Lessons from Sweden

I linked last weekend to former Swedish Finance Minister’s Bo Lundgren’s appearance on the Marian Finucane show.

Lundgren also appeared recently before the TARP Congressional Oversight Committee, chaired by Harvard Law Professor Elizabeth Warren and his written testimony was the basis for the section on Sweden in the committee’s latest report. Here’s a webpage containing the written testimony of Lundgren and three other experts on other banking crises (Great Depression, 1980s S&L and 1990’s Japan) who all appeared before the committee at the same time.

The webpage also has full video of this meeting. The experts delivered short verbal testimony (Lundgren’s starts about 14 minutes in) and about 40 minutes in there is a question and answer session. Prof. Warren’s opening line of questioning about arguments against nationalisation was of particular interest to yours truly but the whole session is really useful.

From this material, I take a couple of points from the Swedish experience. First, the Swedes only set up government-run “bad banks” to buy assets from two banks that were fully nationalised, so this is simply not a precedent for the idea of NAMA buying assets from privately-owned banks.

Second, beyond the two Swedish banks that were nationalised, some others took equity capital investment from the government in the form of ordinary shares and the government took its full voting power.

Third, it appears that the Swedes used a very pessimistic approach to valuing distressed assets (Lundgren discusses this about 55 minutes in). Of course, the prices set by the government-run bad banks didn’t matter so much since in these cases the selling bank and the ‘bad bank’ had the same owner.

Fourth, despite the popular myth that the Swedish government made a big profit from its bad banks, Lundgren reports that the expenditure on bank support has “almost been totally recovered.” In other words, they did not make money from the exercise (even when you use simple nominal values, which are not the correct way to assess real economic costs over time). And Lundgren’s calculation of the return for the government includes all the equity that the government holds in one of the nationalised banks that remains in partial state ownership as well as from privatization proceeds.

In other words, the “lesson” that many Irish people have been taught about Sweden—that the government bought property assets at above distressed market prices and then made a profit selling them later—is a very poor description of the reality. Only by nationalizing the two most problematic banks, and thus having an equity stake, did the Swedes limit the downside for the taxpayer.

Finally, in light of the Irish government’s concession that majority public ownership might be necessary for some banks, I found it interesting to read Lundgren’s description of what happened at one such bank: “we later bought the shares that were privately owned in order to manage the problems in the bank more efficiently.”