overseas that actually generate revenue
its hard to see what the investible proposition is.
But, who knows…

@Gregory Connor
The banks collapsed in Sept 2008. We will never learn the truth about what happened on the night of the guarantee or since. The events leading up to it will not even be partially revealed until late 2010 at the earliest – more than two years after the guarantee. As the now year long Garda Anglo investigation shows, the Irish establishment are expert at stalling while giving the impression of activity. In recent months the Gardai have actually backpedalled on the state of their investigation. Now they are saying there will be no arrests and no developments for many months, whereas in January arrests were imminent by the end of February! Garda sources say this is for “internal reasons”. Canon law strikes again.

On fixing the banks/NAMA, the bank inquiry and the Anglo investigation the establishment have stalled and delayed. They have starved business of credit and cost tens of thousands of jobs as a result. Likewise, justice and truth delayed is justice and truth denied. You said yourself,
“This confirms the year-ago forecasts of Brian Lucey, Karl Whelen and others.” The Establishment knew the banks were insolvent a year ago and that a Japanese scale lending bubble had just burst in Ireland, never to return. Some of them may have convinced themselves otherwise, but deep down they KNEW. They reacted instinctively – by covering up, stalling, delaying, misleading. The whole NAMA scheme was an attempt to evade responsibility by pretending the property market would recover in…10, 12, 15 years time. The date of the great recovery was a very conveniently moveable feast, that kept on moving backwards.

My prediction therefore is that whatever the Irish stablishment do with the banks will involve concealment, secrecy, corruption and enrichment of the well connected and that they will draw it out as long as is necessary to protect their own interests.

@Gregory Connor

“contradicts the contemporaneous claims of bank and government spokespersons that there would be no need for additional equity capital.”

You must not have been following the discussion on the previous thread on Slide 11.

20 academics, inlcuding you, signed the following:

“Nationalising banks is the best option” The Irish Times, 17 April 2009

http://www.irishtimes.com/newspaper/opinion/2009/0417/1224244902514.html

Imporantly, they said the following in the 6th paragraph:

“In introducing its proposals for the National Asset Management Agency (Nama), Government Ministers and Peter Bacon, the consultant who recommended this plan to the Government, have stressed that they see their current plan as likely to produce a superior outcome to nationalisation (though they concede that majority State ownership may be required).”

So they acknowledge that the Government did not rule out “majority State ownership.”

Could you please provide evidence to support your claim that there were “contemporaneous claims of… government spokespersons that there would be no need for additional equity capital”

I can’t find any. I asked Brian Lucey to provide some to support his similar claim, but he has not done so. Could you do so, before I lost faith entirely in academic integrity.

@All
The banker/broker/politician Jesuits have done all they can to confuse the banking debate. It looks like the possibility of very substantial nationalisation has caused their heads to revolve. Their goal now is to try to minimise it. They take their lead from their master Brian Lenihan’s Iceland! terrorism and spin warfare tactics. Why do FF/PDs/Developers/Bankers/Bank Investors want to minimise nationalisation?

– The higher the degree of nationalisation the more failure they acknowledge. They HATE this which is why they want to overpay gigantically through NAMA. Unfortunately they may now not be able to overpay gigantically enough.
– Loss of their own investments – worst of all.
– Loss of broking income as less shares traded.
– Loss of client investments for pension funds and brokers and resulting client ferocity.
– Likely clearout of boards and bank executives and damage to businesses they are connected to. Loss of FUTURE insider power and opportunities. If the banks are sold to foreign banks – as the EU could well demand – this could all be much worse. They’ll take one look at ACC’s experience and fire every senior dodgy Irish bank employee (most of them).
– End to FF/PDs/Megadeveloper/Banker/Bank Investor axis. Imagine if all the Irish banks acted like the tiny ACC has.
It would be ArmaMEGADEVELOPERgeddon.

FF/PDs/Megadeveloper/Bankers/Bank Investors will do all they can to avert full nationalisation. For them, it’s JUDGEMENT DAY.

@zhou:
“I hope there will be an Anglo phoenix from the flames in a few years in any event.”

I suspect most citizens would settle for the flames.

bjg

@ Rob D.

Keep the faith! Here is a relevant quote:

MINISTER FOR Finance Brian Lenihan has said the bank guarantee scheme was “a necessary first step” and “the cheapest bailout in the world so far”.

Mr Lenihan said the guarantee was “the cheapest bailout” compared with bank rescues in other countries, including the UK and the US, where “billions and billions of taxpayers’ money are being poured into financial institutions”.

The Minister said the guarantee had successfully attracted a lot of liquidity into the banking system.

