Hank and the Swedish Model

When the world was about to cave in; when Hank Paulson assured us that the only way to keep the world from caving in was to do what he said, now; when he told us it had to be unreviewable or else-- What he said to be done was this: for the Treasury (meaning us) to buy up the nonperforming assets of the large banks (meaning Hank's friends and colleagues).

Various members of Congress, for various reasons, balked. (Or, as Sarah would say: blinked.) And in reaction: the market tanked.

In that short interregnum, on either side of the Jewish new year, between the vote failed and the vote successful, some people said, maybe Hank's plan isn't the best plan. Among them was the UK's Prime Minister Gordon Brown. Among them were several Doubting Democrats, q.v., Marcy Kaptur (D-OH). Among them was NYU economist Nouriel Roubini, who, because he had been so damnably prescient about so many things, was disregarded. Said Roubini:

Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system.....

In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead - in most cases in which it was used - made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico).

But Paulson said no--he'd rather spend the money to take the bad assets off the books of his pals. He was adamant about it. As he said to the Senate Banking Committee on September 23:

Some said we should just stick capital in the banks, take preferred stock in the banks. That's what you do when you have failure. This is about success.

So Hank got what he wanted (plus another hundred fifty billion or so of inducements to the members of Congess). He had his bank. And then he... sat there. While the market, in reaction to the rescue, tanked and tanked and tanked some more.

So now, several tanks later, Hank seems to have come to his senses. He seems poised to do what he said shouldn't be done. He seems finally to understand that failure's no success at all. As The New York Times reported:

Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the Bush administration has put that idea aside in favor of a new approach that would have the government inject capital directly into the nation's banks -- in effect, partially nationalizing the industry.

Can Hank have seen the light? Is he going to do what must be done? Is he going to do what Sweden, but now also the UK, and, as of this weekend, France and Germany are doing? Is he going to take his Big Pile of Cash and buy us some banks?

Well, almost. Because Hank's no socialist, no. He's willing, after so much tank, to fill his syringe with cash and do some injecting. He's just not willing to do it in a timely fashion. (He could have announced the details today, when the G7 announced its plans. He pointedly did not.) As Chuck Schumer (D-NY) put it this weekend:

''I am hopeful that tomorrow, the Treasury will announce that they're doing it. And they have to do it quickly ... markets are waiting."

What's Hank's hesitation with the Swedish model? Well, Hank's not willing to let us really own the banks we're now injecting that cash into. He emphasized that he'd use our money only to buy "nonvoting shares," and that the Treasury wouldn't tell "healthy" companies what to pay their CEOs, or how to do their business.

In other words: when Warren Buffet gives Goldman Sachs five billion dollars, he gets ten percent guaranteed return, and the option to buy one tenth of the voting shares. When Hank gives firms like Goldman Sachs billions of our money, we get no interest, we get no votes.

That would be too Swedish.

Hank is clearly worried that if he gives our money to his pals, we'll want something in return. That in this diner, we'll point to Warren's plate and say, "I'll have what he's having."

At the end of the day, Hank may realize that the only way to save the world is for us to buy out his pals. Is to listen to those who were right all along, as opposed to those who were wrong-- Or those who got us into this fine mess in the first place.

But Hank, having told us that the world was coming to an immediate end, now takes his time. When pressed, he said

"We are going to do it as soon as possible. We are not wasting time. People are working around the clock."

But in his world, the clocks seem to have no hands. Perhaps, in the end, he prefers to follow the other Swedish model...

...the one where he sits down, and plays chess with Mr. von Sydow.

Comments

[appleknocker]

I wish that the US would emulate Sweden in other respects. In fact, since our ruling class is so fond of outsourcing jobs, maybe they should contract with the Swedes to run our government. But then, everyone would benefit EXCEPT the ruling class. That would never do.

[OutsideLookingIn]

A blog on the main website for lil' ol' New Zealand's main newspaper group included the following paragraphs:

"Mark this point in history down as the time the US ceased to be the world leader. Europe will take confidence from the fact that it found its own solution while the Americans were still sinking in a problem they caused. Other countries, notably those in Asia, will see that America went missing when the big decisions needed to be made. It is a seismic shift."

Earlier it observed: "If the European-led moves to stabilise the banking sector do work, then the name Gordon Brown should go down in history as possibly saving the world from a total meltdown of the whole financial system.

.... he has shown a capacity for clear thinking and articulation that left US Treasury secretary "sheriff" Hank Paulson in the shade.

Paulson's disastrous decision to let Lehman Brothers go under has taken the world to the brink. Brown and Europe might just have come up with a rescue solution. Paulson's name and efforts will go down in history in the worst possible way. Brown should forever be remembered favourably."

