Investor's Checklist: Banks

The business model of banks can be summed up as the management of three types of risk:  credit, liquidity, and interest rate.

Investors should focus on conservatively run institutions.  They should seek out firms that hold large equity bases relative to competitors and provision conservatively for future loan losses

Different components of banks' income statements can show volatile swings depending on a number of factors such as the interest rate and credit environment.  However, well-run banks should generally show steady net income growth through varying environments.  Investors are well served to seek out firms with a good track record.

Well-run banks focus heavily on matching the duration of assets with the duration of liabilities.  For instance, banks should fund long-term loans with liabilities such as long-term debt or deposits, not short-term funding. Avoid lenders that don't.

Banks have numerous competitive advantages.  They can borrow money at rates lower than even the federal government.  There are large economies of scale in this business derived from having an established distribution network.  the capital-intensive nature of banking deters new competitors.  Customer-switching costs are high, and there are limited barriers to exit money-losing endeavors.

Investors should seek out banks with a strong equity base, consistently solid ROEs and ROAs, and an ability to grow revenues at a steady pace.


Comparing similar banks on a price-to-book measure can be a good way to make sure you're not overpaying for a bank stock.


Ref:  The Five Rules to Successful Stock Investing by Pat Dorsey


Read also:
Investor's Checklist: A Guided Tour of the Market...

Buffett Says U.S. Banks a Class Apart From Europeans

Bloomberg News

By Noah Buhayar, Andrew Frye and Hugh Son on May 05, 2012

 

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Warren Buffett, whose Berkshire Hathaway Inc. (BRK/A) (A) has more than $19 billion invested in U.S. banks, said the lenders have ample liquidity and are a class apart from European rivals.

“I would put European banks and American banks in two very different categories,” Buffett, Berkshire’s chairman and chief executive officer, said today at the firm’s annual meeting in Omaha, Nebraska. “The American banking system is in fine shape. The European system was gasping for air a few months back” before getting assistance from the European Central Bank.

Wells Fargo & Co. (WFC) (WFC) and JPMorgan Chase & Co. posted record profits last year and their CEOs are contesting efforts by U.S. policy makers to strengthen banking regulations. European banks have struggled amid the continent’s sovereign debt crisis and turned to the ECB, starting in December, for extraordinary three-year loans at interest rates of 1 percent.

“I’d like to have a lot of money for three years at 1 percent, but I’m not in trouble,” said Buffett, 81. U.S. banks have “liquidity coming out their ears.”

Berkshire, which Buffett has led for 42 years, is the biggest shareholder of San Francisco-based Wells Fargo, with a more than $12 billion stake. Buffett injected $5 billion into Bank of America Corp. (BAC) (BAC) last year in exchange for preferred stock and warrants. Berkshire’s shareholding of U.S. Bancorp (USB) (USB) was valued at $2.2 billion as of yesterday.

http://www.businessweek.com/news/2012-05-05/buffett-says-u-dot-s-dot-banks-a-class-apart-from-europeans
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US Bail-Out Plan

Graphic of banks’ shrinking market caps

Geithner Warns of ‘Headwinds’ on Road to Recovery

Geithner Warns of ‘Headwinds’ on Road to Recovery


Published: December 10, 2009

WASHINGTON (Reuters) — The United States economy is struggling against “headwinds” that mean the government must retain the ability to respond to unexpected crises, even as it starts to wind down emergency programs, the Treasury secretary, Timothy F. Geithner, said on Thursday.

Geithner Statement to Oversight Panel Testifying before a Congressional panel that oversees the Troubled Asset Relief Program, or TARP, Mr. Geithner took credit for having averted a complete financial disaster but warned against becoming too optimistic about a rebound.

“The financial and economic recovery still faces significant headwinds,” he said, citing high unemployment and home foreclosure rates, tight credit and impaired securitization markets, especially for mortgage-backed securities.

Mr. Geithner laid out a strategy for winding down the bank bailout program but also defended his decision on Wednesday to extend it past a scheduled year-end expiration, until next Oct. 3, as a necessary guard against a sudden economic relapse.

“History suggests that exiting too soon from policies designed to contain a financial crisis can significantly prolong an economic downturn,” he said.

The relief money was approved by Congress last year as a $700 billion program to buy impaired assets from banks but was immediately converted into a fund for the Treasury Department to make capital injections into ailing banks.

Big banks now are eager to exit the program by repaying their bailout money, partly to free themselves from pay restrictions.

Bank of America sent Treasury a $45 billion check on Wednesday to do so. Citicorp also is talking to Treasury about a repayment.

Mr. Geithner said it was “a good thing for the country that banks are eager to get out” of the program but it has to be done with care. “We are not prepared to have this money come back in a way that would leave the system or these institutions without adequate capital to face their challenges ahead.”

Citigroup got $45 billion of relief money last year.

Mr. Geithner said the investments made in banks were returning more money sooner than thought and the next few weeks will bring ”substantial income” from more sales of warrants to buy stock in banks that are repaying bailout money.

He said he was extending the program, on a modified basis, through next October because he did not want a repeat of the situation in which the government potentially faces a crisis without having adequate tools on hand to deal with it.

The Congressional Oversight Panel on Wednesday released its assessment of the program, conceding that while it had helped stabilize the financial system it had not succeeded in bolstering lending.

In addition, the panel said, it failed to resolve the issue of too-big-to-fail financial institutions and created an implicit guarantee that the government would again bail them if necessary.

Mr. Geithner said not all relief investments would be returned.

“There is a significant likelihood that we will not be repaid for the full value of our investments in A.I.G., G.M. and Chrysler,” he said, though some $15 billion more might come back than originally projected


http://www.nytimes.com/2009/12/11/business/economy/11tarp.html?ref=business

U.S. stocks, buoyed by optimism for an economic recovery, are instead poised to fall.

Hedge fund manager Tilson doubled bets vs stocks

Wed Oct 14, 2009 2:35pm EDT

NEW YORK, Oct 14 (Reuters) - Whitney Tilson, manager of hedge fund T2 Partners LLC, said on Wednesday he has doubled his bets that U.S. stocks, buoyed by optimism for an economic recovery, are instead poised to fall.

