Notes from the Left Coast

Drummond Pike’s Blog

There was a most intriguing article in the NY Times Business section last Friday, just below the fold. It recounted the story of what happened in Sweden when they hit a major banking fiasco in the early 90’s. The go-go 1980’s had precipitated the crisis, but their solution – advanced and executed by right of center political leaders – was to nationalize the banks, wiping out the shareholders, and to put the “toxic” assets into what they called the “bad bank” (later named Securum) to hold until economic conditions changed enabling a sale. Portions of this strategy were borrowed from the US when we hit that terrible crisis in the S&L industry in the late 1980’s. Instead of calling it a “bad bank” we called it the RTC (Resolution Trust Corporation). Defunct S&L’s were placed under the control of the RTC, and their assets sold off to bargain-hunters. A very large part of the “bailout” was repaid through these sales. As important, the equity of the risk-taking shareholders of the S&L’s was wiped out.

In the Swedish case, Securum took over nearly $3 bn of assets and ended up repaying the national treasury nearly 60% of what had been invested. Importantly, the creation of the “bad bank” instilled fear among some of the large banks that didn’t want to fall under government control. SEB, one of the larger banks that was controlled by the Wallenberg family, set up their own “bad bank” into which they placed the bad assets, allowing the remaining parts of the bank to recover and thrive. This private bank did the same as the government enterprise and sustained losses, to be sure, but it was done entirely outside of the government’s program.

So far, as Paul Krugman has been arguing, neither the Congress nor the Obama administration has indicated much interest in this alternative, though George Soros and other observers have been increasingly vociferous that this will be a necessary part of a successful intervention. The fear that he and others have is that the more centrist economic appointments (Summers, Geitner, Furman) may not be willing to stare down their friends and colleagues in the financial world and wipe out the shareholders of the likes of Citibank. If they don’t, however, we may end up in the mire for a good deal longer.

Also of interest:
“George Soros on America’s New Engines of Growth” (2:24):