Since it appears that the Swedish Bank Nationalization approach is gaining traction, not just in the White House but also amongst the Republicans, I thought it would be good to create a new thread to discuss it. I'm not an econ guy, so I'd like to hear some more thoughts and opinions about the approach.

How was the Swedish experience with this approach? What "Lessons Learned" did they glean from it? Will it scale for the United States? Is it even doable in the United States? What are the benefits and risks?

http://www.ft.com/cms/s/0/2ad3b750-fd27-11dd-a103-000077b07658.html

2/18/2009 11:21:25 AM

long story short - it worked then, and can work now. however, equity holders of distressed banks will mostly be wiped out.

2/18/2009 11:41:41 AM

2/18/2009 11:43:51 AM

We make reliable cars that outlast the rest. Why not try our banking system too?

2/18/2009 11:47:17 AM

Quote :

"long story short - it worked then, and can work now. however, equity holders of distressed banks will mostly be wiped out."

So basically, the Swedish approach would clean up the entire credit market collapse but at the expense of the shareholders of the banks that are sliced up. What kind of ripple effect will that have? I don't know how the Swedes are organized, but did they have the large pension funds and mutual funds like in the United States that might be heavily invested in bank stocks? If so, how did they cope with that?

2/18/2009 11:51:39 AM

I've been hearing a lot about the 'swedish model' being applied in the US for the past few months. It was obviously hugely successful in sweden and it would be a dream if it could be adapted for the US. I found an interesting column by Olle Wastberg, who was the State Secretary of Finance at the time of the crisis.

http://www.thelocal.se/17666/20090218/

Prior to reading the column, i didnt know that the swedish model was adapted from actions taken in Texas during the 1980s.

I currently bank with one of the failed banks from sweden's crisis and they are one of the strongest banks in scandinavia today.

2/18/2009 2:48:01 PM

More than likely Zombie Andrew Jackson would return to destroy the den of vipers and thieves that is a National Bank. Most people forget about Zombie Andrew Jackson when considering bank nationalization.

2/18/2009 3:10:38 PM

As I understand it, Sweden had something like five banks. As such, it was simple to engage in a top down rescue as the Government knew the players and only had to analyze five balance sheets and assume the necessary losses. Also, having only five banks would make the American model of nationalization unworkable, as each bank merger would create regional monopolies within Sweden, never a good policy.

Meanwhile, America has many thousands of banks, which makes any such attempt prohibitively complex. It would take government accountants many years just to perform a cursory inspection, and by the time they finished the information would be uselessly out of date. However, the diversity of America's banking system makes quick bankruptcies, as performed many times over the decades by the FDIC, quite effective. Once a Bank is declared unsound, the FDIC nationalizes it, wipes out the shareholders, covers the excess losses, and quickly rolls the productive assets into other banks.

2/18/2009 3:13:08 PM

2/18/2009 3:15:27 PM

Quote :

"Once a Bank is declared unsound, the FDIC nationalizes it, wipes out the shareholders, covers the excess losses, and quickly rolls the productive assets into other banks."

Isn't this essentially what the swedish model entails?

2/18/2009 3:28:06 PM

No. The FDIC is only operating in the contractual fashion as agreed to by the defunct-banks owners when they applied for and accepted Federal Depository Insurance Corporation protections.

Also, the so called Swedish Model involves the government operating some banks for quite some time, trying to earn back some of the losses it had insured. The key difference is liquidation today or operation followed by liquidation in a few years. The former makes most sence in Amerca, the ladder makes sense in Sweden.

2/18/2009 3:50:49 PM

ok, i see the difference. Im no economist but i dont see how liquidating later wouldnt work here. I understand that it would be significantly more complex to incorporate here but why couldnt we set up a bad bank(s) and liquidate their assets to recover some of the losses? This would, at least in theory, give the tax payers an opportunity to gain back some of the money invested to bail the market out of this crisis. In the case of sweden, they predicted that their intervention would last more than twice as long than it really did.

2/18/2009 4:28:46 PM

The problem with the "Bad Bank" idea is that is incredibly complicated to set prices on the distressed mortgage securities, so complicated that the smartest economists in the world cannot come close to an agreement on their value. The bad bank would have to buy these securities from commercial banks, and if we screw up and set the prices too high or too low, the ramifications are far-reaching from what I understand. Maybe somebody else can elaborate on that one.

2/18/2009 4:32:12 PM

Quote :

"I understand that it would be significantly more complex to incorporate here but why couldnt we set up a bad bank(s) and liquidate their assets to recover some of the losses?"

The devil is in the details. Some techniques of organization simply stop working once a level of complexity has been achieved. That is why open source software abandoned test-traces in favor of peer-review. It just no longer scaled.

