The Pros and Cons of Temporary Nationalisation

[Brendan Burgess]

This is probably the most important decision affecting the financial wellbeing of all Irish taxpayers. We should discuss it and try to arrive at the right decision instead of trying to “win the debate”. There are very strong personalities supporting both sides and these might get in the way of arriving at the correct decision.

It is likely that the government will proceed with NAMA anyway. However, the debate is important to determine the final shape and scope of NAMA. And we can have NAMA and temporary nationalisation.

On balance, I support nationalisation, but I will try to summarise both sides here fairly.

Most people accept that the banks must be cleaned up. The disagreement is on what is the best way to do it.

The downsides of NAMA without nationalisation

1. We will not know the fair value of the development loans for many years until we have attempted to collect them.
2. If NAMA pays too much for the loans, the taxpayer will face huge losses. However, it is proposed to recover any deficit from a levy on the banks.
3. If NAMA pays too little for the loans, the banks’ reserves will be wiped out and they will need further government injections of cash anyway.
4. The Government will have to issue up to around €70billion in bonds to pay for the loans. This will severely reduce our options to borrow for other purposes.
5. The foreign banks operating in Ireland will be able to apply to be included e.g. Ulster Bank, National Irish Bank and Rabo. They will only apply if the terms are good.
6. NAMA will be another huge government run body which will be very costly. It will have a lot of staff while the staff in the banks will have to be let go.
7. NAMA will be very difficult to set up and run:
   Staffing: The required number of experienced staff will not be available at short notice.
   Risk Management: Systems/ policies/ procedures are required to run this project effectively
   Additional banking facilities - a bank could offer additional loans, NAMA won't be able to.

Invalid criticisms of NAMA/a Nationalised Bad Bank

1. This is just the government’s way of bailing out the banks.
   Response: Whether we like it or not, the bad loans have to be transferred out of the banks.
2. This is just the government’s way of bailing out their property developer friends.
   Response: The property developers will be pursued for the repayment of their loans, whether they are owned by the banks or by NAMA. Bacon argues that NAMA will pursue these loans without the croney capitalism of the banks; supporters of nationalisation argue that a public body will be subject to political influence to go easy on developers.
   

Criticisms of specific aspects of NAMA

1. NAMA does not need to buy the good loans – it will increase the size of NAMA which is not necessary.
2. NAMA might be the right answer for AIB and Bank of Ireland, but it is not appropriate for any of the other banks. Anglo and Irish Nationwide should just be wound down. The EBS and Irish Life and Permanent are not insolvent although they do face liquidity problems.
   

The downsides of Temporary Nationalisation = The upsides of NAMA

1. There is a general ideological opposition to the government owning banks
2. Private banks are more efficient and contribute more to the economy than nationalised banks.
3. There would be media and political interference in the banks on a grand scale:
   setting interest rates
   making lending decisions
   treatment of borrowers in arrears
4. It would increase the liability of the taxpayer as the the government would be guaranteeing all the liabilities of the banks. Some bonds issued by the banks are not covered by the guarantees at the moment.
   Response: The additional liabilities are not material.
   
5. Retaining the stock market quotation for the banks would make it easier for the government to sell their interest if and when the stock market picks up. Response: The government can privatise the banks relatively easily as it has done with eircom, Greencore etc.
6. The government would be unable to deal with the banks’ unions
7. This sends a signal to the World that the Irish banks have failed
8. The international capital markets don’t like lending to nationalised banks.
9. The government would not be allowed to issue bonds to nationalised banks so it will be unable to fund the capital requirements of the banks. As the banks are also the main customers for Irish government bonds generally, the government might not be able to fund the budget deficit. See separate thread
   
10. Temporary Nationalisation would last a very long time. There will be a glut of nationalised banks on the markets.
11. The banks should be subject to the scrutiny and disciplines of the stock market
12. Investors would shun all Irish companies – not just banks – for a long time.
    Response: If the government pays for the shares, it is not the same as expropriating them.

See Alan Ahearne’s article in the Irish Times [broken link removed]
And Brian Lucey’s response [broken link removed].

The advantages of Temporary Nationalisation
What is proposed is temporary nationalisation of the systematically importance banks.

1. If NAMA pays too much for the toxic loans, it won’t matter as this will mean that the nationalised banks will benefit.
   Response: The government already has a big stake in the banks, so the taxpayer benefits anyway.
2. If the economy and banks recover strongly, the taxpayer will benefit. With NAMA, the bank shareholders would get most of the benefit.
3. The costly exercise of valuing the loans can be avoided.
4. It will not be necessary to set up NAMA. Anglo could be converted into a bad bank.
5. The Government could change the management and lending policy of the banks to suit the economic policy of the country.

See the full article in support of Nationalisation by 20 economists [broken link removed]


Alternatives to deal with the downsides of Temporary Nationalisation
Let the NTMA acquire the shares of Bank of Ireland and AIB as investments.
They will not have the stigma of nationalised banks.
They can be operated independently of the government and interfering politicians.

 

[Brendan Burgess]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

This thread is intended to be a summary of the main arguments.