"We've doubled our short book from 30 percent to 60 percent and we've trimmed our long book from 120 percent to about 90 percent," Tilson said in an interview with Reuters.

Tilson predicted stocks would give back gains even as the Dow Jones Industrial Average .DJI briefly climbed above the psychologically important 10,000 level early Wednesday afternoon -- part of a stunning rebound for markets that were dominated by fear as recently as March.

"Investors have now gone from being too pessimistic to too optimistic in general," he said.

But Tilson said the Dow touching 10,000 does not translate into the real economy. He predicted that banks, particularly small and regional lenders, would be hobbled by loan losses for up to five years.

"Investors are thinking that the losses are going to start to diminish fairly quickly over the next year or two, and our best guess is that losses remain very high for the next couple of years," he said. (Reporting by Jennifer Ablan and Joseph A. Giannone, editing by Leslie Gevirtz)

http://www.reuters.com/article/bankruptcyNews/idUSWEN467420091014

Investors Are Getting Overly Enthusiastic

Wednesday, 16 Sep 2009
Investors Are Getting Overly Enthusiastic, Says Tilson

Posted By:Lee Brodie
Topics:Employment | Housing | Stock Market | Stock Picks
Companies:Berkshire Hathaway Inc. | Regions Financial Corp | Zions Bancorporation


All this week Fast Money is speaking with the handful of investors who saw the Wall Street crisis coming.

Whitney Tilson, the founder of T2 Partners, is widely known for predicting the mortgage meltdown. What does he see down the road from here?

He’s still bearish, very bearish.

"I'm worried that investors are getting overly enthusiastic. They see a couple of month-to-month sequential home price increases, (and they get excited). We saw the exact same thing a year ago. Don't get faked out by the seasonality."



"We think home prices have another year to go before they bottom and that's going to impact any stock that has exposure to the housing sector."

His outlook comes in stark contrast to what we've been hearing from countless market mavens and even Fed Chief Ben Bernanke who all seem to agree the recession is over.

The Wild Card

Although it appears the economy is improving, unemployment is not and Tilson thinks jobs are the wildcard that could derail the whole kit and kiboodle.

When people lose their jobs they’re able to hang on for a while. They may not pay credit cards but try and keep up with the mortgage. But after a while it become impossible to pay the mortgage.

"What happens to underwater homeowners when they're underwater? Do they walk away from their homes if its economically rational to do so?"

Tilson is betting they do.

As a result Tilson predicts that mortgage defaults are about to skyrocket— the same with consumer loans. In fact, the damage Tilson forecasts is kind of scary.

“There are probably going to be $700 billion of losses in total over the next 8 years and we’ve only seen a few billion of it because those loans haven’t reset,” he tells the traders.

Also Tilson fully expects trouble in commercial real estate. In a past interview he told the desk that "the reason it hasn’t suffered badly so far is that they’re dealing with interest only loans with 5 and 10 year re-sets. Borrowers have been able to make interest payments. It’s upon re-set that they probably won’t be able to refinance."

What’s the trade?

I'd look at regional banks. 50% of their assets are in commercial real estate which is just starting to tip over. I'd short the weaker players such as Regions [RF 5.83 0.13 (+2.28%) ] and Zions [ZION 17.23 -1.10 (-6%) ].

And in case you're wondering, Tilson's largest long position is Berkshire Hathaway [BRK.A 100270.00 --- UNCH (0) ].

What do you think? We want to know.



Do you think a massive number of mortgages and consumer loans are about to default because of rising unemployment?

Vote:

1.  Yes, people can't keep up.

2.  No, most people have jobs and that won't change.

http://www.reuters.com/article/bankruptcyNews/idUSWEN467420091014

Stress Test Preview - JPMorgan vs Citigroup

Friday, 24 Apr 2009
David Faber: Stress Test Preview - JPMorgan vs Citigroup

Posted By:CNBC.com
Topics:Nasdaq NYSE Stock Market Stock Options Stock Picks

The banking industry will learn preliminary results of the so-called stress tests today (Friday) — but CNBC's David Faber reports that plenty of questions will remain. (UPDATED: See below.)

"The banks are going to march down there [the NY Fed], and each CFO will be told, 'you've got an A, a B or a C.' But then the next stage, the real questions have to start to be answered," Faber said.

"For instance, how much capital will need to be raised?" Analyst speculation ranges "as high as 7 percent, as low as 3 percent."

Which Banks Are on The Stress Test List?
Faber Report: Regional Banks' Danger Now

And of course, the speculation differs from company to company:

"If you're JPMorgan, you may not need to raise any capital. If you're Goldman Sachs, you may not need to. But if you're Citi, it may be a different story."

And once the numbers are derived, Faber said, "the big question remains: How are you going to do it?"

The stress test methodology will be revealed at approximately 2pm ET.

UPDATE: The Federal Reserve said "most banks" are currently well capitalized but need to hold a "substantial" amount above regulatory requirements in case the recession worsens. “Most banks currently have capital levels well in excess of the amounts needed to be well capitalized," the Fed said in its eagerly awaited report.

See Full CNBC Report
_____________________________

Top TARP Recipients:

JPMorgan Chase
[JPM 32.78 -0.60 (-1.8%) ]

Morgan Stanley
[MS 21.26 -0.70 (-3.19%) ]

Citigroup
[C 3.07 -0.12 (-3.76%) ]

Wells Fargo
[WFC 20.299 -1.101 (-5.14%) ]

Bank of America
[BAC 8.92 -0.18 (-1.98%) ]

