Reader Scott passed along this article from the Telegraph. Note that earlier this year, a colleague with high-level connections at the Treasury and Fed said that they were looking at a partial nationalization of US banks. The reasoning was that even if they were technically solvent, they would be sufficiently impaired, between writedowns and carrying less than stellar assets on their balance sheets, to prevent them from extending new loans. Thus, this sighting seems a further development along this line of thinking.
From the Telegraph:
The US Federal Reserve is examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis.
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.
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Cannot agree more. No bail outs, no delays, should be the guiding principles. Of course, the top management needs to be purged.
Will it happen? I don’t think so. The reason? This country has had drunk too much anti govt. anti regulation cool aid.
The article is ludicrous. The U.S. has plenty of home-grown experience with nationalizing banks (depositories, not IBs). The Norwegian institutions weren’t IBs. The regulatory regimes for _depositories_ were very different (no deposit insurance in Norway, for example). The US bridge banks and Norway’s nationalizations of depositories have nothing to do with the regulatory void in the US for handling the systemic impact of an IB failure.
What is lacking in the U.S. is law governing IBs deemed to big to fail. I don’t see that anyone in DC, Dem or Rep, is offering legislation in this area. As usual, everyone in DC expostulates on what shouldn’t be done, but nobody is willing to legislate a clear path of action.
LEH comes to market with hat in hadn for another $3 billion. Stock is trading down $1 in pre market but terms are not that onerous 7.5% pref div yield with 40% convert premium. Interesting how management talked about thier susbtantial capital cusion to the tune of $100+ billion chich begs the begs the question on ina incremenatal $3: why?
No one goes to the market now unless they really need the cash…
Looks like they’ve been able to successfully jawbone the market for the past few weeks when perhaps they should have been on life support as well.
“What is lacking in the U.S. is law governing IBs deemed to big to fail.”
What is also sorely lacking is the political will to stop moral hazard dead in its tracks.
“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.”
There’s not a chance in hell this could have happened here at the present time. And that is really appaling.
francois —
When an insured depository institution fails in the US, it’s shareholders are wiped out (they become creditors of the receivership estate). That’s by operation of statute. In exchange for the rents obtained through deposit insurance protections, the equity holders have no say in the timing or disposition of the bankruptcy estate. Right now, we have grotesque moral hazard because the shareholders of IBs have given up nothing in exchange for the rents obtained by access to cheap gov’t funding. Despite the failure of Bear, there is absolutely no movement in Congress to prevent moral hazard with the IBs–which is a good indication of extraordinary financial influence in the political process maquerading as concern for systemic risk.
Anon of 9:29 PM,
One big issue here is that the Fed and Treasury have been pretty dishonest, or at least far less than forthcoming, about why they did what they did.
The Fed had no jurisdiction. They couldn’t declare Bear to be insolvent. They’d have to wait for them to declare bankruptcy. The mechanics of dealing with Bear’s positions via a bankruptcy judge would reportedly be pretty horrific for counterparties. But they have never stated that they were constrained by lack of authority to do a deal through a regulated party that shareholders would approve. And by the Fed not being candid, this can be used as a precedent.
As for Congress, there are hearings on Bear this week, and I wouldn’t rule out Congressional action. This is a turf battle over the power of the purse, and the Fed really has overstepped big time. The Fed has just created a big contingent liability which is likely to result in hard costs down the road. That means its rescue has budgetary implications. Congress is highly likely to rein in the Fed somehow here. And this puts the Fed in an embarrassing position. Either they have to say that Bear was insolvent (which is contrary to what the SEC, Bear’s primary regulator, maintains) or they will have to come up with some excuse. Merely invoking systemic risk and not going further probably won’t wash.