“It allows us to move on and examine other questions which may have to be addressed to ensure that the banks are put on a sound footing and will guarantee to the wider economy the necessary lifeblood that the system requires,” he said at a Leinster Society of Chartered Accountants lunch in Dublin.

October 23rd 2008 quoted in the Irish Times the next day.

@ Rob D

The piece by the academics you referred to was published on April 17, 2009.

Here’s a press release from the Department of Finance on April 20 — pretty contemporaneous, right?

http://www.finance.gov.ie/viewdoc.asp?DocID=5740

Here’s an extract:

“4. What about Bank of Ireland – have they had the same stress tests and will they be needing more capital?

The same type of stress test scenarios were applied to Bank of Ireland as part of their due diligence exercise. These stress scenarios did not indicate to us a need for any further capital beyond the €3.5bn invested by the Government.”

The same press release says AIB only need an additional €1.5 billion.

I look forward to reading your apology to Greg.

As a piece of advice, I’d also point out that since you don’t appear to have followed events of the past year very closely, perhaps you might tone down your rhetoric a notch?

@Karl Whelan
Not losing your faith in anonymous poster intergrity, are you? 😉

@ ym

Can’t lose faith if you never had any. 😆

More seriously, I actually have great faith in the integrity of many our regular anonymous posters, including ones I disagree with all the time.

@ Gregory Connor,

Karl Whelan posted about Dermot Desmond’s IT article last Sept ’09, Financial institutions should be left to manage their own delinquent assets. I quote from Desmond’s article:

If we want to take a pro-development route we need to have a competitive banking system. Does anyone believe that a nationalised group of banks, effectively controlled by the politicians/Civil Service, will provide a competitive banking landscape?

I began to think about it myself. I think there is alot in Desmond’s article that he could have, and should have worded better. But then again, Brian Lucey runs into the 1,000 word budget all the time in the Irish Times. I am not sure what Sarah Carey’s word budget is for the column pieces. I offered this blog entry of mine to Brian Lucey and Sarah Carey to read/contemplate over the weekend, on the other ‘Slide 11’ thread. I think it might provoke some interesting questions for your thread also.

http://designcomment.blogspot.com/2010/03/rise-of-dumb-bank-ing.html

Thats basically what I am trying to do, to re-word Desmond’s article of Sept ’09, in business-speak, and extend it to make some sort of practical sense to a lay person (such as myself). BOH.

@ Rob D,

“You must not have been following the discussion on the previous thread on Slide 11.”

I did.

I offered you this.

At the second reading of the Anglo Nationalisation Bill (20th January 2009) the Minister states,

“Notwithstanding that I have been quite clear about my intentions, there has been speculation that the action we are taking in relation to Anglo Irish Bank somehow changes the position of the two other institutions in relation to which the Government has announced recapitalisation plans. Both Bank of Ireland and Allied Irish Banks are fundamentally sound and solvent institutions. The Government reiterates that it sees Bank of Ireland and Allied Irish Banks as central to the Irish financial system and essential to the proper functioning of the economy. The Government wishes to ensure that both Bank of Ireland and Allied Irish Banks remain as independent banks. The Government re-affirms that it is proceeding with the planned recapitalisation of Bank of Ireland and Allied Irish Banks on this basis and its firm intention is that both banks remain in private ownership.”.

As they say Rob. “You can take that to the bank”.

But Rob, maybe I’m being picky here.

Maybe Brian Lenihan didn’t say Both Bank of Ireland and Allied Irish Banks are fundamentally sound and solvent institutions..

Silly me Rob, When the Minister said that I thought he meant that the “institutions” were not in need of “equity”. You’ll have to forgive me on that Rob. I am a peasant.

You and the Minister obviously interpret “fundamentally sound and solvent” in a language that only you and the Minister speak.

For me, “fundamentally sound and solvent” means you don’t need equity. You’ve got enough. But hey, if some idiot wants to give you more at zero cost of capital? What are you going to do?

Come on Rob, you know the answer?

That’s right Rob, you’re going to take all that zero cost capital with both of your greedy little hands.

Hey Bob, how about I don’t really “get” what you mean?

Maybe what you mean is that if one uses the word “contemporaneous” one means that the toilet paper hits the arse two seconds after a shite?

Tell me Rob, is that how you use language?

No, I’m sure it isn’t Rob.

I’m sure your argument with Connor’s use of the word is some sort of pedantic linguistics.

Would this definition satisfy your pedantry?

“originating, existing, or happening during the same period of time”

As a peasant Rob I must bow to your superior use of language.

