2016-11-05 16:04:01
By CARTER DOUGHERTYSEPT. 22, 2008
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 minister for fiscal
and financial affairs 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 tumultuous events of the last few weeks have produced a lot of tight-lipped
nods in Stockholm. Mr. Lundgren even made the rounds in New York in early
September, explaining what the country did in the early 1990s.
A few American commentators have proposed that the United States government
extract equity from banks as a price for their rescue. But it does not seem to
be under serious consideration yet in the Bush administration or Congress.
The reason is not quite clear. The government has already swapped its sovereign
guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance
institutions, and the American International Group, the global insurance giant.
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.
Photo
Bo Lundgren, minister for fiscal and financial affairs during the 1992 crisis.
Credit Swedish National Debt Office
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.
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.
Correction: October 15, 2008
An article and a picture caption on Sept. 23 about Sweden s response to its
1992 financial crisis misstated the government position at the time for Bo
Lundgren, who described Sweden s strategy and commented on the United States
proposals for resolving its own crisis. A correction in this space on Sept. 27
repeated the error. He was minister for fiscal and financial affairs not
finance minister or deputy finance minister.