can we afford $700 billion in corporate welfare for the financial industry

I’ve spent the weekend without the internet thanks to the innovative new AT&T program Incompetence 2.0, so I’m kind of at a loss as to what’s going on with the economy right now. From what I’ve been able to gather in the last few minutes, it looks as though we, the people of America, are getting ready to bail out our failing financial institutions to the tune of $700 billion. Everyone’s trying to make sense of it. Some are convinced it’s the final stage of a coup to take over our country. Most economists, however, seem to agree that a bail out of some kind is necessary in order keep the world financial markets from spiraling into collapse. The part that I’m struggling with is the hypocricy of it. I don’t like the idea of bailing out the greed-driven investment bankers on Wall Street while doing next to nothing for the hard-working families across America who are losing their homes to foreclosure. One of my favorite quotes to come out of this so far is from Jim Moore, who said, “Taxpayers didn’t get to enjoy any of the big money profits on the phony financial instruments like derivatives or bundled sub-prime paper, but we get the privilege of paying for their debt and failures.”

It’s horribly unfair. We, the American people, aren’t allowed to share in the profits when times are good – no, that would be socialism – but you can bet your hot buttered ass that we’re allowed to contribute toward the clean up… I know that the ramifications of not acting could be catastrophic, but I’m inclined to say “Fuck ‘Em.” I’m tired of bailing out the greedy white men of privilege who sit in power and continually fuck things up, while all the time criticizing the “welfare queens” among us who they perceive as getting rich on their tax dollars. These men should be in prison, but, instead, we’re talking about paying them bonuses for what they’ve done… You did know that, right?

Yeah, as I understand it, a significant portion of the $700 billion would go toward filling the golden parachutes of the men who led Lehman Brothers and others into ruin. Some, like House Financial Services Committee Chairman Barney Frank (D-Mass.), are trying to decouple bonuses from the bail out, but he’s being fought on it. According to Frank, Treasury Secretary Henry Paulson says the bill won’t happen if it doesn’t include big paydays for the men at top. It’s worth pointing out that Paulson, prior to joining the Treasury, was Chairman and Chief Executive Officer of the investment bank Goldman Sachs.

I can see debating whether or not these individuals should serve time in prison, but it’s absolutely beyond me how we can be discussing, even for one minute, whether or not we should pay them hundreds of millions of dollars in bonuses for, at best, failing miserably, and, at worst, acting unethically and putting our entire country in jeopardy… And make no mistake – our country is in jeopardy. The headline of the UK “Telegraph” today is, “Default by the US government is no longer unthinkable.” We are teetering on brink of collapse.

We should be calling for the heads of every man and women serving in Federal government. They knew that this was coming. They knew, as they were working with financial industry lobbyists to slash regulations, that this day would come. How many years ago was it now that Warren Buffet warned us about the “mega-catastrophic risk” we were facing? But, there was profit to be made. The dollars were flowing, and no one gave a shit. And now, now that the money’s not so easy to come by, now that the spigot is tightening and it’s coming time to face the consequences, I guess it’s our job to come to the rescue and make sure their golden parachutes deploy safely, so they can live out the rest of their days in the manner in which they’ve become accustomed. In a more just world, they’d be pleading for their lives, but we’ll make sure they can keep their vacation homes, and that their kids can still go to Harvard Business School. We do, after all, need our generation of leaders, right?

There are lots of articles floating around. Here are a few clips. I’d encourage you to follow the links and read more.

Paul Krugman:

…Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world…

Josh Marshall:

…I’m quite convinced that some drastic action needs to be taken to avoid a cascading and debilitating series of crises. But the more I look at this plan, the more wrongheaded it seems. But if I’m understanding this deal, the taxpayers are going to pony up close to a trillion dollars to take bad debts off the hands of financial institutions who were foolish enough to make the deals in the first place. And in exchange, I think the tax payers get nothing? Sebastian Mallaby makes the good point that this is radically different than the S&L Crisis RTC which was liquidating the assets of thrifts that had already gone belly up — paid the ultimate price, as it were. And as the insurer on the accounts, the government inherited the assets anyway. It was just a matter of selling them off. But here the point is to take these bad debts off these companies’ hands so they can go back to being profitable businesses. This is moral hazard on steroids if I’m understanding this right….

