Thursday, March 12, 2009

“What we learnt in Sweden is that you cannot solve financial crises by taking a piecemeal approach,”

TO BE NOTED:From the FT:

Insight: US is ready for Swedish lesson on banks

By Gillian Tett

Published: March 12 2009 19:13 | Last updated: March 12 2009 19:13

Next week, Bo Lundgren, the head of Sweden’s debt office who played a central role in resolving his country’s banking mess in the early 1990s, will embark on a striking mission.

Washington’s Congressional Oversight Panel has summoned Mr Lundgren and others to explain how they fixed Sweden’s banks – presumably to glean tips on what Washington should do next.

The Nordic gods might well chuckle at this twist in the global financial saga. As recently as last autumn, the phrase turning “Swedish” was tantamount to an insult among most American politicians (and on Wall Street, the joke currently goes, Swedish models used to only attract attention when they were blonde and leggy). But these days, as the economist Nouriel Roubini recently observed, “we are all Swedes now” – at least in the sense of using state funds to fix the banking mess.

Hence Washington’s sudden invitation to Mr Lundgren and his colleagues. Whether the Americans will actually like the message that Mr Lundgren and others wish to impart, though, remains to be seen. For many Scandinavian observers are distinctly critical about what the US is currently doing with its banks. In Washington, politicians are wrapping themselves in knots about words such as “bail-out”. But to the Swedes that misses the point: the really important issue is not whether state money is used, but how it is dispersed. After all, as Mr Lundgren notes, “the word nationalisation can have many meanings” – and not all are very effective.

Sweden’s own crisis bears this out. When its banking woes first erupted, Stockholm (like the US) initially responded with procrastination and denial. Eventually, however, it nationalised two banks, wiping out the shareholders, and placed toxic assets into a special “bad bank”. That cost the government about SKr60bn-Skr70bn (although much of that sum was later recouped through asset disposals). To some extent, many western governments are copying elements of this approach. The UK and US, for example, have partly nationalised banks such as Citi and Royal Bank of Scotland. But, thus far, the UK and US have not ringfenced bad assets, preferring to urge the banks to deal with them while still on their books (supported with complex guarantee and financing schemes.) Anglo-Saxon governments have also refused to wipe out shareholders in banks such as Citi and RBS, for fear of looking too “socialist”.

To the Swedes, though, this seems intellectually muddled. They have a point. After all, American and British politicians are still trying to exert de facto control over banks, by banning bonuses, directing lending patterns (or, at Citi, blocking an order for a corporate jet). “Sweden is less nationalised than people might think,” chuckles Mr Lundgren, who notes that “socialist” Sweden – ironically – never dared “tell the banks how to lend or where to lend, because that is a management decision!”

But the more serious criticism lies with what is not being done. While Stockholm was nationalising two banks in the early 1990s, it also offered a blanket guarantee to any investor holding any Swedish bank liabilities (except for shares or subordinated debt). These days, that measure is not well known outside Sweden. But many Swedish officials and bankers consider that guarantee to have been the most crucial decision of all.

“To restore confidence it is very important to extend a guarantee to bank creditors,” says Mr Lundgren. “Even if you don’t issue a blanket guarantee, there have to be measures that assure creditors that they will not have to take losses, otherwise you just get more uncertainty . . . and it is very hard to get confidence back and to get stability.”

Thus far, that part of the Swedish package has been shunned. The UK and US have introduced schemes to guarantee some new bank debt, for a fee. But outstanding debt is being treated in a variety of ways. At Bear, creditors were saved, at Lehman Brothers, they were wiped out, while at WaMu the fate of covered bonds was initially unclear. Even today the fate of some Northern Rock debt remains contested. No wonder investors are nervous.

The Americans and British seem unlikely to change this situation soon, since they fear that extending a Swedish-style blanket guarantee would cost too much (or look too “socialist”). That is not surprising. Whereas Sweden had just five banks holding easy-to-analyse toxic property loans, the US has hundreds of banks, with complex, opaque products.

But the grim truth is that, if the financial system keeps melting down, then eventually even the unfathomably large cost of a blanket guarantee might look more palatable than other options. And even before that, there is another crucial point: “What we learnt in Sweden is that you cannot solve financial crises by taking a piecemeal approach,” laments Mr Lundgren, who confesses to feeling deeply worried that “there are still [so many] piecemeal approaches being used”.

It is a message that is needed now more than ever – not least with the G20 meeting looming."

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