We can tease out the different arguments in separate threads.

Please only post corrections or additional points to this thread.

It would be helpful to quote the exact piece you are commenting on.

It would also be helpful to prepare a short phrase which I can incorporate easily into the above.

In particular, I would welcome links to good discussions on the various points.

I also welcome suggestions for improving on the balance of the summary if anyone feels it is not fully balanced.

Brendan

 

[Brendan Burgess]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

Bacon's argument in his own words from the [broken link removed] to set up NAMA

Consequences of Additional Capital Investment
24. Any additional capital required to cover losses on transfer to the AMC could result in substantial State ownership of certain credit institutions, depending on the price at which capitalisation is undertaken and the precise form of the capital investment. However, there is an important distinction between this position and fully nationalised entities. Notably, and similar to the RBS and Lloyd’s Banking Group in the UK, both institutions would retain their stock exchange listings and their shares would continue to trade on the Irish and London Stock Exchanges. Accordingly, as and when market conditions improve and the performance of Irish banks return to growth there will be a natural exit mechanism available whereby the Government should be able to divest itself of its majority ownership, should it wish to do this, in an orderly manner that allows it to realise gains on behalf of the taxpayer over time.

 

[GSheehy]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

In the link to the article by Alan Ahearne in favour of NAMA he states that

Under the Nama initiative the taxpayer is protected from unforeseen losses through the Government’s commitment to levy the banks for any losses incurred.

My question is 'Where would the banks raise this levy from?'

Account Holders (?)

 

[Duke of Marmalade]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

An argument that seems to have been overlooked is competition. With NAMA, even if the Government are majority shareholders, the current competition between the big two could be sustained.

It is hard to see how there would be effective competition if the goivernment wholy owned practically the whole banking sector.

 

[Attica]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

The arguments raised are enlightening. However, I am a simple credit controller and I look at NAMA from a practical point of view. Credit control to be successful should have 3 characteristics; know (assess)the customer; be prompt in dealings; follow through on payment demands.
In my opinion, NAMA falls at the first hurdle. The Mahon Tribunal spent years and a lot of money trying to find out the owners of one company. My bet is that ownership of many of these toxic loans will be tied up in knots likewise and will take years to unravel.
If NAMA is set up, it will be the biggest undertaking ever seen in Ireland and will take generations to work off the debt. Why should the Minister for Finance have the right to undertake such a debt on behalf of people yet unborn? He gets the people's taxes to do the job of government, including providing health and education, justice and defence etc. When did the people agree to allow their money to be used to pay off gambling debts??? I believe the decision on NAMA should be put to a plebiscite.

 

[onq]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

If find it difficult to support the whole notion of NAMA. We don't need an artificial Bad Bank. We have one or two already.

I don't see a consensus that this MUST Be done, just some FUD about "losing control of the Irish banks" to foreign investors. Who?! Who would have invested in AIB? Anglo? This argument fails to stand up.

Start a new bank - let the rest go to the wall.
Offer depositors and potential borrowers account transfer facilities and watch them flock in.
Offer to take over the Banks leased premises.
Offer employment to existing mid and low level Bank employees - the tellers, loan officers and branch managers - these the the ones actually needed to conduct the business of the banks

And the argument against this?

The Government shouldn't get into somethign they aren't experienced in.
And why not? Do you know many good bankers? Where? Who?

It would damage our credibility abroad.
We have none! We're about to lose our last A rating!

The issue here is to provide credit lines to small businesses to help them stay afloat.

Do you know what the current line from the Banking intelligentsia is?
They'll support Viable Enterprises. Viable Enterprises! I ask you!

Most of the country is composed of enterprises the viability of which has been threatened by the banking crisis and the least viable of these are the Banks!

Its just adding insult to injury to think that the very institutions which have failed us and which have been bailed out, with neither foresight nor full analysis on the part of the government, whill now be in the position to judge all these other businesses which their gambling and marketeering has put in jeopardy.

Sorry for the rant and I realise this may be off topic, or even speaking against the topic, but there you go.

For me, NAMA doesn't get a free pass. I am not convinced. Sorry.

 

[Duke of Marmalade]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

Start a new bank - let the rest go to the wall.
Offer depositors and potential borrowers account transfer facilities and watch them flock in.

Sorry, onq, in this quote is the great flaw in your proposal. The banks haven't got the liquidity to fund a mass transfer of their deposit accounts to a new bank. The stability of the system depends desperately on there not being a run on the current banks. Hence the government guarantee, the recap, the NAMA etc. etc.

 

[Duke of Marmalade]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

The other banks fail and are dissolved.

Sorry, onq, my rather tenuous grasp of theology made it difficult to follow the main thrust of your post. But do you appreciate what the above quote implies? Let's take AIB. Allowed to fail means it goes into liquidation. The vast majority of depositors who would not have made the last minute run would be trapped waiting on an endless process to see how much cent in the € they are going to recieve - probably take 10 years to sort out. The money transition system would cease to function. The economy would stop. And then we would all kneel towards Mecca and thank Allah for deliverance from our wicked ways.

