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Did the banks bail out the State?

The following is a slightly expanded version of a letter I sent to the Editor of the Irish Independent today:

17 December 2020

Re: Taoiseach’s remarks about the Bank Bailout

The Taoiseach could be more correct than many think in saying, or letting it slip (?), that  the State did not bail out the banks. In fact, the State was  a great beneficiary in the whole process. Take AIB, the largest bank, as an example

AIB never wanted or needed a State guarantee. It was imposed on them.  At no point were they ever “insolvent”, or unable to replace  lost capital. It’s capital (paper)loss primarily arose  because of NAMA, which took c.€ 25 Billion of long term commercial assets off its hands- the majority of which was performing ok when the crisis began- in return for a payment of c. €15 billion.  To make up this paper loss, the bank had to find €10 billion, by selling off subsidiaries, raising some capital and other measures. Also, part of the deal was that the State was to get c. 50% of the equity capital of the bank, for no logical reason- it was just to “grab” control.  The bank  was given 6 months to perform what was assumed to be an impossible task of raising this new capital but when, in the last month, it became clear that the bank had succeeded in the task, NAMA decided to back out of the deal, demanding a last minute extra reduction of €3 billion in the payment it had agreed to make for the AIB assets it was taking over, against the possibility of its future losses in selling the assets (on which, beyond  doubt, it actually made a profit of billions, and for which it had a legal agreement with the banks to be reimbursed if it actually incurred a loss.!)  This increased  the banks nominal paper loss on the deal by a last minute €3 billion which the State, via the Central Bank pronounced should be provided as extra new capital, just as their capital raising operating was effectively negotiated  and done.

That action by the Irish Government collapsed the banks share price even further, to c. 50 cents/share, and also greatly diminished the Irish State’s standing in international capital markets.  There was panic.  AIB top directors resigned and said nothing, to this day !. .  The Minister of Finance then made a solemn promise to the markets that he would arrange the provision of “all the capital the bank needed” in whatever way necessary including underwriting a special rights issue at 50 cents per share.  That sort of worked for a while to stabilise the dropping share price, by encouraging many existing shareholders to stop selling the share and encouraging new investors, especially in Ireland  and Britain, to buy them.. That turned out to be a Fraud on the Market by the Irish State, because, a few months later a new Minister, Mr Noonan, totally ignored the State commitment while rejigging the shares and effectively reducing shareholders wealth from 50 cents to 1 cent per share,  and taking over c. 99% of the company for the government.  (Was there even a bigger theft of citizens’ property by the State in Irish history?)

This was following by years of denigration of bank management by political and media commentators- with no effort made to objectively examine the short embarrassing history of the affaire-  and lies about the  States need to inject €21 billion, etc. Did no journalist ever ask where the almost bankrupt  State ever got €21 bilion??  or why the extra capital requirement which was allegedly €3 billion in September 09 rise to €21 billion a few months later, after the State took full control? It simply wasn’t true and didn’t happen. What did happen, however, is that the State made a fortune on the asset grab, by ordering the bank to borrow up to the limit from the European Central Bank- whose mandate was to support banks in Europe and specifically not governments  – and then lend this onto the Irish State, and  at an artificially low interest rate to the government (official low rate to the bank and then less the banks profit from the onward lending margin). One might wonder whether the State ever repaid these ECB loans to the bank and whether the bank’s capacity for borrowing for house building and other investments in the private economy was not effectively closed off by the State’s greed.

The shareholders were dumped without compensation – another illegality.  The fine men- including public representatives- on the Board, stayed on, most of them, and let their shareholders swing  – 90,000 small investors, typically retired public sector workers or other middle income pensioners.

In summary, the State did nothing for AIB except grab it, take all its assets, and all the wealth of its 90,000 small shareholders and then use it as a vehicle for borrowing perhaps tens of billions of ECB money never intended to be directed towards supporting governments.. for that’s what it was… The Bank bailed out the State.  When will some investigative journalist get on top of this?

 

Sincerely

Brian O’Doherty, Greencastle, Co. Donegal

(Former small shareholder)

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