Mulling this more and listening to the insights in your emails, the key clearly is how much the government pays for these distressed assets. They may be bad debts. But that doesn’t mean they have no value at all. Bought at the right prices and given time on the books — which the government is uniquely in a position to allow them to do — the government could even turn a profit on some of them. But the key is at what price they’re bought and whose get bought. That seems like precisely the kind of process that requires oversight and accountability to make sure the taxpayer doesn’t get fleeced…

Sebastian Mallaby:

With truly extraordinary speed, opinion has swung behind the radical idea that the government should commit hundreds of billions in taxpayer money to purchasing dud loans from banks that aren’t actually insolvent. As recently as a week ago, no public official had even mentioned this option. Now the Treasury, the Fed and congressional leaders are promising its enactment within days. The scheme has gone from invisibility to inevitability in the blink of an eye. This is extremely dangerous.

The plan is being marketed under false pretenses. Supporters have invoked the shining success of theResolution Trust Corporation as justification and precedent. But the RTC, which was created in 1989 to clean up the wreckage of the savings-and-loan crisis, bears little resemblance to what is being contemplated now. The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust. This difference raises several questions.

The first is whether the bailout is necessary. In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTC’s job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice. It would spend billions of dollars on the theory that preemption will avert the mass destruction of banks. There are cheaper ways to stabilize the system…

Senator Bernie Sanders:

…Now, having mismanaged the economy for eight years as well as having lied about our situation by continually insisting, “The fundamentals of our economy are strong,” the Bush administration, six weeks before an election, wants the middle class of this country to spend many hundreds of billions on a bailout. The wealthiest people, who have benefited from Bush’s policies and are in the best position to pay, are being asked for no sacrifice at all. This is absurd. This is the most extreme example that I can recall of socialism for the rich and free enterprise for the poor.

In my view, we need to go forward in addressing this financial crisis by insisting on four basic principles:

(1) The people who can best afford to pay and the people who have benefited most from Bush’s economic policies are the people who should provide the funds for the bailout. It would be immoral to ask the middle class, the people whose standard of living has declined under Bush, to pay for this bailout while the rich, once again, avoid their responsibilities. Further, if the government is going to save companies from bankruptcy, the taxpayers of this country should be rewarded for assuming the risk by sharing in the gains that result from this government bailout.

Specifically, to pay for the bailout, which is estimated to cost up to $1 trillion, the government should:

a) Impose a five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers. That would raise more than $300 billion in revenue;

b) Ensure that assets purchased from banks are realistically discounted so companies are not rewarded for their risky behavior and taxpayers can recover the amount they paid for them; and

c) Require that taxpayers receive equity stakes in the bailed-out companies so that the assumption of risk is rewarded when companies’ stock goes up.

(2) There must be a major economic recovery package which puts Americans to work at decent wages. Among many other areas, we can create millions of jobs rebuilding our crumbling infrastructure and moving our country from fossil fuels to energy efficiency and sustainable energy. Further, we must protect working families from the difficult times they are experiencing. We must ensure that every child has health insurance and that every American has access to quality health and dental care, that families can send their children to college, that seniors are not allowed to go without heat in the winter, and that no American goes to bed hungry.

(3) Legislation must be passed which undoes the damage caused by excessive de-regulation. That means reinstalling the regulatory firewalls that were ripped down in 1999. That means re-regulating the energy markets so that we never again see the rampant speculation in oil that helped drive up prices. That means regulating or abolishing various financial instruments that have created the enormous shadow banking system that is at the heart of the collapse of AIG and the financial services meltdown.

(4) We must end the danger posed by companies that are “too big too fail,” that is, companies whose failure would cause systemic harm to the U.S. economy. If a company is too big to fail, it is too big to exist. We need to determine which companies fall in this category and then break them up. Right now, for example, the Bank of America, the nation’s largest depository institution, has absorbed Countrywide, the nation’s largest mortgage lender, and Merrill Lynch, the nation’s largest brokerage house. We should not be trying to solve the current financial crisis by creating even larger, more powerful institutions. Their failure could cause even more harm to the entire economy.

