How Sweden Solved Its Bank Crisis

Discussion in 'Current Affairs, News and Analysis' started by Virgil, Sep 28, 2008.

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  1. Some lessons here. Interesting article from the NY Times - LINK

    Stopping a Financial Crisis, the Swedish Way

    Correction Appended

    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.

    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 deputy minister of finance at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

    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.


    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.


    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.
  2. Or did they just cash in all the Nazi gold they have stashed away?
  3. I shudder to imagine what Barack would do, with a Democratic controlled Congress and Senate, if we nationalized our banks.

    Bad, bad, bad idea.
  4. Reread the article. The Swedes became part owners in exchange for a massive bailout then when the taxpayer recouped some of the losses left the field.

    I doubt Obama or the Dems would nationalize the banking system permanently, that's more like right-wing fringe BS I think.

    One of the main reasons this fiasco happened was the lifting of regulations in the late 90's that allowed them to expand into areas now under stress.

    Since the early 1930s the U.S. banking system has never been allowed to run rampant like other industries.
  5. I think you're right here, Virgil. Genghis Bush, Darth Cheney and all the rest of the shysters could indeed pull off something similar in the US. But that would mean they'd actually have to care about folks, and the only ones they care about are their slimy chums in the banking business.

    Sweden provides a very good example of how it COULD be done, with some astonishing parallels to the present situation in the US. It's such a real shame that such a plan won't go into operation.

  6. Go back to the mentality of you have to save up the money to buy things. Mortgages are probably the only reasonable loan these days. Everything else is just people wanting to live outside their means.
  7. It was the sub-prime mortgage market that led to the collapse of Lehman Bros, and the Buy-to-let which did for B&B.

    Mortgages are a debt like anything else - if you can't afford it; don't borrow it. :rage:
  8. There was a discussion on the World Service during the week and the Swedish example was offered up as an example of what could (should) be done.

    All 'experts' on the show effectively nodded in agreement and were left to discussing precisely how much it eventually cost the Swedish taxpayer: figures ranged from 200Million to 1Billion - which in the broader sense, is peanuts!

    The 'experts' ranged from a UK investment banker who wrote a book a few years back predicting this crisis and recommending a massive bailout by the US govt, to a US economics professor who said they should just let the system fail and use the money to support those most in need after the fallout!
  9. This was the model suggested and planned by Vince Cable pre-Northern Rock I believe. So a One Billion bailout became 25 Billion + after the Government farted about.

    Now if the same order of magnitude occurs in future bailouts, and I believe there will be more..
  10. How about just letting the bloody things fail and then nationalising them for a nominal £1.

    Then, take the shareholders and managers to the cleaners and bleed them for every penny possible until they die.

    Next, place all the housing stock aquired from this nationalisation into a business to be known as "Council Housing 2008". Let the owners remain in their properties all the time the keep on repaying their mortgages. If they fail to cough up, the house becomes the property of the state, and then start charging them rent at an affordable rate - but on the condition that after X amount of time, they must either move on or pay the market rate.

    Inevitably, the housing market will pick up, and "Council Housing 2008" can be wound up by selling off outstanding stock at a nice profit to the taxpayer.

    In the long run, nobody loses other than the original bankers and shareholders...
  11. True - However where do you expect a first time buyer to find £150,000.00 plus???
  12. I think I've just spotted the reason it's about to become impossible, financially imprudent or against some abstruse or hastily thought-up rule. Other than that, a damn good idea for any government interested in minimising unnecessary pain the the ordinary home-owner. It's certainly a damn sight better than any ideas I've heard from Labour or Tory camps to date.
  13. mercurydancer

    mercurydancer LE Book Reviewer


    That sounds like a remarkably good plan, provided that when the mortgage with the council is paid then the property is entirely owned by the buyer.

    I wouldnt trust the council to run things that well though...
  14. An excellent idea. Do it now. Shares are a gamble, and if you don't want to lose a fortune on them, liquidate when you can. Ordinary account holders are compensated against Bank failure, so do what Dr. Cable suggested months ago, and nationalise every single one that looks in trouble. It'll be tough on those golden parachutes, but who gives a damn. Time to start collective thinking for the good of the nation, instead of individual greedy little sods.

    The bottom line is, for far too long , the Government regarded the housing bubble as a certainty, instead of what it was, a temporary bubble. The pop you hear is artificial inflation getting busted. It was a pyramid game, and if you came in last, you're screwed.

    Stop running around screaming "The sky is falling" and start thinking we're returning to normality, and adjust and plan for that.
  15. Yes but why was the property valued at £150,000 in the first place? Because there was a lot of cheap and easy lolly flying around as the Markets then allowed the lender to recoup the cash (house) and get his intial loan back if the poor feckers who borrowed 5 times their annual income defaulted on the loan. Unfortunately, paying off your Credit Card with another Credit Card ends up in tears.