Sweden’s Financial Bailout Plan: What the U.S. Can Learn From It

In recent history, governments have nationalized banks when the pressures of internationalized financial markets and international competition have made it difficult for them to control and stabilize their finances and currency. During the last couple of decades, countries as different as Mexico, France, Sweden, and Japan carried out partial or more or less complete bank nationalizations to regain control of the financial situation.

In an attempt to overcome the present credit crisis, the U.S. government is using taxpayer’s money to bail out large corporations. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and American International Group, the insurance giant.

Sweden faced a similar crisis in the early 1990s – a banking system in crisis after the collapse of a housing bubble, an economy hemorrhaging jobs, and a market-oriented government struggling to stem the panic.

Sweden was able to overcome the crisis. How did they do it? Can the United States learn something from the Swedish crisis?

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. In 1992, years of imprudent regulation and shortsighted macroeconomic policy left its banking system almost insolvent. The Swedish government not only rescued the banks and financial companies by taking over the bad debts, it successfully extracted equity from the stock holders before writing the rescue checks in an attempt to keep the banks and financial institutions on the hook while returning profits to taxpayers from the sale of distressed assets by granting warrants that turned the government into an owner. The government took a hands-on approach, pumping cash into the banks deemed to only have temporary problems and letting the ones believed to have no prospect of viability go under. Two banks were taken completely over by the state, which in turn offered a blanket guarantee for all creditors, but not for share holders.

Once the crisis was over, the Swedish government sold off nearly all of the nationalized bank investments, getting back most of the money that had been pumped in to rescue the banks.

The Swedish government took over insecure loans during the crisis worth around $9.9 billion of taxpayer money, but eventually got most of it back through dividends and later reselling the nationalized bank assets.

There were proposals in the United States that the government extract equity from the bank for the bailout they receive. But the proposals did not get any serious consideration.

By extracting equity from the banks and financial institutions for the bailout packages, the government could swing the public opinion in its favor. Using taxpayer’s money for bailing out large corporations without offering anything in return is not likely to find much public support. The bailout package appears to favor stock holders without much prospect of the tax payer’s money ever being reimbursed. If the banks survive, the stock holders’ holdings will still be there but the tax payers will have to foot the bill.

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