Stopping a Financial Crisis, the Swedish Way By CARTER DOUGHERTYPublished: September 22, 2008 A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?Swedish National Debt OfficeBo Lundgren, finance minister during the 1992 crisis. It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well. “If I go into a bank,” said Bo Lundgren, who was Sweden’s finance minister at the time, “I’d rather get equity so that there is some upside for the taxpayer.”Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said.The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times.Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.The politics of Sweden’s crisis management were similarly tough-minded, though much quieter.Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.“The only thing that held back an avalanche was the hope that the system was holding,” said Leif Pagrotzky, a senior member of the opposition at the time. “In public we stuck together 100 percent, but we fought behind the scenes.”http://www.nytimes.com/2008/09/23/busin ... ref=slogin
Also at and a good site toboot, is http://ml-implode.com/staticnews/2008-09-24_StoppingaFinancialCrisistheSwedishWay.html
We have no or little soveriengity left, we don't need their help,
G7 nations pledge action to ensure stability
By David Lawder and James Mackenzie Mon Sep 22, 11:32 AM ET
WASHINGTON/PARIS (Reuters) - Group of Seven nations welcomed the $700 billion U.S. markets bailout plan on Monday and said they were prepared to step up international cooperation to protect the world's financial and banking system.
But a day after Treasury Secretary Henry Paulson said he was "aggressively" encouraging other countries to put in place bailout packages of their own, there was little sign other G7 governments were prepared to follow Washington's lead.
"We pledge to enhance international cooperation to address the ongoing challenges in the global economy and world markets and maintain heightened close cooperation between finance ministries, central banks and regulators," the G7 ministers said in a statement following a conference call on Monday lasting 15-20 minutes.
"We are ready to take whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system," they said.
The statement, a few weeks before G7 finance ministers and central bank governors meet in Washington on October 10, follows a tumultuous week that started with the demise of Lehman Brothers and ended with one of the biggest financial rescues in history.
The conference call at 7:30 a.m. EDT, which was convened on Sunday, followed intense telephoning between senior officials over recent days and a preparatory call by deputies to the ministers and central bank governors, a G7 source told Reuters.
The statement said ministers welcomed the "extraordinary actions" taken by Washington to remove illiquid assets that have contaminated banks' balance sheets and fuelled a financial crisis widely seen as the worst since the 1930s.
LITTLE APPETITE
The world's big central banks have already joined in a coordinated move with the U.S. Federal Reserve to pump hundreds of billions of dollars in extra funding into markets to prevent the world financial system from seizing up in a credit freeze.
But there was little appetite to mimic Paulson's scheme to buy up toxic mortgage-related debt from financial firms.
"At the moment, I don't think Japan needs to launch a program similar to that of the United States," Japanese Vice Finance Minister Kazuyuki Sugimoto told reporters in Tokyo, echoing similar comments from France, Britain and Germany.
The European Union also made it clear that it would not be joining a rescue package. EU Monetary Affairs Commissioner Joaquin Almunia told a conference in Slovakia that individual national governments would have to decide on their own.
"It's up to them to consider whether they can follow this initiative," he said.
French President Nicolas Sarkozy, whose country holds the rotating EU presidency, is visiting the United States this week for a United Nations meeting and is expected to talk to U.S. officials about the crisis.
But governments outside the United States have generally been careful to draw a distinction between Wall Street and their own financial institutions.
Canadian Prime Minister Stephen Harper said Canada's financial system had stronger accountability than that of the United States, while France's Economy Minister Christine Lagarde said French banks were better balanced than their U.S. counterparts.
"Everything is affected like all banks in the world but there are no worries over the solidity of these French banks," she told RMC radio on Monday.
http://news.yahoo.com/s/nm/20080922/bs_nm/financials_g7_dc
Iran moves closer to nukes capability
George Jahn, ASSOCIATED PRESSThursday, September 25, 2008
Two years? One? Even less?
Opinions differ on how close Iran may be to developing a nuclear weapon, but concerned governments and experts agree the time to stop Tehran is growing short - and the options are limited.
The time frame is increasingly important because of the possibility that Israel or the United States might opt for a military strike against the Islamic republic if either judged that all diplomatic options to end its nuclear defiance had been exhausted.
AGENCE FRANCE-PRESSE/GETTY IMAGES Iranian President Mahmoud Ahmadinejad (center) and top commanders attend a military parade (below) in Tehran on Sunday to commemorate the 28th anniversary of Iran's 1980-88 war with Iraq. Amid its continuing nuclear standoff with the West, Mr. Ahmadinejad says the country's military will "break the hand" of invaders if attacked.
Also, with Tehran showing no signs of giving up uranium enrichment or heeding other international demands, the diplomatic window is growing increasingly narrow.
That fact gives special significance to a meeting this week of the 35-nation board of the International Atomic Energy Agency (IAEA) and its chief focus of what to do about Iran.
Hard-line Iranian President Mahmoud Ahmadinejad made his annual appearance in New York at the U.N. General Assembly this week, where he told fellow heads of state on Tuesday that Iran has an "inalienable right" to produce nuclear fuel for peaceful purposes.
