Rescuing bank customers or bank shareholders?

November 13th, 2008

So the US rescue fund will now buy equity in the shaky banks instead of their toxic mortgages.

Gordon Brown’s UK bank rescue package also gives the taxpayer substantial equity upside for the risk taken on by the taxpayer. Some banks are saying "no thanks – we’ll look after ourselves if those are the terms".

I suspect that most of our banks would find the means to say the same. We should know which of ours could not.

We New Zealand taxpayers should be told in simple terms why we are giving to our banks’ creditors the liquidity (and credit?) assurance that shareholders’ funds are supposed to provide, but not taking the upside from our rescue.

The shareholders of other companies in strife hand over their ownership to the people who are filling owners’ shoes when they can’t survive without help.

It is not enough to say we are not adopting the US and UK approach because we fear banks will tighten a credit squeeze if they are not helped.

If the government is propping up the banks it can surely influence matters like that, or funnel liquidity through the banks that do not squeeze customers. They might include the two strongest Aussie banks, and locally funded TSB, SBS and Kiwibank.

Filed under Politics

Comments

That is not very much of a good reason to speak against the crown guarantee of financial institution/bank deposits really is it? Basically you’re saying it is a good idea in principle but the way it has been done could have been better. Actually Cullen got it right: guarantees are a bad idea in principle, and the only reason it was done because of alleged temporary need.
Would you rather have an imperfect temporary guarantee or an ideal permanent one?

[I’m basically saying David that if they can not fund themselves, and must have taxpayers backing their liquidity, the taxpayers should be extracting the normal rescue price. Rescuers taking over shareholders’ risk should get shares. Businesses in strife because they’ve been profiting from a strategy that has now misfired might have to be saved because what the business does is critical, but that does not mean its shareholders should keep all the equity upside from the rescue SLF]

Stephen,

Do you think I’m slow? That I missed your point the first time? Nope, I think you’ve missed mine. My point is that by criticising the form of the Crown guarantee you’ve tacitly accepted it was necessary, even desirable. Indeed it seems you want to take things *further* by taking equity stakes, and getting *more* involved in how they are running their businesses, and, by implication, how credit is allocated in the economy. It seems you don’t accept the merits of:
1. NOT establishing a government bureaucracy to administer, improve and institutionalise the scheme, and make it seem indispensible.
2. NOT trying to fine tune the scheme and thereby NOT making it unnecessarily complicated (it is temporary after all)
3. NOT getting involved in the allocation of credit in the New Zealand economy.

Well Stephen, thanks but no thanks. I’d actually prefer Cullen’s approach and I respect him for being open and honest about the actions he is (was) fronting and the reasons why, and his reservations about not just this scheme, but ANY scheme to insure or guarantee bank deposits. I even get the feeling Cullen never supported the necessity or wisdom of introducing the scheme, and was pushed into it by, perhaps, Clark’s drive to take action or who knows really the politics behind it (apparently the Aussies forced us into this scheme if you believe the cover story).

From what I know about you and from what I’ve heard you’re a really decent man, and have a good understanding of the law and the merits of a free society. But I don’t see a shred of that here, and I think, along with the rest of the National Party (see http://davidhillary.blogspot.com/2008/10/david-bennett-national-party-from.html ) you’ve shown your colours by not opposing this scheme, and in fact any scheme outright.

Why not just admit National and you blundered by ever supporting the scheme and just advocate that it be scrapped and limited as quickly and as much as possible? E.g. why not advocate charging a minimum of 1% p.a. so that the big four banks say ‘thanks but no thanks’?

Hi David

I wonder if you are missing a crucial word in Frank’s comment he states

*I’m basically saying David that if they can not fund themselves, and must have taxpayers backing their liquidity, the taxpayers should be extracting the normal rescue price…*

I note Stephen says “*if* they can and must have* in other words he is suggesting that if you adopt this line then certain other things follow as matters of equity.

Matt,

Isn’t the *if* redundant when the conditional is already satisfied? It’s like saying ‘if theft is unlawful then theft is morally wrong’ is basically another way of saying ‘theft is morally wrong’, no?

And so, if we are to have socialism, let’s have ‘fair, moral and equitable’ socialism? This is the sort of reasoning I’ve noticed from you that lead me to write this: http://davidhillary.blogspot.com/2008/10/not-sure-about-law.html

Perhaps it’s more like ‘if we are to have theft, everyone should have equitable rights and burdens resulting from the institution of thevery’ — sure it is a conditional, but what sort of morality or ethics is it to first pre-suppose what is ethically, morally and commercially undesirable?

I’m the one standing up and saying NO, and sniping at those who argue for more ethical, moral or equitable administration of what ought to be condemned rather than redeemed.