_____________________________
Disclaimer
© 2009 CNBC.com

http://www.cnbc.com/id/30388875

US Bank Profits Appear Out of Thin Air

Bank Profits Appear Out of Thin Air

By ANDREW ROSS SORKIN
Published: April 20, 2009

This is starting to feel like amateur hour for aspiring magicians.
Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.
But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.
With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.
Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”
Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.
“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.
Investors reacted by throwing tomatoes. Bank of America’s stock plunged 24 percent, as did other bank stocks. They’ve had enough.
Why can’t anybody read the room here? After all the financial wizardry that got the country — actually, the world — into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.
What’s particularly puzzling is why the banks don’t just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That’s the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.
“If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit,” said Professor Finkelstein of the Tuck School. “And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.’s that populate corner offices?”
But maybe now the banks are simply following the lead of Washington, which keeps trotting out the latest idea for shoring up the financial system.
The latest big idea is the so-called stress test that is being applied to the banks, with results expected at the end of this month.
This is playing to a tough crowd that long ago decided to stop suspending disbelief. If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?
“I can’t think of a single, positive thing to say about the stress test concept — the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at Bankstocks.com, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”
The results of the stress test could lead to calls for capital for some of the banks. Citi is mentioned most often as a candidate for more help, but there could be others.
The expectation, before Monday at least, was that the government would pump new money into the banks that needed it most.
But that was before the government reached into its bag of tricks again. Now Treasury, instead of putting up new money, is considering swapping its preferred shares in these banks for common shares.
The benefit to the bank is that it will have more capital to meet its ratio requirements, and therefore won’t have to pay a 5 percent dividend to the government. In the case of Citi, that would save the bank hundreds of millions of dollars a year.
And — ta da! — it will miraculously stretch taxpayer dollars without spending a penny more.
The latest news on mergers and acquisitions can be found at nytimes.com/dealbook.

This article has been revised to reflect the following correction:
Correction: April 22, 2009 The DealBook column on Tuesday, about accounting changes at large banks that had the effect of improving their quarterly earnings reports, misidentified a professor who was critical of the accounting moves. He is Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth — not Steven Roth.

http://www.nytimes.com/2009/04/21/business/21sorkin.html?em

Banking Industry Showing Signs of a Recovery

Banking Industry Showing Signs of a Recovery

By ERIC DASH
Published: April 16, 2009

Just three short months ago, many of the nation’s biggest banks were on life support.

Related
Times Topics: JPMorgan Chase & Company

Now, a number are showing glimpses of a recovery, aided by a tentative improvement in some corners of the economy and new business picked up from rivals that stumbled in the wake of the financial crisis.

On Thursday, JPMorgan Chase became the latest bank, after Goldman Sachs and Wells Fargo, to announce blockbuster profits in the first quarter. The reports fed a rally in financial stocks that began more than five weeks ago, when Citigroup and Bank of America, two of the banks hit hardest by the crisis, suggested the worst might already be over.

Banks are enjoying a fresh wave of profits from the government’s efforts to nurse the industry back to life. Ultralow interest rates have led flocks of consumers to seek deals on mortgage loans. Investment banking and trading activities are enjoying a bounce from the billions of dollars spent to thaw frozen credit markets. And even before the results of a new health test for the nation’s 19 largest banks are unveiled, those who can flaunt an improvement from their dismal recent performance are quickly trying to free themselves from government money.

But this silver cloud has a dark lining: millions of consumers continue to default on their mortgages, home equity and credit card loans. Corporate loan losses are just starting to pile up. And the residential housing crisis is seeping into commercial real estate with a vengeance: on Thursday, General Growth Properties, one of the nation’s largest mall operators, filed for bankruptcy in one of the biggest such collapses in United States history.

“We are in the eye of the storm,” Gerard Cassidy, a banking analyst at RBC Capital Markets. “The worst is behind us for housing. For commercial real estate and corporate lending, there is still a big dark cloud.”

JPMorgan Chase reported a $2.1 billion profit in the first quarter, besting analysts’ average forecasts. Revenue increased to $25 billion, up 45 percent from $16.9 billion in the period last year.

Still, the results reflected continued turmoil in sectors like credit card services and private equity, businesses that reported losses or steep drops in revenue, reflecting the lingering effects of the recession on consumer spending and the credit markets.

Many banks are preparing for the next rainy stretch, setting aside more money now to cover future loan losses. Regional and community lenders, which are particularly exposed to corporate and real estate loan defaults, are socking away tens of millions of dollars to add to their reserves; big banks like JPMorgan are adding billions. “Times aren’t exactly great as we speak,” Michael J. Cavanagh, the bank’s finance chief, said in a brief interview. “Until home prices stabilize and unemployment peaks, we will continue to be under pressure for losses on our balance sheet.”

As long as interest rates remain low, and the government continues to offer financial support, banks hope to earn enough profit to cushion the blow of some of these looming losses.

The question remains whether the profitability is sustainable if the recession worsens.
Some experts are saying fears of nationalization and bank solvency are subsiding. “What we are recognizing now is that they can produce profits,” Charles Peabody, a financial services analyst at Portales Partners. “The next debate is on the sustainability of those profits.”
With good reason: the banking industry has gotten relief from recent changes to accounting rules, which could inflate earnings.

What’s more, a brief moratorium on home foreclosures during the winter will postpone when some banks book losses on a big swath of soured loans. At the same time, banks have benefited from unusually good trading results and low interest rates, which have propped up the value of their mortgage investments.

The official stress test findings, expected to be released on May 4, may help investors sort out the handful of banks that can generate enough earnings to absorb their losses if the economy worsens. Their conclusions may bear little resemblance to banks’ first-quarter results because the stress test is taking a forward-looking view of the banks’ conditions over the next two years. Quarterly earnings reports, by their nature, look back.

Officials involved in the stress test say they expect the results to show that some banks will need to raise fresh capital. A senior administration official emphasized, however, that those banks would not necessarily need new government money. Besides tapping private investors, banks could derive a major source of capital by converting the preferred stock now held by the government into common shares, as Citigroup intends. The Treasury is likely to rely on individual banks to release their results, and officials said they expected banks that need more capital to immediately announce plans for raising it.

But even ahead of the stress test, investors already appear to be rendering verdicts on which banks will emerge as survivors. Goldman Sachs shares are around $121. Citigroup shares, which fell below $1 in March, are trading at just over $4; Bank of America’s shares have rebounded to above $10.

On Tuesday, Goldman Sachs raised $5 billion of fresh capital in anticipation of repaying the government’s investment.

Jamie Dimon, JPMorgan’s chairman and chief executive, was adamant on Thursday that his company would pay back $25 billion as soon as regulators allowed. “Folks, it has become a scarlet letter,” said Mr. Dimon, referring to the taxpayer infusion the bank received in October. “We could pay it back tomorrow,” he said. “We have the money.”

