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Banking Crisis

Expropriation?

On last night’s Prime Time, when asked about nationalisation, Peter Bacon warned that the government would have to buy the privately-held shares and said “they can’t expropriate shareholders’ value.” On the face of it, there isn’t too much to discuss here. I have advocated that the government should purchase the shares at their closing listed stock market value. Indeed, I don’t know any advocate of nationalisation who has suggested “expropriating” valuable shares from those that hold them.

The reason I’m writing about this, however, is that a couple of other people have also mentioned to me lately that they think this legal concern about expropriation is, in fact, the “real reason” why the government is reluctant to nationalise. “Real reasons” according to this line of thinking, are reasons so important that you don’t talk about them to the public.

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Banking Crisis

More Swedish Bank Blogging

Swedish bank blogging is undoubtedly the new craze on the interweb.  I enjoyed this story of the poney-tailed Swedish finance minister scolding Geithner for his plan and the linked-to story dubbing the Swedes “the acknowledged masters of bank rescues” (As an honour, it reminded me a little of when Ireland were the acknowledged masters of Eurovision.)  Charlie Fell also has a nice piece in today’s Irish Times comparing the NAMA plan with what happened in Sweden.

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Banking Crisis

Sarah Carey on NAMA and Nationalisation

Sarah Carey’s article in today’s Irish Times is worth reading because it is perhaps the most articulate version yet of the key argument that tends to convince people that nationalisation is a bad idea and that NAMA and limited state ownership is the way to go.  The government has made a series of arguments against nationalisation but it’s hard for them to bluntly say “we don’t want to own the banks because we’re scared we’ll make a mess of them.”  But an opinion columnist can and this is the essence of Carey’s argument.

I think Sarah is too pessimistic about the long-term performance of semi-state bodies in Ireland and that, in any case, there’s little point in applying these analogies to businesses for which state ownership is an explicitly temporary measure. 

Beyond that, at the risk of making Sarah’s head hurt a bit more, let me put the case for why she should trust her instincts and support the college boys.

Categories
Banking Crisis

NAMA Website

There may not be any legislation yet but NAMA has a website.  It provides an example of how NAMA will buy loans from the banks using a “purely illustrative” example of a 25% discount.  It has been widely reported that AIB would be selling €30 billion in loans to NAMA.  A writedown of €7.5 billion would wipe out essentially all core Tier 1 (shareholder) capital, so this is an interesting illustrative example.

Update: Patrick correctly points out that the illustration is of a €25 million writedown of a €65 million loan for a property originally worth €100 million.  So indeed it’s a 38.5% discount. I know it’s just an example but it’s interesting all the same.

Categories
Banking Crisis

Ahearne on Nationalisation

The government has been trying out a series of arguments against nationalisation.  However, while one can make cogent arguments against nationalisation (and we have had a wide-ranging discussion about these arguments on this blog) the latest arguments from government seem particularly weak.  My old friend Alan Ahearne, now special adviser to the Minister for Finance, roled out the latest arguments today:

“Nationalization has lots of downsides for a banking system like Ireland which relies on international funds,” Mr Ahearne, a former Federal Reserve economist, said at an event in Tullamore, Co Offaly today.  “Nationalization is often viewed from wholesale markets as a sign that the banking systems have completely failed.   That’s a message the Government would not want to give out,” he said.

Let’s recall, however, that the only reason the Irish banks are currently able to borrow international funds is because the government has issued a blanket guarantee on their liabilities.  In effect, the banks’ debts are also government debts.  So, there is no reason to think that nationalised banks would have any less access to international funds than the current propped-up outfits.

As for not wanting to send out messages about the poor state of our banking system, I think that’s a ship that’s already sailed.  We should not let wishful thinking substitute for a rational assessment of the scale of our problems.

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Banking Crisis

AIB Re-Cap Announcements

So where does the substance of the AIB announcement leave us?  As has often been the case with the government’s approach to the banking crisis, this pushes us one step closer to some kind of resolution, while still maintaining lots of uncertainty as to what that resolution will look like. 

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Banking Crisis

Goodwill Hunting at AIB

I’ll write a bit more later on the substance of the announcements today from AIB and the Department of Finance. However, I thought I’d first discuss an aspect of today’s developments that hasn’t been discussed in most of the press reports. Together with the Minister for Finance (with whom they have good reason not to disagree) AIB have “formed a view” that they need to have an extra €1.5 billion in Tier 1 capital.

Those who followed AIB and BOI’s fruitless attempts to raise equity in recent months were probably surprised to hear that rather than just announce that AIB was taking an extra €1.5 billion from the government, the bank stated that it was planning to raise these funds itself.  Most media stories have focused on how AIB can achieve this by selling its minority stake in M&T, an American bank, and perhaps also selling its stake in a Polish bank.

