Bank of Ireland have released details of their capital raising plans. The fraction of government ownership of the bank will depend upon how many subordinated bondholders take equity instead of an alternative cash offer. Various scenarios are presented but it seems pretty likely that the bank will end up in majority state ownership. So we’re likely to have nationalised all our domestic banks. We await the long-predicted frogs and locusts.
This is hardly the most important issue right now with so much going on but it’s a two cents I’d like to toss out there all the same.
Last year, I regularly heard the following argument on this blog, in the media and in private. “Overpaying for assets via NAMA is actually the best way to recapitalise the banks. This is because we can purchase the property assets with “NAMA bonds” that we can just print off. They’re not real money, just IOUs. But if we paid a low price and had to recapitalise nationalised banks, we couldn’t do this. We’d have to borrow the money expensively on sovereign debt markets and then hand over real money to the banks.”
Tomorrow we should finally see a resolution of much of the uncertainty that has been hanging over the Irish banking system. We are being told that the estimated prices for NAMA transfers will be announced, as well as the capital requirements set by the Central Bank and the new legal framework for the Central Bank and Financial Regulator.
With the news so soon to be released, there is little point in me speculating as to what is going to happen. What I would flag, however, is that there is something of a disconnect between two sets of statements doing the rounds in today’s media coverage.
First, there has clearly been widespread leaking that the NAMA loan transfers will see some banks taking considerably larger writedowns than had previously been expected. For instance, in the Irish Independent, Emmet Oliver writes that “AIB is set to be hit with a discount of up to 40pc”.
Second, much of the coverage mentions the idea of the state owning 70 percent of AIB and 40 percent of BoI. See, for instance, here and here. And note that Emmet Oliver’s full sentence is “AIB is set to be hit with a discount of up to 40pc, making majority State control all but inevitable” and he mentions the Minister’s “plan to take a 70pc stake in the lender.”
The disconnect is that these two sets of figures don’t seem to add up. There is nothing new about the idea of the state potentially owning 70 percent of AIB. Even based on previous expectations for NAMA discounts, this was always a possibility. For instance, I’m looking now at a Davy stockbrokers report from April of last year that projected a base case of the government owning 78% of AIB.
However, it is hard to reconcile the continuing circulation of the same ownership statistics as before with the new information (if such it is) on discounts and also on capital levels.
To give a concrete example, AIB’s annual report says that it had €9.5 billion in core equity capital at the end of 2009. This included the government’s €3.5 billion in preference shares (this isn’t core equity in my book, or most people’s, and it is likely to be converted to ordinary equity.) So that leaves €6 billion in private core equity capital. AIB is supposed to be transferring €24 billion in loans to NAMA. Forty percent of €24 billion is €9.6 billion.
So, do the math on this and you’d probably come to a different conclusion about ownership percentages than have been flagged by the media. One way or another, we’ll find out tomorrow, but today’s leaks are confusing, perhaps deliberately so.
Update: This post should have been clearer that AIB’s annual report already allows for €4.1 billion in provisions for losses on loans going into NAMA. So the calculations would involve an additional €5.5 billion in losses over and above that. With half a billion in equity capital and the need to get up to a core equity ratio of eight percent, the 70 percent state ownership doesn’t add up. Still, perhaps I’ll see tomorrow how it’s going to add up and still end up with the 70 percent outcome.
I’ve noted on a number of occasions that both Brian Lenihan and Brian Cowen are very fond of misleading analogies in which any proposals to nationalise the two main Irish banks are linked to events in Iceland. For example, I noted recently that in an interview with Business and Finance, Minister Lenihan linked Iceland’s banking system collapse to a decision to nationalise. Some of the Minister’s bigger fans on this site argued that he was merely citing the sequence of events rather than indicating any actual causation.
Well, on this evening’s edition of The Last Word on Today FM, Minister Lenihan was at it again (podcast here — the interview is during the first hour of the show). In addition, as is usually the case when Lenihan and Cowen discuss this issue, the principal point of the discussion appeared to be to link the Labour Party’s position on the banking crisis to that of the Icelandic government. About 53 minutes in, the Minister said:
We didn’t go off, again like Iceland, and nationalise the system overnight because that lead to a banking collapse in Iceland. That’s what some of the Labour Party people wanted us to do in the last year.