Mr. Dimon added that his bank did not plan to be a buyer or seller in the Treasury’s public-private partnership program to siphon loss-making investments from banks’ books. “We’re certainly not going to borrow from the federal government because we’ve learned our lesson about that,” Mr. Dimon said.

Stephen Labaton contributed reporting from Washington.

http://www.nytimes.com/2009/04/17/business/17bank.html?em

Who’s Most Indebted? Banks, Not Consumers

Who’s Most Indebted? Banks, Not Consumers

By FLOYD NORRIS
Published: April 3, 2009

FIFTY years after executives at Bank of America had a clever idea — issue credit cards to ordinary consumers — the leveraging of America may finally be over. The amount owed by consumers, in relation to the entire American economy, has started to fall.

Multimedia
Graphic
The Leveraging of America

But it is not consumers whose willingness to take on debt was most notable during the half-century. It is the financial sector itself. The banks that made the loans proved to be much more willing to borrow than their customers, whether corporate or consumer.

And that debt has not begun to recede, despite Wall Street bankruptcies and widespread efforts by financial firms to reduce their own debts.

At the end of 2008, according to the Federal Reserve Board, total debt in the financial sector came to $17.2 trillion, or 121 percent of the size of the gross domestic product of the United States. That was $1 trillion more than a year earlier, when the total came to 115 percent of G.D.P.

Half a century earlier, the financial sector debt was $21 billion, which came to just 6 percent of G.D.P.

Household debt, by contrast, stood at $13.8 trillion at the end of both 2007 and 2008, allowing the debt as a proportion of G.D.P. to fall to 97 percent from 98 percent.

Peter L. Bernstein, an economist and financial historian, drew attention to that trend last month in his publication “Economics and Portfolio Strategy.” He says he thinks households will choose to continue cutting debt even after the economy begins to recover. Even if they want to keep borrowing, he wrote, “The free and easy days of reckless borrowing from 2000 to 2007 are hardly likely to repeat.”

He added that such a decline in debt would reflect “a sustained reduction in the appetite for consumption, which has been the driving force of growth in the economy over the past 15 years or so.” And that, he said, will “be a powerful drag on economic activity for an indefinite period of time.”

Debt levels of nonfinancial businesses rose during a period of high profits earlier in this decade and kept growing last year. The high levels of debt left some companies ill prepared for the combination of recession and tight credit markets that developed in 2007 and 2008.

Government borrowing has soared over the last year and seems likely to continue doing so as the bailouts grow. But over the longer term, the changes have been minimal. In 1958, the total debt of governments, from the federal level down to the smallest town, came to 60 percent of G.D.P. Half a century later, the proportion was just about the same.

Put another way, in 1958, of every $100 in loans in the country, governments accounted for $44 of the borrowing. At the end of last year, government borrowing accounted for only $17 of each $100, while the proportion borrowed by companies and consumers was far higher.

The changes reflect the rapid changes in the American financial system over those years. Not only did consumer credit become much more widely available, as the Bankamericard became Visa and drew competition from other credit cards, but the ways banks financed their loans also changed.

In 1958, 75 percent of financial sector debt was on the books of traditional financial institutions — banks, savings and loans and finance companies. Now the proportion is 18 percent.

Over the half-century, a myriad of financial products and institutions were created to borrow money and own assets, so that one loan to a consumer could create a myriad of debts as it was bundled into a pool that issued securities to buyers that, in turn, borrowed money to finance their purchases. That created a mound of debts that enhanced profits in good times but left financial institutions vulnerable if the value of their assets began to fall.

One of the major questions of the current financial crisis is how many of those innovations will endure and how much they will be changed. It seems likely that the result will be a contraction of financial sector borrowing, but so far that does not show up in the statistics.

Floyd Norris’s blog on finance and economics is at nytimes.com/norris.

http://www.nytimes.com/2009/04/04/business/economy/04charts.html?ref=business

U.S. Lays Out Plan to Buy Up to $1 Trillion in Risky Assets

U.S. Lays Out Plan to Buy Up to $1 Trillion in Risky Assets

Todd Heisler/The New York Times
President Obama met with his economic team, including the Treasury secretary, Timothy F. Geithner, at the White House on Monday.

By BRIAN KNOWLTON and EDMUND L. ANDREWS
Published: March 23, 2009

WASHINGTON — The Obama administration formally presented the latest step in its financial rescue package on Monday, an attempt to draw private investors into partnership with a new federal entity that could eventually buy up to $1 trillion in troubled assets that are weighing down banks and clogging up the credit markets.

Multimedia
Interactive Feature
Tracking the $700 Billion Bailout
Video
Geithner Pushes Bank Rescue Plan, Part 1
Geithner Pushes Bank Rescue Plan, Part 2

Related
The Lede: A Boom in the Financial Metaphor Market (March 23, 2009)
Transcript: Treasury Timothy Geithner’s Press Briefing (March 23, 2009)

The Dow Jones industrial average was up sharply in afternoon trading on Monday, gaining more than 270 points. When the Treasury secretary, Timothy F. Geithner, spoke on Feb. 10 of a bank rescue plan without offering much detail, investors took that as a worrying sign and the Dow fell sharply, losing 380 points.

The Treasury secretary did not deny the uncertainties inherent in the new program on Monday but defended it as a practical approach. “There is no doubt the government is taking a risk,” Mr. Geithner said, “the only question is how best to do it.”

President Obama said later that he and his economic advisers were “very confident” that the program outlined by Mr. Geithner would start to unclog the credit markets.

“It’s not going to happen overnight,” the president said after meeting with his economic team. “There’s still great fragility in the financial systems. But we think that we are moving in the right direction.”

The president also reiterated his pledge “to design the regulatory authorities that are necessary to prevent this kind of systemic crisis from happening again.”
The success or failure of the plan carries not only enormous stakes for the nation’s recovery but certain political risks for Mr. Geithner as well. At least two Republican lawmakers have called for his resignation. And on Sunday, Senator Richard C. Shelby of Alabama, the ranking Republican on the Banking Committee, told Fox News that “if he keeps going down this road, I think that he won’t last long.”

