The Swedish Model

August 29, 2009

Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.
After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.
Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.
Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.
Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.
The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.
“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”
By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.
More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.

http://www.namasayno.com/links.html

http://www.nytimes.com/2008/09/23/business/
worldbusiness/23krona.html?_r=1

My comments italicised, selected quote here from url above. Note Sweden also adopted the fire sale  method, for reference blog entry

How to defeat NAMA!

Posted August 28, 2009 by colmbrazel

In fact,  as well as setting up one supervisory agency to manage the banks, ‘Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.’

It should also be observed below that ‘The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout’

This would indicate that banks faced with nationalization may choose to solve their own problems by way of recapitalisation. They should be given opportunity if able to do so.

In summary, the Swedish model, a worthy model for Ireland to follow, has 3 main components:

A)

A write down of debt by the banks followed by recapitalisation and survival independantly of government if possible by banks able to do so

B)

Nationalization of banks ;

C)

Sell off of assets the state held as collateral, regulate/hire/fire

While this article does not go into the ‘market value issues’, see earlier posts, or indeed Sweden’s fire sale experience, it would be very worthwhile to examine closely the experience of their asset selling agency in the Swedish market place.

See http://www.voxeu.org/index.php?q=node/3293 also below:

The formula followed by Sweden was successful and is a model we should follow. Note ‘Japan made the mistake of dragging this process out, delaying a solution for years.’ NAMA threatens to drag its process out over decades of muddy quick sand that will create an even larger problem than the one it attempts to solve.

The sooner a consensus emerges based on nationalisation and bank recapitalisation similar to the Swedish model, the better for all who wish the best for our country.

“Stopping a Financial Crisis, the Swedish Way

By CARTER DOUGHERTY

Published: September 22, 2008

Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.

After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.

Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.

“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”

By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.

More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.”

http://www.voxeu.org/index.php?q=node/3293

Note below the ‘Bank Holiday’ concept, could this concept if applied in Ireland have prevented investors such as Dermot Desmond speculating for profit
on zombie banks that provide rich pickings in a banking crisis? The longer the delay in responding effectively to a crisis, the more damage is done and the more the crisis deepens.

Government-held assets that were deemed viable were merged under one name, Nordbanken, and permitted to continue operating. Bad assets were transferred to two asset management companies – Securum for Nordbanken’s assets and Retrieva for Gota’s.

The asset management companies were charged with managing and liquidating the bad assets of these banks and taking on the assets of non-bank companies that were in default. Swedish legislators made sure that the companies were adequately capitalised and granted exemptions from regulatory rules that would have rushed their actions or limited their effectiveness, including a rule that required seized collateral to be liquidated within three years.

Often, the asset management companies became managers of otherwise private, failed companies, performing such tasks as hiring and firing, managing property, and changing operational strategies until their assets could be favourably sold. Their flexibility and financial resources shortened their own existence from an expected duration of 15 years to a few years. Liquidations were completed in 1997, and the companies’ remaining funds (less than half of their original capitalisation, in real dollars) were returned to the Swedish treasury.

Sweden also extended considerable political and financial independence to the asset management companies, which allowed them to carry out their task with adequate resources. Doing so served as a public signal that their operations would not be subject to changing political winds. Similarly, Swedish officials’ relaxation of collateral liquidation requirements implied that the dispensation of assets would take place over an extended period of time. Arguments can be made either way about the best time to sell assets – selling early returns assets to private use and avoids investor anxiety about debt overhang, while selling gradually sidesteps a distressed-pricing feedback loop. In any case, asset managers were given flexibility to make their own decisions about the trade-off.

To restore credit flows, Sweden moved quickly to provide incentives to bank owners to inject additional capital into their banks or to inject government capital into banks directly, when necessary. Asset management companies played a key role in restoring the financial health of the non-bank companies they were operating. Some viable corporations were allowed to survive through capital injections, though in return the government acquired a majority of their shares so that taxpayers could profit from any upside. Recapitalised institutions could return to ordinary operation, gradually rebuilding the creditworthiness of the overall economy.

Sweden’s success at maintaining market discipline was perhaps more limited. Ideally, discipline is sustained by not saving undisciplined investors through issuing blanket guarantees and unlimited liquidity. In Sweden’s case, policymakers avoided the liquidity pitfall but ended up guaranteeing bank liabilities before the banks themselves were taken over. Edward Kane and Daniela Klingebiel have suggested an alternative to such incentive-skewing guarantees. They have argued that the optimal response to a systemic banking crisis is to call a bank holiday long enough for examiners to determine which banks are viable, while still giving insured depositors access to their funds. Doing so would insure business as usual for insured depositors without permitting uninsured investors to cash out before they’ve taken their share of unrecoverable losses.

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rgds

Colm

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