Last week I wrote that the interview with Anglo chief executive Mike Aynsley in the Irish Times to me marked a shift in the PR strategy underlying the bank recapitalisation/nationalisation schemes. David McWilliams yesterday talked about it in similar terms. I warned that the next week would see a miasma of news and spin, and so it appears to be coming to pass with several speeches planned this week around the issue.
Today we are given page one stories all about the impending banks scheme. While all of them cover it, it was Emmet Oliver’s lead in the Irish Independent this morning that struck me most. Headline:
Accept my deal or quit, Lenihan to tell bankers
Let us get this very straight. Many commentators and economists argued a long time ago that nationalisation should happen early, and if it didn’t, it would happen eventually. Now this is coming to pass. As Constantin writes:
Since May 2009 I have consistently supplied estimates as to the eventual state ownership in both AIB and BofI. Depending on various scenarios:
* assumed Nama haircuts,
* the actual current risk weighting on the loans being transferred,
* share price at the time of announcement and the willingness of the banks and the Government to recognize future expected losses on the loans not transferred to Nama
RVF approach to valuing AIB and BofI balancesheets suggests that at the end of the current crisis, the state will outright own around 85-90% of equity in AIB and 50-60% in BofI. This eventual outcome, for political reasons, will come in two stages:
* post-Nama injection of capital (with AIB placing around 60-70% of its equity with the State and BofI placing around 40-45%), plus
* second stage recapitalization to correct for continued deterioration in the books over 2010-2011 (adding another 20-30% of equity for AIB and 10-15% for BofI)
The problem with this two stage recapitalization is that the taxpayer will end up paying three times for the same equity:
Having injected €7 bn into two banks at the time when they were worth less than €2.5 bn for the entire lot,
* we are now be left on the hook for some €20 bn worth of largely worthless loans – to be purchased at ca 30-40% discounts (against the real market discount of 65-90%),
* plus €7-8 bn in fresh capital post-Nama
* plus the margin of ca 10-15% for further deterioration in non-Nama loan books (requiring another €7-9 bn of fresh capital).
Thus the Irish state is now likely to use up to €20 bn to buy up equity and loans from a bank that is currently worth around €1.5 bn… In the world of finance, even the most reckless bankers never managed such margins.
Now without personalising this against Mr Oliver (and the headline would have been written by a sub), what part of this particular story is positive? When was Mr Lenihan screaming “Iceland!”, what was the Government’s view 12 months ago on de facto nationalisation? How much has all this waiting cost us? Does anyone remember the last 12 months?
When you use sentences like “Finance Minister Brian Lenihan is going to seize control of the country’s biggest bank, and tell its top executives to leave if they cannot work under the new regime”. Eh?
Add in words and phrases like “uncrompromising” “momentous” “pump” “state of the union” “uncompromising” (again) “forced” “fall on their swords” and you would be left with the impression that the Government knew exactly what it was doing all along. Sadly this was never the case.
A bit like backdating the NAMA values arbitrarily to November 2009, when prices have fallen significantly since then. Backdating the values has likely cost more to the State than the entire public sector cuts will save the economy this year. But remember, in September Mr Lenihan said we were very near the floor:
No, nowhere near it. We do have “further to go down, and further and further and further”. Even Friends First agrees prices will fall nationally another 10% this year.
And do not forget how the system reacted to the letter by economists nearly 12 full months ago.
OVER THE last number of months extraordinary changes have occurred in the Irish banking and financial scene. We believe that we are now at a critical stage in Irish economic history and that it is crucial that the Government take the right course of action to deal with the problems in our banking sector.
The banking system is widely perceived to have seized in terms of lending, and whether correct or not this perception needs to be addressed. We believe that the correct action to take now is nationalisation of the banking system, or at least that part of it that is of systemic importance.
Their professionalism was called into question, and they were vilified for railing against the prevailing views. And how do you go back on all that and nationalise now? You make it sound as if you’re taking on the evil bankers.
Deflection I guess, is a good remedy.