So, how bad is the legislation being pushed by the Treasury? Will it do for finance what the Patriot Act did for privacy? And, what happens if this doesn’t go though? Do things really spiral out of control? Will other industries be sucked down? Do more people lose their homes? Do we give up even more equity in our country to the Chinese and the Saudis? If not, how do we stop the bill from going through? Or, perhaps more appropriately, how do we edit the bill so that it better holds people accountable for their roles, and protects us from having this happen again? Who do we write to? Where do we protest?

[Thanks to Jim and Arun for many of the links.]

[note: It’s worth pointing out that this $700 billion is 7-times what we’d need to enact the Center for American Progress’s Green Recovery Plan we were discussing here a few days ago.]

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28 Comments

  1. Brackache
    Posted September 21, 2008 at 9:22 pm | Permalink

    No.

  2. designated republican
    Posted September 21, 2008 at 11:09 pm | Permalink

    To: The Honorable George W. Bush, President (comments at whitehouse dot gov)

    President Bush,

    Your Treasury Secretary runneth amok sir! I understand the desire for stability in the financial markets, but I would rather the business and political leaders who CREATED the mortgage crisis feel the pain than the American taxpayer. Your administration is acting like a parent who repeatedly bails out their college-age children when they overspend their credit card.

    Take away the credit card, sir – stop the bailout! The CEOs and CFOs and political leaders in Congress who cretaed this mess ought to be arrested and held personally liable for the losses, not bailed out! In the long-term, the bailout will be far worse for our country than the pain of the consequences of such widespread greed and fraud.

    Respectfully submitted,

    /s/

    ps Just now I read that Mr. Paulson believes that the US bailing out foreign banks is “a distinction without a difference!” Has your administration gone mad?

  3. Ol' E Cross
    Posted September 21, 2008 at 11:24 pm | Permalink

    Let the chips fall.

  4. LW
    Posted September 22, 2008 at 9:17 am | Permalink

    But what do we do about it? Do we write to Barney Frank, or to our own Congress person?

  5. Steph
    Posted September 22, 2008 at 9:30 am | Permalink

    Does anyone know how they arrived at the number 700 billion? Did they just pick it out of the air? From what I’ve read, it also looks like Paulson can spend it where he likes with no oversight.

  6. Meta
    Posted September 22, 2008 at 10:03 am | Permalink

    Richard Behan says this isn’t about saving the economy, but those specific companies.

    The Bush administration’s proposal to buy, with taxpayers’ mon-y, $700 billion of toxic liabilities from the corporate financial titans of Wall Street is a fra-d. It is by no means necessary, as Treasury Secretary Henry Paulson claims in the agency’s Fact Sheet, “to promote market stability, and help protect American families and the U.S. economy.”

    It is necessary only to assure the financi-l survival of Wall Street banks and brokerages, the administration’s most loyal supporters and its greatest political contributors — and in large measure the cause of the fin-ncial meltdown the country is facing.

    These financial corporations lobbied ferociously to be free of government regulation. Had they not succeeded, they could not have done what they did next: They created and leveraged trillions of dollars of complex “deriv-tives” — mortg-ge-backed securities, collater-lized debt obligations and credit default swaps — all riding on an unprecedented re-l estate bubble stimulated by their frenzy of creative finance. When the bubble burst, as bubbles do, many of these financial titans faced b-nkruptcy, their obligations far exceeding their as-ets.

    http://www.alternet.org/workplace/99707/

  7. Curt Waugh
    Posted September 22, 2008 at 10:18 am | Permalink

    Is anybody laying any odds yet on this thing passing yet? Are the democrats gonna pull some crap that, if they get their short wish list of giveaways to the little guy, they’ll roll over like a cheap rug (like always)? What’s the over/under here? I want in. (Then I want a bail-out if I lose.)

  8. not one of the cool kids
    Posted September 22, 2008 at 10:46 am | Permalink

    “You can’t handle the truth!”

    My husband blurted that out while we were watching on ABC, This Week with George S.
    Chris Dodd and John Boehner were guests, George was trying to get them to answer the question:

    G: “tell us what will happen if we do not go through with this bail out?”

    Dodd: ” uh uh uh, deep breath, I don’t want to use the language, and I don’t think John does because the language has impact. I will say that when Paulsen ended his explanation about what is happening, well, nothing was said, the air came out of the room. It was startling.”