And of course I must provide my Lord Minister with my share of €100,000,000,000 for the good of the nation.

If only I was as educated as you Rob, I understand why.

Did you go to FAS Rob?

Have they any vacancies?

@ David O’Donnell

What a strange thing.

Whelan doesn’t seem to understand the meta use of “Ferengi”.

The Startrek Ferengi describe the behaviour of Bondholders precisely.

Sociopathic.

They would destroy (their own) family, community, nation, enterprise, politic, capital and land for a couple of “bps”.

Am I to accept as peasant that Sociopaths are my masters?

Am I to accept the endless and deliberate pedantry of Rob?

Perhaps he has not read any of Philip K Dick.

“Do Androids Dream Of Electric Sheep” made in film as “Blade Runner”.

Dick had a view on banking. I think he meant it’s were the deliberately ignorant go.

“The trouble with being educated is that it takes a long time; it uses up the better part of your life and when you are finished, what you know is that you would have benefited more by going into banking.”

Still there are older tales on banking like the Wizard of Oz.

@ Rob D,

Sorry, there’s me with the ignorance of a peasant.

Like all peasants I am forgetful of ideas.

Maybe you can help me out here Rob?

Just a couple of questions so my peasant memory is not confused.

I know you’re going to help me out on this Rob because you know the meaning of the word “contemporaneous”.

Rob, this “contemporaneous” thing is a bit difficult for a peasant like me.

Will it be “originating at the same time” when Brian Lenihan admits that Allied Irish Bank and Bank Of Ireland are insolvent and “gives” another €6,000,000,000 just to keep the peasants happy?

Is that the way “contemporaneous” works Rob?

No?

Maybe this is the way it works Rob.

Maybe at the same time that Brian Lenihan gives another €6,000,000,000 to AIB and BofI he gives €8,000,000,000 to Anglo Irish Bank and Irish Nationwide Building Society.

Is that “contemporaneous” Rob?

I’m going to have to sleep on it.

If I wake up in the morning and declare that you are the magnificent you’ll be the first to know.

The quotes from the Minister supplied by Gregory Connor are pretty ambiguos. “a necessary first step” What’s the second and thrird step, recapitalisation?

“The Minister said the guarantee had successfully attracted a lot of liquidity into the banking system.” There’s a difference between liquidity and capital.

“It allows us to move on and examine other questions which may have to be addressed to ensure that the banks are put on a sound footing …” What other questions? Recapitalisation?

The 20 April quote supplied by Karl Whelan is better. But it doesn’t take into account the crystallisation of losses by NAMA. So the place to look is at the Budget speech two weeks earlier when NAMA was announced:

http://www.budget.gov.ie/Budgets/2009Supp/FinancialStatement.aspx#CreditSystem

It says “If the crystallisation of losses at any institution requires additional capital the State will insist on participation by way of ordinary shares in the relevant institution.”

Since the price paid by NAMA for the loans was always going to be a lot lower than the book value of loans on the banks’ balance sheet, the banks were inevitably going to need extra capital. The questions were how much, when, and from whom?

There is some way to interpret government spokespersons 15 months ago to mean that the banks would need 25 billion euros of taxpayer-supplied equity? That is a wild stretch, in my opinion. They were wildly off-base, and Whelan-Lucey were spot-on.

re “Why would foreign banks come into Ireland”

I’m assuming we can leverage the enourmous tax credits against previous losses at some stage. I mean, if you were to buy AIB right now, and assume another loss making year in 2010 after the NAMA transfer, you’re probably not going to be paying any tax on any Irish-earned profits for another 5-10 years right? For the right bank with a smart structuring/transfer pricing concept, couldn’t this be very lucrative?

@ Gregory Connor

“There is some way to interpret government spokespersons 15 months ago to mean that the banks would need 25 billion euros of taxpayer-supplied equity? ”

So you have now changed your accusation from one in which the the Government claimed “that there would be no need for additional equity capital” to one in which the Government underestimted the need for additional equity capital.

Your arguement is now that because the Government did not provide a figure for future capital needs, it must have underestimated the future needs. I’m sorry, but that just doesn’t follow.

Instead you say “It seems clear that the amount of new equity capital needed is equivalent to majority ownership”. Yet, as has been documented many, many times on this website, the Government has consistently said over the past year that majority ownership is possible. So that does that square with your “underestimation” claim?

It seems what the Government is doing is letting the actual valuations coming from the NAMA transfers to determine the capital needs. What’s wrong with that?

@ Brian O’ Hanlon

“They may have been spot-on, but what is the plan now?”