Americans, read the whole thing at http://www.stuff.co.nz/4726742a1865.html, ponder your President and weep

[appleknocker]

Great headline!

[gabbinjane]

I certainly hope not!! Wasn't it Lenin who said that if he could control the currency, he would control the country? Scary!

[OutragedMom]

Most of us knew Paulson's 700 billion bailout was a last grab of cash from the Bush administration, meant to go straight into the pockets of their rich banking buddies. Why else did they want it to be non-reviewable and fought the idea of limiting CEO compensation?
So I guess this "sucker" (as our President so classily referred to the economy) went down anyway because Paulson never had any intentional of using the bill passed by Congress.

[larmarch5]

Ha, I thought this was going to be an expose about Paulson having an affair with Angelica Bremert.

[EricPrentis]

Wall Street excesses made the crooks rich, now Americans are paying to bail bankers out, all the while jeopardizing their own retirement. What is ailing the free-markets is there is no confidence in Treasury Secretary Paulson and his other Goldman Sachs" (GS) shills to fairly implement the $700 billion dollar banking bailout. Paulson is a shill for Wall Street bankers and his main goal is to protect Wall Street crooks. Paulson and his GS cronies must go.

[ProfessorDuh]

Hank is going to take the big pile of cash that the poor and the middle class are going to have to pay for and give it to his rich, crooked pals. That's what the Bush Republicans have done all along.

[Yermammy]

Why not! I own own a boat and two labs. A bank would be nice! What do banks eat, by the way? Do they like boats?

[carolinacal]

Hank-
You have the deepest pockets in the world.

Negotiate the best deal for your clients, the American taxpayers.

Then spend the damn money.

[kpayson]

Howard -
Spot on - you agreed in advance with Nobel Prize winner Paul Krugman-
see his column today.
Maybe President Obama should replace Paulson with Paul.

[JPHR]

Paulson as a market fundamentalist/ideologist seems to be unsuited for his job. He still does not seem to be aware that he is supposed to represent the interests of the taxpayer. Only the European example seems to have forced his hand now in the direction of recapitalization by having government taking a stake, but he is still watering that down (nor influence, no seat on the board). The rest of the world is slowly getting angered that the party responsible for this mess does not even take its responsibility.

[funkalicious]

Sweden's tiny economy was recapitalized by US bond kings our crisis is in the CDS CDO CDO^2 and the rest of the alphabet soup quadrillion derivative markets.
Sweden's problem was commercial real estate ours is residential and commercial.. and the Mortgage backed securities that investment banks cut up like confetti and tossed around to banks all over the world. Investment banks made huge on the fees for all of the failed algorithms.
The problem laid out in Roubini's site below is the 62 Trillion in Notional value of the CDS market and the domino effect.. the Lehman value is 8.9 cents on the dollar.. who takes the 58 trillion dollar loss GDP is 13 trillion on a good day our deficit is creeping up to 12 percent of gdp. Baby will be wearing ductape shoes or no shoes at all... six of the top ten counter parties in the CDS market have fallen.

"Lehman was one of the top ten counterparties in the unregulated $62 trillion OTC credit default swap (CDS) market. As Lehman defaults, tens of billions worth of hedges become worthless and can only by renewed with a new counterparty at much higher premiums (i.e. CDS spreads). Moreover, Lehman bondholders will only receive about 10 cents on the dollar in exchange for defaulted Lehman bonds and protection buyers will have a claim on 90 cents on the dollar in the hope that protection sellers will be able to perform."

[jaundicedview]

So Hank got the money he demanded, but dammit, there are strings attached. He did not allow for the possibility that congress might not like the 'no congressional or judicial review' part. He did not anticipate not getting everything he wanted, he has always gotten everything he wanted. So now Hank sits paralyzed.

That's executive material, by golly!

[Svendem]

It's interesting to note that the Swedish bailout was done by a conservative (by their standards) government. Of course, since it's a far more left-leaning country, the people, and their politicians were not horrified or terrified at the idea of the state owning a minority stake in a private business. (For the record, even the Social Democrats there no longer regard state ownership of anything as an ends in itself.) The more controversial policy (at that time) was their (mis)handling of a concurrent monetary crisis - defending an overvalued fixed exchange rate. That policy eventually failed and is almost unanimously regarded as a mistake.

Actually, the term "Swedish model", in Europe and in Swedish itself, usually refers to their welfare system. I don't think they'd ever thought their banking crisis, or its solution, was that noteworthy before. Except for being used a few times by right-wing pundits in the US to illustrate the 'failings' of their welfare state.