NAMA’s Free Lunch for Shareholders

Since first advocating the Nationalisation of Ireland’s banking system in February here, public dialogue has shifted the focus of the debate. Although not lightly considered, Nationalisation is still a better option than the plan currently proposed by the government under the National Asset Management Agency. At least the government would then be pouring money into assets that it already owns, rather than simply bailing out share-holders.

Nationalisation is no panacea, and there are hurdles that need to be surmounted before it could become viable. It’s bitterly ironic that Alan Aherne, defending the government’s current position, responds to calls for nationalisation by saying:

“Empirical evidence strongly suggests that private banks perform better than nationalised banks. International studies have shown that too much “policy-directed” lending by wholly state-owned banks has retarded economic growth.”

The risk of politicised control of lending is not insignificant, but this can be overcome by keeping the nationalised banks at arms length from government policy. It has been suggested that their policy be independent by making them semi-state. Somehow, recognition of this problem by government advisers doesn’t precipitate the obvious solution.

Let us consider the problems with the plan as it currently stands. First of all, the government hasn’t addressed the problem which links the banking system to the current economic downturn. There is absolutely no guarantee that the banking system will not remain frozen if left in private hands. This was the experience in the US after the Great Depression, under the New Deal initiated by Roosevelt in 1933. Banks will simply hoard credit and consolidate their position.

Secondly, there has been no substantial clarification over how the troubled assets will be evaluated. This might prove indicative of the difficulty which will be encountered before any final sale of the troubled assets to NAMA will take place. This will take time that the economy doesn’t have.

There are finite options in this regard, but the only option currently being considered in Ireland is discounting the troubled assets before sale to NAMA. Estimates of what this discount could be vary wildly, but any capital seized from banks in this manner will end up coming from the government regardless in the form of recapitalisation – or cause reduced lending and proliferate economic stagnation.

Any victory declared by the government in negotiating the sale of the troubled assets would be most Pyrrhic in nature. Appealing to the clause that would allow NAMA to apply a levy to banks in the future to recoup the shortfall, unfortunately falls short of mitigating the imposition. In fact, that vagueness is the very opposite of what is needed to recover investor confidence.

Such problems disappear with nationalisation, because it’s completely irrelevant what NAMA paid for the troubled assets from the nationalised banks. The government would purchase the banks at current market capitalisation. The troubled assets would depart, and be managed by NAMA as in either case. Any money which then went into the banks, either from recapitalisation or remuneration for troubled assets, is then increasing the value of an asset that the government actually owns.

When the government eventually sells the banks, having quickly cleaned them up, that price will incorporate all the money that the government has poured into the banks. Meanwhile, under the government’s suggested system, recapitalisation and troubled asset sale merely increases the value of shares which are privately owned. The return on the government’s actions goes to share-holders, and the tax-payer foots the bill.

Nationalisation would also insulate the banking system from further shocks. For example, Ronan Lyons notes the increasing level of negative equity amongst Irish home-owners. If optimistic forecasts of asset performance aren’t realised, the costs to the tax-payer could rise significantly under the auspices of NAMA.

These problems would be compounded by the need for these banks to raise and hoard capital. Such “fire-sales” can have depressing effects on prices and would put the banks in a worse position in the long-term. An example of such thinking comes from AIB, who discussed the sale of their stake in M&T. The government is in a much better state to hold onto these assets in appreciation of their long-term value, and actually make money on them.

As regards the ability of banks to raise capital, it is ludicrous to suggest that investors will be more wary of a nationalised banking system. In uncertain times, they are more likely to have confidence in the ability of governments to pay them back. Meanwhile, the government’s ability to borrow to fund budget deficits is unaffected until the banks are recovered, due to their erstwhile guarantee.

Recapitalisation and sale of troubled assets to NAMA will increase the value of these banks. The government can own these banks, and profit from the increase in value through their actions. The alternative, is that they increase the value of somebody’s shares through their actions. That doesn’t sound fair.

Republished as “Government Fears NAMA N-word Backlash” in the University Times (21st of September, 2009).

© The Free Marketeer 2009

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