Writing in Fortune, Feb 16th, Allan Sloan’s article, ‘Geithner’s Redemption’ rings bells in the context of Ireland. Sloan focuses on the mess that has been made of Citi and Bank of America – requiring a €90bn government bailout. He references concerns that the banks will not seek to lend to business at a lower return than the 5-8% they are required to pay on the government preference stock. He argues stongly for conversion to common stock – with the government acquiring controlling interests in both banks.
In Ireland the government has nationalised Anglo Irish – when there seemed only one other choice: to let it go under (with all that would entail). For now the government has followed the recapitalisation route (via preference shares) in respect of the two main banks – AIB and BoI. Any number of commentators seem to expect that there will be a requirement for further funding – notwithstanding that there may be some merit to a phased, careful, approach (has any other country actually worked out the right solution yet?). But eventual government ownership may be the outcome. Sloan would argue: ‘The dilution (of the common stockholders) would inflict pain in the right places – institutional shareholders – and perhaps cause them to police their investees in the future’.