Well, it is a similar reason why America has such an ungodly high number of banks. America's economy is not hundreds of times larger than Swedens, but we have hundreds of times more banks. As such, while it is possible to make five banks act as one, once you nationalized three of them, it is not possible to make a thousand banks act as one, even if you nationalize 600 of them.

"According to Federal Deposit Insurance Corporation figures, there are 10,271 FDIC-insured institutions in the United States"
And that excludes all non-FDIC-insured financial institutions. I call failure on any such plan. Let the ones that are insolvent collapse and be taken over. Smaller-wiser banks will grow to replace their larger-insolvent brethren.

2/18/2009 5:53:27 PM

Let's get one thing clear first: There is no talk about nationalizing the entire banking sector. I'm not sure where anyone got that idea.

Quote :

"The key difference is liquidation today or operation followed by liquidation in a few years. The former makes most sence in Amerca, the ladder makes sense in Sweden."

There really is no reference for which you can make that judgement. The camp that is for that thinks we get the pain over with quick, the question is, just how much pain are we talking here? Would it be such a shock that rather than a 5 year meander we have a 6 month neutron bomb followed by steady growth only to end up where we would have been without the bankrupting of large institutions?

Consider this, when Lehman went bust, the credit markets instantly froze. Instantly. Now what do you think would happen if we let the same thing happen to 5-18 of the largest banks? Answer, financial Armageddon, but no one really knows how bad it will be or how long it will take to pick up the pieces and move on.

Quote :

"The problem with the "Bad Bank" idea is that is incredibly complicated to set prices on the distressed mortgage securities, so complicated that the smartest economists in the world cannot come close to an agreement on their value. The bad bank would have to buy these securities from commercial banks, and if we screw up and set the prices too high or too low, the ramifications are far-reaching from what I understand. Maybe somebody else can elaborate on that one."

You have it in a nutshell. What the current group of suits is doing is walking an extremely fine rope between how much do they want to stick with taxpayers and how much do they want the banks to be stuck with it. If they were forced to mark to market today and maintain proper Tier 1 reserves, most of the big ones (Citigroup, BaC, Wells, others) would be instantly insolvent. The current values of the MBS have fallen so much, that the Fed probably can't pay even double that and still keep the banks from being insolvent. Doing so would anger voters to know end, and Geithner knows this. The mitigating factor in all this is the added CDS exposure on these MBSs for certain institutions. It took financial alchemists years to perfect this system and lever the shit out of it. They have all probably been working overtime since this mess started trying to figure out how to unwind it all without financial mass destruction. De-leveraging happens just as spectacularly as the leveraging.

Hopefully, someone can figure out a way to have a bit of a soft landing with this stuff. I think that is what is taking so long to come to some sort of solution.

2/18/2009 8:04:13 PM

oh boy this isn't going to go over well with drudge readers, rush listeners and beck/hannity/oreilly watchers. last time i checked sweden was a dirty liberal euro country.

[Edited on February 18, 2009 at 8:34 PM. Reason : .]

2/18/2009 8:34:09 PM

it hit drudge before the thread was posted

2/18/2009 8:54:41 PM

Quote :

"Consider this, when Lehman went bust, the credit markets instantly froze. Instantly. Now what do you think would happen if we let the same thing happen to 5-18 of the largest banks? Answer, financial Armageddon,"

Could not be more wrong. The so called largest banks are FDIC insured; as such, there is no need to invent from scratch a new method of handling insolvency. We already have a true and time tested methods. They work (most banks are under FDIC control for a matter of weeks, not months), and more importantly investors understand them and what the outcome will be. And once it is over everything is back to normal: private banks competing against private banks.

So, no. Wachovia went bust and there was no fallout to speak of. That is the beauty of the existing systems; they have worked for so long people don't really notice them. But not now, no, GM and Chrysler are too good for bankruptcy proceedings, and today's banks are aparently too good for the FDIC.

2/18/2009 9:07:00 PM

Quote :

"Could not be more wrong. The so called largest banks are FDIC insured; as such, there is no need to invent from scratch a new method of handling insolvency. We already have a true and time tested methods. They work (most banks are under FDIC control for a matter of weeks, not months), and more importantly investors understand them and what the outcome will be."

Just, no. You have yet to address what has us in this predicament. Namely, an MBS and CDS monster that the FDIC doesn't have the staff to figure out in the timely manner it does for any ordinary bank seizure. In the mean time, once we have identified the handful of banks that are being seized, the market still shits the bed while everyone waits for the final outcome. Maybe it isn't three weeks but a couple months, which is a helluva lot better than years, but it's clear you are underestimating the complexity of how tightly wound and obscured the system is.