Mr. Ahmadinejad also appeared to stoke the flames on Sunday, declaring that Iran's military will "break the hand" of anyone targeting his country's nuclear facilities. He spoke during a military parade displaying various types of Iranian-made missiles. Also in the parade was a military truck carrying a huge banner saying, "Israel should be eliminated from the universe" in both English and Farsi.
Iran insists its nuclear activities are geared only toward generating power, but Israel says the Islamic republic could have enough nuclear material to make its first bomb within a year. The European Union warned Wednesday that Iran is nearing the ability to arm a nuclear warhead, but the United States estimates that Tehran is still at least two years away from that stage.
At the low end is physicist and former U.N. nuclear inspector David Albright. He says Tehran could reach weapons capacity in as little as six months through uranium enrichment.
An IAEA report drawn up for the IAEA board meeting says Tehran has increased the number of centrifuges used to process uranium to nearly 4,000 from 3,000 just a few months ago.
Mr. Albright, whose Washington-based Institute for Science and International Security closely tracks suspect secret proliferators, also has been able to extrapolate other information from the report that is less obvious but of at least equal concern.
Iran, he says, has managed to iron out most of the bugs in the intensely complicated process of enrichment that often saw the centrifuges breaking down. The machines, he says, "now appear to be running at approximately 85 percent of their stated target capacity, a significant increase over previous rates."
That, he says means they can produce more enriched uranium faster. Though the IAEA says the machines so far have spewed out only low-enriched material suitable solely for nuclear fuel, producing enough of that can make it easy to "break out" quickly by reprocessing it to weapons-grade uranium suitable for the fissile core of a warhead.
To date, Iran has produced nearly 1,000 pounds of low-enriched uranium, the report says - close to the 1,500-pound minimum Mr. Albright says is needed to produce the 45 to 60 pounds needed for a simple nuclear bomb under optimal conditions.
With Iran's centrifuges running ever more smoothly, it "is progressing toward this capability and can be expected to reach it in six months to two years," Mr. Albright said.
Additional work - making a crude bomb to contain the uranium - would take no more than "several months," he said.
That work could be done secretly and consecutively with the last stages of weapons-grade enrichment. With Iran limiting access of IAEA inspectors to facilities it has declared to the agency, the U.N. nuclear monitor is blindsided in efforts to establish whether such covert atomic work is going on.
Iran's President Mahmoud Ahmadinejad addresses the 63rd session of the United Nations General Assembly at U.N. headquarters in New York Tuesday. He has repeatedly made threats against Israel.
Iran insists it is an innocent victim of U.S. pressure. However, international concern has grown enough to result in three sets of U.N. Security Council sanctions over the past two years. Also, Iranian stonewalling of IAEA inspectors probing claims that it actively tried to modify a missile to carry a nuclear payload and conducted other weapons-related research has added to fears.
The IAEA report prepared for the board meeting starting Monday faulted Iran for blocking efforts to further investigate the suspicions, based on intelligence from the United States and several other IAEA member nations.
Part of the report spoke of what appeared to be drawings and calculations by Iranian engineers on reconfiguring its Shahab-3 missile to be able to carry a nuclear payload.
Iranian officials say the missile has a range of 1,250 miles, enabling a strike on Israel and most of the Middle East.
Such reports stoke Israeli fears and may force the Jewish state's hand.
Beyond veiled warnings from Israeli leaders of a possible last-resort strike, the country is building its capacities with weapons that could spearhead such action.
ASSOCIATED PRESS PHOTOGRAPHS A poster of Iranian supreme leader Ayatollah Ali Khamenei is the backdrop for a missile during a military exhibition in Tehran Tuesday marking the 28th anniversary of the onset of the 1980-88 Iran-Iraq war. Experts differ on how close Iran is to producing a nuclear bomb.
It has purchased 90 F-16I fighter planes, which can carry enough fuel to reach Iran, and it will receive 11 more by the end of next year. It has bought two new Dolphin submarines from Germany reportedly capable of firing nuclear-armed warheads - in addition to the three it already has.
This summer it carried out air maneuvers in the Mediterranean that touched off an international debate over whether they were a "dress rehearsal" for an imminent attack, a stern warning to Iran or a just a way to get allies to step up the pressure on Tehran to stop building nukes.
Former Israeli Deputy Defense Minister Ephraim Sneh told AP on Sunday that "the military option for Israel is the last resort."
Still, those now in power leave no doubt that it remains on the table.
"If Israeli, U.S., or European intelligence gets proof that Iran has succeeded in developing nuclear weapons technology, then Israel will respond in a manner reflecting the existential threat posed by such a weapon," Israeli Deputy Prime Minister Shaul Mofaz said recently.
http://www.washingtontimes.com/news/2008/sep/25/tehrans-threat/
Commentary: Financial meltdown is an absolute disaster
Editor's note: Glenn Beck is on CNN Headline News nightly at 7 and 9 ET and also is host of a conservative national radio talk show.