    George: “Give us that description. What startled you?”

    Boehner: “George you can’t describe on Sunday Morning how ugly it would look if we don’t act”

    George: “why?”

    Dodd and Boehner: “It’s too global, we just can’t”

    Boehner: “This is the most serious crisis that the world has ever dealt with.

    Dodd: “We are going to be talking about this for decades.”

    George pushed a little more and all Dodd would add is to think about things like retirement funds, credit cards, etc, etc, and if those failed.

    So, we don’t even know the truth and these too high ranking finance committee members admitted it on national TV. They admitted that we are stupid and would panic.

    I felt this on CNN, CNBC, MSNBC, NBC – all of them were not telling us the entire story.

    I want this $700 billion to be transparent. I want to know what we are buying. If we don’t get all the truth, we really need to wake up and stand up!

  9. Jim
    Posted September 22, 2008 at 10:47 am | Permalink

    The good news is that even Republicans like Newt Gingrich and Bill Kristol think that this is a bad plan, so maybe the Dems will have the courage to say no. Links to a lot of critical commentary here:
    http://www.dailykos.com/storyonly/2008/9/21/11359/7555/652/605498
    I agree with Curt–the Dems can’t just pretty up this proposal with a little stimulus spending; they need to treat it as DOA, and come up with something very different. It seems to me that Krugman cuts to the heart of the matter in today’s column:
    http://www.nytimes.com/2008/09/22/opinion/22krugman.html?_r=1&ref=opinion&oref=slogin

  10. not one of the cool kids
    Posted September 22, 2008 at 10:51 am | Permalink

    Oh, and I called John Dingell’s office in DC at 9:15 am this morning. I briefly commented that if you give $700 billion away I want it transparent. I also said I want know what has happen to the original FBI investigation started months ago into 16 mortgage lenders, because we can not just blame people that “bought to much house” that is not the real story.

  11. Bing
    Posted September 22, 2008 at 5:28 pm | Permalink

    Can we also make the source of this 700 billion dollars transparent? Seriously, they might as well be using monopoly money at this point. A country pushing 10 trillion dollars in debt is going to offer a 700 billion dollar bail-out package to corporations? How is that possible?

    I finally just watched that Noam Chomsky documentary – filmed 2002 I believe. The line that he kept repeating that stuck with me (paraphrased):

    “It’s astonishing how many educated people can be so disciplined – ie. take a look at everything happening around them and DO NOTHING”

    I’m starting to feel like burying my head in the sand, too, because these problems have spiraled so out of control, it’s hard to understand how we are going to effectively turn this thing around. Greed is a cancer and I believe we’ve been officially diagnosed with a terminal case.

  12. Posted September 22, 2008 at 5:55 pm | Permalink

    The should print the money on transparent paper.

  13. Dirtgrain
    Posted September 22, 2008 at 6:08 pm | Permalink

    Hey, the fifth of November is coming.

  14. Brackache
    Posted September 22, 2008 at 7:50 pm | Permalink

    America needs this coming disaster for character growth.

  15. mark
    Posted September 22, 2008 at 9:01 pm | Permalink

    Best quote so far. I believe it comes form an anonymous lawmaker in DC… “I don’t want to trade a $700 billion dollar giveaway to the most unsympathetic human beings on the planet for a few fucking bridges. I want reforms of the industry, and I want it to be as punitive as possible.

  16. John on Forest
    Posted September 22, 2008 at 10:14 pm | Permalink

    I have to say I don’t understand it one wit. Why the H*** does the government need to put up one dollar, let alone $700B !!!

    Who f’ing cares if a bunch of investment banks fail. I sure don’t.

    Does anyone realize that $700B would build 500,000 windmills, generating 750,000 Mwatts of electricity? Ok, so you’d need transmission lines and other infrastructure to carry all that power, so maybe half the amount would be needed for the infrastructure. That’s still 250,000 windmills: 275,000 megawatts.

    Does anyone know how fast this 700B is going to be spent? Is the bailout going to occur in a few months? Over the next year? Or will it take 5 years?

    Assuming it would occur over then next year, think of having so many power generating windmills built in the same amount of time.!!

