February 22nd, 2009 ,
David McWilliamns
first published in the Sunday Business Post
“Whether we like it or not, the economic recovery plan must start in the banks. As this column has argued from the start, shoving capital into contaminated banks is not the answer. In November, this column suggested that a solution was to isolate a ‘bad’ bank which, in turn, would create clean, ‘good’ banks. This is still the way to go. If the government is thinking in this direction, it is about bloody time. Why did they waste so much time, pay so many second-rate advisers and, by prevaricating, directly cause the loss of jobs?…
1. Create a ‘financial skip’ and throw all the bad debts of all the banks into it. This bank will be given the mandate to work out the bad debts over ten years. It should be staffed by the best liquidators and recovery experts in the country. These are people who know how to get value out of an asset. They know, not how to lend, but how to sell. Today, everyone is talking about debts, but there are real assets in this financial skip and, over time, these assets -if managed properly – will become valuable. In effect, the new bank will be the Irish property market. It will control the price and control development.
2.The skip has to buy the assets from the banks. It must do this at a deep, deep discount. In reality, this figure could be as low as 20 per cent of the original price. Let us assume the bad bank needs a huge whack of cash; where are we going to get the stuff? Where could we get €40 billion?
3. Here’s where we play the EMU card. We go to the European Central Bank (ECB) and say: ‘‘You lend us the cash. We, after all, gave up our interest rate and exchange rate policy to join the euro, now you have to help us out. You have to prove that the EU is a community of nations, in reality. Show us some practical solidarity.
Otherwise we default and undermine the euro.”
In addition, the ECB is already committed to the Irish financial system. It is drip-feeding money into our contaminated banks every day, keeping them alive. We should suggest they lend us the money at 4 per cent for ten years. This is money that the ECB is spending on the financing of our banks anyway as the lender of last resort, so it should not matter to it. In fact, lending to the solution should be much smarter than lending to the problem.
The ECB would be crazy not to go for this. We then have money for ten years at 4 per cent with which to work out bad loans.
4.The old banks are now clean. They are free of contamination and they can go about raising money from the market, such as our own pension funds, through the normal channels, like rights issues. This means that they can start lending again to good businesses.
The old banks pay the new bad bank a fee for managing their old debts and dealing with their old clients. If the new bank charges 7 per cent for the service, the old banks need to provision for this charge over the next ten years. This means that their profits will be affected, and they must adjust their costs at the beginning of every year to account for the charge. But 7 per cent of €40 billion is manageable. It could operate like a bank tax.
The state then makes money on this plan -a s it would be getting the difference between what the bad bank charges and what the old, forgiven banks pay. So it gets tax revenue of 3 per cent of €40 billion every year -or €1.2 billion. You can build a lot of schools with that sort of bread. 5. Obviously all senior management of the banks must be fired right now to facilitate this financial renaissance.”…. Link to full article