What’s your “plan” in less than fifty words?

@Noel
You may like to put reverse swing on the impression the government were giving eighteen months ago. God bless your rosy memories. The rest of us remember a government that did all in its power to keep the banks private and the state’s shares as no more than token.

The man on the street, in my experience, is also of the view that creeping nationalisation is no different to ‘outright’ ‘pre-emptive’ full nationalisation (whatever you like to call it yourself). The government have lost the argument on this one where it counts.

Hi All
Seems rather hot tonight or is it me?

The banks will shrink and their capital needs will also shrink. The practice of putting tax payer money into banks is subject to EU control.

EU control, OK? Ireland is no longer sovereign, you spanners.

The banks may be worth -20,000,000,000 euro. Or worse, especially as their value is falling further as time passes by. Everyone knows this except the impulsives. The question is not finding a sucker, it is putting the banks to sleep. Now. The paying loans are transferred to a good bank, entirely owned by the state as the state is well into a huge whole. One or two good banks doesn’t really matter.

Do it. Now! Wasting time is wasting taxes that will be levied.

What are we waiting for?

@ Gregory Connor

The Government statements you proffered don’t even come near to supporting your claim. If anything, they point in the other direction. Why don’t you just concede that your were mistaken and we can get on with the discussion.

@ Karl Whelan

You negelcted the last paragraph on that statement, which talks about the possiblity of future capital as a result of the NAMA operation. The early capital injections allowed the banks to meet regulatory capital requirements and therefore to stay in business, but I see no evidence that the Government or the Central Bank did not foresee future equity capital injections due to the transfers to NAMA. Indeed, the Government stated that “NAMA will accelerate the losses” associated with property loans, so by design NAMA made future capital injections inevitable.

@ Greg

That statement is pre-dated the announcement of NAMA. Without NAMA, banks might have attempted to rebuild their capital gradually over many years without future injections.

@ Noel

“The questions were how much, when, and from whom?” If reports in yesterdays papers are to believed, we will soon get answers to all three questions.

@

“its power to keep the banks private and the state’s shares as no more than token.”

But what is your evidence for this? The best way to keep “the state’s shares as no more than token” would have been to allow the banks to write off a few billion of losses each year for the next 10-15 years. A Government doing “all in its power to keep the state’s shares as no more than token” would not have set up a bad bank that accelerated losses and reduced banks’ capital.

@ All

I think this arguing over who said what by both sides of the debate is somewhat childish. How about looking at actions by the government and judging whether they indicate a desire to take majority control of the baking system or Private Control:

1. Liability Guarantee – Private Control
2. Nationalisation of Anglo – this was due to a desire to keep the bank in existence, but for argument sake let’s say it points to a desire for majority control.
3. Recapitalisation scheme – Private Control.
4. NAMA – Private Control

Now, assuming the government (and their advisors) aren’t idiots they were surely aware all this time that majority state control was a highly likely possibility. Yet they would have preferred private control so they have pursued this obviously more expensive (financially and in wider economic terms) route. I would liken the excess cost to buying a call option on private control. I think the various arguments reduce to one about the cost of this option.

@ All,

If you study my blog entry, The Rise of Dumb Bank-ing, it will help you ask the right questions of existing government policy. That is the part of it, where Irish economists are losing their way at the moment. They are not savy enough in terms of asking the right questions of the elected representatives. You hear phrases from government such as ‘strengthen-ing through consolidation’ is the best way forward, to solve the banking crisis. What does that mean? I don’t think it means anything. I don’t think the government know what it means. I don’t think anyone knows what that means. In my blog entry, The Rise of Dumb Bank-ing, what I suggest we need is a ‘dial tone’, a basis bank-ing infrastructure. That should never be allowed to go down in the first place. That basic banking level is not intended to be attractive at any later stage, to any risk taking bond or share holders. (This is the massive problem I have with all of proposals by Irish economists, they don’t seem to understand) The best way to make some attractive, is to do something risky and innovative that is small – not large, small. So ‘strengthen-ing through consolidation’ isn’t going to work. Worse, it is only going to compound and exascerbate problems we already had, and paid dearly for. We don’t want consolidation, we want the opposite to lumping in all parts together. That is never going to be right. Irish economists are unable to direct this kind of offensive on government policy.

