HOW TO RESCUE YOUR BANKING SYSTEM WITH A SWEDISH MODEL
Sep 30th, 2008 by Conor McCabe
Short-sighted economic policy?
Property bubble burst?
Severe credit-crunch?
Erectile dysfunction?
If you are ticking all of the above boxes, (except maybe, ahem, the last one), then you’re probably in Ireland in 2008, or Sweden in 1992.
Sixteen years ago, Sweden was looking down the barrel of an insolvent gun. Its housing bubble had burst, resulting in a credit crunch and the serious threat of bank closures. Then, as now, Government stepped in to rescue the system, and the manner of Sweden’s intervention saved not only the banking system, but was done at a final cost to the taxpayer of between two and three per cent of GDP. Following extensive research, (i.e., I went to wikipedia), this is what Sweden did:-
* The government announced the state would guarantee all bank deposits and creditors of the nation’s 114 banks.
* It assumed bad bank debts, but banks had to write down losses and issue an ownership interest (common stock) to the government. Shareholders were typically wiped out, but bondholders were protected.
* It 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.
* When distressed assets were later sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies in public offerings.
The key to Sweden’s success was that it got the banks to come clean with regard to its losses before recapitalization took place. Also, it pressed hard on shareholders. This from the New York Times:-
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.
Irish media commentators are trying to make out that Irish banks are not insolvent, that the problem is not liquidity, but that nobody in Europe and beyond will borrow to Irish banks.
This is absolute nonsense. The reason why nobody will touch Irish banks is because the Irish banking banking system has crippled itself with construction boom debts. It lent money to builders to build homes, and then lent money to people to buy homes. Part of the problem in the international banking system is that nobody knows where the toxic debts are, or how much, or how little, each is holding. But, take one look at the Irish system, and it’s quite clear where the bad debts are sitting: most notably, AIB and Bank of Ireland. The government’s response, that the Irish banking system is fundamentally sound, is fundamentally wrong. It’s laughable to hear Irish commentators talk about this rescue plan as a possible model for the European and international banking system. It’s even funnier to hear them say, “well why hasn’t anyone else thought of this? Aren’t we the clever dicks!”
In order to save the Swedish banking system, shareholders took a hit. The managers and CEOs of the banks made bad decisions, and the shareholders lost out. As Paul Krugman puts it:-
the problem is insufficient capital: you want to inject capital, but you don’t want it to be a windfall to existing stockholders — hence, take over and recapitalize the failing firms.
(Source: AIB Group website.)
In order to protect these shareholders, the public is to take a hit. The idea that the Irish banking system is fundamentally sound, and that shareholders’ interests (and their dividends) are to be protected with taxpayers’ money - which is all that this plan, (such as it is), achieves - flies full-square in the face of the reality of the situation.
Its entire purpose, in its present manifestation, is to protect shareholders’ interests. It is short-term in the extreme, and ultimately, it will fail.
(Note: just watching the oireachtas live stream [11.21pm] and Simon Coveney has just said that he does not believe in the nationalization of banks. It’s always the wrong decision, he says - a bit like voting Fine Gael, I suppose.)
Very interesting article. Thanks for sharing the information. I remember some bits of the Swedish crisis, but was not familiar with the details, as in 1992 I was going through a major change in my own life - moving to another country, changing my profession and a lot more.
The Swedish government has also imposed stricter rules on the banks, which in particular work for the good of customers. For example, money lodged into an account in the morning in one part of the country is available to be withdrawn anywhere in Sweden within hours.
Irish banks still take days for that, and even longer if it is a cheque. Should it be a foreign cheque, it could take up to four weeks. This is unacceptable in the time of international electronic banking, and the only reason for doing it is that it gives the banks extra time to use our money for their speculations and gambling.
Now is the time to put new rules in place and tell the banks that they are after all nothing more than businesses with customers. They still behave in a Victorian manner, as if they own the country, even though the quality of their staff has declined steadily over the past 10-15 years. It will be up to the government to make the right decisions on the big scale, but we customers should voice our discontent towards the banks on the lower levels individually. As things are, they need us now more than ever, and even more our money. Let’s be shrewd and get a fair deal in exchange.
Cheers for the comment, Emerald, and for the additional information. In relation to your comment that Irish banks act as if they own the country, I think the actions of the government today shows that it is no act.
And great point about us being shrewd for once. Absolutely true.
Glad to see that my little posts on ILR are not going entirely unnoticed
http://www.irishleftreview.org/2008/09/25/how-sweden-solved-its-bank-crisis-nytimescom/
oops!
Shit. I promise. I do read ILR.
You should have put some ladies on, Donagh, I mean, Sweden and model, it writes itself!
Well, it’s not as if I win a prize for linking to an article in the New York Times and anyway, you’re post is a great reaction to the decision of the Irish Government to ensure that the banking sector can continue on its merry way and continue to hide all its bad debts, no matter what Morgan Kelly and Michael Taft have to say.
Actually, Morgan Kelly was on Primetime last night, but I missed it. A colleague told me that he was saying that this bail out (which is not a bail out) won’t make a damn bit of difference.
Here’s Morgan Kelly making a concluding point in his piece Just How Sound is the Irish Banking System?
What, driven by ideology, the banking system? Well I never. I guess the answer to the question in the title is ‘not very much’.
By the way, as well as Michael Taft’s piece on the lunacy of the bail out I’ve also published a piece by Dr. Gerry Burke on the TASC survey which was published last Monday. It argues that people in Ireland are more left wing than we think.
Don’t mind me, I’ll keep plugging away:)
Great piece. Thankyou.
Cheers Damien. By far the most informed, articulate, and insightful work on this is that by Morgan Kelly and Michael Taft, as per the links in Donagh’s comment.
On the nine o’clock news we had George Lee again, and this time he made a very good point at the end. The problem with this plan is that the terms and condition are not known, and the legislation is going to be very broad so we may not know the terms and conditions properly for a while. However, we can’t appreciate the implications of the bail out because we don’t know the extent of the banks bad debts, and we don’t know that because the banks aren’t telling.
We must assume then that those bad debts are very large indeed, and for the government now to guarantee the debts of foreign banks is mind boggling. Never mind that the government is acting unilaterally without wanting to be part of some EU plan which would consolidate government guarantees. And what does that say about Lisbon?
The Irish scheme can’t be part of an EU plan - for the EU would insist on knowing the extent of the debts. That’s the whole point, I reckon, for the solo run. It’s to keep the EU as far away as possible from the accounts of AIB and Bank of Ireland.
[…] in the EU are providing for their banks, it’s pretty clear that until the Cowen follows the Swedish Model that they are going to fall further. In fact, at this point they’ll inevitably require […]