Even the president has been talking about the Swedish solution to the banking crisis, so it’s valuable to read a Swedish insider’s view. Leif Pagrotsky, who held a variety of ministerial posts through the ’90s and early ’00s, writes on Eurointelligence that Sweden may not be a model. I think the headline slightly overstates the case he makes, which is really concerned with some of the different aspects of Sweden to today’s situation. He writes:
Often the Swedish experience of bad banks in the early 1990’s is used as an example of how great this idea is. Some times the lessons derived from our experience are based on misunderstandings of what we actually did, and how our system worked.
Pagrotsky offers five points:
1. A bad bank can a be an effective instrument in the recovery of losses and of the business of banks.
2. Our experience has nothing to do with bonds or similar financial instruments, only with shares in companies used as collateral for credit. But I expect this situation to arise in many countries today as the crisis continues. As the crisis continues more companies will go bankrupt and banks will recall their collateral and take possession of shares in indebted companies. This can take the form of both bad companies as well as healthy companies that have been used as collateral for credits to their owners or for investments in other parts of the group.
3. Government subsidies for private bad banks, or public bad banks to support private banks with toxic assets is a bad way for taxpayers to tranfer money to troubled banks compared to normal capital injections. All subsidies should be transparent, and public/private bad banks are not.
4. Its key to staff bad banks with professional and experienced management who are untainted by prevoius scandals. Our experience is encouraging, it was easier to recruit good people tha we expected, good people wanted to work for this pioneering state-owned bad bank. it was perceived to be a unique challenge to participate in this endeavour in the public interest.
5. Taxpayers economic interest must be the guiding principle, not ideology or political considerations. The public should be in no doubt about this, and their trust is necessary.