Posted on 03/30/2008 9:16:48 PM PDT by bruinbirdman
The US Federal Reserve is examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis.
The Fed has been criticised for its rescue of Bear Stearns, which critics say has degenerated into a taxpayer gift to rich bankers.
A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region's economy to its knees.
It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options.
Scandinavia's bank rescue proved successful and is now a model for central bankers, unlike Japan's drawn-out response, where ailing banks were propped up in a half-public limbo for years.
While the responses varied in each Nordic country, there a was major effort to avoid the sort of "moral hazard" that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems.
Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure.
"We were determined not to get caught in the game we've seen with Bear Stearns where shareholders make money out of the rescue," said one Norwegian adviser.
"The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial," he said.
Stefan Ingves, governor of Sweden's Riksbank, said his country passed an act so it could seize banks where the capital adequacy ratio had fallen below 2pc. Efforts were also made to protect against "blackmail" by shareholders.
Mr Ingves said there were parallels with the US crisis, citing the use of off-balance sheet vehicles to speculate on property. All the Nordic banks were nursed back to health and refloated or merged.
The tough policies contrast with the Fed's bail-out of Bear Stearns, where shareholders forced JP Morgan to increase its Fed-led rescue offer from $2 to $10 a share. Christopher Wood, chief strategist at brokers CLSA, says the Fed's piecemeal approach has led to "appalling moral hazard".
"Shareholders have been able to lobby for a higher share price only because the Fed took over the credit risk on $30bn of the investment bank's dubious paper. The whole affair also amounts to a colossal subsidy for JP Morgan," he said.
Absolut Socialism.
Damn, that’s good!
If this advocated to be in the USA, it will NEVER happen.
"Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure. "
If those "purged" senior management were transfered with benefits to new positions...a deal could be made!
On its surface, this doesn't sound entirely unreasonable. If the entity is worthless and has no way to ever make good on its obligations without a bailout, why should the stock be worth anything?
When you invest in equities, 100% of your capital is at risk. That is the nature of the game.
Shareholders like voters need to start throwing the bums (elites) out aka feckless politicians and management. Lesser of the evils as long as it doesn't effect me thinking is suicide.
Just because an entity is illiquid does not mean it is insolvent. Bear Sterns may have been worth more than $10 per share in an orderly liquidation by the bankruptcy court. Most of those mortgage securities for which there is currently no market are not worthless. Since the government thought it important to avoid the disrupting effect of a bankruptcy proceeding, it would not have been reasonable to expect Bear shareholders to pay the full price of that policy decision. Where true fairness lies is a thoroughly murky subject, not clear cut as this article implies.
I remember when Republicans used to stand for small government solutions.
Doesn't sound too different from the actions taken in the aftermath of the last US real estate bust in the late 1980's/early 1990's when the Resolution Trust Corporation took over control of insolvent American banks.
No one has claimed that the original, pre-crisis value of that basket was $30 billion.
It is entirely possible that the Bear mortgage securities will be worth more than $30 billion in a calmer market, in which case the Fed will actually make a profit on this alleged bailout.
The Fed should have loaned Bear Stearns the money - 0% for the first 12 months, then 6.99% - and if they're a day late, 39%.
Am having a kind of ‘de ja vu’ but it is only the ‘Truman Story’ - and those ‘master manipulations’ I am thinking of. Nonetheless, this all has a strange quality about it. . .
Evans-Pritchard has been edging out to the loony fringe for a while, but this takes the cake.
Maybe under Obama or Clinton. But unimaginable otherwise.
yitbos
“I remember when Republicans used to stand for small government solutions.”
That was a loooooong time ago.
We are soooooo dead!
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/v5SLFncnzYHc.asf
I very much enjoyed this Bloomberg interview with Jim Grant, publisher of Grant’s Interest Rate Observer, who is pretty widely regarded as a most astute observer/commentator on interest rate policy. And, I agree with virtually all he’s saying. For those who care about such things.
And for those who care about such things, I highly recommend listening to Don Coxe’s weekly conf. call here:
http://events.startcast.com/events/199/B0003/#
What has always frightened me so much about Bush is how he turns every crisis into a government power grab. It always takes me back to “1984” and “Brave new world”. Americans keep giving up there freedom in the name of Government is going to fix everything. When in fact Government is destroying everything that America was founded on. Even this current crisis was caused by relaxing rules and regulations for the sake of wall street and bankers. It gave them the chance to create this whole mess. Is the federal government now proposing to ban these types of ponzi get rich quick schemes- No they are not. They just want more power to watch over it. They never used the power they already had. The financial “Geniuses” made all the money from it. They get to laugh as the American tax payer gets to try and bail them out. How far we have fallen.
It...it seems SO LONG ago....sniff.
prisoner6
I echo your sentiments.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.