Did Sweden really nationalize its banks?
Since everyone seems to be talking about nationalization and pointing to Sweden as a model for the future, one should ask whether Sweden actually nationalized anything. No one is talking about outright Hugo Chavez-style expropriation here. The only nationalization I see is what was done in the case of AIG and we know where that led.
I certainly believe the knee-jerk reaction against the ‘N’ word, as Barry Ritholtz calls it, is overwrought and have suggested we dub it pre-privatization. After all, didn’t the word recession come into existence for similar reasons — fear of the ‘D’ word depression.
Back in August, I pointed to Sweden as a model as well. You can read the post, “The Swedish banking crisis response – a model for the future?.” But, the Peterson Institute also has a fine post by Anders Åslund on what really happened in Sweden and it was not nationalization.
Here’s a bit of what he had to say:
Having lived through the Swedish banking crisis in the 1990s, I am struck by how poorly the American public understands what really was a successful cure that remains relevant to the current situation. In fact, the Swedish example would probably provide the best, most capitalist, solution for the United States…
Sweden did not nationalize its banks. It was Norway that did so, which is an alternative model. In Sweden, a temporary emergency bank authority was set up on the model of the US Federal Deposit Insurance Corporation. It had outside, mainly foreign, consultants to scrutinize all bank debts and establish objectively which were nonperforming. The banks were forced to write off their bad debts and transfer them to bad banks.
Sweden had no aggregator bad bank and the bad banks were not nationalized. Each big bank set up its own bad bank. They were given illustrious names such as Securum, Retriva, Nackebro and Diligentia. Securum was the biggest bad bank belonging to the already state-owned bank, Nordbanken, and it became a separate state company. The private bad banks, however, remained the property of the private banks from which they were removed.
Nobody traded toxic waste at the height of the crisis in Sweden. Such trade is an unnecessary complication. A bad bank is not a bank but a private equity fund, which does not need much capital or recapitalization. Its task is to isolate the rotten apples so that they do not contaminate the good loans in the cleansed banks.
The bad banks sold off their assets at a leisurely pace over several years to maximize their value, avoiding excessive depreciation of assets through fire sales. Any gain was to the benefit of its owners. In this way, Sweden avoided the problem of trading undervalued assets. In the end, even Securum made a small profit.
I have deliberately quoted only part of the post as I would like you to read the entire on the Peterson Institute site, which I have linked below. Before I add any comments, I should note that the Peterson Institute was founded by fiscal conservative and former Nixon appointee Pete Peterson, about whom links are also provided below.
Having cleared that up, it should be more evident how disingenuous the conversation regarding potential economic fixes is. What we are really seeing is guardians of the state defending the status quo at all costs, somewhat blind to alternative solutions. The Federal Reserve and the Obama Administration have decided that pre-privatization and the Swedish solution are non-starters purely for ideological reasons. Meanwhile, they have decided to continue the bailouts under TARP and instituted another back door bailout with TALF.
Given the enormous losses incurred through these bailouts already, one can expect no different in this particular go ’round. Obviously, Geithner, Bernanke, et al. believe ‘irrational despondence’ is the source of what ails us and that propping up asset prices will be the cure.
Witness remarks made by Ben Bernanke just recently before Congress:
Federal Reserve Chairman Ben Bernanke said Wednesday recent sharp declines in stock prices mostly reflected investor attitudes about risk and had become detached from real U.S. economic fundamentals.
“The risk appetite of investors changes over time and right now the standard measures of the risk premium that investors are charging to hold stocks are at very high levels relative to anything we have seen in recent decades,” Mr. Bernanke said in semi-annual testimony to Congress.
“The stock values reflect not so much the fundamentals, the long-term profitability of the economy, but they also reflect investor attitudes about risk and uncertainty which right now are at very high levels,” he told lawmakers during questions.
U.S. stocks have fallen to 12-year lows this month, with the benchmark S&P 500 down about 15% and the Dow Jones industrial average off about 16% since the start of 2009.