(Cue philosophical debates in the comments about the meaning of the word “because” or perhaps “lead”).
My former colleague, Mike Casey, wrote the following in this article in today’s Irish Times:
When Nama is up and running, the banks will be able to borrow far greater amounts from the ECB. Some of this money may be lent to the private sector (one hopes), but it is likely that substantial funds will be made available to the Government to finance the budget deficit.
This may be the main reason why the Irish banks were not nationalised. If they had been nationalised this transfer of funds could not occur, since the ECB cannot lend directly to government.
I’m afraid I have to disagree with this argument for why Irish banks cannot be nationalised.
Commenter MM highlighted this article from Saturday’s Irish Times by John Kelly and Eunan King as an interesting argument in favour of the government’s current approach towards the banks and against nationalising banks. The Kelly-King duo wrote that an
advantage of the proposed Nama model is that keeping most of the banks as stock market entities enables the ECB to fund part of the Irish Government’s deficit, in a manner that provides the veneer that the central bank is not buying government bonds directly.
This is a practice prohibited under the rules governing the establishment of the ECB, because it amounts to the central bank simply printing money to finance Government spending.
I do not believe that this argument is correct. The clause in the European Treaty prohibiting monetary financing is Article 101 of the Consolidated Treaty of European Union (link here). This has two paragraphs and they read as follows:
1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions.
So while Paragraph 1 rules out the ECB giving loan facilities to, or purchasing bonds from, national governments, Paragraph 2 explicitly states that this does not apply to publicly owned credit institutions. As such, lending to nationalised banks does not break the prohibition on monetary financing.
Furthermore, even under the NAMA plan no central bank is “buying govenment bonds directly”. Rather, what is being proposed—whether we have a stand-alone NAMA or a NAMA used in conjunction with nationalisation of some banks—is using these bonds as collateral for loans from the ECB.
I’d note that since I’ve “gone to ground” following Dr. FitzGerald’s appearance on Morning Ireland, I have written fourteen blog posts and a newspaper column and have also appeared on two national radio shows. Next week, I’ll be maintaining the low profile, briefly emerging from my cave to make appearances at a gathering of the Labour Party Parliamentary Party and a Green Party membership event as well as writing another newspaper column (wifi isn’t so good in the cave.)
Update: In an interview in the Sunday Tribune, Minister Lenihan persists with the circular logic, this time in a more entertaining form. He says:
I have made it quite clear, a majority state stake is not a problem. But if the valuations of certain commentators were accepted, the Bank of Ireland board, the Allied Irish Bank board would have resigned by now, because they couldn’t perform their duties as directors, presiding over insolvent banks.
Can anyone spot any flaws in this line of thinking?
Everybody’s favourite Swede has weighed in again, this time in an interview with RTE’s Tony Connolly. Morning Ireland had a excerpt from the interview this morning and apparently there will be more on the Six-One TV News tonight.
It is interesting to see Mr. Lundgren make an intervention again on this topic. After his appearences here a few months ago, the government spin was that he was wholly supportive of their approach—see for instance, here. I found that interpretation untenable but the sublety of Mister Lundgren’s words and the effectiveness of the government’s PR approach meant that they got away with it.
I think it’s pretty clear now that Mr. Lundgren does not support the government’s approach and one must wonder whether his intervention was prompted by a discomfort at being misrepresented by the Irish government.
I guess it’s back to the drawing board on international support for NAMA and long-term economic value. Time to fall back to claiming that the IMF fully support this approach. No, wait. we mean the ECB. No, wait, we mean Alan Ahearne. Listen, we’ll get back to you.
During today’s Oireachtas Committee meeting, the Minister for Finance referred to a formal ECB opinion document on NAMA and that it was being published this afternoon. Well, lo and behold, here it is.