Now here’s where it gets tricky. RTE and other media outlets have reported this as a simple story of “bank short of funds raises funds by selling assets.” The problem is folks, that plausible as this may sound, that’s not the story at all.

Categories
Banking Crisis World Economy

Lessons from Sweden

I linked last weekend to former Swedish Finance Minister’s Bo Lundgren’s appearance on the Marian Finucane show.

Lundgren also appeared recently before the TARP Congressional Oversight Committee, chaired by Harvard Law Professor Elizabeth Warren and his written testimony was the basis for the section on Sweden in the committee’s latest report. Here’s a webpage containing the written testimony of Lundgren and three other experts on other banking crises (Great Depression, 1980s S&L and 1990’s Japan) who all appeared before the committee at the same time.

The webpage also has full video of this meeting. The experts delivered short verbal testimony (Lundgren’s starts about 14 minutes in) and about 40 minutes in there is a question and answer session. Prof. Warren’s opening line of questioning about arguments against nationalisation was of particular interest to yours truly but the whole session is really useful.

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Banking Crisis

Arguments Against Nationalisation, Part 5: Lack of Government Expertise

[Last in Series …. For Now]

Speaking with Myles Dungan on RTE radio on Thursday, Minister Eamon Ryan put forward the following argument against nationalisation:

You have to run the whole bank, the system, from Merrion Street … And there’s no ability, I believe, in the Department of Finance to run six banks at the one time … They [the Department of Finance] recognise that you don’t just suddenly start running six banks. And you can’t do it in a very transparent way.

I think the Minister raises a fair concern here, so I thought I’d throw this one out there as my final (for now) post on this.

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Banking Crisis

Arguments Against Nationalisation, Part 4: Continuous Stock Market Listing

Peter Bacon’s final argument against nationalisation in his Morning Ireland interview was the following:

Also, if you nationalise the bank, it’s gone. If the bank remains there, even if it comes to pass that in some cases there is majority ownership by the government, by the taxpayer, there will be a quotation on the Irish and London stock exchanges. There will be a price every day that bank shares will trade at and that will provide taxpayers with an exit mechanism out of their ownership of the banks in due course.

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Banking Crisis

Arguments Against Nationalisation, Part 3: Transparency

Peter Bacon outlined two other arguments against nationalisation in his Morning Ireland interview. The first related to the question of transparency:

You nationalise it and then you would still have to deal with it. You would be dealing with it behind closed doors. People have screamed “let’s have transparency with this”. The only place you will find transparency is if you do this in the open market.

Given the amount of public money at stake, I couldn’t agree more with Dr. Bacon that transparency is essential. However, I disagree with him regarding the levels of transparency that would prevail under nationalisation relative to his NAMA plan.

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Banking Crisis

Arguments Against Nationalisation, Part 2: Baconian Equivalence

Probably the most common argument I have heard from influential Irish commentators when they argue against nationalisation is to quickly dismiss it on the grounds that it simply does not help in “solving the problem” or reducing the cost of the banking crisis for the taxpayer.  Yesterday’s Irish Times article by Scott Rankin provides one example of this argument.  Let me provide three other examples.  Here are two examples from Prime Time on March 19.

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Banking Crisis

Arguments Against Nationalisation, Part 1: Politicisation of the Banks

Let’s start with what I see as the single best argument against nationalisation. The vast majority of economists get very worried when public ownership of banks is brought up because, as Frank Barry discussed yesterday, nationalised banks are particularly likely to be subject to abuse by politicians and their crony capitalist mates.

Categories
Banking Crisis

Bacon on Pricing Assets and Nationalisation

I was somewhat heartened by the overall tone of Peter Bacon’s comments about NAMA on Morning Ireland yesterday. He talked pretty tough about the need for NAMA to pay market prices for loans and correctly argued that indexes for property prices showed that one could put market valuations on these assets that would involve steep write-downs.

That said, I’m still not encouraged to think the plan will work out well for the taxpayer. Bacon himself won’t set the valuations for the loan portfolios—I’m guessing this will be done by a major accountancy firm. And I am concerned the accountants hired will value the portfolio according to conservative rules so that currently impaired loans are written down but all other property loans are valued at book value.

For me, however, what was more interesting than the tough talk on valuations was Bacon’s detailed explanation of why he did not favour nationalisation (starts at about 6.50 in). I think it is important that a full debate is had about nationalisation. To help with this, I’m going to write a few separate posts over the next few days to discuss the arguments made by Bacon and some others and to put forward a defence of nationalisation. Doing these as separate posts will facilitate interaction with our readers on specific issues and I’d be happy to take suggestions on which issues to discuss.

And before any our more excitable commenters start getting too worked up, I would like to emphasise from the outset that I view myself as politically moderate: A brief perusal of my research scribblings will uncover lots of boring arcane technicalities and no track record of radical left wingery. So, it is only with reluctance that I am advising this approach.

Without further ado, the first nationalisation post is just above this one.