NAMAWineLake blog performs yet another valuable public service and points out that Brian Lenihan’s statement of October 30 told us that “AIB’s upcoming €5.4 billion will be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share.” Unfortunately, the shares closed on Friday at €0.337.
This means the Pension Reserve Fund looks set to make an instant loss of €1.8 billion when it purchases these shares. There is, of course, an alternative. Cancel the underwriting, nationalise the bank and appoint an assessor to value the shares. If, for instance, the shares were valued at their closing price on Friday, this would cost us €364 million. Which sounds better? Losing €1.8 billion or losing €364 million. Is it worth €1.4 billion to retain a tiny private ownership share?
It is also worth raising the question of whether the current process we are going through with AIB is the right one. Rather than being so sure that the bank just needs another €5.4 billion to fix it, why not remove the current upper management immediately, introduce new management charged with fully assessing the bank’s loan book and then decide what to do with it?
If AIB is deemed to be deeply insolvent at that point, we are already (albeit slowly) developing a template for dealing with banks of this kind. This would involve splitting AIB into a good bank and a bad bank, leaving the €4.5 billion in subordinated debt in the bad bank and perhaps negotiating with with the holders of these securities to reduce the amount of public funds required to cover the losses.
If the losses at AIB are larger than the authorities currently envisage, then there are strong arguments against continually putting taxpayers money in to protect other providers of risk capital.