I haven’t had a proper chance to read this but two sections jumped out. First, on valuation of assets being transferred:
Although the measures contemplated by the draft law should restore confidence in the Irish banking system, the ECB considers it important, in line with previous opinions that the pricing of acquired assets is mostly risk-based and determined by market conditions. The preference expressed in the draft law for the long-term economic value of assets, rather than current market values, requires careful consideration in this context. In particular, it should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme.
And on nationalisation:
the ECB notes that the Irish Government shares the guiding principle that the preservation of private ownership is preferable to nationalisation. If the NAMA scheme will be successful in this respect, this strategy should help to avoid, in the short-term, the high costs involved in nationalisations and, in the medium-term, the risk of banks’ objectives being diverted from profit maximisation to alternative goals that might distort the market structure and jeopardise the level playing field.
The opinion is silent on what should happen when their preference for pricing that is “mostly risk-based and determined by market conditions” comes into conflict with their preference for preserving private ownership.
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.
Minister Lenihan has returned from his holidays to talk about NAMA on RTE’s This Week. I’m not sure much new was revealed from this interview. On the key question of what will happen with the major banks, the Minister argues that only “some allowance” will be incorporated for long-term economic value while at the same time he says “we don’t anticipate nationalising any other institutions in their entirety”.
To see what this means in practice, consider AIB. This bank has property-related loans of €48 billion, half of this being development loans. It is widely reported that €30 billion of these loans will be transferred to NAMA. The bank has private core tier 1 capital of about €8 billion. So the minister is saying that he is not anticipating a discount for AIB as high as 27 percent (because 27 percent of €30 billion is €8 billion.)
Given what we know about the current financial situation of Irish property developers, the haircuts envisaged by the Minister appear to rely on a very substantial recovery in property values. And yet the Minister also rules out purchasing assets at multiples of their current market value, so I don’t see how the various comments here hang together.
It would be interesting to know on what basis the Minister’s anticipations about NAMA transfer values have been formulated. And since the people doing the mysterious long-term economic value calculations all work for the Minister, it is reasonable to ask how likely it is that these people can back out the right answer as to what the average haircut needs to be to fit with the Minister’s anticipated outcome.
Of course, this could all be a bait and switch, and the main banks could end up being nationalised. However, the spin suggests otherwise. The Minister’s latest comments contained a series of misleading remarks about nationalisation.
For instance, Minister Lenihan blames the cost to the taxpayer of re-capitalising Anglo on the fact that the bank was nationalised, rather than on his decision to guarantee almost all of Anglo’s liabilities last September. In relation to AIB or BOI, the implication is that the cost of sorting them out would be higher if we don’t overpay for the assets to keep them in private ownership. There are arguments worth airing against nationalisation but this just isn’t one of them. As long as the guarantee is kept in place, these banks need to be recapitalised, most likely by the state. Doing so by overpaying for assets rather than by getting an equity share really doesn’t save money.
An unnamed foreign country that nationalised its banks, leading to disaster, was mentioned by the Minister. I’m guessing the country the Minister has in mind is Iceland. Minister Lenihan may think a decision to nationalise the banks was the cause of Iceland’s problems. I’d wonder though.
The Taoiseach has emerged to defend the government’s banking proposals. He has been reported as saying:
The proposal we have brought forward is on the basis of the best international advice, including the European Commission and the International Monetary Fund, and we are doing this in consultation with the European Central Bank.
Invoking international support for their approach has been a key element in the government’s PR strategy in recent months. However, these comments seem to me to confuse the actual roles being played by the various international organisations referred to.
I’ve been reading some funny stuff in the Sunday newspapers about how those who oppose the current NAMA plan are in favour of having a big fire sale of property assets. I’m not sure if anyone has ever proposed this as an alternative to NAMA (it would be interesting to know if any of the prominent NAMA critics have.) But since I’m generally associated with NAMA criticism, I thought I’d clarify that I certainly have never suggested this.
For instance, in the four point plan article I put forward in April, I proposed that after nationalisation of our two main banks the government could “set up a State asset management company to sell these assets over time to attempt to recoup as much as possible. “Over time” means over time, not an instant firesale. And an “attempt to recoup as much as possible” most likely would imply a careful sequencing of sales. But, of course, being in favour selling the assets over time in a careful sequencing is still consistent with starting to sell some of them soon.