 

[Spondulicks]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

NAMA is a way of allocating losses between stakeholders over time. You need capital to absorb losses. Banks get capital as follows
- from shareholders ( rights issues, new issues, retained profits)
- from depositors ( currently government guaranteed)
- from bondholders
- from the exchequer ie us

Depositors are not going to take a hit. Bondholders are not taking a hit because the government needs to maintain supplies of capital to the State and the Banks.

That leaves us and shareholders.

Shareholders have seen their investment literally decimated in a manner of speaking. The grim reaper has taken €9 out of €10, rather than 1 out of 10 as in Roman times.

Looks like we are in the firing line. Will the government secure a good deal? Well these trusty card sharks went in to play poker some time ago with the novices from the Conference of Religious in Ireland and lo and behold guess who seemed to play all the trump cards?

On the basis of this experience, the banks look like a good investment again - the current crew just cannot seem to get the better of powerful interests no matter how hard they try(!!).

Our economic high priests turned their collective backs on political economy some time ago to concentrate more on econometrics and high finance. They need to put orginal sin and human nature back into the equation if they are to comprehend what happens in the market for the command of resources in Irish society.

 

[GSheehy]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

Looks like we are in the firing line. Will the government secure a good deal? Well these trusty card sharks went in to play poker some time ago with the novices from the Conference of Religious in Ireland and lo and behold guess who seemed to play all the trump cards?

I would share your mistrust of the negotiating skills of the Government. It would probably be prudent to bring in outside expertise in this regard.

Was surprised to read this yesterday in the IT

The banks are expected to be able to charge Nama an administration fee for tending to the loans.

Under the Nama plan, financial institutions may be offered up to 10 per cent of the value of the recovered loans as an incentive to encourage the lenders to recoup as much money from developers as possible on behalf of the State.

Full piece [broken link removed]

 

[Duke of Marmalade]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

I thought it interesting to revisit this debate in the light of recent developments. The Gang of 20 argued:

These three outcomes are simply mutually incompatible, and we are greatly concerned that the Nama process may operate to maintain the appearance that all three objectives have been achieved by failing to meet the first requirement. This would arise if Nama purchases the bad loans at a discount – but still well above market value.

It now appears that one of the main arguments made by the G20 is correct - NAMA is going to pay above market value for the assets. This is unashamedly "bailing" out current shareholders. The case is now strong (and not too late) for the G20 argument to be accepted but on a much diminished timescale. I suggest that the State should confiscate the shares of insolvent banks, clean them up with NAMA, and then very very quickly (matter of months) offer 75% of the shares back into the market, and at some subsequent time compensate confiscees with the independently assessed value of the shares at time of confiscation assuming there had been no State intervention whatsoever, i.e. practically Nil.

Another thing that puzzles. Let us assume that banks A & B are insolvent without State support, but that A is much worse than B. There seems to be a feeling that what the State does for A i.e. the bare minimum to keep it viable without a shareholder windfall it must equally do for B but because B is in better shape its shareholders will enjoy a bit of a windfall. What should happen is that B too should have the bare minimum done to it to keep it viable even if the terms offered to it by NAMA appear "unfair" compared to those offered to A. The fact is neither group of shareholders "deserve" anything in the way of a windfall other than that bare minimum for viability.

 

[Duke of Marmalade]

Re: NAMA or Temporary Nationalisation? A summary of the arguments.

Mistaken thread

 

[z109]

The government would not be allowed to issue bonds to nationalised banks so it will be unable to fund the capital requirements of the banks. As the banks are also the main customers for Irish government bonds generally, the government might not be able to fund the budget deficit. See separate thread

The ECB appears to have ruled that there is no objection to either issuing bonds to nationalised banks or to nationalised banks buying government bonds provided this is done on a competitive (market) basis.

This is good news, at the very least, for Anglo, which, regardless of other arguments, has already been nationalised and must be cleaned up and refloated.

 

[z109]

Invalid criticisms of NAMA/a Nationalised Bad Bank

1. This is just the government’s way of bailing out the banks.
   Response: Whether we like it or not, the bad loans have to be transferred out of the banks.

I don't accept that this is an invalid criticism. The banks could bail themselves out by establishing their own off-balance sheet banks, placing problem loans in them for workout, selling off assets, raising equity. This is, after all, what is supposed to happen. Other banks in Europe and the US have managed it. The choice is not between NAMA and nationalise.

 

[Duke of Marmalade]

Let's cut to the chase. It seems that all contributors are against nationalisation in principle. Even the Labour Party has included that crucial word "temporary". There are no closet communists out there. So we can list the pros and cons if we like but we know that on balance everyone agrees that the cons outweigh the pros.

So that leaves the residual cost of avoiding nationalisation is what is left on the table for shareholders. Leaving begrudgery aside, most would agree that, say, 1Bn would be a cheap cost of avoiding that final step which no-one actually wants.

Then we are, in the words of GBS, only haggling about the price. IMHO if the state ends up with significant majority ownership then we will have avoided that final undesirable resort of nationalisation without "over windfalling" the existing shareholders.