It is clear that, throughout the observable universe, most banks and many other highly leveraged financial institutions are deemed to large, too interconnected or too politically connected and sensitive to fail. Indeed, even financial corporations masquerading as units of non-financial corporations (GE and GM come to mind) may well fall into this category. One way or another, the tax payer is on the hook for the banks, the AIGs and GEs of this world.
Tax payer support can take many different forms: extension of deposit guarantees provided by the state on terms involving a subsidy from the tax payer (USA, UK, Ireland, Greece). Extensions of these guarantees to other categories of unsecured creditors and bond holders (UK, Ireland). Outright purchases of assets from the banks, at prices above their fair value (soon, without doubt, the USA through TARP). The acceptance of such assets as collateral in loans from the central bank, again at valuations in excess of their fair value (probably the euro area and the USA, possibly the UK). Governments have injected capital into ailing financial institutions, sometimes in exchange for ordinary or preference shares, with or without warrants (USA, Netherlands, Belgium, Luxembourg, France). Bans on short selling the equity of financial corporations (including such non-bank financial corporates as AIG and American Express and such financial institutions masquerading as non-financial corporations, including GE and GM) are another example of shareholder support for the financial sector, broadly defined. Other governments have promised unspecified support for the financial sector to ensure stability (Italy).
Voor wat, hoort wat (or “nothing for nothing” for those of you unfortunates who never learnt the language of Vondel). State support for the financial sector should come with a price tag. I propose, as part of this price tag, a permanent shareholding for the state in the corporations benefiting from the tax payer support. It may be that what I will propose will turn out to be redundant, because much or most of the financial sector will be nationalised as this crisis unfolds. In case this does not happen, or in case complete re-privatisation is planned following nationalisation, here is my plan.
- The state should take (preferably for free, that is, in exchange its explicit or tacit support) a minority shareholding in every systemically important financial institution. The state determines the eligible population. It certainly would include all banks, building societies and other near-banks. It would also include many other large highly leveraged financial institutions that are not banks, including such entities as AIG, AMEX, GE and GM.
- The state shareholding should take the form of ordinary (voting) shares, because the tax payer ought to be able to use ‘voice’ as well as the threat of exit as a way to influence the governance of the organisation.
- The state shareholding should be the smallest share that still guarantees a seat on the board of directors (if there is more than one board, the state should either have a seat on all boards or on the one that matters).
- The representative of the state on the board should be a full-time employee of the Ministry of Finance. He or she should not be able to have any beneficial association with the private institution on whose board they serve (or with its successor institutions) for five years following the end of his/her membership of the board.
- The representative of the state on the board should be automatically a member of the remuneration committee and the internal audit committee.
The mandate of the state shareholder should be (1) to make sure the actions of the institution don’t pose a threat to systemic financial stability and (2) to minimize the expected exposure of the tax payer to the institution.
Nothing for nothing. As the financial sector grabs for the public nipple at the first sign of trouble, it is imperative that the price of the milk obtained at the public breast be made painfully high – both to achieve fairness and political acceptability and to encourage more responsible behaviour in the future.