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Rescuing the Banks

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Given that the economy will contract by a massive 4% next year and that State's guarantees to the six banks will expire just a year later, delays in restructuring the banks are simply making matters much worse for shareholders, borrowers and the economy.

Instead of inviting management of the banks to reluctantly submit proposals for rationalisation and recapitalisation, the government should take off its gloves and exercise real leadership by appealing directly to shareholders and announcing cash offers, based on current share prices, to temporarily nationalise the quoted banks.

To ensure acceptance by all six guaranteed banks, it should make it patently clear that the State's existing guarantees cannot be extended and that a special levy, or other sanctions, will be applied to any profits of banks which don't accept the offer. The acquisitions would cost about €4 Bn and warrants should be issued to existing bank shareholders so that they benefit from the restructuring.

On acceptance of the offers, the government should form three distinctive banking entities with realistic balance sheets and new boards and senior management teams. They should be seeded with mezzanine finance from institutional and private equity sources and immediately refloated on the stock market to raise a final round of new capital. The government could, if desired and appropriate, gradually reduce its holdings during the next decade.

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This page contains a single entry by Brian published on December 19, 2008 3:12 PM.

Supplementary Budget was the previous entry in this blog.

Bank Recapitalisation is the next entry in this blog.

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