Perhaps what’s going here is that there’s a (deliberate?) mixing up of the idea of transferring loans to NAMA at low prices with the idea of having a property firesale. I guess there may be people who think that calls to wipe out the bank shareholders via the losses incurred with the NAMA purchases and then nationalise (not my preferred sequencing, mind you) rely somehow on writing down development loans at Carroll-liquidation levels.
This is not all the case, however. AIB, for instance, have €24 billion in development assets alone and €8 billion in core equity capital. So one doesn’t need to rely on Carroll-liquidation levels of discounts on loans to conclude that this bank is insolvent.
Indeed, the current debate about “the right price” to transfer the assets illustrates a highly unfortunate aspect of the government’s plan that had been flagged by critics all along, which is that the pricing on transfer was always going to be incredibly controversial.
A plan involving nationalisation, an asset management company and a stake for the bank shareholders in the AMC (as proposed by Patrick Honohan) would allow for the banking system to be quickly placed on a sound footing and shareholders to be treated fairly without having to rely on the wisdom of Solomon to decide the right price at which the assets should be transferred. But, of course, that is an alternative and as we know now, There Is No Alternative.
On various lunchtime news reports today, I heard commentators discussing how today’s announcement of Canadian interest in acquiring a stake in AIB was a sign of international confidence in NAMA and helped to rule out nationalisation, and about how this is good news for current shareholders.
It has now been reported that the bank in question appears to be Royal Bank of Canada. This would be the very same Royal Bank of Canada whose Capital Markets Division yesterday released a report including the following statements:
Irish banks are in a vegetative state, in our view. Earnings power is in atrophy and free capital to unsecured debt holders is low to non-existent. Allied Irish (AIB), Anglo Irish (ANGIRI) and Bank of Ireland (BKIR) appear to be on ECB life-support. All non-guaranteed debt holders are effectively subordinated to the ECB. The NAMA proposal alone is insufficient to address the business model challenges facing the banks. As such, all non-guaranteed debt-holders are at substantial risk of uncertainty regarding the requirements of the NAMA proposal, distressed exchanges and potential nationalizations.
Irish banks are on ECB life-support and the ECB may decide their fate, in our view. The ECB appears to be acting as the lender of last resort for the Irish banks as their funding models have collapsed. This lending is well overcollateralized. Liquidity generated by NAMA may be used to repay ECB borrowings, limiting its benefit to the wider economy. Nationalization could keep the ECB in the game and allow more liquidity to remain in Ireland.
NAMA alone may not restart lending, other actions could be required. Distressed senior debt exchanges may assist in recapitalizing the banking system. Irish Nationwide’s offer to exchange senior debt at a discount to par for Irish government guaranteed debt adds a new twist to bank recapitalization.
Perhaps those reporters preparing to explain this story to the Irish public this weekend might rely on statements from the horse’s mouth rather than speculating about what RBC might be thinking about NAMA or the prospects of nationalisation.
While RBC’s interest in purchasing a stake is being taken as a sign that AIB isn’t going to be nationalised, RBC’s own report into the Irish banks says they are likely to be nationalised and that bond-holders are also likely to take a hit. A fairer reading of this story would seem to be that RBC are only going to be interested in buying into AIB after it has been nationalised.
Note — Bloomberg story on RBC Capital Markets report is here.
Update: Well this story just gets messier. Despite the Indo reporting RBC as the interested bank, I did phrase it as “appears to be” rather than “is” because you can never trust this kind of reporting. Indeed, RTE are now claiming the bank in question is Canadian Imperial Bank of Commerce. Of course, it is perfectly possible that CIBC have a completely different assessment of the Irish banking system than RBC but somehow I doubt it.
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.
Two days into the public debate about the implications of the proposed NAMA legislation, I have been extremely disappointed at the approach taken by the government to debating the key questions raised by this policy.
