Monday, 31 August 2009

Why, you're welcome Mr Desmond

You will go a long way to find a much clearer and damning indictment of the way the banking crisis has been handled in Ireland than the reported cases of Dermot Desmond in the Sunday Independent. The articles reports how Mr Desmond divested himself of around 14 millions shares in Bank of Ireland and AIB that he had acquired in January, netting himself a supposed €20 million profit.

Let's just review what has happened here. Over the course of 6 months it has been possible to make a staggering windfall return on, what everybody explicitly accepted at the time of purchase, were two insolvent banks. No extra capital required, just a share of the negative net asset value purchased and then sold for a higher sum.

How is this possible? John Q Taxpayer of course, via the globally patented "bank liability guarantee" and more recently "NAMA". Entirely predictable; the government effectively took financial responsibility for these entities but left ownership (potential upside) to the current shareholders. Desmond, among others, was too shrewd to let Christmas pass buy and did the rational thing.

But the real travesty in this case is that this is unlikely to be the end of the story if the NAMA plan results in a taxpayer funded recapitalisation of the banks (via overpayment for assets, or invocation of the liability guarantee or both - see earlier blog) without a proper equity stake (probably 100%) in return. NAMA might not lead to this. The government might stand strong and insist shareholders and bondholders lose all - but the track record is not encouraging. After nearly a year we are still not yet in a position to ring fence the cost to taxpayers to any meaningful degree - we still might end up recapitalising the Irish banking sector using taxpayers' money, but with equity left in the hands of the current shareholders and also possibly bond holders fully repaid.

NAMA is a bad idea because it leaves this possible outcome open.

That is the long and short of it.

1 comment:

Fungus FitzJuggler III said...

I did suggest on that given the make up of the government, NaMa might be more of a scam than it looks! They may reject NaMa and then stock prices collapse ... time to buy! Then NaMa gets passed due to free money from the ECB ... or some such BS from the government of the day. Lots of dough made. The ECB has just suggested that the values should be close to market value. Hence the sale.