20 Economists call for nationalisation of the banks

Brendan Burgess

Brendan Burgess

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Although I am a shareholder in AIB, as a citizen and tax payer, I agree that AIB and Bank of Ireland must be nationalised.

NAMA without nationalistion, means that the taxpayer is taking all the risk and gets none of the upside.

This point is very well made by 20 economists in today's [broken link removed]

It protects the taxpayer
It's a more long lasting solution
It is more transparent
It will allow the Government replace the management
 
I agree. [It's easy for me to agree because I do not have shares in any bank.]

The big problem is that there seems to be no clarity on the terms on which the proposed NAMA might purchase the debts. It looks possible to me (tending towards probable) that they might be acquired at far more than their realizable value.

If NAMA results in a loss and, at the end of the process, bank shares have any value, then I will feel that the taxpayer will effectively have subsidised shareholders. That's what I currently think the most likely scenario.
 
I also agree
[I'm neither a shareholder nor an economist!]
NAMA will be a disaster for the tax payer if we overpay for the assets. If we own the banks we're paying, then it won't be such an issue.
I think current shareholders should only get €0.01 per share as effectively the banks are bankrupt, and only have some value due to the govt guarantee & NAMA.
 
Great article in The Irish Times.

I have been convinced for some time that the most likely "end game" is nationalisation for AIB and BOI.

I am in favour of nationalisation provided it is a short term and with a clear exit route for the government. Also, provided it is not a "one size fits all solution" -meaning other options are considered for PTSB, INBS and EBS.
 
Yes, there is need only to nationalise AIB and Bank of Ireland.

Anglo and Irish Nationwide should just be wound down.

The EBS and Permanent TSB are solvent and can continue to trade with the government guarantee.



Brendan
 
It is absolutely impossible to value the assets of AIB or Bank of Ireland.

We will not know how much the loans are worth for at least 5 to 10 years. So it's impossible to be transparent or to put a value on these loans.

Brendan
 
There is a significant difference between the government owning the majority of the banks and the banks being nationalised.

If they are nationalised, the current shareholders would expect fair value. The determination if that would inevitably be similar to the determination of the value of the assets by NAMA. I have a horrible vision of a tribunal-esque investigation in to the amount given to shareholders for their bank share.

Nationalising the banks and controlling the management decisions changes the focus from commercial to political. Will a nationalised bank call in a loan from a elderly or unemployed person? Political pressures will pollute the commercial operation and will negatively impact our banking operations. This will impact both individuals and businesses as the prudent people will pay even more for the sins of the financial gamblers as the banks/government will 'take care' of the little person. Irelands image will be further eroded as a country that takes assets from private companies rather than a government that supports private enterprise.

There is an assumption that you need to nationalise the bank to get good management. The opposite is true as good bank management will not want to run an organisation where their decision making is subject to the whim of political pressures and elections. An arms length approach by government emphasising the seperation between state and banks is the right way. The operational decisions of bank managers could not be impacted by a trip to your TDs constituency office.

The article is even less useful for planning than the average RTE weather forecast:

Once cleaned up, recapitalised, reorganised with new managerial structures, and potentially rebranded, we recommend that the banks be returned to private ownership.
Click to expand...

'cleaned up' is quite vague, we know what the 'recapitalised' task is, what do we know about the problems with the old or need for new management structures? This is a platitude with no details. There is no timing or method by which banks would be returned to private ownership. We would just defer the argument that the state/taxpayers are getting screwed from now until the time they would sell or float it.

The article is written by civil servants (academics paid by the state) who are blind to the fact that private sector operations are generally more efficient and effective than their public sector equivalent. Get me an article by 20 people that we would like to run our banks and get them to say that nationalisation is the way to go and then I might be convinced.
 
There are disadvantages to nationalisation, but I think that the advantages far outweigh them. I also think that the disadvantages can be minimised. Here are the disadvantages as I see them:

Ideological
I would guess that, in normal times, 90% of us would be opposed to nationalisation of commercial organisations. I certainly would be.

But these are not normal times. The taxpayer has already taken on all the liabilities of these banks.

Nationalisation would send a bad signal to international investors
I think that this exceptional nationalisation would not send a bad signal. It is not that we are seizing the assets of a profitable business.
There will be political interference in lending decisions
As a shareholder in AIB, the best strategy for the bank is to deleverage as much as possible. Stop issuing loans. Don't agree to rescheduling. Batten down the hatches. But is making the economy even worse. It is in the national interest that banks start lending to businesses again.

