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Sunday, December 14, 2008

Lenihan raids pension fund to shore up banks

Minister for Finance Brian Lenihan has decided to recapitalise the Irish banking industry to the extent of €10 billion. He proposes to utilise the National Pension Reserve Fund investments to ensure that the banks can continue on. Legislation passed by the Daíl in September facilitates the move. About 3 weeks ago a list of 6 potential appointees to boards of banks as published from which the banks can choose 2 directors. Its obvious to me that there is he concern that Anglo Irish Bank would not survive into next week and this move is to ensure that the collapse point in the share price does not continue. Some institutions have already said they do not want the money so obviously they seem to feel that they can tough it out, watch the opposition tumble and then be ready to hoover up the business. Some banks clearly have an agenda other than surviving, some will welcome the collapse of rivals or the amalgamation of some banks as provided for by the emergency legislation.

Despite flagging enormous profits last week Anglo Irish is a zombie bank. The bank boomed during the decade as it expanded its commercial lending to developers and the property sector. It has huge levels of toxic debt as they overlent during the boom. The government would like to see AIB merge with Anglo Irish and they’ve floated other proposed mergers. The key objective of the government is to ensure credit can flow and banks can business can access liquidity. But to leave the top management in place with state cash and no state directors would be gross negligence. I couldn’t see any government even one as casual as this one doing that. The planned investment by US venture capitalists in Irish Banks added to the shoring up with the remaining state cash leaves our banking industry significantly vulnerable and perhaps under capitalised in the event of a prolonged economic depression.

Appropriately for Christmas Brian Lenihan has gifted the banks cash without any indication that the banks would be obliged to accept directors representing the state. Minister Lenihan plans on taking either preferential shares or ordinary shares and also proposes to allow existing shareholders expand their shareholding base if the so wish. The minister sets out the context within which the tax payer will be protected. The taxpayer will get an appropriate return on agreed terms in the investment. What the minister failed to mention is that the entire value of the pension reserve fund is €18B so over half is now gone to shore up a bank where the CEO effectively said that the citizens are in debt to how well they did in the good old days. If this investment is to instil confidence in those of us who’re paying it then the top management should be fired. One executive, who was dispatched to North America early in the week to sweet talk investors, was rapidly recalled as shares dropped like a stone. The official along with the CEO met with Department of Finance officials early this week as the crisis deepened.

What is interesting is that there is no mention of state directors being appointed to the board to ensure that the state’s shareholding is protected. Labour Youth has said that they support nationalistion and I’m inclined to agree with them. My concern is also how big is the NPRF actually today, they invested in shares outside the state that doubtless are doing poorly. How deep the pot is for Brian Lenihan to share out is a moot point, so lets see the legislation.

1 comment:

Wexford Musings said...

I few things to consider...

Is €10 billion enough - I dont think so

Is this a loan by the government and if so are we at least getting a decent interest rate - or is a freebee?

If we are only concerned with helping people to get credit why dont we just open our own back or lending institution - we seem to have oodles of €10 billion lying about and use that

If borrowing is what got us into trouble wahy are we teling the bangs, yes hav €10 billion but you must lend it all out - is this not the pot calling the kettle and all that!


John Ryan