The 'bad Bank' That Came Good

Bo Lundgren, head of Sweden's national debt office, the Riksgälden, has been touring the US telling policymakers how to mount a successful banking bail-out without hurting taxpayers.

He should know. In the early 1990s he was finance minister when the Swedish economy went into a tailspin, contracting 4% as a lending and property bubble prompted by deregulation burst.

Five of the seven biggest banks, covering 90% of the market, were effectively insolvent, requiring huge injections of capital from government or shareholders to keep afloat.

Lundgren and Carl Bildt, the then prime minister, rapidly drew up a rescue scheme with the bipartisan support of the opposition social democrats. The government avoided the problems associated with the $700bn US plan by taking equity stakes in Swedish banks rather than handing taxpayers' cash to the worst-managed banks.

The "Swedish model" is now being pored over by Wall Street analysts and policymakers, including Hank Paulson, US treasury secretary, and Ben Bernanke, Federal Reserve chairman.

In 1992 Lundgren and Bildt reacted to evidence that banks' non-performing loans far exceeded their total equity capital by providing a blanket guarantee for the creditors of all 114 institutions - but not shareholders.

They set up a "bad bank" called Securum that took on all the non-performing loans and gave it the mission to recoup taxpayers' money. A new national agency was tasked with overseeing all banks needing recapitalization and ordered them to write down their losses.

So, the two key elements of the Swedish model were: banks had to give the government a stake in return for funding and the taxpayer was protected. In fact, according to Bildt in a comment piece in the International Herald Tribune, the taxpayer actually made a profit.

In all, the Swedish authorities injected SEK65bn (£5.3bn) into the banking sector. The equivalent then of 4% of the country's GDP or, according to some analysts, $850bn in the US case today - a shade more than envisaged by the Paulson/Bernanke plan.