There does need to be strategic political influence in lending policy.

There would have to be safeguards to stop interference in particular decisions. I don't think that they would be perfect, but anyone who has been refused a loan recently will have been told that it was refused by someone in head office. Very little pressure can be brought to bear on the local branch manager.

The government would not be able to run banks
The banks would still be run by an executive management and by independent directors. Sure there would be civil service involvement and monitoring. But the culture would continue to be private sector.

The taxpayer would take on all the liabilities of the banks
We have taken them on already.

The one area I would be very concerned about would be the pension scheme deficits. If AIB can't afford to pay its pensions, then it should not do so, whether it is owned by the shareholders or the taxpayers.

Bank employees and trade unions would have huge political influence
This would be a big worry. It is very difficult for public sector groups like the ESB or Dublin Bus to implement reform. I think that the public attitude is changing and such reform becomes necessary.

It would be difficult to agree a price for the shares.
Not really. The stockmarket today values AIB at €750 million and Bank of Ireland at €660 million. Add a 20% premium to that and the government could buy the shares for less than €2 billion which is tiny in the overall scheme of things.

The potential mispricing of the transfer of bad loans to NAMA is far more significant.

Bacon's argument that the market is a good monitor of the banks
He has to be joking. I was a great believer in the Efficient Markets Hypothesis. But I have lost 95% of the value of my investment in AIB.

The market has done nothing.
 
Some more arguments against nationalisation

These 20 economists have no credibilty as they remained silent during the bubble

Most academics remain out of public debate. There was no one particular incident to provoke them to action. This potentially disastrous move prompts action.

They have expertise. They have actually studied banking and public finance in other countries. They have a wealth of experience and their arguments must be considered.
 
Let the National Pension Reserve Fund buy the banks instead of nationalising them.

This would have the same impact as nationalisation in that the taxpayer would gain from any mispricing of assets.

But it would put the banks at one remove from excessive political influence.
 
Here's a solution to our banking problem.


Let the banks who have failed, ahhh fail.

Let them go to the wall.

Let entrepreneurs establish new banks form the ground up afresh.

That's the only solution. Nationalising them and recapitalising is wrong.
 
That might well be a solution if only one bank was in trouble.

It might even have been a solution in the middle of last year.

But, like it or not, we have guaranteed the liabilities of the banks and we have to adhere to that guarantee.

We have to go forward from here. Not from where we would like to be.

Brendan
 
There is an obvious conflict in what the government is trying to achieve here.

If NAMA overpays for the distressed loans then the tax-payer loses out (as they will be liable for the debt on NAMA's balance sheet).

If NAMA underpays for the distressed loans, then the capital ratios of the banks are eroded and the tax payer loses out as the government will have to inject more capital.

Since the government is responsible for all the banking liabilities in any case, transferring bad loans to NAMA is little more than like an expensive accounting exercise. As such, the divisive, complex and politically fraught process of valuing these distressed "assets" looks is a complete distraction and waste of effort to me.

The one advantage of the "underpay" option is that the shareholders take the hit before the taxpayer. This is not insignificant. Last years guarantee already let the subordinated debt holders off the hook, it would be highly inept for the government to let the shareholders off too. However this can be achieved far more simply by nationalisation which is probably only a formality at this stage anyway. I don't have a huge issue in public ownership in the current circumstances but would have an issue if in addition to taking ownership, the government started meddling with the executive functions of the banks (for example you could imagine political pressure to force banks to "allow" fixed rate mortgage holders to switch to variable).

In fact most governments are pulling in two directions when it comes to their handling of their banking industries; on the one hand, the want banks to provide more credit to help their national economy while on the other they want them to improve their capital ratios in order to stabalise the banking system. Unfortunately these goals are mutually exclusive so trying to encourage both is futile.
 
Brendan said:
Some more arguments against nationalisation

These 20 economists have no credibilty as they remained silent during the bubble

Most academics remain out of public debate. There was no one particular incident to provoke them to action. This potentially disastrous move prompts action.

They have expertise. They have actually studied banking and public finance in other countries. They have a wealth of experience and their arguments must be considered.
Click to expand...


Brendan,

Using this argument then suggests that the Economists (e.g. Alan Aherne)that are currently advising the Government have no expertise, experience or that their arguments shouldn't be considered. Interesting ....

Regards,

BM
 
20 economists recommending nationalisation is the best argument I have heard so far for going with NAMA.

