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Thursday, September 03, 2009

The Swedish bank rescue model and Irish "bad bank' NAMA

From Anglo Irish Bank's Annual Report 2006

The launch of the Irish State "bad bank" NAMA - - the National Assets Management Agency -- to quarantine and absorb toxic property loans valued at about €90 billion - - equivalent to more than half Irish GDP - - from Irish banks, has created controversy because the discount on the loans won't be related to the market value of the underlying secured property but to a range of assumptions of mainly insiders, who will determine what is termed "long-term economic value."

One proposal is that value of loans would be set looking back at property market cycles - - which had averaged seven years in duration - - since 1971.

These cycles have been heavily influenced by periods of reckless public spending and a system of land rezoning that makes land scarce in a country that is 4% urbanised.

On Sept 16th, Minister for Finance Brian Lenihan will provide an outline on how the valuation system will work.

SEE: European Central Bank, NAMA and long-term economic value

The Swedish bank rescue model is often touted in Ireland as a template to use for the Irish bank rescue but loans were not transferred by the Swedish because of the difficulty of valuing them.

US Treasury Secretary Tim Geithner announced a plan to clear toxic assets from US banks' books but the issue of valuation, effectively killed the chicken in the egg.

Nobel laureate Joseph Stiglitz at the time of the launch, was reported to be very unhappy. “‘The Geithner plan is very badly flawed," Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong. He said the US government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said: "Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”

Also last March, Peter Thal Larsen and Chris Giles of the FT, presented a detailed analysis of the model and it is not all it's cracked up to be.

Larsen/Giles wrote: "one of the first things visitors who ask about the 1992 bail-out are told is disconcerting. 'There is nothing Swedish about what people call the Swedish model," says Stefan Ingves, the Riksbank's governor, in his spartan office. Mr Ingves was a finance ministry official in the early 1990s and headed the Bank Support Authority, the agency Sweden set up to resolve its crisis. "What we did was to put the thing together but we did not invent the wheel - we used the knowledge that we could find wherever we could find it in other parts of the world.'"

The writers said: "Contrary to the myth that surrounds the Swedish model, the authorities nationalised only two banks: Nordbanken, which was already state-controlled, and Götabanken. Co-operative and savings banks were merged but other private banks ultimately chose to raise private capital."

Private banks were encouraged to place their bad loans in separate entities. However, in contrast with the recent debate in the US, the authorities never contemplated removing bad assets from those banks.

"There is nothing Swedish about what people call the Swedish model," said Stefan Ingves, governor of the central bank, the Riksbank.

Ingves was a finance ministry official in the early 1990s and headed the Bank Support Authority, the agency Sweden set up to resolve its crisis. "What we did was to put the thing together but we did not invent the wheel - we used the knowledge that we could find wherever we could find it in other parts of the world."

"We refused to buy assets from privately owned banks because it would have been impossible for us to agree on the price and we were never in the business of giving privately held banks subsidies," he said.

Sweden's banking system was relatively small. When Stockholm issued its guarantee, banks' total liabilities represented little more than a year's gross domestic product.

Sweden's kroner was devalued and during the recovery period, the international economic backdrop was positive.

Larsen/Giles write, that if the Swedish experience can provide some pointers for today's stressed-out policymakers, the country's subsequent approach offers a lesson in what not to do.

Having tackled the crisis, the authorities conspicuously failed to put in place longer-term reforms to help avert similar problems in the future. "The regulatory framework we put in place in the early '90s had sunset clauses. So the sun set and that was it," said Ingves. "The politicians felt, 'that won't happen again'," says Staffan Viotti, an adviser to Ingves and adjunct professor at the Stockholm School of Economics.

The FT says that during the recent credit boom, Sweden's banks embarked on another growth spurt, expanding their lending throughout the Nordic region and particularly in the Baltic states, where Swedish lenders account for a large chunk of the banking system.

The following article has links to material on NAMA, Irish house prices since 1970 compared with other developed countries and the corrupt land development system:

Kelly tells High Court Irish property prices are likely to fall back to mid-1990s levels