The Irish government last week was arguably in the strongest negotiating position of any government in the history of the country in relation to the banking sector. The government was in a position to order the biggest restructuring of Irish banking ever undertaken.
Government representatives argue that the time was too short and the last thing it wanted was undermine the very institutions it was seeking to save from meltdown. It claims a "programme of reform" is still on the cards, but it may be harder to make that stick a few weeks or months from now than it was last week.
The initial government statement made no mention at all of reshaping banking or forcing banks to operate more prudently. Of course it would have been risky to make ad hoc arrangements with the banks at that point, but not even to signal publicly that this was a key part of the process angered large swathes of the public.
So this is what the government's shopping list could have looked like:
1. Put an end to dividends
The Irish banks could have been forced to shore up their capital positions if they had been barred from paying dividends for the next year or more. The four listed banks have dividend yields racing way ahead of their P/E (price earnings ratios) which can only mean one thing – they will have to curb their payouts like Bank of Ireland did last month. Recently AIB actually increased its dividend by 10% in a move that was widely questioned and Irish Life & Permanent has pledged to keep its dividend at current rates.
2. Take an equity stake
The government is still considering taking equity stakes in banks that participate in the scheme, and board directors are also expected to be appointed. But to date the plans in this area have been extremely vague.
It would probably have made more sense to have regulators sitting on credit committees, rather than boards, if the concern is lending practices at Irish banks. The banks could have been forced to issue new shares, and while this would significantly dilute the stock of existing shareholders, it would allow the government to get direct exposure to any upswing in banking shares.
The other option would have been to demand warrants from the banks so the state could exercise stock options later and then sell the shares on behalf of the taxpayer at a profit. This is the model used in the case of American insurer AIG, where the US government took warrants on 79.9% of its stock and elbowed out other stock-holders.
3. Change the personnel
Despite the biggest guarantee ever advanced in Irish corporate history, the government appears not to have demanded any changes at the top of the Irish banks, at least not publicly. The US authorities have handled the issue entirely differently. For example, when Fannie Mae and Freddie Mac were placed into "conservatorship", it was at a price – the departure of Daniel Mudd from Fannie Mae and Richard F Syron from Freddie Mac. The US government also decided to oust Robert Willumstad from AIG when it took over that company.
4. Demand asset sales
The government could have added the rider to its guarantee agreement with the banks that they must consider asset sales and use the proceeds to shore up their capital.
AIB has a 24% stake in US regional lender M&T bank and there would be willing buyers, including Warren Buffett. The bank would obviously get cash from the sale, but would also be allowed to write back goodwill it wrote off when it acquired the stake originally. A sale would help its Tier 1 equity ratios. Bank of Ireland has non-core assets in Britain, many of them mired in risky property lending, as does Irish Life & Permanent.
Yes, the banks would have to sell at fire sale prices, but its highly unlikely stakes in these various companies (Bristol & West or Capital Home Loans) are going to rise in value for many years to come.
5. Curb pay
While it had a whiff of populism about it, the Labour Party's idea of limiting the pay of bank executives could have been accepted by the government last week in the Oireachtas.
Joan Burton advocated two ideas. The first – tying the pay of executives to that of the minister for finance –was unrealistic. The second, that the NTMA should oversee the remuneration of bank executives and report annually to the Oireachtas, was more constructive. Neither was accepted.
To be fair, several bank executive have been taking pay cuts recently, but the government could have done what the US lawmakers have been doing – trying to legislate to reduce remuneration and stamp out excessive severance payments.
6. Impose mandatory lending guidelines
The government is prepared to stand over all bonds, deposits and subordinated debt the banks raise and accumulate over the next two years. In exchange for this, it could have imposed mandatory lending guidelines.
For example, it could have prevented banks from having any exposure beyond a certain point to any one client or company. It could have demanded specific rules about how much of a bank's loan book could be devoted to residential and commercial property lending.
In the mortgage market, it could have demanded that the banks, at all times, stick to certain rules on loan-to-income ratios, which have loosened in recent years. It could have imposed a ban on self-certified, interest-only or 100% loans.
Finally it could have demanded that banks must, at least in the longer term, make sure there is a closer relationship between their deposits and their lending outlay. It could have imposed a rule on banks that bonuses and pay scales cannot be tied to lending volumes alone.
7. Encourage and cajole banks to merge
Retail banking in Ireland is in severe trouble and the government could have used the opportunity created by the guarantee scheme to demand deals and consolidation. Anglo Irish Bank and Irish Nationwide was a combination mentioned in recent weeks.
The government could have sought to create a national banking champion by promoting the idea of Bank of Ireland and AIB joining together, along the lines of what happened in Spain with Banco Santander.
Those for the Bail Out
Mary Coughlan, tánaiste: We would have found ourselves in a different set of circumstances if we had not brought in this piece of legislation. We would have completely undermined the system of banking. It would have totally collapsed.
NCB Stockbrokers: The benefits of the guarantee undoubtedly outweigh the costs as these banks are at the centre of the Irish economy. The impact on employment (both direct and indirect), the fiscal position and the economy more generally would be far more costly than any potential losses the government may be confronted with.
The 'Irish Times': It was a bold initiative, taking the international financial world by surprise, in that it ringfenced Irish institutions, improved their credit ratings and made them attractive homes for foreign lenders and investors.
IBEC director general Turlough O'Sullivan: IBEC strongly supports the government in this decisive move to safeguard the Irish banking system. It helps remove the uncertainty of recent times and sends a very positive message to the domestic and international business community.
Citibank: The Federal Reserve should follow the lead of the Central Bank of Ireland and guarantee interbank lending markets to help unclog the frozen interbank market.
Noel Smyth, property developer and solicitor: Money is going to come back into the system and the bottom line is you'll see the market… moving forward.
The 'Wall Street Journal': One of the most ambitious measures taken by a government since the crisis began more than a year ago.
Those Against the Bailout
The 'Financial Times': It is true that Ireland, like all EU member states, is responsible for the stability of its banking system. But this is not a justification for a guarantee that... amounts to economic nationalism. The government has behaved anti-competitively and the protection it is offering could even destabilise other banks.
Neelie Kroes, EU competition commissioner: When Europe was confronted with a banking crisis in the 1930s, governments decided to go national and close their borders. Protectionism was not the solution at the time, as we very well know. Let us not make the same mistake twice.
Colm McCarthy, UCD economist: Now the property developers will have banks to deal with instead of liquidators and the banks will be much more amenable to them.
Consumers' Association: It is vital that the government protect the interests of taxpayers and consumers. It is far from clear what consumers are getting in return for the life-saving assistance they are providing the banks with our money.
Morgan Kelly, professor of economics, UCD: What we need to understand is what caused foreign banks to stop lending to Irish banks while they kept lending to most other banks in Europe. Once we understand the answer to this question we will understand how inept and potentially dangerous the government's attempted bailout really is.
ISME, the small business organisation: There should be a freeze on all bank charges for the duration of government bank rescue scheme.