Postbank and Anglo Not Comparable

There are many aspects of the government’s handling of the Anglo Irish Bank fiasco that are open to criticism. However, this doesn’t mean that every Anglo-related criticism of the government is accurate. Today’s Irish Times column by Fintan O’Toole has an appealingly simple argument that I suspect will get repeated a lot in the coming weeks:

Yesterday, Postbank, jointly owned by An Post and BNP Paribas, stopped taking new business. It will close by the end of the year. Its name would suggest that Postbank is actually a bank, but this must be an illusion.

If it were a bank, Postbank would not be allowed to fail. And Brian Lenihan’s reaction to its closure was merely to say that he is “disappointed [his favourite word] but not surprised”.Why does the closure of Postbank get a c’est la vie shrug of the shoulders while the closure of Anglo is so unthinkable that at least €30 billion of public money is being used to keep it, if not actually alive, then apparently undead?

The answer Brian Lenihan would give is that Anglo is of “systemic importance” to the Irish economy, while Postbank is not.

O’Toole then correctly points out that Postbank has lots of branches and customers.

The problem with this argument is that it is based on a confusion of the meaning of the words “close” and “fail” in the context of the banking sector. Postbank is a subsidiary of BNP Paribas Fortis and that bank is not going out of business. Every one of Postbank’s depositors will get their money back and BNP’s withdrawal from Ireland has no implications for its bondholders.

In contrast, when we discuss letting Anglo fail, we aren’t talking about shutting down its nonexistent branch network. What we mean is acknowledging that the bank is insolvent (and Fintan is correct that claims in January 2009 that Anglo was solvent were indeed ludicrous) and then having it declare bankruptcy. Normally, such a decision would lead to Anglo’s creditors not getting all their money back. However, if we did that now, we would face the problem that the Irish government has guaranteed essentially all of Anglo’s liabilities, so no money would be saved for the taxpayer.

My point here isn’t to defend the scale of the September 2008 guarantee or its extension to Anglo but merely to acknowledge that the issues related to Anglo are completely different to those related to Postbank.

Elaine Byrne’s column today also focuses on Anglo with reference to Iceland! She discusses whether, if the Iceland!ic referendum passes, we should follow suit and not pay off Anglo debts. There will be more discussion of this question in the coming months.

There are major decisions still to be taken in relation to reducing the costs to the taxpayer of resolving Anglo and other banks that appear to be only NAMA over-payment away from insolvency. We could decide to just remove the guarantee and let all the banks declare bankruptcy. But this would have, let’s say, some short- to medium-term implications for the functioning the Irish banking sector.

With the September 2008 guarantee set to expire later this year, there is the opportunity in the coming months to arrive at an orderly resolution process in which insolvency is recognised, bad property assets are cleared off the bank balance sheets, providers of risk capital lose money in a way the reduces cost for the taxpayer, and the banks are placed back on a sound footing.

These are very important decisions and the sooner our more influential journalists recognise what the real issues are, the better the public debate will be.

Anglo-Irish Bank: “Spending cash we do not have to save a bank we do not need”

Brian Lucey explains in this Irish Times article: you can read it here.