Glenn Beck says the financial crisis has become severe and a solution is needed right away.
NEW YORK (CNN) -- When I see something on the horizon that I consider serious, all I can do is dive in and do as much homework as my brain can possibly handle.
Then, after I digest the information, I look around for the smartest people I can find and talk to them. And then I e-mail them.
Then I call them at home during their child's fourth birthday party. This is why there's not a long line of people gathering to be my friend (among other things).
Doing my homework and then listening to the best brains from both sides of an issue allows me to crystallize my opinions better than any other method I've tried.
When I first started to truly understand the economy, one of the smartest people I began speaking to was Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University's Stern School of Business.
Right here on CNN.com, after sifting through all of Roubini's "smart guy" language, I attempted to boil down the five levels of economic disaster that we could be facing. Like our military's DEFCON (a one-to-five scale, with one being the most serious), the "DEFCONOMY scale" has been eerily prescient so far. And believe me, this isn't a set of predictions that either Mr. Roubini or I wanted to turn out to be correct.
Back in February when the column was published, I was being called crazy for being too pessimistic. I had become a bit of a dark cloud to be around. No one wants to grab lunch with the guy constantly whining about the sky falling, especially when things seemed to be going generally well.
At the time, most people weren't even sure we were on the DEFCONOMY scale at all. Now, we've clearly raced passed DEFCONOMY 5, 4, and likely 3 as well.
Look at the description of DEFCONOMY 3:
"Some banks begin to crack under the pressure of continuing write-downs and mounting defaults by consumers. A national or large regional bank finally collapses, triggering hedge fund failures and general chaos on Wall Street, potentially leading to a 1987-style market crash.
Odds we get here: Very good. Roubini says that we'll likely socialize the losses, "effectively nationalizing the mortgages or the banks."
Any of that sound familiar? The Wall Street Journal reported that last week, "the market for mortgage-backed securities disappeared" and that the "financial system was behaving like a patient losing blood pressure."
As we threaten to cross into DEFCONOMY 2, the government rushed to bring us into the current bailout debate and stop the bleeding. But it may be too late -- my gut tells me we're already in Defconomy 2, and if true -- the transition to Defconomy 1 may be far quicker than many expect. To show how serious of a situation we are in, Defconomy 1 on Roubini's list is the great depression.
So now that we're here, what do we do? I am massively conflicted about this bailout program. The idea of government stepping in to bail out international banks that were reckless with their own business literally makes my stomach churn. We are privatizing gains and socializing losses.
As George Will wrote this week: "Treasury Secretary Paulson, asked about conservative complaints that his rescue program amounts to socialism, said, essentially: This is not socialism, this is necessary. That non sequitur might be politically necessary, but remember that government control of capital is government control of capitalism."
Unfortunately, he's right. In fact, it would have to take an absolute disaster to make me even consider supporting something like this. Welcome to that absolute disaster.
In the weeks following that DEFCONOMY column, I moved from thinking this meltdown scenario was a frightening possibility to realizing it was a near inevitability.
While it took the people in power far too long to recognize it, they are now understanding the same sad truth. This bailout plan is not a good idea -- it's an absolutely terrible idea. It's just the only idea we have left.
Our financial system is like a 747 flying around with all four of our engines on fire. The bailout effort will not stop us from landing hard, but without it, we may simply drop out of the sky. iReport.com: Will a bailout save us?
What Congress is attempting is a last-second search for an open field to land this plane with as little damage as possible. With that in mind, I think some kind of action may be a necessary evil, but we must be very, very careful.
Action for the sake of action, much like change for the sake of change, doesn't solve problems. It usually inflames them. And what's worse is that it creates brand-new catastrophes we haven't even considered yet. Wall Street and Congress have been playing with fire, and now it's Main Street that's beginning to sweat.
http://www.cnn.com/2008/POLITICS/09/24/beck.bailout/index.html
Well this is not really political, it is just the turth. What a bunch of hypocrites.
Flashback to the 1990s: Origins of the Credit Crisis
It’s one of the hidden success stories of the Clinton era. In the great housing boom of the 1990s, black and Latino homeownership has surged to the highest level ever recorded. The number of African Americans owning their own home is now increasing nearly three times as fast as the number of whites; the number of Latino homeowners is growing nearly five times as fast as that of whites.
In 1992, [a majority Democratic] Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets.
Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected.
The top priority may be to ask more of Fannie Mae and Freddie Mac. The two companies are now required to devote 42% of their portfolios to loans for low- and moderate-income borrowers; HUD, which has the authority to set the targets, is poised to propose an increase this summer. Although Fannie Mae actually has exceeded its target since 1994, it is resisting any hike. It argues that a higher target would only produce more loan defaults by pressuring banks to accept unsafe borrowers.
~LA Times article on May 31, 1999
MP: Government policy turned millions of perfectly good renters into terribly bad homeowners.
http://mjperry.blogspot.com/2008/09/flashback-to-1990s-origins-of-credit.html
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