The State may rapidly rue any sale of the banks to overseas opportunists, writes John McManus

IT'S STARTING to look increasingly likely that a significant portion of the Irish banking industry, including up to three of the largest banks, could soon be owned by overseas-based private equity investors.

Alarm bells have already started ringing in various quarters, with the main cause of concern being that the interests of private equity investors and what might be broadly termed "the national interest" are rarely aligned.

It's a valid point, but before going too far down that road it is probably worth asking a question: to what extent can the interest of the banks, as currently owned, be said to be aligned with the national interest?

"Not very" is the answer. Without a doubt, the Irish banks played their part in creating the current economic crisis by happily pouring petrol on the roaring fire that was the property bubble. Presented with the choice of acting responsibly or making supernormal profits, they not surprisingly chose the latter.

In fact, any discussion of merits of private equity investment in the banks probably has to start with a debate as to what sort of role we want banks to play in society and from that we could deduce the optimal ownership structure!

But few would have the appetite for such navel-gazing and, in any case, nobody has the time. The barbarians are at the gates with their cheque books and time is of the essence.

It's really a question of whether a banking system controlled by private equity would be any worse than the one we have at the moment, or one in which the State owned the banks.

Before going any further, however, it's necessary to point out that this all presupposes that the new private equity investors will actually control the banks.

But given the current capitalisation of the banks, it's hard to see how the banks can raise the money they need without giving the new investors controlling stakes.

A banking industry controlled by private equity would probably be worse than what we now have. Our banks may not have covered themselves in glory, but they have a stake in Ireland and Irish society that JC Flowers, Carlyle and the like simply don't have.

You only have to take a cursory look at Eircom - and the destruction wrought by two bouts of private equity ownership - to understand the extent to which the Minister for Finance is playing with fire by trying to solve the bank capitalisation problem by inviting in private capital.

But Brian Lenihan has made it clear that he does not think - in the current climate - recapitalisation of the banks is a sensible use of State resources, although this would put the State in a position to truly reform the sector. It's easy to understand why.

The Government would have to borrow any money it injects into the banks. As things stand, it's hard to see how additional borrowing could be paid for without higher taxes or swingeing spending cuts.

The short-term political attraction of stabilising the banks without having to use taxpayers' money is obvious. But it's also fiscally prudent when you really don't know the scale of the economic and fiscal challenge confronting you.

Against that, there is a very good chance that the State will get back any money it invests in the banks, relatively quickly and with a significant dividend.

It is axiomatic that if JC Flowers, Carlyle, Middle Eastern sovereign wealth funds and others think that they can make money investing in the Irish banks at their hour of need, then so can the Government.

But it appears that, from the Government's perspective at least, the economy is in such a dreadful state that the Exchequer cannot afford to make this sort of investment, and handing over the keys of the Irish banking industry to a bunch of people who may well spend the next five years or so milking it dry is the lesser of two evils.

One suspects it's a judgment that the Government will come to regret relatively shortly, once the new owners of the banks start to wield the axe, start fighting with the Financial Regulator and drive a coach and four horses through whatever elaborate "safeguards" they will initially sign up to in order to close the deal.

If the Government does not think this is going to happen, then it needs to take a closer look at private equity and what it does for a living. Pursuing the Eircom file might be a good place to start.

If the recent Budget showed anything, it is that the Government was out of tune with its citizens - and its enthusiasm for selling off the banks indicates this remains the case.

One would not want to be a rural TD facing an election while fighting to save the local Bank of Ireland branch as Carlyle, JC Flowers and the like start cashing out.