The New York Times
January 23, 2009
Sweden’s Fix for Banks: Nationalize Them
By CARTER DOUGHERTY
The Swedes have a simple message to the Americans: Bite the bullet and
nationalize.
Officials in Washington are trying to figure out how to shore up
American banks that once ruled the financial world but now seem to
weaken by the day, despite receiving hundreds of billions of dollars in
government aid.
With Sweden’s banks effectively bankrupt in the early 1990s, a
center-right government pulled off a rapid recovery that led to
taxpayers making money in the long run.
Former government officials in Sweden, many of whom come from the
market-oriented end of the political spectrum, say the only way to
solve the crisis in the United States is for the government to be
prepared to temporarily take full ownership of the banks.
Sweden placed its banks with troubled assets into a so-called bad bank,
where they could be held and then sold over time when market and
economic conditions improved. In the meantime, it used taxpayer money
to provide enough capital to allow banks to resume normal lending.
In the process, Sweden wiped out existing shareholders.
By contrast, the United States government, so far, has bailed out banks
without receiving large equity stakes in return, said Bo Lundgren,
Sweden’s minister of fiscal and financial affairs during the Swedish
bank takeover.
“For me, that is a problem,” said Mr. Lundgren, who called himself more
of a free marketer than some Republicans. “If you go in with capital,
you should have full voting rights.”
To be sure, the United States has a much larger economy than Sweden’s,
with a vast and international banking system. The toxic assets Sweden
took from its banks improved when the economy improved, but Sweden was
not confronted with a global recession.
Still, many analysts believe that Stockholm has lessons for Washington.
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 H. Thunell, the former chief
executive of Securum, the institution that became Sweden’s repository
of all the underwater assets. “We hired industrial M.& A. people.
We needed to manage real assets.”
The United States has become embroiled in a debate about creating its
own bad bank after months of decisions to recapitalize American banks
without taking control of them.
For all the billions of dollars committed to the banks by the Treasury
and the Federal Reserve, American taxpayers have, in effect, used
mostly loans to turn themselves into emergency creditors of the
financial system.
For their part, bank shareholders have taken big hits as the stocks
plummeted. But the government has largely avoided acquiring equity and
diluting the value held by 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.
Fears of bank nationalization are diverse — skeptics worry that
nationalization would cost too much, the government would not run banks
effectively or nationalization would be too complicated. Mr. Lundgren,
the former minister of financial affairs, said the costs of
nationalization have to be measured against the perils a hobbled
banking system creates for an economy.
Moreover, he said the mere threat of nationalization nudged some
Swedish bankers to find creative solutions to their problems in the
1990s.
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.
Nordbanken, a Swedish bank that had expanded in the go-go years of the
late 1980s, fell entirely under the control of the government because
its losses were so great. It is now Nordea, a banking giant in the
Baltic Sea region, and still partly government-owned.
Securum was capitalized with 24 billion kronor ($2.88 billion), a sum
equal to the country’s military budget at the time. (The total United
States military budget is less than the $700 billion allocated to TARP.)
A study by the Federal Reserve Bank of Cleveland concluded that Securum
eventually returned about 58 percent of that upfront cost to the
Swedish treasury, though in depreciated krona.
That does not mean Sweden has escaped the current banking turmoil
unscathed. As credit markets froze last fall, it created a financial
stabilization package intended to ensure new lending from banks. Only
Swedbank initially signed up for the plan. Other banks have moved to
raise capital in the market.
To make Securum work in the 1990s, the Swedish state had to become a
specialist in such diverse industries as chemicals, biotechnology,
office supplies, aerospace industry services and, as would certainly be
the case in the United States, real estate.
Chunks of real estate from Stockholm to London to Atlanta had been
collateral for loans and occupied 70 percent of the portfolio of
Securum.
“As a result of the bubble, a lot of Swedish real estate people thought
they were the best in the world,” recalled Mr. Thunell, who now heads
the International Finance Corporation, a part of the World Bank.
Securum owned the Australian Embassy building in Myanmar, as well as a
guitar that was said to have belonged to John Lennon and a company that
employed military advisers in Yemen.
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,” Mr.
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.
There is no guarantee the Obama administration will be so fortunate,
with a global economy facing its most severe downturn in decades.
If there is any criticism 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.
Swedish law envisioned a 15-year life span for Securum when it was
created in 1993. It closed four years later.