Wednesday, April 2, 2008

Nordic-style welfare for banks?

Today's article from Ambrose Evans-Pritchard of the Telegraph looks at Scandanavian Central Bank's attempt to stem a financial crisis in the early 90's.

If youre not familiar with Evans-Pritchard's work, you can check out his blog here. Always provocative, his longheld stance against the Euro currency is the recurring theme throught most of his writtings.

Fed eyes Nordic-style nationalisation of US

Ambrose Evans-Pritchard, International Business Editor

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
nursed back to health and refloated or merged.
The tough policies contrast with the bail-out of Bear Stearns, where shareholders forced JP Morgan to increase its Fed-led rescue offer from $2to $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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