International Herald Tribune
Swedish crisis advice: Bite the bullet on banks
By Carter Dougherty
Friday, January 23, 2009
The Swedes, who pulled off a rapid recovery from their own banking crisis in the early 1990s, have a simple message for their American colleagues: Bite the bullet on nationalization.
With the new administration of Barack Obama pondering what the U.S. government can do to deal with the wasted assets that are crippling a hobbled banking system, officials in Washington are grappling with a conundrum: How do you heal the banks without wounding the taxpayer?
Former Swedish officials, many of them from the more conservative, market-oriented side of the political spectrum there, say the only way to avoid that conundrum is for the U.S. government to be prepared to take full ownership - temporarily - of some big banks that once defined excellence in global finance.
Sweden did just that, carving off all the banking industry's troubled assets into a so-called bad bank, where they could be sold off over time. With the banks effectively bankrupt, the government wiped out existing shareholders, but then instead of shutting the banks down it used the taxpayers' funds to provide enough capital to allow the banks to resume normal lending.
By contrast, the U.S. government, in its actions so far, "did bail out shareholders" by providing funds for banks without receiving large equity stakes in return, said Bo Lundgren, Sweden's minister of fiscal and financial affairs at the time.
"For me, that is a problem," Lundgren said, "and I am a market liberal, more than some Republicans in the U.S. If you go in with capital, you should have full voting rights."
In effect, the Swedish state took on all the assets that were worthless or impossible to value at the time, and then managed them or sold them with the aim of getting as good a deal as possible for the taxpayer.
"We hired real estate people," said Lars Thunell, the former chief executive of Securum, the entity that became Sweden's repository of all the underwater assets. "We hired industrial M&A people. We needed to manage real assets." M&A refers to mergers and acquisitions.
The United States has become embroiled in a debate about creating its own bad bank - the term of art for an institution that assumes control of assets whose current value is less than their cost - after a long string of decisions to recapitalize banks without taking control of them.
For all the trillions of dollars committed to the banks by the U.S. Treasury and the Federal Reserve, U.S. taxpayers have, in effect, used mostly loans to turn themselves into an emergency creditor of the financial system.
Though bank shareholders have taken huge hits as markets pounded their stocks, the U.S. government has largely avoided acquiring equity and diluting the value of existing shareholders. Former Swedish officials said that was a mistake, for political reasons if nothing else, because owners of bank stocks did so well in the boom years early in the decade.
"We neutralized the issue," said Leif Pagrotsky, a senior member of the center-left opposition at the time. "We turned it into an internal issue of how to manage what we had under our control, not an issue of wealth distribution, subsidization and wasting taxpayer money."
In the United States, the fears of nationalization are diverse, with Americans worrying that it would cost too much, the government could not run banks effectively and it would be too complicated.
Lundgren, the former minister of financial affairs, said the costs of nationalization have to be measured against the perils that a lame banking system creates for an economy. And the mere threat of falling into state hands nudged some Swedish bankers to find their own creative solutions.
SEB, the bank controlled by the Wallenbergs, the first family of Swedish business, engineered a private recapitalization to plug the hole in its balance sheet. Distressed assets were then placed in a bad bank of its own, freeing management to run the sound parts of the business.
The politics of state ownership did unsettle the center-right government of Carl Bildt, as the opposition at the time never hesitated to point out.
Nationalizations were an "intellectual and ideological trauma of a conservative government in the Reagan-Thatcher era," Pagrotsky said.
Nordbanken, a Swedish bank that had expanded sharply in the go-go years of the late 1980s, fell entirely under the control of the government because its losses and corresponding need for capital was so great. It is now Nordea, a banking giant in the Baltic Sea region, and still partly government-owned.
Its assets were funneled into Securum, a state-owned company. A smaller version, Retriva, was also created with assets from another bank, and later merged into Securum.
Securum was capitalized with 24 billion kronor, or $2.88 billion, a sum equal to the country's military budget at the time. A study by the Federal Reserve Bank of Cleveland concluded that it eventually returned about 58 percent of that upfront cost to the Swedish treasury, though in depreciated krona.
To make Securum work, the Swedish state had to become a specialist in such diverse industries as chemicals, biotechnology, office supplies and aerospace industry services. At the time, Thunell, the former Securum executive, called it a "true super-conglomerate" with "no rationale whatsoever." It even had to wrestle over ownership of an Andy Warhol painting in London, and a guitar that was said to once belong to John Lennon. And it also owned the Australian Embassy building in Myanmar and a company that employed military advisers in Yemen.
Chunks of real estate from Stockholm to London to Atlanta had been collateral for loans and occupied 70 percent of Securum's portfolio. "As a result of the bubble, a lot of Swedish real estate people thought they were the best in the world," Thunell recalled wistfully.
Since the whole idea was to eventually put Securum out of business, managing it required a deft touch that rewarded financial success with incentives for employees, but also stressed their work's nature as a public trust.
"I think people felt a tremendous responsibility for the taxpayer in a fiduciary sense," Thunell said. "But it was extremely stimulating from an intellectual and business standpoint because you were doing completely new things."
Securum hemorrhaged money in its first year in business, which was 1993, but recovered quickly, as savvy deal-making combined with a swift pickup in the Swedish economy created markets for what once seemed so worthless.
Early on, Securum sold a chemical company it controlled, Nobel Industries, to Akzo of the Netherlands, to form the largest paint producer in the world. With 18.2 percent of the combined company, Securum later reaped a hefty profit when it sold out.
Property proved less nettlesome than feared as the Swedish economy recovered. Pandox, a Swedish hotel company, was privatized and finds itself, today, trolling for distressed assets in North America.
If there is any critique of how Sweden handled the bad bank, it is that it might have managed an even better return if Securum had sat on its assets longer.
"Our only mistake was that we were not confident enough about the future of the Swedish economy," said Pagrotsky, formerly with the center-left opposition. "No one was confident enough to say that we should wait."
That argument rankles Securum's former leaders, who said sales needed to be prompt but orderly.
"With that argument, the government should stay in forever if it thinks the value will keep rising," said Thunell, who now heads the International Finance Corp., a part of the World Bank.
In any case, the Swedish bad banks did not gather much dust.
Swedish law envisioned a 15-year life span for Securum and Retriva when they were created in 1993. They closed up shop four years later. |