    Bottom line: If the US government has that much money to spend, then, why do we have an energy independence problem?????

    That’s 5000 windmills per state. 7,500 megawatts more generating capacity in EACH state of the USA. [Not accounting for differences in wind density…obviously windy states would be the actual states that got the windmills. But all states would benefit from the power.]

    What’s that you say? We don’t have the manufacturing capacity to build that many windmills in a year? OK. How about 25% of the 700Billion for windmills, another 25% for photovoltaics, 25% for switchgrass and algae biofuels, and 25% for geothermal, hydroelectric, and other sources?

    Folks: We are talking about generating ten million new jobs in one year if we spend the $700B this way. Does anyone know how many bankers will be out of a job if we don’t bail them out?? Someone PLEASE tell me this nation doesn’t employ 10,000,000 bankers.

  17. John on Forest
    Posted September 22, 2008 at 10:20 pm | Permalink

    What is the federal debt this year? 400B-500B??

    Does this mean the federal debt is going to soar to $11T-$12T dollars this year????? That is nearly the annual GDP!!

    WHO THE H*** is running our government????

  18. paulg
    Posted September 23, 2008 at 4:30 am | Permalink

    I believe the $700B number derives from the $1 Trillion of mortgage debt that isn’t going to be paid back (the other $300B has already been lost, causing the failures and bailouts we’ve seen up to now).

    Lenders were irresponsible in the sense that they trusted potential home buyers to know their limits, rather than using old-fashioned lending standards based on credit history. The housing bubble led to the change. Since housing prices would keep going up forever, any consumer who did get in trouble could simply sell, pay off the mortgage, and use the remaining profit to remodel the kitchen at the next place. So there was no longer any risk (other than prepayment risk) in lending, thus no real need for standards.

    Also, even conservative banks that otherwise wouldn’t have relaxed their standards couldn’t help but notice the lines stretching down the block at the bank across the street. They all had to get in on it, just as Mercedes, Porsche, and other formerly august car companies had to get in on the SUV craze. The easy money was just too hard to resist.

    I guess one lesson here is that people can’t be trusted to manage their own affairs and a government nanny is most definitely needed. The current mess seems to have been created mostly by ourselves, rather than any corporate entities, though they certainly contributed with their incompetence and herd mentality.

    It occurred to me that that $1 Trillion wasn’t actually “lost”- it just changed hands. This suggests who should pay for the current bailout: everyone who sold real estate during the bubble. :) After all, they’re the ones with the money. If the government taxed 100% of housing-related capital gains taken during the bubble years, the bailout budget would balance perfectly…

  19. not one of the cool kids
    Posted September 23, 2008 at 9:51 am | Permalink

    I just have to say that this trend to blame this all on people that bought to much house is really pissing me off. Go ahead jump on that bandwagon, but many people did NOT buy to much house. Many people simply lost their jobs or their wage did not go up in the last 3 years. It really started in states like Michigan, where jobs started to disappear over 4 years ago! Then add in the crooked mortgage companies. Seriously, I know first hand that they ran many bait and switch operations. I know for a fact that these mortgage companies did not answer their phones when people tried to contact them to try and work something out when they ran into trouble paying a monthly payment. On the answering machine of my contact person at my mortgage company over a year ago I heard this, “This is Mr. X, I am unable to answer my phone, please leave a detailed message with your account number. If you call me back and leave several messages, I WILL NOT CALL YOU BACK.”
    This is the absolute truth!!!!

    I have always felt that someone was making money on these foreclosures…and now they will, because Uncle Sam is going to bale out these crooked Republican run companies.

  20. Brackache
    Posted September 23, 2008 at 2:05 pm | Permalink

    Vastly outnumbered adherants to the school of Austrian (free market) economics have been predicting this shit for years.

    Now that it’s happening, instead of being justly vindicated, comes a chorus of how it’s somehow the fault of free market capitalism, which we haven’t had in this country AT LEAST since the creation of the Federal Reserve.

    This is the fault of Government intervention in the marketplace via the Federal Reserve. If it continues with this bailout bullshit, we may get a temporary postponement of a recession/depression, but it will come back even stronger later because the dollar will be destroyed, more unwise investment will be encouraged, and this whole great tapestry of convoluted fiat credit bubble-blowing will unravel in our faces.

