Saturday, 2 October 2010

What shall we do with our new banks?

Slí Eile: as the sweet tones of the 'People's flag is deepest red it shrouded oft our martyred dead' signalled the end of that very nice protest on Kildare St last Wednesday it became obvious that the authorities were so impressed that at long last they decided by 6.30am the following morning to take majority public control of Allied Irish Banks. The commanding heights are now in full view and socialism (for bankers) is within reach. From each according to their means (higher interest payments to unknown investors) to each according to their needs (the same unknown investors are are senior bondholders). No wonder it can be claimed that some €15bn in senior debt (in Anglo-Irish) has the same status as deposits and this is a legal matter (did I hear some mutter the constitution - they must be talking about private property). Now would readers of this site care to suggest what we the people of Ireland - gnáth phobal na hEireann - might do with this new found resource. This is about democracy. Truly Marx was right when he said that the modern State is but a committee for the management of the common affairs of the bourgeoisie. Except that the international bourgeoisie are not too impressed with the efforts.


Rory O'Farrell said...

"take majority public control of Allied Irish Banks"

This is something that the media seem to have missed out on. With all the debate about bondholders, people have missed out on AIB shareholders being bailed out. Granted the sum involved is small in comparison to Anglo, but a few hundred million is still better in our pockets than the shareholders. There is no reason why we should not have 100% control (and then I would add buring some bondholders to that).

As for the future: I'm not a big fan of having the state control individual banks (I'd leave the state focus on regulation). Instead I would like to see a rebirth of mutual banking similar to local credit unions.

If I was in charge I would bring in a bank resolution scheme immediately, make AIB face up to the loses it made (burning all deadwood, ie shareholdings and much bondholdings as soon as the extended guarantee lapses). This would leave depositors. They would then just get ownership of the bank as a mutual.

We have to just cut our losses on the banks, rather than repay all the debts. The bondholders are a stone around the necks of the state and the banks. I say cut it loose. Also I have no confidence that AIB will become profitable again except due to reduced competition (which is bad for the economy). This is due to the govt's overly deflationary policy will cause more bankruptcy, and house prices still have some way to fall.

I would also be tempted into splitting it in two, a mutual personal bank, and a mutual business bank. The latter would make riskier business loans, but would also pay higher interest to those who deposit money.

I'd be happy for any suggestions so I can iron out my banking plan :)

Slí Eile said...

@Rory thanks for very useful comments. I think that there is a case for a mix of ownership models. However, trust in banking has been shattered and the case for state ownership beyond the present crisis stage is strong. is it really going to be possible to reform banking and to take effective control of banking without majority state ownership of at least some banks modelled on specific missions from retail lending to industrial lending and support.
The piece in today's FT is very apt by the way:

So what should Ireland do? …...You cannot simply apply a haircut on a bond unless the issuer has formally declared bankruptcy. Dublin is now preparing legislation that would allow it to apply a haircut to the subordinate debt. First, coming two years after the beginning of the crisis, this is absurdly late. …..My concern is that Dublin is overburdening the taxpayer, and might worsen the downward spiral. …..The European political establishment recoils so much at the idea of default, it is willing to accept extreme hardship. Just look at Latvia. But Latvian brutalism is not going to be realistic for Ireland. Brian Lenihan, the Irish finance minister, might wish to ponder whether his monumentally unfair taxpayer bail-out is what will ultimately “bring down Ireland”. Wolfgang Münchau