I am really tired of another meaningless phrase the government uses at will, Anglo should be subject to the same regulation as everyone else. In my blog entry, The Rise of Dumb Bank-ing, I suggest we develop a model for banking policy, which has several layers. The highest level of assistance going to the layers at the level of risk (layers which are of most infrastructural importance) That is the layer which gives you the bank-ing ‘dial tone’ so to speak. Visa versa, players such as Anglo Irish bank aren’t going to get any assistance. They are going to be moved to the top layers of the banking system. One where the same level of regulation, does not apply. That is the best trade off to make. That is how you overcome the moral hazard problem. To take that awful phrase government throws around so lightly, Anglo will be subject to the same regulation as everyone else, denies a whole reality of banking in the 21st century. This kind of political fair play, one size fits all, is quite frankly dangerous to employ. It denies the whole entire reality that is banking today. I quote Matt Cooper from today’s Sunday Times paper: They knew the risks when they bought the bank’s bonds, risk that was measured in terms of the attractive rates they were paid. BOH.

@ GK,

I would liken the excess cost to buying a call option on private control. I think the various arguments reduce to one about the cost of this option.

I have been thinking along the same lines myself. I agree with you. But the point is, I only came to the conclusion you have come to, by going at it, through a different thought process to what economists go through. I think that economists, used as their starting point, for thinking about this as, the various layers of ‘risk capital’ contained in banking institutions. This in turn set up the whole way economists have to think about these issues. Whereas, in my blog entry, The Rise of Dumb Bank-ing, I decided to establish a very different layer-structuring of the problem, and came to conclusion(s) in my own mind, very similar to what you are presenting in your comment above. BOH.

@ All,

If you read my comment to Edgar Morgenroth, in the thread Recovery strategy needs to integrate investment focus,

http://www.irisheconomy.ie/index.php/2010/03/05/recovery-strategy-needs-to-integrate-investment-focus/#comment-38933

You will see, my point about a basic bank-ing infrastructure, that could be owned and funded, in large measure by a community, such as the people of this island, at a low level of risk over an extended time period. I argue, that is what many of the ‘small’ shareholders of BOI and AIB were in effect. Not the providers of the first tranche of ‘risk capital’ as suggested by many economists on this blog site. BOH.

Gregory,

I do not think it is anything like as simple as you describe.

I think at core, you are confusing ‘risk’ (which is a marketable commodity and which foreign banks will invest in) and ‘uncertainty’ (which is something there is no market for). Risk is something like putting out the clothes on a sunny day, where the odds of a successful or acceptable outcome are reasonably predictable and quantifiable, and uncertainty is more like drying the clothes in the oven – it might work, or you might just start a fire, it’s hard to know for sure.

Normally, investing in a bank share is buying a bundle of risk and return, quantifiable, depending on the risk profile of the bank. As a result, you can put a value on it. But BoI and AIB are bundles of uncertainty. No one really knows how big the problem is and no one can quantify it. That’s why I say it’s ‘uncertainty’, not ‘risk’. There is little or no chance of a major, publicly quoted bank buying such a big bundle of uncertainty. It is just too big a chance to take, and the possible upside of owning a successful two-bit bank in a small economy is far too small. NAMA has taken some of the uncertainty out for sure, but there is still plenty more left. It is hard to say what the commercial lending books are really worth, for example, and it is much harder to gauge the value of the collateralised asset for this type of business. (And there is still a lot of development property loans to smaller developers in there.)

On a point of law, if a foreign bank were to take over all the shares in an Irish bank, it wouldn’t necessarily mean that the foreign bank would take on all the downside (any more than the current shareholders are taking on the downside), because the liability of the shareholders is limited to the share capital. It might, if the foreign acquirer bank decided to guarantee the Irish subsidiary bank, but it does not necessarily need to do this. It could drip-feed capital, and retain the option to pull the plug and dump the whole problem back on the Irish government.

To get foreign capital (and more importantly, know-how and street-cred) into the Irish banks, the government is going to have to underwrite the whole thing by guaranteeing the lending book to a large extent. In return for this guarantee, the State could expect to be paid a considerable premium. This is what happened in Japan with LTCB and Nippon Credit. (LTCB and NC have had their difficulties but have made a considerable positive impact on the Japanese banking marketplace.)

The Irish banks are in intensive care, kept alive by gov’t cash infusions and promises of even more infusions if conditions warrant. The problem is that the gov’t itself will soon be in intensive care and at the mercy of whatever ministrations that the ECB or IMF care to employ. Angela Merkel is doing her best to get the Euro down by 10% (now down 8%) by keeping up the Greek bailout uncertainty. Poor France is only a year away from needing its own infusion, this explains Sarkozy’s behaviour and sympathy for the PIIGS which will soon be FIGSPI. If Ireland was the only country in trouble we would be bailed out in a flash. Unfortunately fear of setting precedents now dominates the thinking of the solvent sovereigns.

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