Ireland And Banks: The Road Less Traveled

Ireland decided to create the national “bad bank” after the credit crisis, a move the US government considered but rejected. The fate of that decision has come to haunt the small nation, but the haunting may not go on for long.

The major banks in Ireland face a 32 billion euro shortfall as the “bad bank” begins to buy their distressed assets. The National Asset Management Agency, aka “the bad bank” announced it would buy 16 billion euros worth of loans for which it will pay only 8.5. billion euros. As the FT commented, “The Irish government, which has already nationalised one bank, Anglo Irish, is now widely expected to end up as the majority owner of every big bank in the country, bar Bank of Ireland.”  The sale of the bad part of their balance sheets to the NAMA leaves them low on capital and fundamentally unable to function without a money infusion. The government is the only source.

Ireland has not stopped its national restructuring with the banks. It also means to cut the pay of public workers and other expenses to get it below the EU mandated ratio of deficit to GDP. The Greeks should be so disciplined.

The American government decided more than a year ago that its investments into banks would be temporary and done largely though the TARP. Although many small institutions which received TARP money will never pay the government back, the largest banks like Citigroup (C), JP Morgan (JPM), Goldman Sachs (GS), and Bank of America (BAC) have repaid their obligations back in full and the Treasury should make profits on these investments through the sales of warrants and common shares. The taxpayer will net  about $8 billion from a planned sale of the government’s stake in Citigroup.

It is too early to tell whether the Irish made the right decision. Many bank analysts believe that the large American banks still have too many commercial loans and too much  consumer debt on their balance sheets. These analysts say there will be another day of reckoning for US financial firms. That point of view has many doubters, but no one can forecast the economy and the results that a bad downturn in GDP might have on the loans that banks gave out two, three, and four years ago.

The taxpayers may yet get a larger share in American banks than they anticipated.

Douglas A. McIntyre