Stopping a Financial Crisis, the Swedish Way

I often do not have time to research a complete post for publication but find articles that just go over the top in trying to portray things that just are make believe. The link above is one example {Stopping a Financial Crisis, the Swedish Way.

A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.

But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

At least they get one thing right, it is imprudent regulation not the phony Binary Opposition about more or less deregulations. But I have to wonder when people use insolvent, does the writer actually mean that the whole banking system had no more capital to work with, and more importantly that it had no possibility of making enough money to pay its debts? Seems to be a tall order for a developed nation to be in. But yes, tell us the wonderful things they did...

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s finance minister at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

And are we to think that the $400 billion write downs for banks this year was not any flesh they gave up. And how have the bank stocks done since the beginning of this crisis? Seems like shareholders have taken some hefty pounds of flesh extraction. Bear Sterns was at one time $2.00 down from like $180 a couple of years earlier.

Why equity in a company if it is mismanaged to begin with? There is nothing special about equity in this class of assets. If we the people {"the government"} are concerned about homeowners then owning the debt instruments makes more sense then "we" could negotiate the mortgage terms more easily.

What says there is not some upside now? I have heard that as low as 30 cents on the dollar may be the basement that the government may use as a backstop. Thus $700 billion is going to pay for 2 1/3 trillion dollars in assets. I imagine there should be some upside for the risks. Notice that some "bailouts" did manage to generate a "profit" for the government as in the case of Mexico bank failures.

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

Let me get the straight! The initial outlays were 4% of GDP and in the end they lost 2% of GDP thus they lost 50% of their seed money. And I just pointed out that sometimes like in the case of Chrysler the government made money or at least broke even. Chrysler was still a bad idea. That does not sound like prudent fiscal policies.

The tumultuous...

the global insurance giant.

Yes, we already are part owners of certain firms so what was all the other dribble for earlier?

Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said.

Yes, I just said above we get the title deeds to a bunch of real estate titles. We could easily set up all kinds of other social services with these assets or set up a trust to rent out repossessed properties. And why do we want shareholders value at zero? Isn't 90% lost on assets enough? I don't believe that to avoid moral hazards that people have to pay the full amount to prevent the pattern repeating, only that have to pay a SIGNIFICANT amount.

The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.

Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times.

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.

I agree that Japan messed up the process and delayed write-downs soon enough, but there has to be some flexibility in tough times. Also I find it ironic that if they did follow their advice then the banks then just are declaring themselves insolvent and must basically close up shop until recapitalization. Maybe they did this during the weekends.

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.

The politics of Sweden’s crisis management were similarly tough-minded, though much quieter.

Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.

“The only thing that held back an avalanche was the hope that the system was holding,” said Leif Pagrotzky, a senior member of the opposition at the time. “In public we stuck together 100 percent, but we fought behind the scenes.”

Basically more fluff as the filler at the bottom. "No sacred cows" meaning as they say sacrifice equity holders, which I understand are the first to lose out but still an important part of the economy. I am just not sure how efficient the government is at managing companies. I have an idea that they would actually manage tangible assets a little better-assuming that not too many special interests get involved in managing the assets.

So I think it is just a matter of how much groveling we demand of the banks in trouble. We know that the assets {unless pure fraud} have value because they are based on actual assets {houses and condos} thus if we do provide the backstop for the market to prevent zero value of these assets then it is very likely that "we" can make money in the deal. Before I mentioned 30% based on last valuation, and if we say that even houses fall 50% in value in the aggregate that is a lot of value we could still extract. Some markets would hit that 50% but I see numbers overall being like 10-20%.

So the article really is just spin that others do it better than the USA and in which this case does not show the least especially since they lost 50% of their assets.

Dweebs of the Whole Left|Kossacks

It started out with a blog at Daily Kos: There Are No Libertarians In Recessions.

Then Nutters at Thom's got it: http://www.thomhartmann.com/index.php?option=com_fireboard&Itemid=104&func=view&catid=11&id=257928

And even Dr Thoma got into posting a link to it with actual discussions from the wing-nuts. September 18, 2008 links for 2008-09-18

You would think at least someone would verify that Laurence D. Fink was actually a Libertarian before making a fool of themselves.

My first advice is to never believe Kos for a source of information.

But in case you are interested ... then they must not be talking about the Laurence Fink of BlackRock Inc {founder, CEO}.
Barack Obama (D) PresidentOBAMA VICTORY FUND - $30,800 primary

Notice that since 87 no Republican.

Newsmeat also notes that total contributions that they gathered information on that Fink spent the following amounts:
$2,000 Republican
$44,800 Democrat
$6,000 special interest
total: $52,800

Well, no Libertarian Party donation and no Ron Paul support but a big paycheck for Obama!!! I think he made his bed and it is not with any libertarian ideals.

John McCain's "Big" Economic Plans|Dr. Thoma is a Dweeb P2

The post "John McCain's "Big" Economic Plans" seems to tell me more about a Liberal Economics Professor than about McCain's Economic Plans. I can see some of the points of the first part of his post about ear-marks, but let me address the drilling issue specifically.

