Index

Sweden’s Fix for Banks

— Nationalize the Bad Banking Part and Clean It Out

W.K.
The New York Times (23/01, "Sweden’s Fix for Banks – Nationalize" by Carter Doughterty) has worked a new version of setting up for readily unsaleable assets: "In the process Sweden wiped out special ‘bad banks,’ if you wish, and put in charge experts in mergers and acquisitions who are likely to pick themselves bargains for well-financed clients looking for acquisitions. And, most amazing, it has worked: ‘The Swedes have a simple message to the Americans.’ Bite the bullet and nationalize."Officials in Washington are trying to figure out how to shore up American banks that once ruled the financial world, but now seem to weaken by the day, despite receiving hundreds of billions of dollars in governmental aid.

"When Sweden’s banks were effectively bankrupt in the early 1990s, a center-right government pulled off a rapid recovery that led to taxpayers making money in the long run.

"Former government officials in Sweden, many of whom come from the market-oriented spectrum, say that the only way to solve the crisis in the US is for the government to be prepared to temporarily take full ownership of the banks.

"Sweden placed its banks with troubled assets into a so-called ‘bad bank,’ where they could be held and sold over time when the market and economic conditions improved. In the meantime it used taxpayer money to provide enough capital to allow banks to resume normal lending.

"In the process, Sweden wiped out existing shareholders. ‘By contrast, the US government, so far, has bailed out the banks without receiving large equity stakes in return,’ said Bo Lundgren, Sweden’s minister of fiscal and financial affairs during the Swedish bank takeover.

"‘For me, that is a problem,’ said Mr. Lundgren, who called himself more of a free marketer than some Republicans. ‘If you go in with capital, you should have full voting rights.’

"The US has a much larger economy than Sweden’s, with a vast and international banking system. The toxic assets Sweden took from its banks improved when the economy improved, but Sweden was not confronted with a global recession.

"Still, many analysts believe Stockholm has lessons for Washington.

"In effect, the Swedish state took on all the assets that were possible or impossible to value at the time, and then managed or sold them with the aim of getting as good a deal as possible for the taxpayer.

"‘We hired real estate people,’ said Lars H. Thunell, the former chief executive of Securum, the institution that became Sweden’s repository of all Sweden’s underwater assets. We hired industrial Merger and Acquisition people. We need to manage real assets.

"The United States commitments to the banks by the Treasury and the Federal Reserve, American taxpayers have in effect used mostly loans to turn themselves into emergency credit of financial system.

"For their part, bank shareholders have taken big hits as the stock plummeted, but the government has largely avoided acquiring equity and diluting the value held by the existing shareholders.

"Former Swedish officials said that was a mistake, for political reasons if nothing else, because owners of bank stocks did so well in the boom years early in the decade.

"Fears of bank diversification are diverse – skeptics worry that nationalization would cost too much, the governments would not run banks effectively or nationalization would be much too complicated. Moreover, he said the mere threat of nationalization nudged some Swedish banks to find creative solutions to their problems in the 1990s.

"SEB, the bank controlled by the Wallenbergs, the first family of Swedish business, engineered a private recapitalization to plug the hole in the balance sheet. Only Swedbank initially signed up for a bad bank of its own, freezing management to run the sound parts of the business.

"Nordbanken, as Swedish bank that had expanded in the go-go years of the late 1980s, fell entirely under the control of the government because its losses were so great. It is now Nordea, a banking giant in the Baltic Sea region.

"Securum was capitalized with 24 billion kronor ($2.88B, a sum equal to the country’s military budget at the time. (The total US military budget is less than the $700 billion allocated to TARP.)

"A study by the Federal Reserve Bank of Cleveland concluded that Securum eventually returned about 58% of that upfront cost to the Swedish treasury, though in depreciated kronor.

"That does not mean that Sweden has escaped the current banking turmoil unscathed. As credit markets froze last fall, it created a financial stabilization package to ensure new lending from banks. Only Swedbank initially signed up for the plan. Other banks have moved to raise capital in the market.

"To make Securum work in the 1990s, the Swedish state had to become a specialist in such diverse industries as chemicals, biotechnology, office supplies, aerospace industry services, as would certainly be the case in the US, real estate.

"Chunks of real estate from Stockholm to London to Atlanta have been collateral for loans and occupied 70% of the portfolio of Securum.

"Securum owned the Australian Embassy building in Myanmar, as well as a guitar said to have belonged to John Lennon and a company that employed military advisers in Yemen.

"Securum hemorrhaged money in its first year in business, which was in 1993, but recovered quickly, as savvy deal-making combined with a quick pickup in the Swedish economy created markets for what was seemed to worthless. Early on, Securum sold a chemical company it controlled, Nobel Industries, to Akzo of the Netherlands, to form the largest paint producer in the world; Securum later reaped a hefty profit when it sold out.

"There is no guarantee the Obama ad-ministration will be so fortunate, with a global economy facing its most severe downturn in decades.

"If there is any criticism of how Sweden handled the bad bank, it is that it might have managed an even better return if Securum had sat on its assets longer. Swedish law envisaged a 15-year life-span when it was created in 1993. It closed four years later."

This is a particular technique far salvaging value of what the public sector had picked up a "bad bank" to be stored for careful specialized marketing by a country that knows what it is doing and can arrange its affairs to take on a special repertory of special bad assets. Illiquid key downtown sites of growing large cities or key highway corners are cases in point. The government’s ability to carry such "snoring assets" will in fact depend on how it arranges its key concerns for looking after the country’s key capital investments.

W.K.

- from Economic Reform, February 2009

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