Fed Could Become Stockholder In Banks
RENEE MONTAGNE, Host:
This is Morning Edition from NPR News. I'm Renee Montagne. The U.S. government plans to buy stock in struggling banks to halt the financial crisis. For this beacon of capitalism, even partially nationalizing banks is an extraordinary move. Treasury Secretary Henry Paulson hasn't said yet just how he's going to do this but banking experts say he's drawing inspiration from a similar experiment in Scandinavia. NPR's Frank Langfitt reports.
FRANK LANGFITT: See if this rings a bell.
BO LUNDGREN: The real estate was speculated in and we got a bubble and when the bubble bursts, you have problems in the banks since the loans are not worth as much as beforehand.
LANGFITT: That's Bo Lundgren. He used to be Sweden's minister for fiscal and financial affairs. What he just described sounds a lot like our mess in America. But he's actually talking about his own country in the early 1990's. It was Lundgren's job to fix that problem and he did very much what Secretary Paulson is talking about now.
LUNDGREN: You are on the verge of implanting the Swedish model as far as I see it.
LANGFITT: Very simply, the Swedish model is this. Pump billions of dollars into banks crippled by bad assets, take stock ownership in those banks. Now the banks can lend a lot more and hopefully, begin to unclog credit markets. If the bank does well, Lundgren says the government can sell the stock and make some money.
LUNDGREN: For every amount you put into the bank as equity or otherwise, you will have the same ownership share of the bank, then you're in a strong position to regain because obviously, the bank is going to survive and is going to be worth more. So doing this might be profitable.
LANGFITT: The Swedes put the bad assets into a government-invested holding company. Lundgren says when the market improved the government was able to sell those too. If all of this sounds too good to be true, Lundgren says it was neither easy nor painless. Bank shareholders got creamed. Companies lost tons of real estate.
LUNDGREN: And a lot of people are very angry at me, still they have writings in Sweden on books about how much I made people lose money during this crisis.
LANGFITT: The Swedish economy still went into recession, but most importantly, it avoided financial collapse. Lundgren thinks something like this could work in the United States but it might be more challenging. For one thing, the problem assets in Sweden were bad commercial real estate mortgages. Here, its toxic mortgage backed securities that are more complicated.
LUNDGREN: It was easier to handle since the loans weren't packaged in other instruments and then repacked once again or twice again. We had seven major banks. It's a small economy. It's easier to handle.
LANGFITT: Lundgren won't tell the U.S. how to handle its rescue plan, at least not publicly. Billionaire financier George Soros is less reticent. He's written a new book subtitled The Credit Crisis of 2008 and What It Means. And in today's financial times, he lays out a blueprint for Secretary Paulson. Soros thinks government examiners should figure which banks have enough money in reserve. Those that don't would have to raise more privately or by selling preferred shares to Uncle Sam. When the banks improved, hopefully, Soros says could sell those shares at a higher price.
GEORGE SOROS: Right now, the banking system is disrupted. Prices are at a very low level so putting money in would be actually a very good business for the government.
LANGFITT: But Soros says fixing the banks isn't enough. The government has to address the problem that sparked the crisis - risky lending that turned catastrophic.
SOROS: You have to renegotiate the mortgages, reduce the principal amount so that it doesn't exceed the current market price of the houses. And the mortgage holders have to take that hit.
LANGFITT: Taking a stake in private banks is a big turnaround for the U.S. government. Until recently, Secretary Paulson had opposed it. Soros says it's a move in the right direction and one he hopes will begin to restore confidence.
SOROS: Without this scheme, there would no be recovery in sight and this decline in the stock market would simply gather more momentum and we are right now at a very, very critical moment and it's very important for people to be able to see how we are going to get out of it.
LANGFITT: Up next for the Treasury Department? Explaining exactly how this new plan will work. Frank Langfitt, NPR News, Washington.
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