Wednesday, September 24, 2008

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.

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