    I look forward to being wrong and having to admit I’m just some idiot who’s watched too many Ron Paul videos on the youtube, but I’m afraid I’m right.

  21. Meta
    Posted September 23, 2008 at 3:00 pm | Permalink

    Some are suggesting that Eliot Spitzer’s take down was connected:

    http://www.brasschecktv.com/page/291.html

  22. Curt Waugh
    Posted September 23, 2008 at 3:17 pm | Permalink

    Brack, I’m right behind you on this one. I’m not a big Ron Paul fan, but what you speak is wisdom.

    Please add to this idea the thought that our government should never have let private any entity get so big that its demise would harm our country. Isn’t that really what the government’s for? What ever happened to busting monopolies? Where is Teddy Roosevelt when you really need him?

    I mean, what’s next? The rise of private armies? That’s never gonna hap…..

    Excuse me, some fine young jackbooted men in Blackwater-embroidered black shirts are knock, knock, knockin’ at my door.

  23. elviscostello
    Posted September 23, 2008 at 3:34 pm | Permalink

    Saw this on the net today. Laughed my ass off, then realized it’s not so far off…for those of you who have received one of those emails…

    Your Urgent Help Needed

    Dear American:

    I need to ask you to support an urgent secret business relationship with a
    transfer of funds of great magnitude.
    I am Ministry of the Treasury of the Republic of America. My country has had
    crisis that has caused the need for large transfer of funds of 800 billion
    dollars US. If you would assist me in this transfer, it would be most
    profitable to you.
    I am working with Mr. Phil Gram, lobbyist for UBS, who will be my
    replacement as Ministry of the Treasury in January. As a Senator, you may
    know him as the leader of the American banking deregulation movement in the
    1990s. This transactin is 100% safe.
    This is a matter of great urgency. We need a blank check. We need the funds
    as quickly as possible. We cannot directly transfer these funds in the names
    of our close friends because we are constantly under surveillance. My family
    lawyer advised me that I should look for a reliable and trustworthy person
    who will act as a next of kin so the funds can be transferred.
    Please reply with all of your bank account, IRA and college fund account
    numbers and those of your children and grandchildren to
    wallstreetbailout@treasury.gov so that we may transfer your commission for
    this transaction. After I receive that information, I will respond with
    detailed information about safeguards that will be used to protect the
    funds.
    Yours Faithfully Minister of Treasury Paulson

  24. dm
    Posted September 23, 2008 at 8:46 pm | Permalink

    “Let the chips fall.”

    Well said OEC.

  25. mark
    Posted September 23, 2008 at 10:23 pm | Permalink

    Americablog has a good idea – if the Republicans want to include CEO bonuses in the bail out package, have them say so publicly, in a vote.

  26. Paw
    Posted September 24, 2008 at 9:09 am | Permalink

    I’m not suggesting that we do it here, but did you see in the news yesterday how the employees of an Indian company beat their boss to death with metal pipes yesterday?

  27. Meta
    Posted September 24, 2008 at 9:14 am | Permalink

    “Stopping a Financial Crisis, the Swedish Way” from the NYTimes:

    Article Tools Sponsored By
    By CARTER DOUGHERTY
    Published: September 22, 2008

    A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?
    Skip to next paragraph
    Swedish National Debt Office

    Bo Lundgren, finance minister during the 1992 crisis.
    Add to Portfolio

    * Federal National Mortgage Association (Fannie Mae)
    * Freddie Mac
    * American International Group

    Go to your Portfolio »

    It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.

    But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

    Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

    That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

    “If I go into a bank,” said Bo Lundgren, who was Sweden’s finance minister at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

    Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

    But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

    The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.

    A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.

    The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.

    Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said.

    The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.

    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. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.

    After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.

    Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

    Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

    Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

    The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.

    “For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”

    By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.

    More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.

    The politics of Sweden’s crisis management were similarly tough-minded, though much quieter.

    Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.

    “The only thing that held back an avalanche was the hope that the system was holding,” said Leif Pagrotzky, a senior member of the opposition at the time. “In public we stuck together 100 percent, but we fought behind the scenes.”

  28. Brackache
    Posted September 28, 2008 at 11:43 pm | Permalink

    The real free market solution.

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