Initially, a new Public-Private Investment Program will provide financing for $500 billion in purchasing power to buy those troubled or toxic assets — which the government refers to more diplomatically as legacy assets — with the potential of expanding later to as much as $1 trillion, according to a fact sheet issued by the Treasury Department.
At the core of the financing package will be $75 billion to $100 billion in capital from the existing financial bailout known as TARP, the Troubled Assets Relief Program, along with the share provided by private investors, which the government hopes will come to 5 percent or more. By leveraging this program through the Federal Deposit Insurance Corporation and the Federal Reserve, huge amounts of bad loans can be acquired.

The private investors would be subsidized but could stand to lose their investments, while the taxpayers could share in prospective profits as the assets are eventually sold, the Treasury said. The administration said that it expected participation from pension funds, insurance companies and other long-term investors.

The plan calls for the government to put up most of the money for buying up troubled assets, and it would give private investors a clearly advantageous deal. In one program, the Treasury would match, one for one, every dollar of equity that private investors invest of their own money in each “Public Private Investment Fund.”

On top of that, the F.D.I.C. — tapping its own credit lines with the Treasury — will lend six dollars for each dollar invested by the Treasury and private investors. If the mortgage pool turns bad and runs big losses, the private investors will be able to walk away from their F.D.I.C. loans and leave the government holding the soured mortgages and the bulk of the losses.

The Treasury Department offered this example to illustrate how the program would work: A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors submit bids. In the example, the top bidder, an investor offering $84, wins and purchases the pool. The F.D.I.C. guarantees loans for $72 of that purchase price. The Treasury then invests in half the $12 equity, using funds from the $700 billion bailout program; the private investor contributes the remaining $6.

An attractive feature of the program is that it will allow the marketplace to establish values for the assets — based, of course, on the auction mechanism that will signal what someone is willing to pay for them — and thus might ease the virtual paralysis that has surrounded those assets up to now.
For a relatively small equity exposure, the private investor thus stands to make a considerable return if prices recover. The government will make a gain as well. In the worst case, the bulk of the risk would fall on the government. The presumption, of course, is that the auction will lead to realistic purchase prices.

One institutional investor said he was surprised that the government was lending so much of the money, saying that private investors have been willing to buy up pools of mortgage-backed securities with less “leverage” or outside borrowing than the Treasury proposed on Monday.
The true magnitude of the toxic-asset purchase program could amount to well over $1 trillion. Buried in Mr. Geithner’s announcement was the detail that the Treasury would sharply revise and expand its joint venture with the Federal Reserve, known as the Term Asset-backed Secure Lending Facility, which was originally created to finance consumer lending and some forms of business lending.

Starting soon, that program will be expanded to finance investors who want to buy existing mortgages and mortgage-backed securities, including commercial real estate mortgages. By allowing the so-called TALF program to buy up older assets, as well as new loans, the Treasury and Fed will be putting nearly an additional $1 trillion on the line — on top of all the money being provided through the F.D.I.C. program and the Treasury partnership programs announced on Monday.

The department defined three basic principles underlying the overall program.

• First, by combining government financing, involving the F.D.I.C. and the Federal Reserve, with private sector investment, “substantial purchasing power will be created, making the most of taxpayer resources,” the fact sheet said.
  
• Second, private investors will share both in the risk and in the potential profits, the Treasury Department said, “with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.”
  
• The third principle is the use of competitive auctions to help set appropriate prices for the assets. “To reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased,” the department said.

By emphasizing that private investors will share in the risk, the Treasury Department seemed to be seeking to reassure ordinary taxpayers that they will not bear the entire downside burden of yet another $1 trillion program.

At the same time, administration officials strove over the weekend to reassure potential investors that they would not be subjected to the sort of pressures, criticism and public outrage that followed reports of multimillion-dollar bonuses to executives of the American International Group.

The Treasury Department defended its approach as a compromise that would avoid the dangers both of being too gradual an approach and of burdening taxpayers with the entire risk.

“Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience,” the department said. “But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases — along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.”

The plan relies on private investors to team with the government to relieve banks of assets tied to loans and mortgage-linked securities of unknown value. There have been virtually no buyers of these assets because of their uncertain risk.

But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations.

Mr. Geithner made it clear on Monday that no limits on executive compensation would be imposed on companies that invest — unless the companies are already subject to such limitations as recipients of TARP money — because the government does not want to discourage investor participation.

Eric Dash and Rachel L. Swarns contributed reporting from Washington, and Andrew Ross Sorkin from New York.

http://www.nytimes.com/2009/03/24/business/economy/24bailout.html?_r=1&hp

US calls on Sweden's "Mr Fix It" Bo Lundgren

US calls on Sweden's "Mr Fix It" Bo Lundgren
The Swedish financial chief known as "Mr Fix It" has been summoned to Washington to advise on how Sweden's model might avert a global banking meltdown.

By Henry Samuel in Stockholm
Last Updated: 11:11AM GMT 20 Mar 2009

US turns to "Mr Fix It" Bo Lundgren, the steely-eyed head of Sweden's National Debt office, played a leading role in averting the collapse of the Swedish banking sector when a property bubble burst in the early 1990s.

Sitting in his office in downtown Stockholm before his trip to Washington, Mr Lundgren chuckled at the Wall Street joke that "Swedish models used to only attract attention if they were blonde and leggy".

Now, US President Barack Obama cites Sweden as a possible model of how best to tackle failing banks. Mr Lundgren, who was fiscal and financial affairs minister at the time of the last crisis, yesterday outlined the Swedish solution to the Congressional Oversight Panel, which supervises the US administration's troubled asset relief programme.

"I am a market liberal. I was even called the nearest Sweden had every come to having a party one could call libertarian," said Mr Lundgren, the former head of the Moderate Party with links to the Conservatives.

This did not stop him nationalising two failing major banks in 1992: the already majority state-owned Nordbanken, and the privately owned Gota bank.

"In the case of a crisis, the state needs to be strong," he said. "If it decides to act, it should become an owner."