Quote :

"So, no. Wachovia went bust and there was no fallout to speak of."

Are you kidding? They were absorbed by Wells who probably got them for a steal if the government goes all the way through with the backstopping of toxic debt.

Quote :

"today's banks are aparently too good for the FDIC"

I think we eventually see some sort of FDIC like action happen with the banks. But like I said, the suits in DC are trying to tip toe around the minefield that works for all parties. The problem is, some of those parties should have to deal with whatever they are fed, not given a menu of choices to pick from.

2/18/2009 10:59:50 PM

IM FOR BANK NATIONALIZATION!

2/19/2009 10:41:47 AM

I'll post in here.

2/19/2009 11:42:42 AM

If this happened, it would be temp and for a maxium of 4 banks, CIT (for sure) and then BOA...the others probably will pass the "stress test." CIT will flunk it bad and probably BOA. There are only a handful of banks that are "too big to fail".....the other two being Wells and JP...although, they appear to be the healthiest.


I figure out of all of them CIT has the best shot at being nationalized.



[Edited on February 19, 2009 at 12:04 PM. Reason : w]

2/19/2009 11:57:25 AM

^^^That's what I was thinking.

AHA

2/19/2009 12:42:37 PM

i agree with Roubini - we'll be better off following the Swedish model than the Japanese:

http://www.youtube.com/watch?v=uX4P6I-7JTI

2/20/2009 4:45:39 PM

dammit, i was too late with the funner side of the Swedish Model double entendre

2/21/2009 9:44:10 AM

FYI, there seems to be a lot of misconceptions about what exactly the "swedish model" is, or what Sweden actually did.

Here is a conversation with a Swedish politician who was actually making some of the decisions back then and he clears up what actually happened and how it is similar or different to what we are doing.
http://www.npr.org/blogs/money/2009/02/is_sweden_a_good_model.html

Quote :

"Some highlights from the talk (which will come to you in the podcast soon): - The first big bank to collapse, Nordbanken, was already government owned--they had owned it for years. So when it failed it wasn't an issue of the government taking over a private company, it was a bank being rescued by its biggest shareholder, which happened to be the government. - Only one other bank was nationalized, a relatively small one. This is very much unlike the U.S. nationalizing several of the largest banks in the world. - Pagrotsky says Sweden's history of government-managed banking is mixed. Up until the early 1990s crisis, Sweden's government was pretty lousy at managing a bank. In fact, he says, the government's bad management CAUSED the crisis to begin with. But after the mid-1990s and right through today, the government, he says, has done a great job with Nordbanken's successor: Nordia. For what it's worth, Pagrotsky thinks the U.S. should nationalize several of the big U.S. banks. He just doesn't think Sweden is a perfect model for how to do this."

here's an iTunes link for the podcast conversation
http://itunes.apple.com/WebObjects/MZStore.woa/wa/viewPodcast?i=50394743&id=290783428

2/21/2009 10:53:32 AM

Quote :

"we'll be better off following the Swedish model than the Japanese"

I have to agree with mr. economist

2/22/2009 1:25:06 PM

i already shot this thread dead

2/22/2009 6:09:52 PM

Just to reassert myself here

Quote :

"Could not be more wrong. The so called largest banks are FDIC insured; as such, there is no need to invent from scratch a new method of handling insolvency. We already have a true and time tested methods. They work (most banks are under FDIC control for a matter of weeks, not months), and more importantly investors understand them and what the outcome will be. And once it is over everything is back to normal: private banks competing against private banks. So, no. Wachovia went bust and there was no fallout to speak of. That is the beauty of the existing systems; they have worked for so long people don't really notice them. But not now, no, GM and Chrysler are too good for bankruptcy proceedings, and today's banks are aparently too good for the FDIC."

I said this:

Quote :

"Namely, an MBS and CDS monster that the FDIC doesn't have the staff to figure out in the timely manner it does for any ordinary bank seizure."

And now we find this out

http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=alsJZqIFuN3k

Quote :

" March 4 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said the deposit insurance fund could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency. “Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group. "

Let's not fool ourselves here folks. The big money running this country knows they are fucked. They abused their fiefdom right out of business and all that is left is a giant stall tactic so they can extract as much out of the system as they can before it really goes up in flames. On top of that, there is a real fear of an outright world catastrophe and another 50% vaporized from world stock markets near instantly if creative destruction is allowed to happen. No politician wants that on his head. The problem is simply bigger than they are and none of them are man enough to take the strong medicine that needs to be taken, which is some sort of bankrupting, but do they really know how to accommodate that in the proper way? Does anyone?

3/4/2009 9:29:20 AM