Banks – no need to panic

So, we have arrived at the moment of truth..NAMA is to reveal the price it will pay and the banking system will end up in government hands, according to the professional professors, the insider winkers, the usually well informad media commentators and the bewildered of RTE.

Well, I think they’re wrong. I’m sticking my neck out like an idiot, I suppose, but, in the midst of all the panic- share prices today are down c. 20% !- one should take a minute or two to calmly consider the realities: the last thing the State- and the citizens- need is majority-or substantial minority control of the two main banks. We simply can’t afford it !

The inevitable result of “nationalisation” is “re-privatisation sometime; and, at that time, who would buy the banks from the Government? Who could? The traditional investors in our banks- the 150,000 Irish resident individuals, of older age and simply looking for dividends as pension supplements- would have been wiped out and, if not dead, or in State-nursing homes, still suffering the bitter taste of savings lost investing in banks. No Irish corporations or institutions would have both the strategic benefit and the financial means to buy large stakes in the banks. The reality is that our main banks–and with them, control over all Irish owned deposits- would have to be passed over to foreigners. At that stage, we might as well throw away all pretence to economic sovereignty.

Admittedly the new Central Banl governor, Pat Honohan, made some very silly comments a few weeks ago, indicating that it is almost government policy to wipe out local shareholders and sell off our major economic assets. But he seems to have taken the foot out of his mouth in recent weeks.

In any case, I believe that Brian Lenihan and his advisors and top officials have a more sensible view of the importance of our banking system and of what is required from NAMA. And they would also realise that a move into State control would cause an immediate drainage of deposits from the system which could not be replaced by any government actions or guarantees and which would be a burden our economy could not support

Therefore, the right price for assets going to NAMA from the two main banks is the price at which the assets can later be sold for, subject to the maximum which the banks can afford while staying independently controlled in the private sector. This price, which may be around 30% discount on original assets values, is affordable by our nation- because its totally financed by the banks and it comes with an indemnity against loss provided by the banks, in effect. It is the price at which the banks will be able to raise capital privately- assuming some forebearance from Pat Honohan in the matter of unnecessariily early achievement of new stringent capital ratios- which most international banks cannot achieve in the short term anyway- and at which they can finance necessary activities in the rejuvenation of our economy

Aided by the likely positive change in the near future in the accounting rules pertaining to banks’ impaired assets – which will greatly help to diminish the impact on banks’ capital of residential mortgages losses- our two main banks will recover their relatively strong position over the next 2-3 years. The outcome for the nation will be far better than what we would achieve through (partial) nationalisation. And as for shareholders, don’t follow the herd but be strong now…have faith in Lenihan and look forward to a doubling of the share prices in AIB/BOI over the next few months. Indeed, shareholders should take up a rights issue, particularly if the banks could offer exactly the same terms on which they permitted the State to get in a year or so ago.

3 Comment(s)

  1. Europe is running the NAMA decisions. They will say what is to happen. I have commented on this on http://Irisheconomy.ie, where I noticed your website.

    I find you advice to take up rights bizarre! If I do so and lose money, may I sue you? I presume you have an interest in advising strangers?

    Pat Donnelly | Mar 30, 2010 | Reply

  2. Pat…The so called “state aid” which AIB is receiving is far inferior than that which many other banks across the EU are receiving. In reality, the EU Commissionn has no case against AIB/BOI. There is no discrimination or distortion of competition here…In fact, foreign banks are pulling out of Ireland, with encouragement from their own governments, in order to concentrate funds on lending in their own domestic markets–having caused much of the lending problem here in the first place! And the EU Commission is to be blamed also–for setting up a single monetary policy based in Frankfurt, which infused cheap funds into our market at the wrong time, just because it suited certain larger countries. The Commissionn has failed, over the past 20 years, to formulate economic policy that suits the peripheral regions of Europe

    As for buying AIB…see my next post, but take your own risks.

    Brian | Mar 30, 2010 | Reply

  3. ‘ The reality is that our main banks–and with them, control over all Irish owned deposits- would have to be passed over to foreigners. At that stage, we might as well throw away all pretence to economic sovereignty’

    Irish banking interests may have had some sort of loyalty or commitment to the Irish economy, but only up to the point where a more attractive opportunity came their way.

    Insofar as banking is a utility, the important thing is that it is accessible, and that it is run and regulated safely. Ireland didn’t do too good on that score.

    Insofar as banking offers entrepreneurial opportunities, ‘the divil take the hindmost’ remains the motto. The lazy way to win is to fix the game.

    ‘Our’ bankers ‘persuaded’ the government to facilitate the blowing of their property bubble. The record will show that our banking system, and our sovereignty, was thoroughly abused in the process.

    Given the widespread nature of such misconduct in the global financial services ‘industry’, it is difficult to see ahead, but I think we have seen enough of the ‘Green Jersey’ to look with equanimity on ‘foreign takeovers’.

    paul quigley | Apr 2, 2010 | Reply

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