Contrary to the spin, we do have a choice. In fact, it is probably the most important choice for years

Do you feel like you are sleepwalking into yet another banking disaster? Tomorrow’s stress tests are likely to result in you and me lumbered with another €20bn bill for Ireland’s dysfunctional banks. Why? Will this make a jot of difference to the economy? Is there a cheaper way of doing this? Why do we have to pay anyway? The banks are bust and yes, they can be made solvent by throwing billions of our euros at them, but to what end? To fatten them up for sale so someone else — some investor — gets all the upside?

Remember NAMA was supposed to “get credit flowing”? Now we know it is a fee fest for the same auctioneers, accountants and lawyers whose fingerprints were all over the collapse of the economy, the property market and the banks in the first place. They got paid enormous sums in the boom and now they are getting paid enormous sums in the bust and they are being paid with your money. NAMA hasn’t gone away you know!

Maybe just consider one thought on NAMA: the very auctioneers who overvalued Irish property in the boom and were instrumental in feeding the frenzy have been rewarded for their part in this mess by being made valuers for the very same property that they once overvalued. How does that make you feel?

Now let’s consider the banks. The stress tests will tell us just how bankrupt the banks are now, after five previous injections of cash. So the stress tests give us a chance to decide how are we, in this country of ours, going to deal with the banks. Contrary to the spin, we do have a choice. In fact, the choice is probably the most important policy choice faced by any government for many years.

We are being told from all quarters — by the vested interests who insecure commentators refer to as “serious people” — that we have no choice but to put more money into the banks. This is cobblers and overlooks legislation, which is actually in place to deal with bankruptcy.

There is a different way of doing things and there is a normal business way of dealing with bankrupt banks which doesn’t endanger deposits and keeps the banks’ doors open for business without lumbering you and your children with a huge bill which was never yours to pay.

But as usual the ordinary Joe — who is paying the bill — is being so bombarded by half-fictions, quack economics and financial propaganda by the “insiders” — who will benefit from his largesse — that he is totally confused and doesn’t know which way is up at this stage.

Let’s clarify things. There are three ways of dealing with bankrupt banks. There is the present Government/ establishment’s way; there is the nuclear option of receivership and there is the logical, business-like procedure which is called “examination”.

The present option means that no bondholders will be touched or, if they are, their pain will be modest and you, the taxpayer pays. Even the new language is duplicitous. ‘Burn the bondholder’ was ridiculous when the bondholders burned themselves by their stupid investments. But now we have a new expression ‘burden-sharing’. Think about the meaning of ‘burden-sharing’; I will share a burden with someone if we are both culpable; that sounds fair. But why should I share the burden of a loan that was never mine and was always his? Every cent of citizens’ money given to a bondholder is a subsidy from the poor to the rich. This is corporate welfare for the banking classes — the very people who regularly rail against social welfare for the working classes. It is grossly unfair and financially incoherent.

The second option or nuclear option is receivership. This is where the losses are so big and you conclude that the bank has no future so you close the bank down. Here is where we get into the ranking of who gets paid and in what order in a receivership.

In a receivership, the receiver comes in and looks at a balance sheet and assesses the difference between assets and liabilities. He then tries to sell the assets and pay back the creditors. The creditors form a queue and will be paid in the following order.

The first to be paid in a bank closure are secured and trust creditors. Secured creditors might be other banks that have lent money to the bank in cash. And trust creditors are depositors who deposited money into the bank based on trust.

After secured and trust creditors, if there is more money left, the next in line are super-preferred creditors. These are the employees and the Revenue Commissioners.

If there is any money left after the secured, the trust and the super-preferred creditors are paid, the unsecured creditors will get paid. These are the bondholders and the trade creditors. We know who the bondholders are and the trade creditors are people like the IT supplier or the landlord and the like. Finally, if there is anything left after this, it goes to the lowliest creditor — the shareholder.

The receivership approach is deployed if you think that there is no future for the company. As such, it is the nuclear option. But we know that for some of the banks, there is a future. So why not go down the examinership route?

Examinership is in Irish company law. It is already there. The aim of an examinership is to keep the company open. It is designed to restructure all the debts, clean the company up, find a new buyer and start again. The main aspect of an examinership is that historical debts are not paid in full. The line is drawn in the sand at historical debts. The company undertakes to pay all its overheads and trade through the difficulties.

The historical debts are treated like a receivership. The new owners decide who gets what and how much. The same priorities apply. So the secured creditors and trust creditors get most. In the case of a bank, deposits could be guaranteed by the Government. After that a haircut is applied to all the other creditors. It could be 40 cents in the euro or 10 cents depending what the stress tests reveal.

This is exactly what Obama did with General Motors. In the US examinership is called “Chapter 11”. There are various different ways of sweetening the pill for the creditors who get whacked. For example, you could give them 20 cents on the euro and then a ‘kicker’ later if the banks’ profits improve in a few years. So you tie payment to future profits. You could involve debt-for-equity swaps in this too.

There is always a buyer.

Ask any liquidator whether they have ever failed to get a buyer after a proper examinership. Who wouldn’t buy an Irish bank if it were cleaned up? There will be any number of suitors both from Europe and further afield, and the taxpayer doesn’t have to pay a cent more. The depositors would be safe and one part of the great Irish financial crisis would be solved.

This is the way out. It is the business solution to a business problem and it works all over the world.

Tomorrow’s stress tests only reinforce the logic of examinership for the Irish banks. Let’s hope the new Government is open to persuasion.

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