Monday, September 22, 2008

How Sweden solved its bank crisis

In 1992 - not all that long ago - Sweden had its own banking crisis. Similar causes, similar effects as in the U.S. The government required banks to issue warrants in exchange for taking over bad loans. A warrant is a negotiable security allowing the holder to buy shares in the future at some specified price. The Swedish government, in other words, took an equity interest in the banks. It would have been able to exert pressure on management and sell its shares when the banks recovered.

U.S. Treasury Secretary Hank Paulson proposed to allow the Treasury to buy up to $700 billion of loans. The proposal needs to pass Congress. Democrats seem determined to help "Main Street" (the public, especially investing public, as opposed to "Wall Street", or professional investors) at the same time by inserting miscellaneous other provisions, like allowing bankruptcy judges to modify terms of bad loans and limiting executive compensation. Additionally, the Democrats are rightly concerned about the lack of oversight provisions.

The Bush administration generally cannot be trusted. Also, excessive oversight could limit the Treasury's maneuverability when purchasing securities to stabilize the market. I'd trust Hank Paulson, but I agree in principle that the Treasury needs to report to someone.

Additionally, it seemed odd that early versions of the proposal left out having the Treasury take warrants in the companies it helped. What Sweden did makes perfect sense. Further, the government already did this with AIG. However, Businessweek reports that the Senate and the White House are coming to agreement on some terms, and these include the issuing of warrants.

Meanwhile, the crisis is urgent. I'd prefer that aid to homeowners be debated thoroughly in Congress and put into a later bill.

Now, let's hope the corporate lobbyists don't poison the bill, that homeowners will receive some sort of reasonable aid and most importantly, that the U.S. will learn from this crisis to regulate its banks and monetary policy properly.

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