Friday, January 23, 2009

Scandinavian bank nationalisation and due process

The proposal in my nationalisation after due process post the proposal I gave was not new.  I probably should have pointed out it had a precedent - Norway.  Norway was the country with the most pervasive nationalisation in the crisis.

You can find the reasonable history of Scandinavian bank nationalisation here.  Read Chapter 3 if you are interested in this stuff.  The biggest nationaliser was Norway - not Sweden - though Sweden did buy out the minority shareholders for token sums.

The process used in Norway was to assess the shareholder capital of the bank.  Shareholders were given FIRST RIGHT to recapitalise it.  If private money could be raised they kept the bank.  If they were short capital the government loans (which had previously guaranteed liquidity) were converted to equity and the old equity was written down.  Here is the key paragraph explaining the Norway result for the biggest banks:

Amendments were also made to the banking law, enabling the government under certain conditions to write down a bank’s shares to zero. This ensured that share capital really was written down to the extent that capital was lost.

It was soon realised that Christiania Bank and Fokus Bank had lost their entire share capital.  The share capital in Den norske Bank was written down by 90% according to losses.  The banks needed more capital, but private investors were unwilling to invest. All three banks thus received a substantial capital infusion from the GBIF [which was an independent but government owned bank manager] at the end of 1991. Conditions were established regarding balance sheet restructuring/downsizing, cost cuts and other measures to improve results. Share capital was written down to cover estimated losses. In both Christiania Bank and Fokus Bank the share capital was written down to zero by government decision (after shareholders had refused to do so). The existing shareholders thus did not receive anything for their shares, and the GBIF became the sole owner of the two banks. The boards and the top management were replaced. The banks received further capital support from the GBIF in 1992.

What we had here was a recapitalistion by government with rules which were widely understood and where the existing shareholders were given first rights of refusal over the recapitalistion.

In other words it was nationalisation without theft and it was not theft because there was a process which treated shareholders fairly.  Because Den Norske Bank had 10% of the required capital when assessed the private shareholders kept 10% of the equity.  Christiana and Fokus had less than zero capital and the shareholders were wiped out without compensation but after due process.

In Sweden similar processes were involved - but like Den Noske Bank the companies mostly had some capital left and so existing shareholders received some value.  One major bank (the very well run Svenska Handlesbanken) never surrendered any ownership to the government.  It had liquidity problems (it actually needed government money from memory) but it had no capital problem when it was assessed. 

Finland also had a crisis - but as far as I can tell (and know no banking expert that speaks the language) it was handled much worse.

The lessons of Scandinavian crisis are many.  One of them however was that if you want to reconstruct a banking sector post crisis (and I presume most people do) then you probably want to treat the existing shareholders fairly.  Fairly can mean confiscation as per Fokus or Christiana bank - but it is fairly after due process.

I only mention this - and also remention Chapter 3 of this document - because Kevin Drum and Interfluidity are maintaining their argument about what happened and how it should be handled.

Nationalisation probably will happen for some banks.  It has already happened for Royal Bank of Scotland for the most part.  It happened without much process - and the lack of process has put the fear of government into everyone who might fund banks.  Lack of process will wind up meaning that everything gets nationalised because if there is no fair process there will be no private money as an alternative to nationalisation.  In that case nationalisation becomes a self-fulfilling prophecy...  

Will the policy makers PLEASE read Chapter 3.

Pretty please.




John Hempton

6 comments:

Unknown said...

Great posts on the way to nationalise banks. Just a note to tell you that shareholders of Den norske Bank also lost all their holdings, as the remaining 10% were wiped out by further losses in 1992. In 1991 the government injected subordinate capital, so the private 10% were wiped out completely by 1992 losses. Its all in the report.

Thanks for a great blog.

John Hempton said...

Morten

I knew DNB was further reduced by the 1992 injections and the old share capital was wiped out. But there was an intermediate private capital that was retained.

The report skims this and just says:

"New reported losses in 1992 further reduced the value
of the old share capital to zero, leaving the government as the dominant owner
of the biggest bank in Norway and as the sole owner of both Christiania and
Fokus."

Note that the government was not the SOLE OWNER of the biggest bank (DNB). It was the sole owner of Christiana and Fokus.

But yes - the process even for that second write down was clear.

My details here are mostly from memory of a long and pleasant conversation I had with the CEO of DNB many years later. He lived through it.



J

John Hempton said...

Moreten - I chased back your identity - and you are Norwegian and write a finance blog.

Your memory of this stuff is probably good compared to mine. I am just a semi-retired Australian who has been to Norway just once (though admittedly to spend time with the CFO of DNB - the bank in question).

J

Unknown said...

Yes you are right. But your take on Scandinavian banking is far superior to mine.

Sorry my blog is in Norwegian, so not sure you can get much from it.

By the way, the Norwegian regulator (Kredittilsynet) has repetedly been in the media assuring us of the health of Norwegian banks. Analysts however, have some concern about eg. DnBs exposure to shipping, Baltics etc. Time will tell.

sugam said...

John, I got a question... if govt nationalise by adding capital what would happen to unsecured senior debt holders? ... Another point I would like to make is that RBS was nationalised ( partly ) due to lack of shareholders subscribing to the rights issue... should that not be considered a 'process' and not a theft..

John Hempton said...

Morten - can you please email me. I am interested in someone who can interpret the local tea-leaves on DNB Nor.

J

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.