Yves,
I agree with your reply to my comments. But consider the extent of regulatory overhaul that would be necessary for the Fed to (legitimately) act as receiver for a failed IB. What we’re talking about is a level of regulation that I don’t see being discussed in DC (and have no doubt, Schumer and Dodd would quietly help to kill it). I expect to see a lot of grandstanding, posturing and finger-waving at Bernanke, but not a single concrete bit of legislation to do anything differently next time. No one in DC wants a `bridge’ IB, capitalized by taxpayers, with employees earning 7 figures. Won’t happen. Perhaps the most frightening thing about the Bear rescue is that, quite clearly, the Fed and Treasury had no contingency plans. It would seem that such an eventuality was waved away with a, “oh, let’s not think about that”. The upshot is an improvisation, with the Fed as the main actor in order to provide political cover to the Executive Branch. Paulson wasn’t going to sign anything. So what we have is a “let’s bury it in an LLC, with no public disclosure of the kind of crap Bear held on its books”, and absolutely no will to legislate a better and more equitable way.
Steve (for some reason, my Google/Blogger ID isn’t working)
This LEH deal is strange. When you look at the exposures, $14B Alt A, $4 billion subprime, $30 billion commercial real estate and total assets of $700 billion, the deal makes no sense.
Then UBS comes out and is talking $18 billion!!!! And, there may be another $10 behind that! These numbers are huge. Clearly this is beyond the capacity of the Fed and other to control.
Steve,
Your are right that the hearings will be largely grandstanding EXCEPT Congress can and probably will block Bernanke from going out and doing another rescue.
The first comment holds true: we have an enormously well-inculcated anti-regulatory bias here. The train wreck will have to inflict lot more damage before that ideology becomes unpopular. Then we might see some action.
Yves,
I hope you’re right about the result of the hearings. I remain not very sanguine. If Congress merely acts (or threatens to act) to prohibit another Bear-style rescue by the Fed, then, without proposing a positive law to handle things differently, there will be screams of tying the Fed’s hands, endangering the financial system, etc. While I believe that the systemic risks of a Bear bankruptcy were overstated, that’s a distinctly minority view, and I don’t envision our august legislators having the political courage to risk a second Fed-less IB bankruptcy. As with funding for Iraq, lots of sound and fury and nothing more.
Steve
Steve,
I agree I may be too optimistic, but the one thing that may embolden Congress is they know the budget is a complete mess, and it is already going to be tough to scrounge up the dough for the various homeowner bailout programs under consideration. They have no tolerance for Wall Street eating into their available funds.
I also agree the systemic risks were overblown. I bet the real issue was that they didn’t want price discovery on Bear’s holdings.
Force majeure at 2% capital or less is what we need, with stakeholders and senior management Xed out. We will get it in the mid-term if the banking system truly has the crash that seems in process. Public authorities _must_ be able to act before failing institutions hit the zero event horizon.
Despite the profound anti-regulatory bias in the US, don’t think we are so far away from this transition. Congress tends to do what ‘experts’ advise; if the Fed wise men march in formation and say “Give us the tools, or you can chop cotton yourself,” we’ll see movement. So the fact that a Fed vice-chairman is letting his name be attached to the idea tells you how far along we actually are. I’m of the view, expressed before, that most of the larger commercial and ibanks are capital-dead, or will be once asset values force their reality into the discussion. The Fed sees the books of many of them, and knows this: that’s why they are looking for solutions _and_ desperately putting off asset price discovery.
Nationalization must happen if we are to get to the other side of this thing. We need action by Congress to make this happen. Oh, and ‘a massive subsidy to JP Morgan’ is so right. I’m less offended by BSC’s stakeholders forcing their price up—I mean they weren’t declared insolvent, so what else are shareholders gonna do, lie down on the train tracks for the public good?—than I am by Morgan’s exploitation of the Fed’s fecklessness and lack of appropriate tools.
Oops, left my name of the preceding post.
I believe the influence of enormous payola from Wall Street to Congress, both direct and indirect, suffocates any true effort to rectify the “financial crisis” mess. Action by Congress to “do the right thing” is pure fantasy, unless a complete and utter collapse occurs, a la the 1930s.