Sweden had its own banking crisis in 1993 and at that time – Securum – was created. Securum was structured as an Asset Management Company, rather than a bank to give it more flexibility, but the press and media referred to it as a bank and in a lot of cases, as a “Bad Bank”.
A little history first. Nordbanken was a “too big to fail” state owned Swedish bank, which had a lot of toxic assets on its balance sheet and was considered insolvent. These assets were related to – real estate and were a result of a Sweden’s real estate bust.
Securum was created with a capital of $3.3 billion dollars of Government (taxpayer) money at that time, and took over the dud assets of Nordbanken with an aim to free up – Nordbanken to carry out regular banking activities while Securum acted as a specialized company that reorganized these dud or toxic assets, and tried and extracted maximum value out of them for the taxpayers.
When Securum took over the $8.67 billion dollars worth of Nordbanken assets, overnight, it became the largest property owner in Europe. From office space in Atlanta to hotels in UK — Securum – The Bad Bank of Sweden had it all.
It had also made Nordbanken a much healthier bank overnight and over the course of the next year – Nordbanken was successfully privatized.
Securum was hugely successful as it was able to keep the cost of the bail-out below 2% of GDP, and was able to return about 58% of its initial equity back to the government.
Initially, it was estimated that it would take up to 15 years for Securum to take care of all these assets but it took a significantly lower time for it to do its job.
How did Securum work?
First Securum was staffed with real estate agents, brokers and other specialists from the realty space. There were other staffers but since the majority of its assets were related to real estate, Securum had a majority of people from this sector. It had an independent board and an active management that was also staffed with professionals and not bureaucrats.
Once, it was staffed, the next thing it had to do was to value the assets on Nordbanken’s balance sheet and then buy them off from it and manage them.
Those assets were real companies and not complex derivative instruments (like US today). It then went on to classify these companies as ones that were bankrupt or ones that had a chance of operating normally.
About 70% of Securum’s companies were classified as bankrupt, and were forced into liquidation and receivership.
The other companies, ones that were deemed viable – were re-organized and sold off at a later date when their financial health recovered.
This later date was not 10 to 15 years, as it was originally expected, but a much shorter time frame of 5 years. After five years of its existence – Securum was able to perform all that it was expected to do and much more.
An American Securum?
American policy makers are urged to look at the Swedish experience to draw solutions for the current banking crisis. It is true thatÂ this is a very good example of how a banking crisis was solved, but there are some fundamental differences that makes this approach a little difficult to take.
1. In Sweden, taxpayers were at both ends of the table: Nordbanken was a state owned bank and Securum was also a state owned company. Whereas – Â American banks are privately owned. But if the government created a bad bank like Nordbanken – the taxpayers will have to take the tab of the poor decisions made by the private sector and this creates the problem of moral hazard as well.
2. Nordbanken had real assets that were easy to value: It is easier to value a hotel or an office space, than it is – to value a Mortgage Backed Security (MBS) or other such exotic derivative instruments. In some ways it is easier to liquidate real companies or assess their health, than it is to liquidate derivative instruments that form the bulk of the toxic assets today.
3. There was no Global Recession in 1993: The entire world faces the prospects of a deep and protracted recession today and the global economy needs to recover in order for anÂ American Securum to repay anything back to the taxpayers.
The Swedish experience can’t be taken as a template or model solution for the current situation. However, there are many important lessons there like the structure of Securum with an independent board, the swift way in which it acted etc. that can be taken to formulate a solution for the current crisis.