First I go to his link with the picture and what do I see: Drill here, drill now A pipe dream, a post by grist without comment. Which is enough to question where Dr. Thoma gets his information. Then this leads me to another link of: Impacts of Increased Access to Oil and Natural Gas Resources in the Lower 48 Federal Outer Continental Shelf. The charts say January 2003. Are we to take this information as current and reflects the current reality of prices in the world market now? Let us see if it has some information that may be useful or just shallow analysis.

Although existing moratoria on leasing in the OCS will expire in 2012, the AEO2007 reference case assumes that they will be reinstated, as they have in the past. Current restrictions are therefore assumed to prevail for the remainder of the projection period, with no exploration or development allowed in areas currently unavailable to leasing. The OCS access case assumes that the current moratoria will not be reinstated, and that exploration and development of resources in those areas will begin in 2012.

Well no wonder that the yellow in the graph does not start until 2015. Let me put some of Dr. Thoma's words in here:

I can't even see the sliver of yellow until after 2015, and even after that it's not much of a contribution. That's supposed to lower gas prices?

With such a solid foundation for the polcy porposals - a couple of slivers of pie - I can't imagine why the McCain campaign would resort to lies, deceptions, misdirection, and misleading characterizations to sell these "big" plans.

But as noted above we are basing this on the moratorium until 2012 and if it was enacted now that makes the start as 4 years earlier and with prices higher then there is more urgency to get more supplies to market. To the larger issues, the paragraph above from EIA says that the present restrictions would continue. Back to EIA:

For AEO2007, an OCS access case was prepared to examine the potential impacts of the lifting of Federal restrictions on access to the OCS in the Pacific, the Atlantic, and the eastern Gulf of Mexico. Currently, except for a relatively small tract in the eastern Gulf, resources in those areas are legally off limits to exploration and development. Mean estimates from the MMS indicate that technically recoverable resources currently off limits in the lower 48 OCS total 18 billion barrels of crude oil and 77 trillion cubic feet of natural gas (Table 10).

Are we to conclude that 18 billion barrels of recoverable resources could only net .2 million more barrels per day when ANWR has predictions of 1 million barrels more per day? That seems to be quite a stretch to say so little will be produced from so much.

We still have not seen any indication that prices have any effect on production when in reality we know as economists that prices have effects on quantity supplied to the market. But lastly if Cuban oil renews embargo debate/Discovery of sizeable reserves means U.S. trade ban may finally have a cost, then I am sure we could increase our production of OCS oil to the market at least as well as the Cubans can do. The article does not mention any projections for oil production but we could easily see that 1 million per day is possible.

Seven months later, a report by the U.S. Geological Survey confirmed it: The North Cuba Basin held a substantial quantity of oil — 4.6 billion to 9.3 billion barrels of crude and 9.8 trillion to 21.8 trillion cubic feet of natural gas. Cuba wasted no time, dividing the 74,000 square mile (120,000 square kilometer) area into 59 exploration blocks, and then welcoming foreign oil conglomerates with offers of production-sharing agreements.

Lastly back to Dr Thoma in the comments section again:

You'll hear a lot of attempts to discredit these numbers, but nobody has really done so, and even if you increase or decrease the yellow area by, say, 50% it doesn't change the picture much, so it's all just a lot of noise about a very small contribution to satisfying our energy needs.

But what if the yellow areas is 4 years earlier and 5 times broader? Then what? What if Venezuela cuts off oil? What if another war breaks out in the ME? What is the value of having resources at home instead of getting oil from unsavory characters? What about the externalities of the above as well as causing a major trade imbalance?

Do we use the same standard in alternative fuels as we do with oil? No one talked about how much bio-fuels was going to reduce our costs for gas when in reality it raises our costs. When building our damns, did we say well this will only supply 3% of our energy needs? When all these windmill farms sprung up did we calculate how much energy it would produce as a percentage of the total energy needs?

P.S.: I guess 1 million is a little overly optimistic for Cuban production but I did find one report that claims:

In December 2004, the Cuban regime of Fidel Castro announced that it had
discovered a significant oil reserve off the northwest coast of the island.
More importantly, the potential of the oil finds could dramatically decrease
the island’s dependence on imported oil and could serve as boon to the Cuban
economy. There has been much conjecture of the size and scope of oil
reserves in the 59 offshore tracts in Cuban exclusive economic zone (EEZ).
The working estimates are that there is the potential for 120 thousand barrels
of oil per day, perhaps more, but the sea floor is over a mile deep and the oil
reserves perhaps an additional 3,000 feet beneath the sea floor. This lies
within the capacity of the existing oil drilling technology, but as previously
explained, the task of extracting the oil will have to be undertaken using second-
or third-generation technology because of U.S. export control regulations
against trading with Cuba. The challenge for Cuban oil development
policy makers is to simultaneously pursue frontier exploration in the Gulf of
Mexico, while continuing to produce from the existing mature oil reserves
with higher levels of efficiency and environmental integrity. Add to this challenge
the additional question of securing the appropriate technology for the
task. {Page 40|48PDF}
http://web.gc.cuny.edu/bildnercenter/cuba/documents/CITBookFMpdfbychapter_000.pdf

The point is still that 18 billion barrels to produce only 200,000 barrels per day compared to tiny Cuba producing 120,000 barrels per day.