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February 2009 Archives

Banks & Ictu Advertisements

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Last Monday, the Irish Times contained full-page advertisements from AIB and ICTU. The contrast between the two could not be greater.

The former comprised patronising guff about commitment (mentioned five times) which was undoubtedly generated by an advertising agency. The ICTU contribution was a measured document which addressed many of the problems confronting the state. Although far from perfect, it was close to being the type of comprehensive plan that the Government should have produced months ago.

The bank's advert stated that it is regulated by the Financial Regulator. Thankfully, the ICTU advert contained no such statement.

Letter published in the Irish Times on 20th February 2009.

The Banking Crisis

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There are clear signs that the proposed recapitalisation of the main banks will prove inadequate and that further support will be required from the Government in line with its minimalist "drip drip" strategy.

To protect the economy and banking system as distinct from banks and bankers, the Government should change tack before being forced to do so and withdraw their proposal in favour of the following variation on the "bad" bank approach. This would buy time and ensure that state funding is used exclusively for productive purposes. In addition, it would be less risky and costly for the taxpayer, eliminate the need for bad debt insurance, and remove pressures on the banks to withhold credit or hoard resources to cover future bad debts.

Here are some suggestions:

  1. AIB and Bank of Ireland (combined market value of €0.86 billion) should be nationalised and their existing shareholders compensated mainly by options to acquire substantial new equity stakes when the two banks are eventually re-privatised.

  2. Each nationalised bank should be divided into good and bad banks with new boards and senior management teams working exclusively in the public interest and insulated from political interference. The good banks should receive capital injections from the state to improve liquidity and operate using existing staff, premises etc. These banks could be very profitable as all their problematic loans would have been shunted into their bad banks.

  3. The two bad banks should undertake no new business and, having secured minimal working capital from the state, would effectively operate as high-powered debt collectors. They would pursue borrowers for repayments and where necessary call in securities and, rather than engage in fire sales, accumulate such assets for sale once economic growth resumes. Repayments should be passed back to good banks to further enhance liquidity.

  4. Once the crisis has passed, the final deficits attributable to the bad banks will be clear. These should be absorbed by the good banks which could then be refloated on the stock market to repay the state, grant equity to option holders and raise new capital.

Proposals on Crisis

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The following proposals are aimed at those in leadership positions and the higher paid. While small in number, they are hugely important for setting example, restoring fairness to the tax system and contributing to the national finances and competitiveness.

  1. Salaries, pensions and expenses of ministers, TDs and senators should be reduced by, at least, one-third and instead of being pegged to overblown civil service scales, their salaries should be linked to those of politicians in other states of comparable size and status, and having similar parliamentary sitting days.

  2. Salary scales of senior administers and professionals across the public sector should also be benchmarked against opposite numbers in other comparable countries and linked to the average industrial wage. In the interests of fairness, the proposed pension levy should be restructured as was done for the income levy.

  3. As applies in the US, exceptional salaries in the private sector should be funded by shareholders rather than subsidised by taxpayers. Accordingly, any elements of total salary, bonus and pension contribution exceeding €200,000 should cease to be deductable for corporation tax purposes.

  4. The conditions applicable to non-residency for tax purposes should be reviewed so that non-residency means exactly what it says or tax exiles pay up like every other citizen. For starters, tax should be changed on worldwide incomes of tax exiles pro-rate to days (or part of) spent in the state.

  5. Having been introduced to encourage greater participation in the work force, tax individualisation should be phased out to help distribute scarce jobs across more households. Dual-income households with high mortgages that voluntarily become single-income should get special tax credits or be able to extend the term of their mortgages.

  6. A new tax rate of 48% should be applied to the 60,000 tax payers with incomes above €100,000 a year. The annual yield would be about €800 million, and could be higher if allowances for "top-hat" pensions, investments etc. are reduced. If applied immediately for the next five years, these changes could cover about a quarter of the projected €16 billion shortfall.

Letter published in the Irish Times on 10th February 2009.

Facing Reality

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Nothing illustrates the Government's weak-kneed approach to the crisis more clearly than the fact that on the same day that President Obama demanded that US companies receiving bailouts should limit executive salaries to US$500,000, our Taoiseach who earns more than President Obama merely urged top executives in banks covered by tax payers' guarantees to take 25 per cent salary cuts. Arguably, a maximum salary of about €200,000 would be appropriate for Irish bank executives when account is taken of their size relative to their US counterparts

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This page is an archive of entries from February 2009 listed from newest to oldest.

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