Definition of an economist: Someone who knows 100 ways to make love, but does not know any women.
 
Since the government is responsible for all the banking liabilities in any case, transferring bad loans to NAMA is little more than like an expensive accounting exercise
Click to expand...

I don't agree. I think that NAMA should be set up and the bad loans should be transferred out. What will be left will be two good banks. These can be recapitalised and then refloated.

I don't think you can have NAMA without nationalisation. And if the banks are nationalised, then NAMA should go ahead anyway.

Better than NAMA, transfer the bad loans to Anglo.

Brendan
 
I think NAMA is the worst possible idea apart from nationalisation, or rather, the structure of NAMA is the problem.

Look at the way the government is going to fund both NAMA and the resultant recapitalisation of the banks - it is going to issue treasuries directly to the banks both through NAMA and in recapitalisation. That is, the government is going to issue IOUs without going to the bond markets. In effect, the government is doing quantative easing. It is increasing the supply of credit in the economy by swapping bad assets for good (sound familiar to any Fed watchers?). Given that Mr. Lenihan has already indicated that the ECB/EU have approved the scheme, this is a significant point, IMO.

Now consider the situation where the banks are nationalised. Can the government issue treasuries to itself? I doubt very much that would be approved.

Why not just nationalise the banks without using the treasury swap? The banks are currently insolvent by any form of mark-to-market accounting. They would be unable to borrow and would probably have great difficulty rolling over the bonds they have due this year. Rather than a 'what if' liability of the government guarantee, we would have a 'definite' liability. There could be little more funding for the banks privately, so it would all have to come directly from the government.

Given the scale of the numbers required, the government would be looking to sell debt at a debt:GDP ratio greater than Italy's without the use of magic pixie money. It would require a huge amount of government bonds to be put on the market and the price to be paid would be huge.

Add to this the fact that some 76% of the government bond issue this year has been bought by domestic financial institutions. With those institutions privatised, who is going to buy Irish debt at a reasonable price? The nationalised banks? I don't think so.

So, however, unpalatable it is, the banks have to remain private.

What I would like to see, though, is a move to convert some of the equity and debt holders of the banks into equity holders of NAMA and have it a 60/40 state/private operation. This, I think, would encourage some transparency, would certainly encourage the recovery of the maximum value of the loans possible, would reduce the cost (in that some of the existing debt of the banks is transferred to NAMA), and might in the long run reduce the losses to the taxpayer.
 
It's an interesting idea BM, but it has one flaw, I think. As far as I understand all residential and a fair amount of commercial is likely to be swapped (Citigroup analysis courtesy of Dreaded_Estate: http://ftalphaville.ft.com/lib/data/filecache/attachment/C/i/Citi-on-Irish-banks.pdf ). If the underlying assets were bought, at whatever discount, the remaining similar assets (amounting to some 15% of AIB's remaining loan book according to the Citi analysis) would have to be marked to the price obtained from selling to NAMA.

This leaves the government in the same (or a worse) position - overpay for the assets so as not to cause more major writedowns for the rest of the banks' loan books or pay a realistic price and increase the recapitalisation cost (Cost of NAMA + cost of NAMA purchase recapitalisation (crystallised losses on the loans for the banks) + cost of recapitalisation for marking the rest of their property book to the market value of the assets). It is in the interest of the banks that the underlying price of the assets remain a mystery. That, I believe, is what the NAMA is trying to achieve.

However, your suggestion does have the following merits:
- clean up the loan books of the banks possibly making them attractive for new capital
- greater recapitalisation money = greater possibility of shareholder upside in the long-run either through paying back the loans or in equity terms, IMO
 
yoganmahew said:
It is in the interest of the banks that the underlying price of the assets remain a mystery.
Click to expand...

First of all I need to said that alot of what has been said is over my head.
But I would like to comment on the theme that the banks are being somewhat devious or underhand in valuing their toxic debts.

1. I'm guessing they do not know which debts are truly toxic until they have the benefit of hindsight. There are dodgy looking debts but probably 50% or more of these will actually pull through, eventually??

2. How can you value things like commercial or even residential property in the current climate?
As far as I can see the only way to value it is to sell it.
Again hindsight is a requirement.

Any prospective valuation is subjective and flawed and no political body will have the cahunas (?sp) to make such valuations IMHO

Is the taxpayer not vunerable in all these scenarios any which way?
Until this renewed talk of nationalisation the banking situation seemed to be improving?
The news coming out of the US banks seems to be positive.
 
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