After initial hesitation, when the Swedes chose to act they soon reached a broad political consensus.

The first, and in his eyes crucial step Mr Lundgren took was to restore liquidity by issuing a so-called "blanket guarantee" for all non-equity claims on Swedish banks.

This was vital to restore confidence, he said, and is something that has not been done in the US and UK.

It was also crucial not to put a figure on the guarantee, according to Stefan Ingves, the governor of the Riksbank, Sweden's central bank. Mr Ingves was a finance ministry official in the early 1990s and led the Bank Support Authority, created to resolve the crisis.

"If you pick a very low figure, people will say: 'That's not credible, we think the problem's bigger than that.' If you pick a very high figure, then people say: 'Oh gosh, is it that big a problem?'," he said.

The government did not extend its credit guarantee to shareholders of the nationalised banks, who were wiped out.

In the UK, the Royal Bank of Scotland has refused to go this far, but the Swedes insist this acts as a wake-up call to shareholders of troubled but still solvent banks to shape up or ship out. This decision spurred two private banks to raise private capital.

A "stress test" was worked out to determine how bad the problems were in each bank for the coming three years.

Banks were then ranked as healthy or as candidates for nationalisation, and those in between were told to clean up their act or face being taken over by the state.

Next, the toxic assets of the nationalised banks were ring-fenced into two separate bad banks and run by independent asset-management companies. The good assets were placed in a single, merged bank.

As central banks and supervisors "don't do corporate restructuring", the Swedish authorities decided to bring in investment bankers from the private sector to run the corporate finance side of the bad banks' assets. "Huge numbers" of bankers and auditors were flown in from London to do the "daily running of these businesses," said Mr Ingves.

Private banks were also urged to place their non-performing loans in separate bad banks. However, unlike what has been mooted in the US, there was never any question of the authorities buying bad assets from banks that remained in any way privatised. "We refused to do that because we could never agree on the price. If you pay too much it's a giveaway to the shareholders. If you pay very little then the transaction simply won't happen," said Mr Ingves.

Despite calling it a "political value judgment", it is clear he disapproves of countries such as Britain and the US who have committed huge sums to insure bad assets of private or part-private banks.

Once split, the two Swedish bad banks managed to liquidate their assets by 1997 and the state recouped at least half the funds it had made available.

While the process worked back then, the two Swedes recognised that the 1990s crisis, essentially home-grown and involving half a dozen national banks, was very different from the current global meltdown, involving far more banks and complex "packaged and repackaged" assets. Still, the solution remains the same, said Mr Ingves, even if far more co-ordination is today required.

"Clearly, one of the lessons that comes out of all this is that in Europe, the financial integration between countries ran way ahead of the EU's willingness to have a regulatory framework following at the same pace," said Mr Ingves.

The Swedes also expressed concern that other countries' handling of this crisis was still too piecemeal.

"In the US, certainly early on, there was no consistent policy over capital injection and bad assets. Now it's better but there are still too many loose ends," he said.

"To restore confidence you have to show exactly how big the problems are and how you are going to take care of that."

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5019186/US-calls-on-Mr-Fix-It.html

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Nowhere Near End of Crisis: Dr. Doom

Nowhere Near End of Crisis: Dr. Doom
By: Reuters 20 Feb 2009

Nouriel Roubini, one of the few economists who foretold much of the current financial turmoil, Friday said the United States is nowhere near the end of the banking and credit crisis.

"We are still in the third and fourth innings," Roubini told Reuters in an interview, using a baseball analogy to drive home his view that the current cycle is only nearing its midpoint.

"And it's getting worse," said Roubini, a professor at New York University's Stern School of Business and chairman of RGE Monitor, an independent economic research firm.

On Feb. 10, Treasury Secretary Timothy Geithner unveiled his newest bailout plan for banks, including the government's so-called "stress tests" involving all banks with more than $100 billion in capital. Regulators will analyze the banks' books far more closely than previously to see if they have the capital to endure worsening conditions.

"It is the step to form an objective way to decide which banks are illiquid and which ones are insolvent and to take over the insolvent bank," Roubini said. "We have to take over some banks."

Bank of America [BAC 3.79 -0.14 (-3.56%) ] and Citigroup [C 1.95 -0.56 (-22.31%) ] shares plummeted for a sixth straight day Friday, hammered by fears that the U.S. government could nationalize the banks, wiping out shareholders.

Nationalization or receivership of a bank need not be a permanent issue, Roubini added.

"I think of it being a temporary measure -- take them over and clean them up and sell them back to the private sector," Roubini said. "No one is in favor of long-term government ownership of the banking system."

For example, IndyMac was bankrupt and taken over in July.

"Less than six months later the very same group of private investors was willing to buy back the assets and the deposits," he said.

"So it doesn't have to be under government control for years and years. You can do it actually relatively quickly."

All told, Roubini said he sees negative economic growth throughout 2009, predicting that the unemployment rate could reach roughly 10 percent in the next year.

http://www.cnbc.com/id/29301301

Roubini tells Geithner to nationalise US banks

Roubini tells Geithner to nationalise US banks
Tim Geithner must nationalise some of America's biggest banks and take the total toll of the US bail-out to around $2 trillion, according to one of the world's most prominent economists.

By James Quinn Wall Street Correspondent
Last Updated: 1:12AM GMT 16 Feb 2009

Nouriel Roubini – the man feted with having foreseen the financial crisis before almost any of his peers – has warned that the US Treasury Secretary must go significantly further than his detail-light bail-out plan delivered last week, and argues that the Obama administration should move swiftly to take public ownership of those major US banks which are failing.

Professor Roubini, who worked with Mr Geithner in the Clinton administration, told The Daily Telegraph: "Many US banks are insolvent, even the major ones." While nationalisation is "a politically- charged decision" which needs to handled carefully, he said it needs to take place "sooner rather than later" for the sake of the wider economy.

Professor Roubini calculated that, on top of the existing $700bn (£491bn) of American taxpayers' money allocated to solving the banking crisis, Mr Geithner may need to ask the US Congress for between $1,000bn and $1,250bn in extra funds. "Sooner rather than later, they'll need more money," he added.

