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Bank Recapitalisation

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Given that the state is committing €5.5 billion to the banks using borrowed money sourced via the National Pension Reserve Fund, the net return to the Exchequer is really only two-thirds the proposed divided payments. The Minister for Finance has stated that the deal is a good one for the taxpayer. In reality, the return is derisory given the risks involved and the fact that the shares are neither convertible nor cumulative and have no priority over ordinary shares in the event of a liquidation.

In addition, the government has agreed to act as the funder of last resort for the two main banks in the event that their private fund raising is unsuccessful and, most extraordinarily, it has offered Anglo a blank cheque "to make further capital available if required so that it remains a sound and viable institution". This begs the question as to why it needs €1.5 billion from the taxpayer if it is already sound and viable. All this largess comes on top of several hundred billion of guarantees which have already increased interest costs for the state's own funding needs.

Notwithstanding the offer of billions which the Exchequer can ill afford, the combined market value of the three banks has sunk by a half billion over the past week. This speaks volumes and suggests that another, even larger, funding round will be required next year as the economic decline accelerates, unemployment rises and property prices tank.

As further preference shares will no longer be an option, the government will be forced to do then what it should have done at the outset, namely, nationalise the banks, reform them into three distinctive banking entities with new balance sheets and management and then refloat them on the stock market to raise further capital and ensure that taxpayers benefit from the upturn.

The blame for the domestic banking crisis can be laid squarely at the foot of the Government, Financial Regulator, Central Bank, bank directors and some property developers.

Where is the "moral hazard" to ensure that their reckless behaviour is not repeated and why should the taxpayer shoulder all the risk and none of the rewards when the perpetrators of this debacle continue to enjoy enormous salaries and other perks?

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This page contains a single entry by Brian published on December 23, 2008 3:15 PM.

Rescuing the Banks was the previous entry in this blog.

Banking Package is the next entry in this blog.

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