Fed eyes Nordic-style nationalisation of US banks

[RadioFreeSeaLab]

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/31/cnfed131.xml

The US Federal Reserve is examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis.
The Fed has been criticised for its rescue of Bear Stearns, which critics say has degenerated into a taxpayer gift to rich bankers.

A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region's economy to its knees.

It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options.

Scandinavia's bank rescue proved successful and is now a model for central bankers, unlike Japan's drawn-out response, where ailing banks were propped up in a half-public limbo for years.
While the responses varied in each Nordic country, there a was major effort to avoid the sort of "moral hazard" that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems.

Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure.

"We were determined not to get caught in the game we've seen with Bear Stearns where shareholders make money out of the rescue," said one Norwegian adviser.

"The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial," he said.

Stefan Ingves, governor of Sweden's Riksbank, said his country passed an act so it could seize banks where the capital adequacy ratio had fallen below 2pc. Efforts were also made to protect against "blackmail" by shareholders.

Mr Ingves said there were parallels with the US crisis, citing the use of off-balance sheet vehicles to speculate on property. All the Nordic banks were nursed back to health and refloated or merged.

The tough policies contrast with the Fed's bail-out of Bear Stearns, where shareholders forced JP Morgan to increase its Fed-led rescue offer from $2 to $10 a share. Christopher Wood, chief strategist at brokers CLSA, says the Fed's piecemeal approach has led to "appalling moral hazard".

"Shareholders have been able to lobby for a higher share price only because the Fed took over the credit risk on $30bn of the investment bank's dubious paper. The whole affair also amounts to a colossal subsidy for JP Morgan," he said.

[charby]

Bernanke wrote an article about how the Great Depression could have been prevented by the feds. This is one of the items mentioned in it.

[Balog]

You have a source on that Dasmi? I'd like to know it's not written by Alex Jones et al before I get insanely pissed about it.

[RadioFreeSeaLab]

Oh oops, I forgot to link the source!
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/31/cnfed131.xml

[LAK]

A private bank should never have been given control over our monetary system in the first place. Now they are suggesting gov ownership of other private banks all under the control of what is still a private bank itself? that has been fleecing us all along?

Why don't we just let "the Fed" Chairman sit in the WH and the board can be the cabinet? Just think; it would eliminate this show called national election and save so much time and money. They could then privatize Congress and really streamline the process.

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[Finch]

I guess we have four branches of government now...

[The Annoyed Man]

Well, if these companies are so big that they have to have .gov step in with our $$ and bail them out of their messes, they should be nationalized.  If we, the people, are going to foot the bill, we ought to control the company.

[RadioFreeSeaLab]

Right.  Just like we the people control the government?  We the people don't control a damn thing.  We the people are becoming serfs more and more every day.

[Glock Glockler]

If we, the people, are going to foot the bill, we ought to control the company

Maybe the solution might be to neither foot the bill nor control the company, and simply let the free market deal with things.  Less govt. intervention is needed, not more. 

[RadioFreeSeaLab]

If we, the people, are going to foot the bill, we ought to control the company

Maybe the solution might be to neither foot the bill nor control the company, and simply let the free market deal with things.  Less govt. intervention is needed, not more. 

Damn right.