Prof Roubini, professor of economics and international business at NYU Stern, New York University's business school, is highly critical of Mr Geithner's bail-out plan, which he unveiled to much market chagrin last Tuesday.

The New York-based academic believes that although his former boss (the two worked together when Mr Geithner was under-secretary of international affairs at the Treasury in the dying days of the Clinton era) is moving in the right direction, he is either unwilling or unable to be direct enough when it comes to taking the tough decisions.

Prof Roubini also has some stern advice for the British government, itself facing yet another banking crisis this week as it considers whether to increase its ownership of Lloyds Banking Group.

"In the UK, the government has taken over those banks in distress through a number of measures. But the question now is whether they want to go from de facto ownership to de jure?

"It's necessary and I think that's the way we're going in the UK," he continues, saying he would be "supportive" of such a decision. Politicians "might not want it," he adds "but it is strong in action," before going on to explain that it is better for markets that governments nationalise banks quickly, resolve problems whilst in public ownership, before returning them to the market.

Prof Roubini argues that the UK is very similar to the US in terms of its economic position due to its analogous problems – both suffered housing and consumer credit bubbles – but is even more concerned about Germany, which produced dismal gross domestic product figures at the end of last week.

"Germany did not have the same excesses as the UK, but even the German banks had significant exposure to other types of excesses in lending, and they're weak," he says.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4634398/Roubini-tells-Geithner-to-nationalise-US-banks.html

Nouriel Roubini trusts Timothy Geithner to get it right on US banks

Nouriel Roubini trusts Timothy Geithner to get it right on US banks
Nouriel Roubini can see that the 'N' word might be a little difficult for Western governments to swallow right now. But for him, it's the right – indeed, the only – route to follow.

By James Quinn, Wall Street Correspondent
Last Updated: 2:34PM GMT 16 Feb 2009

Nouriel Roubini predicted the current financial crisis and now argues that many US banks should be nationalised
The "N" word, of course, is nationalisation: nationalisation of failing banks which are continuing to wreak havoc on the world's economies.

"Many US banks are insolvent, even the major ones," argues Roubini, professor of economics and international business at NYU Stern, New York University's business school, without naming names. "Call it nationalisation, or if you don't like the dirty N-word, use 'receivership' or whatever is palatable."

Call it what you want, says Roubini, but without nationalisation of some of the major banks in both the US and the UK, the banking crisis will get worse and the current recession deepen.

"If the problem of banks is one of liquidity, you can do anything you like, which seems to me what the US Treasury wants to do," he says, with reference to US Treasury Secretary Tim Geithner's slightly-fumbled banking bail-out plan launched last week to much disregard from Wall Street.

"But if the banks are insolvent, none of these will work," says Roubini of Geithner's three-part plan which includes stress-testing major banks to see if they need more public capital.

"To see which banks are insolvent, a stress test is a step to making these tough decisions," he says, tough decisions which are so politically charged that they need to be "done right" due to the number of stakeholders involved who face being wiped out if nationalisation were to occur.

"Triage the banks that are solvent but illiquid, and those that are beyond redemption need to be nationalised. But it's urgent to do it sooner rather than later. Let's not wait another 12 months."

Roubini, one of the world's foremost experts on the current banking crisis, argues that until now, the US government, like many of its European counterparts, has been busy "trying to provide manna to everyone" without actually working out who needs what.

So why, given that Geithner appears to know some of what is needed, does Roubini think he didn't go the whole hog last Tuesday?

"The benevolent view of what they've done is realise the problem, but maybe not go as far as they might like to. A month into the [Obama] administration, saying "we're going to take over most of the US banks" because they're insolvent - that might lead to being accused of being Bolshevik," he surmises.

The second reason Geithner may have held back, Roubini adds, is that perhaps he and the rest of Obama's economic team – including senior adviser Larry Summers and chairman of the White House Council of Economic Advisers Christina Romer – were banking on the economy recovering somewhat later in the year, which might lead to less stress being placed on bank assets. "A sense of cautiousness, perhaps?" he says.

Based on Roubini's forecast for the US economy, such caution is perhaps a little unwise.

He estimates that a "broad recession" – will continue well into next year, with some form of recovery into 2011. But even that is not certain, he argues, saying there is a "risk" that the current recession does not create a U-shaped curve as the majority do, but that the US ends up like Japan of the 1990's with "nasty L-shape stagnation."

"In a banking crisis, some banks are so under-capitalised that they might as well just take them over," he argues, pointing out that often it is better from a capitalist-friendly perspective to take them over, clean them up in public ownership, and sell them off again, than it is to leave them flailing for help on the open market.

Roubini, who turns 50 in March, makes his comments with a degree of inside knowledge. Although he is no way connected to the Obama administration – and is an independent economist whose only commercial tie is as chairman of economic analysis firm RGE Monitor – he did work with Geithner at the tail-end of the Clinton administration.

When Geithner was promoted to under-secretary for international affairs, Roubini became his adviser, working together for just under a year.

"I trust him," he says, despite acknowledging that he may not quite have got his ducks in a row yet. "He's someone I know well and I have great respect for him."

Why then did Geithner get it so wrong, with his ill-timed and ill-structured banking bail-out which was in many ways smothered by the ongoing debate on the now-passed $787bn fiscal stimulus package?

"You cannot blame him," says Roubini, pointing out that he's facing the "worst economic crisis since the Great Depression" and also that he is just one of a number of high-level economic advisers working under Obama. Although he does concede that his old boss could have waited for a few weeks to "get it right."

Getting it right, in Roubini's eyes of course, means nationalisation, which will invariably involve Geithner returning to the US Congress for additional funds on top of the existing $700bn bail-out fund. "Sooner rather than later, they'll need more money," estimating that $1 trillion to $1.25 trillion of extra money needs to be injected in to the US financial system to revive it, having previously warned that credit losses from US institutions will total $3.6 trillion by the time the crisis is over.

"If you do it fast, you will get private money. But if you take time, and mix good apples with bad apples, then private investors won't want to get involved," he warns.