As I write this, the government is continuing to mull over its NAMA proposal. The proposal has been around so long that it is easy to forget that we are actually still at an early stage with this process, with the legislation yet to be published even in draft form and no vote due for a couple of months. For these reasons, it is still worth discussing why alternative approaches may be worth taking.
I’d like to set out one such approach. But before doing so, let me explain why I think things have moved on since the NAMA proposal was introduced.
One interesting aspect of the government’s current approach to promoting its NAMA plan for dealing with the banking crisis is their tendency to interpret everything said by authority figures as being in full support of their chosen approach.
As an example of this, on RTE’s The Week in Politics, Minister Eamon Ryan said the following (about 15.40 in):
The difficult and unpopular decisions that were excoriated by the Labour Party endlessly—you’re bailing out the banks, you’re bailing out the banks—have been described by the International Monetary Fund as the right way forward; has been described by the ESRI as the first time the government is getting it right, as they see it; has been described by the Swedish finance minister who was over last week, who got them through a similar crisis, as exactly the right thing to do.
I have written before about the incisive and articulate contributions of Bo Lundgren, the Swedish Finance Minister in charge during their banking crisis of the early 1990s. Lundgren was in Dublin on Tuesday, giving a talk at the Institute of International and European Affairs and testifying before the Oireachtas Committee on Finance and the Public Service. A productive guy, he also appeared on Morning Ireland. Here’s a link to his interview on that show (scroll down to find it) which has lots of interesting material. I will post a link to the transcript of his Oireachtas appearance when it is put up.
I think there are statements in Lundgren’s Morning Ireland interview which could be probably be latched on to by all sides of the debate on banking being played out on this blog. Rather than attempt to score points on this, I will only note that Lungren argues that a political consensus greatly helps when dealing with a banking crisis (about 7 minutes in).
In the Irish context, perhaps the key issue causing political controversy is the price that NAMA will pay for the assets. In Sweden this was set by an independent Valuation Committee overseen by a cross-party board. The emerging details suggest that the price that NAMA pays will come from a complex valuation process recommended to the NAMA officials by HSBC (the IT today reported that 370 categories of information must be provided by banks on each developer on the loan books so that HSBC can use this information to develop a valuation mechanism.)
In relation to this, let me put forward a suggestion that could potentially lead to all-party support for the government’s approach, which Lundgren viewed as crucial: Appoint a cross-party board to approve NAMA’s pricing of assets being transferred. I think it might be hard for opposition politicians to turn down an offer like this and it could be a way to address well-founded opposition concerns about potential losses to the taxpayer as well as less well-founded concerns such as the idea that NAMA is a bailout for developers.
If the only solid support for NAMA’s pricing mechanism comes from representatives of an unpopular government, then it’s hard to see how this process will be successfully sold to a public that is already highly concerned (not to mention angry) about the potential costs to the taxpayer of solving the banking crisis.
The Opposition has claimed many times that no independent economist supports the Government’s approach to the banks. The IMF is independent, and more expert in advising on banking problems than most commentators, and it supports our approach.
So how out of line is the IMF’s position on banking with other economists who the government has consistently criticised, such as the signatories of the 20 guys Irish Times piece?
Thanks to Philip for posting about the video of the the InterTradeIreland event. I was interested in the video footage because Ciaran O’Hagan had, justifiably, raised a question about my post last week about the Minister for Finance’s reported comments at this event. The Irish Times article I pointed to had partially summarised the Minister’s statement and Ciaran questioned whether we could really be sure that they had gotten it right.
Well, having looked at the video, I can say that the Times story accurately reflected what the Minister said. In addition, the Minister’s comments on the banking situation were actually far more interesting than reported by the Times, so I took them down and have repeated them below (on the video these comments start at about 8.50 in).
One of the classic techniques of government spin-doctoring is to brief the press prior to a bad news announcement to the effect that the announcement is actually good news.