This goes to the mindset here. What Ben Bernanke does not say but clearly suggests is that asset prices are being depressed artificially by ‘irrational despondence.’ Stepping in to offer a bid to these assets will lift them — at which point the despondence will go away and all will be fine with the world.
This view is misguided because many asset prices are still above their long-term trend. This is certainly the case with house prices, where renting is still significantly cheaper than purchasing in many locales.
In short, the U.S. government is making a big mistake by rejecting pre-privatization and embracing bailouts. We all will pay the price. Americans, get your Japanese phrasebook out – you will need it. America is turning Japanese.
Sources
Pete Peterson on Charlie Rose – Charlie Rose website
Peter George Peterson – Wikipedia
Lessons for the US from the Swedish Bank Crisis – Anders Åslund, Peterson Institute
Bernanke says stock market ignoring fundamentals – National Post
“It had outside, mainly foreign, consultants to scrutinize all bank debts and establish objectively which were nonperforming. The banks were forced to write off their bad debts and transfer them to bad banks.”
I wonder, although I like the directness of the Swedish solution, how applicable it is. I dont think they had nearly a severe situation as the one here in the States or for that matter, around the world. There are a lot of banks that if forced to write off their bad loans, would be effectively bankrupt bc so much of their equity had been swallowed by these bad loans. If they dont, bc of the bad loans they could go bankrupt as their equity gets eaten away. Writing off bad loans doesnt remove the fact a bank could have negative equity. Lending money has to come from somewhere.
I spent two years of my early professional life working 24/7 on the bailuot as an associate with a law firm, however in the phase preceding the one discussed by Anders Åslund. For two years, we tried to fix the holes in the dikes with ad hoc and tailor-made solutions for each corporate crisis. Despite all the efforts, there were more holes in the dikes all the time and they were getting bigger and bigger.
The regulatory framework to deal with these situations was non-existent. Once the systemic meltdown was staring everybody in the face, the Government stepped in with wholly new legislation and a new, comprehensive, approach. Nationalisation was one tool in the box. But the most important achievement was that the state intervention created a coherent approach and clear rules for the markets.
Trying to sell big assets in a falling market, AIG style, is just silly.
Sweden did not nationalize its banks. It nationalized *one bank* and this only as a knee-jerk reaction after shopping it around and no buyers appeared. The single nationalized bank was the old Nordbanken bank. None of the other several dozen odd banks were nationalized, though several went bust.
Leif Pagrotsky, a Swedish politician, wrote this piece describing what actually did happen https://www.eurointelligence.com/article.581+M5b55b38d58a.0.html .
Finally someone is outing the real story and killing the urban legend that is getting so much airtime in the MSM.
Nationalization did occur, just not of the whole sector. There was a state-owned bank called Post- och Kreditbanken. PK Banken took over two large private banks, Nordbanken and Götabanken. PK Banken changed its name to Nordbanken. The bad assets that the PK banken absorbed were eventually spun off in a bad bank called Securum. Nordbanken changed its name to Nordea when it gobbled up the biggest bank in Finland, Merita bank (itself a merger of troubled Finnish banks). At that point the Swedish government’s stake was diluted to the point privatization occurred by default, though even after selling stock over the years the Swedish state still retains 20% of the stocks.
thanks for all of your comments. Just to be clear, we are all pointing out that Sweden did not nationalize its entire banking system but rather forced banks to write down assets and stick them in a bad bank. As a few of these banks were so undercapitalized due to the writedowns, they were forced into the hands of the state.
In my view, some variant of this type of exercise needs to occur in the U.S. – the key being writing the assets down and separating them from the remaining asset base. I would even see a capital injection instead of pre-privatization or liquidation as warranted — as long as it comes after a quid pro quo of writedowns and separation of assets is met.
Ultimately the purpose is to have well-capitalized financial institutions which can lend with confidence.
I have argued this line for many months (https://pro.creditwritedowns.com/2008/09/i-was-wrong-heres-my-new-plan.html). Clearly, the U.S. government wants to head down a different path. In my view, the Swedish solution works even if the assets are artificially depressed in price as the Peterson article demonstrates.
Wondering how much CDS exposure the Swedish banks had at the time of their crisis.