The myth of nationalisation as the solution for banks.

‘Value for the taxpayer’ is the most common line I hear in defence of nationalisation, and inside I laugh every time I hear this line, because it implies that up to this point we gave been actually getting value for our taxes. If our tax take was managed so carefully in the past (as the argument for ‘value’ seems to suggest because they certainly are not saying ‘we were ripped off left and right in the past’) we would have a surplus with which to counter the current cycle, much like Chile or Norway are doing.

It struck me that value for the taxpayer might be in keeping the banks non nationalised and here are a few points that I have not seen answered adequately in the public domain.

1. If an Irish pension fund takes a serious fall in value due to the bank shares it holds being nationalised (on top of what are already serious losses, wiping the share holders may push a fund over the edge) – who will bail them out? Joe tax payer (via the state) will have to step in, this is not factored into any of the nationalisation schemes, but if people (and ultimately people are at the end of every share) are wiped out in favour of the tax payer, and many of the share owners are taxpayers, then where is the port of call for them? Right back on the state and thus the taxpayer, there is no way the state could stand by in this example.

2. Markets might not opt to fund other banks if we nationalise, not because the risk is much different, but these same institutions holding bonds might hold shares nobody has checked this out, burn them on one they might repay by withdrawing another. The most common statement downplaying this risk is that people see ‘no clear evidence that this would happen as a state backed entity would be more secure than a private one’, which is true, but take the pension scheme from point 1, say they have shares in ILAC and AIB, they get wiped on AIB so they sell out their ILAC position and that actually causes a confidence shock in a different entity, bondholders might do the same, and if this happens then you are nationalising banks not because of them doing something wrong but because confidence is totally shot.

Nicolo Machiavelli often said that it was ‘better to have the confidence of the people than to build fortresses’, it seems that the pro-nationalisation crew aren’t concerned about market confidence, they assume it will remain in stasis while we build a nationalised fortress bank, but unfortunately you can’t pre-empt that, and once you upset the cart there is no undoing it.

There is c. €150bn of short term debt for AIB and BOI to roll over in the near future, if you nationalise them who can actually say that bondholders won’t react? Its ridiculous to see the world from an Irish-centric point of view,

3. The over riding message from markets is that they don’t favour nationalisation, rolling over 150bn in short term debt would be impossible if we were tested, if tested we will fail, so under the current system you don’t have an ideal situation but if tested banks will fail, if the bank is taken by the state and tested the state fails. Once you go down that road there is no coming back.

4. Nationalisation doesn’t change the assets involved, and in fact, overpaying, realising a short term loss and then penalising the banks as per the NAMA agreement is a way of getting ongoing profit for a loan which is based on the difference between the amount paid and the amount realised, if you nationalise the banks then during the years it would take to amortize back those payments you’d be doing several things

a: running identical operations funded by the taxpayer with one ultimate owner and yet total inefficiency, eg: UB and FA had one operations centre, if you had several state owned banks what is the argument for having four treasury departments? if further running costs are needed the taxpayer is actually being ripped off, we wouldn’t stand for it if there were four teachers for one class, why stand for it else where? Once the charade is realised and addressed it would mean a lot of job losses.

b: You would end up with total monopoly, you might not be able to divest of institutions unless they are amalgamated, venture capitalists who showed interest in the past didn’t want ‘one small bank’ they wanted to buy into ‘one massive bank’. Would the market really want to buy back into the banks down the road? And how far down the road are we talking about? Would it be as successful as the Eircom IPO? One can only hope not.

c: consumer suffers – meaningful competition won’t exist. and the reality is that the likes of Anglo are paying some of the highest interest rates in the country, how can they afford to do that? And how can AIB write loans at the lowest rates? You can think (in the short term) ‘but the best deals are coming from banks who got state support?’… yes… but how long will that last and who will pay for the difference? If it was easy to distribute and fund at those prices there would be more competition, so it’s already happening, we are setting them up for a fall.

d: if there is some ‘windfall’ will the taxpayer actually get any of that? are we really to believe that somewhere down the line in time there is 40 acres and a mule in store for us! Bigger the fool who believes this.

e: If it ain’t broke don’t fix it, that means that while we have banks that are not working in their traditional sense (the fact that our company is still functioning means banks are not ‘totally broken’, that type of terminology is thrown around far too loosely), that tinkering with the market beyond providing recovery is a mistake, why not treat the banks like they treat customers? Lend money where necessary and charge interest, if they fail to repay then you repo them, not in advance of the loan! National ownership won’t mean the banks will be able to pay back any better, in fact, we will remove the stick of hardship that will encourage performance.