Today the Irish Independent reported that the soon-to-be-released IMF Article IV staff report enthusiastically praises the government’s approach to the banking crisis. The Indo reported that “the IMF says the Government is right in the action it has taken on the two key areas of banking and the public finances … The IMF backs the setting up of the National Asset Management Agency … It says NAMA offers the chance of taking bad assets from the banks, which is a precondition for their return to health. And the IMF agrees NAMA can be self-financing”
Sounds like a strong endorsement for the govenment, huh? Well, the report has now been released. It has lots of interesting stuff in it, which I’m sure our contributors will have more to say about later. Naturally, however, I was drawn to page 19 of the report:
25. Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.” Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus preserving the political legitimacy of the initiative. The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities. The management of the full range of bad assets would proceed under the NAMA structure. Nationalization could also be used to effect needed mergers in the absence of more far reaching resolution techniques.
26. The authorities prefer that banks stay partly in private ownership to provide continued market pricing of their underlying assets. They disagreed with the staff’s view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks. Staff emphasized nationalization would need to be accompanied by a clear commitment to operate the banks in a transparent manner on a commercial basis. In particular, nationalized banks should be subject to the same capital requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy to return the banks to private operation would be needed.
What do people think? A ringing endorsement of the government’s approach?
From today’s Sunday Times:
Brian Lenihan, the finance minister, said last week that the plight of Anglo Irish Bank was a reminder that nationalisation carried a heavy price for taxpayers.
Lenihan held up Anglo as a warning to academic economists who support the nationalisation of Ireland’s big two banks, Bank of Ireland and Allied Irish Banks.
A direct quote along these lines is reported in Saturday’s Irish Times. The Minister is quoted as saying that
Anglo’s need for capital “illustrates the point that, when nationalising a bank, there is an issue for the taxpayer”.
Ok then, perhaps I shouldn’t bother taking the bait at this point, but let’s think about this for a second.
Suppose Anglo had remained in private hands after last Autumn, perhaps with new management after Seanie and co were cleaned out. Now they report losses that wipe out their capital base.
What would the government do at this point? No private investor would be willing to recapitalise Anglo. The government could decide to let Anglo be liquidated. However, the September 30 guarantee would then put the government on the hook for paying back Anglo’s liabilities and a disorderly asset firesale would probably only make things worse. (Which is the government’s argument for not winding up Anglo right now.)
So, because of the September 30 guarantee, the government would be forced to re-capitalise Anglo now, whether the bank had previously been nationalised or not. To blame the cost of re-capitalising Anglo on the decision to nationalise is putting the cart before the horse. The principle argument in favour of nationalising Anglo was that the government had guaranteed its liabilities and could not afford to keep a discredited management in place gambling with taxpayers money.
I would summarise the moral of the story here somewhat differently: When issuing blanket guarantees to troubled banks, there is an issue for the taxpayer.
With Anglo about to report its results, last Sunday’s newspapers contained stories that the government was considering not honouring coupon payments on Anglo’s Tier 1 perpetual bonds. In light of that, it is interesting to note the following story (from Wednesday’s FT):
Bradford & Bingley, the nationalised mortgage bank, quietly issued three statements after the market had closed on Tuesday, informing holders of three classes of notes that they would not now be getting their next due interest payment.
The FT notes that the market value of these bonds collapsed on this news. Anglo’s perpetual bonds have been trading at about 15% of par value lately.
Update: Anglo results released here along with a statement from the Minister of Finance. The loss of €4.1 billion essentially equates to all of its equity capital (see page 23 of the report’s PDF file.) And from the Minister’s statement:
the Government has decided, subject to EU approval, to provide up to €4 billion of capital to Anglo. The bank is also in a position to generate further capital of its own by buying back certain outstanding subordinated loans from bondholders at a significant discount to par value. This exercise will generate profit and additional capital for the bank.
See page 50 of the report’s PDF file for details on Anglo’s subordinated debt, which has a book value of €4.9 billion. About €2.1 billion of these bonds are dated, and thus covered by the guarantee up to September of next year (though the earliest maturity is 2014). The remaining €2.8 billion are undated and are not covered by the guarantee.
Last night on The Week in Politics, Fine Gael’s Leo Varadkar criticised proposals for nationalisation of the banks on a couple of grounds, one of which was that it “wipes out 300,000 small shareholders.” Later, in describing FG’s plan he said that the new banks created as part of this plan “would buy the good loans off the banks, take the good loans off the banks and set up a clean bank and, by doing that, you then create capital for the old banks and give them some chance of survival.”