Aware that going back to the US Congress for an extra $1 trillion of taxpayer's money will be a hard sell for Geithner, Roubini stresses that sum would not necessarily be the final cost. "That's not necessarily the total loss for the taxpayer, as the net costs are less than the headline number due to interest payments and the hope that most of the capital will be repaid."

"They'll get to that point, it's just a matter of when," shrugs Roubini, who, nationalisation or not, will no doubt be watching the actions of his former boss with keen interest.


http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4639504/Nouriel-Roubini-trusts-Timothy-Geithner-to-get-it-right-on-US-banks.html

Government thwarts lending, banks claim

Posted on Tue, Feb. 03, 2009

Government thwarts lending, banks claim
Comments (1) Recommend (1)
BY STEVENSON JACOBS
Associated Press

NEW YORK - Banks that are being scolded by the government for not lending are blaming a new obstacle: the government itself.

Fearing more bank failures, federal regulators are forcing institutions to hold more money in reserve and scrutinizing loans. But bank executives complain that the extra oversight thwarts their ability to quickly pump billions of bailout dollars into the ailing economy.

Banks say they are caught in a frustrating Catch-22: How can they make more loans when creditworthy borrowers are scarce, their balance sheets are saddled with bad debt and regulators are hounding them to horde cash?

"We want to lend, but the regulators are flat-out telling us, 'Get your capital up.' Then there's Congress telling you to lend it all out," said Greg Melvin, a board member at FNB, a Hermitage, Pa.-based bank that got $100 million in bailout money.

"Two arms of the government are saying exactly the opposite thing -- it's ridiculous," added Melvin, who is also chief investment officer at investment firm C.S. McKee.

Regulators say they are only being careful, and they deny slowing lending.

"We don't believe that prudence and increased lending are mutually exclusive -- they go hand in hand," said Andrew Gray, a spokesman for the Federal Deposit Insurance Corp.

The tit-for-tat marks the latest problem for the government's financial bailout, known as the Troubled Asset Relief Program, or TARP.

The government rolled out the $700 billion bailout late last year, hoping that injecting money into banks would expand lending and ease the credit crisis. But in a survey released Monday, the Federal Reserve said many banks are making it harder to get credit cards, mortgages and other loans.

Regulators have long required banks to keep a minimum level of capital on their books to stay in business. It was typically a figure equal to 10 percent of assets.

But as the financial crisis has worsened, many banks say they have been told to keep capital equal to at least 12 percent of assets. At the same time, regulators are combing through banks' loan applications and flagging those considered too risky.

It's unclear how broadly the stricter rules are being applied. But interviews with bank executives indicate that healthy and troubled banks are facing more stringent oversight, regardless of whether they have received bailout money.

The goal is to keep banks from getting into more trouble. But to comply, some banks say they have little choice but to scale back lending -- sometimes even to creditworthy borrowers.

Four government regulators oversee the country's roughly 8,500 federally insured banks and thrifts: the FDIC, the Office of Thrift Supervision, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

Regulators shut down 25 banks last year and closed three so far this year because their capital levels fell too low. Meanwhile, regulators have ordered several banks to stop lending until they get more capital.

But the credit crisis has made it harder for banks to raise private capital. And the government doesn't want to give bailout money to banks that might later fail.

The harsh climate has taken a toll on banks such as Los Angeles-based First Federal Bank of California. It was forced to halt lending last month after its regulator, the Office of Thrift Supervision, said it needed more cash to absorb future losses on adjustable-rate mortgages.

Chief executive Babette Heimbuch said her bank wanted to keep lending but had a "difference of opinion" with the OTS over what its cumulative losses were and how quickly it will see them.

"They basically told us to stop lending," she said.

While the Treasury wants banks to lend, "the regulators have a whole different mind-set: They want to protect the insurance funds," Heimbuch said, referring to money that regulators use to insure bank deposits.

Regulators see things differently.

William Ruberry, a spokesman for the OTS, said its No. 1 mission is to safeguard the institutions it oversees. He denied that such efforts were slowing lending.

"We want our institutions to lend, but we want them to lend in a safe and sound way," Ruberry said. "We think creditworthy borrowers shouldn't have a hard time finding loans."

http://www.kansas.com/business/banking/story/686222.html

All Big US Banks Must Go to Fix Crisis: Economist

All Big US Banks Must Go to Fix Crisis: Economist
By: Kim Khan 30 Jan 2009 12:55 PM ET

The creation of a government bad bank to buy toxic assets is necessary, but then the government will need to take control of and restructure major banks to fix the system, one economist at the World Economic Forum in Davos told CNBC.com.
"They have to do a bad bank," Harvard Economics Professor Ken Rogoff said. But "if that's all they do then it's idiotic."
Institutions like Citi and Bank of America will have to go, boards will have to be fired and equity stakeholders will be wiped out, Rogoff said.
The plan could mirror the one Sweden implemented, where all troubled banks were nationalized, their balance sheets were cleaned up and the good parts of the businesses were sold to the private sector.
That solution was "much cleaner," he said.
Sweden’s banks were effectively bankrupt in the early 1990s, but the government pulled off a rapid recovery that actually helped taxpayers make money in the long run.

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The government placed banks with troubled assets into a so-called bad bank, where they could be held and then sold when market and economic conditions improved.
In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending, but wiped shareholders out in the process.
Officials from the Obama administration are holding around the clock meetings with senior Wall Street executives on how to create a new government bank to buy bad assets from major financial firms.
However, people with direct knowledge of the talks tell CNBC there is no consensus on how such an entity would work or whether a plan could materialize any time soon or possibly ever.

Jobs Won't Come Back this Year
Looking to the overall economy, it unlikely the job market will improve this year, Rogoff told CNBC.
"I'm afraid unemployment is going to keep rising until at least 2010," he said.
The US is in "a very deep financial recession" and in those situations unemployment rises for almost five years, he added.
US housing and jobless claims data on Thursday showed there was no end in sight for the gloomy economy, while Japan's industrial outlook plunged by a record pace in December, contributing to the bleak picture of the world slowdown.

Baccardax: Bad Banks Are Good ... Aren't They?
© 2009 CNBC.com

http://www.cnbc.com/id/28928650?__source=yahoorelatedstorytext&par=yahoo