f: Look no further than Anglo and then extrapolate or speculate, Anglo is a zombie bank that is being kept alive with taxpayer money, nobody there is going beyond the call of duty now that they are all essentially civil servants, what of unexpected outcomes? what if the heavily unionised houses in other banks go on strike? Anglo wasn’t a unionised house, but the likes of AIB and BOI are.

g: We need to get to grips with being prepared for nationalisations that are forced upon us rather than ‘going after them’. With Anglo there was no choice and Nationwide will be the same, but why ‘chase’ it if it doesn’t have to be?

h: the taxpayer will be, in short, raped by nationalisation, look at Eircom, look at the IPO disaster that was, the ‘exit plans’ we keep hearing about, they are assumptions, the current system still has an escape plan, if you take over banks you have only a conceptual ‘exit plan’, doesn’t mean it will come through, but you have no escape plan and they are two very different things, one is an orderly idea, you ‘exit’ the other is what to do if things go bang, and you can’t let a bank collapse if it is nationalised, this is perhaps a key factor that is indefensible.

i: Crony capitalism: are we to believe it wouldn’t become widespread?

Nationalisation as a cure is misguided, even as part of a cure it is misguided, it should only be used where a bank is going into a run-based collapse and providing working capital is not the same thing. Its like a person having a temperature and blaming the thermometer, the issue is bad assets and debt, and the people of this country ‘the nation’ who are made up of ‘tax payers’ are the ones not paying their loans which is what causes the problem, that’s the fever at the base of this all. Interestingly nobody is coming out and saying ‘I’m part of the problem because i take out loans i can’t pay back or that i won’t pay back’.

A nationalised bank will have serious issues chasing down debtors, think about it ‘I pay my taxes, govt. brought us here etc. why should I pay?’ how do you repossess a house when the alternative is to put a person into public housing? the ‘no repo’ rule is already a pre-condition of the recapitalisation scheme, really it will end in debt forgiveness and that is a very expensive business.

I don’t care how many academics or industry people say nationalisation is a good thing, I’m certainly not doing a Coleman on it with that comment, indeed, the people I admire are not footballers or film-stars, but humble economists.

The reality is that the state are not in the business of running banks, if they were they would already run the banks, the only thing the state need to focus on is running the businesses that don’t have private sector competitors, and this occurs in the areas they already take care of such as water distribution and military services.

Nationalisation of itself is not the cure except in the most extreme of examples, that’s why it isn’t the ‘cure all’ being put forward by the US or the UK, in fact, Germany is creating a bad bank which is not totally dissimilar from the NAMA, those market powerhouses know full well that markets don’t react well to nationalisation so they avoid it at all costs, yet we don’t seem to get that message, some of the greatest economies in the world understand it, but not Ireland and thus a petition goes around with 20 signatories and it becomes gospel that nationalisation is the answer, one can only wonder how many signatures might go onto a ‘non nationalisation’ petition.

So why the rush in for state ownership of banks? are people really naive enough to think the state knows best? If the state had all the answers and foresight we wouldn’t be facing 17% unemployment next year!

I will remain unpopular in some circles due to my beliefs, however, they remain and thus far there is no compelling argument for nationalisation that isn’t fundamentally emotive, taxpayers will lose out no matter what, the Irish taxpayer has never actually ‘won’ for that matter. We need to remember that the banks are not a ‘them versus us’ situation, it is just ‘us’ because without functional banks all of society loses out, we need to move beyond the scapegoating stage and focus purely on curing the problem, not the symptoms such as SME’s not getting overdrafts.

I have been asked in my anti-nationalisation stance, if I hold banks shares, the answer is ‘yes I do’ I have always been very public about that, however I in turn asked many pro-nationalisation commentators if they stood to lose out should a bank be nationalised and they have replied with a hearty ‘no, I am totally independent, no skin in the game’, but it also got me thinking: perhaps its easy to be cavalier when you have nothing to lose, when you gamble on a certain result with other peoples money, and when you are in receipt of a state pension that has zero correlation to stock market performance ‘wiping shareholders’ doesn’t mean quite as much. Perhaps the same proponents of nationalisation will be willing to explain this to a crowd of people who have not only lost money but been 100% wiped out and had their retirements – so hard won – reduced or in ruins. Maybe the people who want to put banks under state control will be the ones having eggs thrown at them next.

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  1. NAMA to save the share/bondholders, cost the taxpayer
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