Those watching would probably interpret these comments to imply that Fine Gael’s plan does not involve nationalisation and that it would be better for bank shareholders than what has been proposed under nationalisation. In my opinion, neither of these positions are correct.
As Patrick Honohan has noted often in his recent contributions, despite the confusion prevailing in Ireland today about our banking problems, there is wide agreement among banking experts about what constitutes best practice when dealing with banks that are either insolvent or failing to comply with capital adequacy regulations. Regulators seize the bank, place it into administration and the bank’s assets are used to pay off depositors first with bondholders getting paid off if there is anything left.
In our current circumstances, the almost-blanket guarantee on liabilities agreed on September 30 prevents such a solution from being imposed now on the covered Irish banks. I interpret Fine Gael’s new plan as an attempt to achieve an FDIC-style resolution while sticking within the restrictions imposed by the guarantee.
For those who might be interested in the NAMA debates, the full text of all Dail debates can be found here.
Lots of interesting stuff was discussed in last night’s debate but my favourite moment was the Minister for Finance’s perfect invocation of the Baconian equivalence fallacy, complete with brass plate metaphor:
Nationalisation of the whole of the Irish banking system, which is what is being proposed in the motion, will not be the short-term panacea that some envisage. Wholesale nationalisation would do absolutely nothing to resolve to the banks’ bad debt problems and get credit flowing again to support economic recovery and jobs. Nationalisation may change the brass plate, but it does not provide the individual institution with any additional funding or any resolution of the bad debt problems which cripple our financial institutions.
While much of the recent media discussion about our banking problems has been framed as NAMA versus nationalisation, this has not been a fair reflection of the debate between economists. My four-point plan and the gang of 20 article explicitly allowed for the idea that a NAMA-like vehicle be used in conjunction with nationalisation.
That said, I’m a little worried now that the public may perceive the case for a NAMA as a slam dunk. My own preference for this approach came from thinking about the alternatives and deciding that the balance of the arguments were in favour of using an Asset Management Company (AMC) in conjunction with nationalisation. Since the NAMA proposals have been introduced, I’ve been getting a bit less enthusiastic about the idea, so I thought I’d write up what I see as the competing arguments for and against an AMC.
With AIB and BOI share prices having quadrupled over the past few months thanks to increased hopes of a NAMA-based bailout from the taxpayer, it is interesting to note the similiarities with how the situation has developed in the US, as outlined in this piece by the Baseline Scenario guys. On why the administration has not shut down insolvent banks, Johnson and Kwak write:
One reason is that taking over banks has somehow been redefined as “nationalization,” with the images it conjures up of forced confiscation of property. Yet there are no guns involved here. Ordinarily, when an investor puts a large amount of new capital into a bank, it gets some measure of control in return. Yet Treasury has bent over backward to minimize its voting shares, beginning with the initial round of recapitalizations and continuing through the latest Citigroup bailout in February.
Perhaps after fighting off charges of “socialism” from the McCain campaign, the Obama administration is wary of any steps that could be described as nationalization. And so instead of insisting on its well-understood duty to shut down failing banks for the public good, it has tied its hands by taking this option off the table.
On last night’s RTE News at 9, David Murphy (fresh from an interview with the Minister for Finance) reported his understanding of the government’s thinking on the banks as follows:
It’s had a good long hard look at the two main banks, AIB and Bank of Ireland, and it’s clear AIB has an awful lot of problems and the government may well end up owning 70% of AIB. It did look at nationalising it, I think, and the situation is that if it does go down that road, other lenders in other countries, some of them won’t even lend to banks which are owned by governments. And for that reason, it’s ruled out nationalising AIB.
I am highly sceptical of this line of reasoning. It is possible that there are financial institutions out there who will (a) Lend directly to the Irish government and (b) Lend to a 70% state-owned bank with a government liability guarantee, and yet who will somehow refuse to consider (c) Lending indirectly to the Irish government via a loan to a 100% state-owned bank.