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Dublin: 1 °C Sunday 23 November, 2014

Nick Leeson: Look to Swedish model of dealing with toxic banks

The former trader has been visiting Sweden – and looking at how their management of a bank crisis contrasts strongly with the Irish government’s treatment of Anglo Irish Bank.

Nick Leeson

AS GOVERNMENT OFFICIALS and the banking hierarchy met in Leinster House in September 2008, they all had several things in common: a blank look, a glazed expression and each was equally bereft of ideas to solve the crisis that was facing them.

Whilst I am sure that the scope of meaningful discussion was far more superficial than many would have wanted, that wasn’t because of malicious intent. It was more to do with the fact that nobody really understood how grave the situation was. The outcome of the meeting was a bank guarantee that settled matters for a while, bought each of those individuals some time and ultimately cleared the way for the nationalisation of Anglo Irish Bank.

We will all be paying for those decisions for many years to come.

I was in Sweden this week and was reminded of how very different the outcome could have been. Sweden right now has a buoyant economy, has tremendous purchasing power and is also home to at least 1,500 Irish people. It is also a country that is no stranger to financial scandal but is also a country that has recovered better than most.

Around the same time that the heated discussions mentioned above were taking place in Dublin, there were very similar discussions taking place in Stockholm.

They had their own problems with a struggling investment bank, Carnegie. Carnegie was a revered trading house and was first started by Scotsman David Carnegie in 1803 and had around 1,100 employees. The bank had suffered a series of serious mistakes, principally related to a lack of controls, and found itself drained of funds, leading to Sweden’s financial regulator to revoke its licence.

“Sound familiar?”

The bank’s demise was caused by a 1 billion kronor (€119 million) write-down against a loan to a borrower who apparently posted collateral that could not be valued. Sound familiar?

Even in its death throes, the bank refused to provide details of the loan which had been on its books since 2004. The Financial Supervisory Authority took their decision because the bank had been taking “exceptional risks for a long time by lending large amounts to one individual client” and that, as far as they were concerned, violated Swedish banking law. The future looked bleak until Carnegie became the first state nationalisation of a bank since a financial crisis of the early 1990s. The similarities between that situation and ours with Anglo are clear.

The Swedish national debt office took control of the bank after it offered up loans of around €501 million to the firm, replacing loans that the central bank had previously provided to keep the bank liquid. Carnegie’s shares were posted as collateral for the debt office loan. In a statement, the debt office stated that the decision had been taken “in order to protect the financial stability and to preserve the value of the collateral”.

Sweden’s centre-right government had taken power in 2006 aiming to sell off large chunks of state assets; the financial turmoil meant that they could not follow their intended manifesto. The Prime Minister told journalists: “We don’t believe that the state should own banks and therefore it should be returned to the market as soon as possible.” The Government had already privatised Absolut Vodka maker Vin and Sprit and sold a number of other holdings but retained a legacy holding in the banking group Nordea from the previous banking crisis: they didn’t want any more like it.

All debt was written off, all shareholders were completely wiped out regardless of their class of equity. A lot of people were upset but there was only one way to resolve the issues. Carnegie was eventually cleaned up, sold off and is now once more again in private hands and no longer a burden to the taxpayer.

Compare and contrast this with what has and will continue to happen with Anglo Irish; there is no comparison!

“They understood the risks”

Ireland limps along trying to pay off loans which are assumed to pay the bondholders. Like investors in Carnegie, they all knew the risks that they were assuming. As bondholders, rather than normal shareholders, the likelihood is that they understood the risks far more clearly.

Some may say that Sweden had more experience, having weathered a previous crisis in the 1990s but I believe even more so that the politicians had the power of their convictions. It’s difficult to say the same in Ireland where the government have been bullied and cajoled along by those that really pull the strings in Europe. While the Irish voted Yes in the EU treaty referendum this year, Sweden continues to be stand strong against those same people. Just this week Swedish Finance Minister Anders Borg said his government will never agree to let taxpayers in the largest Nordic economy bail out “ill-managed” banks elsewhere in Europe.

In his latest attack against Europe’s proposed banking union, Borg called the basic structure proposed for a common European banking framework “unreasonable,” arguing that Sweden won’t accept a model that gives euro members more clout than European Union states outside the currency bloc. The 1,500 Irish in Sweden are best staying put.

Read other columns by Nick Leeson>

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