State must be rewarded for banking guarantee

Wed, Oct 1, 2008, 01:00

OPINION:BRIAN LENIHAN'S undertaking on our behalf early yesterday morning to guarantee all deposits with AIB, Bank of Ireland, Anglo-Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society was a massive favour to hugely wealthy financial institutions, writes Vincent Browne

It is a favour that must be rewarded by the State taking a majority shareholding in each of the financial institutions concerned.

I am not arguing that the banks should be nationalised or taken into State control indefinitely. I am saying that when the financial crisis recedes and the stock markets return to their senses, that the State, which has undertaken such considerable risk with such enormous benefit to the institutions concerned, should be rewarded by being in a position to sell off its shareholding at considerable profit to the public exchequer.

What happened in 1984 should not be repeated.

In March 1984 it emerged that AIB had behaved recklessly - as did so many banks over the last few years - in giving mortgages without the normal and traditionally prudent restraints.

In 1984, AIB's recklessness was due to the purchase and operation of the Insurance Corporation of Ireland. It had incurred what were said to be "unquantifiable liabilities" in the London insurance market.

The pitch was that unless the State intervened to get AIB out of a financial mess of its own creation, it might go under, bringing with it the Bank of Ireland.

One of the reasons for AIB's vulnerability was that it had acquired some of its equity funding by way of loans from other banks, loans that could be withdrawn without notice if any subsidiary of AIB became insolvent. This was precisely the kind of caper that American banks engaged in, which was in part responsible for the subprime crisis.

The government of the day, led by Garret FitzGerald, acceded to the alarms and agreed to take over ICI and all its liabilities.

A scheme was put in place whereby over the years AIB would return to the exchequer the cost of this arrangement and the other financial institutions would also contribute.

The eventual cost to the Irish public was considerable. Incidentally, it is not true that there was no cost to the "taxpayer" (to use the unfortunate term, it is not just the taxpayer who is at a loss, it is all citizens).

AIB's subsequent conduct was astonishing. Instead of being grateful to the State for this bailout - a consequence of which was that well-heeled shareholders were saved the entire value of their shareholding - AIB announced shortly afterwards that its results for the year would not be affected by the crisis and there would be no reduction in the dividend payable to the shareholders.

And, incidentally, shortly afterwards, AIB began to implement a major fraud on the State through the Dirt tax scam, a fraud that amounted to at least €80 million. (I have relied, for the most part, on the memoirs of Garret FitzGerald All in a Lifefor the 1984 crisis - he did not deal with the subsequent Dirt scam.)

Why did the State not tell AIB in 1984 that it would be rescued only if 80 per cent of its equity was handed to the State, subsequently to be sold off at a handsome profit? Why were the shareholders the ones to benefit exclusively from the State's intervention - it was they who made the very handsome profit, for without the State's intervention their shareholding would have been worth nothing.

Now we have a similar crisis and again Irish citizens (through the agency of the State) are intervening to rescue the banks, perhaps from collapse, certainly from a meltdown in the value of their equity.

Once again the shareholders of financial institutions are being favoured massively by the rest of society.

This time the citizens should get their reward for this rescue by getting at least 80 per cent of the shareholding of the financial institutions. And if one or all of the financial institutions don't want this, so be it.

In 1992 there was a banking crisis in Sweden. Its banking system was close to insolvency.

The government came to the rescue but insisted on acquiring effective ownership of the institutions concerned.

When the worthless assets were sold, the profits went to the state (ie the citizens) and, later on the state was able to recoup most of its investment by selling its shares in the companies.

That is what should happen here. It would be a travesty if as a consequence of Irish citizens taking on such huge risks and thereby rewarding the present shareholders so spectacularly, that they, the shareholders, should be the main beneficiaries.

Their shareholding is, or was at midnight on Monday, worth very little.

By lunchtime yesterday, as a direct consequence of Lenihan's reassurance, AIB shares rose by 17 per cent, Bank of Ireland shares rose by 16 per cent, Anglo-Irish Bank shares rose 36 per cent and Irish Life and Permanent shares rose by 26 per cent and, no doubt, will improve considerably further as a result of the guarantee.

(Actually the figures on the rise of the share prices by lunchtime yesterday, over the losses on Monday, understate the position, for had the statement not been made, the shares would have fallen further yesterday morning.)

A little fairness is no dangerous thing.