Tell me if any of this sounds familiar:
Risky lending practices, poor reporting transparency, and a booming real estate market led to a major meltdown in a large, established banking system. A weak regulatory framework was in dire need of an overhaul, and the government had no choice but to step in and take direct action in the banking sector.
The year was 1991; the country we're talking about is Sweden. But the whole scenario sounds eerily familiar to Americans in 2008.
That had to hurt!
Of course, there are massive differences between the financial crisis that spread across the Nordic countries nearly two decades ago and the U.S. system failure that's in progress today. The American banking system is far larger, with a much bigger power to affect the global economic climate. We now have the benefit of hindsight, but the Nordic countries were swimming in unfamiliar waters back then. And the Americans don't seem too keen on going through the temporary hardships that were inflicted on Sweden and its neighbors.
There were indeed hardships. The Swedish government passed an act in 1991 to let the government seize the assets of any bank whose real capital fell below 2% of the invested asset balance, forcing all but one of the major banks of the time to ask for help. The Norwegians went a step further and actually invoked a similar act to take over two large banks wholesale.
Executive heads rolled into the fjords and lingonberry fields, billions of crowns in outstanding debt were simply canceled (with the banks eating the losses), and the public outcry was probably heard on the moon. GDP growth stalled, fell into negative territory in 1992, and never again climbed back to the preposterous mid-teens of the 1980s. (On a personal level, my father had been gambling on real estate investments with risky, borrowed money, and the bank took our house away in 1992.)
But it worked. The Nordic model is now seen as a model for handling banking crises, in stark contrast to the interest-lowering campaign that sent Japan into an economic tailspin a few years later. Guess which model our government is following today?
If history teaches us anything, it's that we're incapable of learning from history.
Where do we go from here?
The Fed might have felt macho for stepping in and taking charge of the Bear Stearns (NYSE: BSC ) situation. But disappointed shareholders forced JPMorgan Chase (NYSE: JPM ) to quintuple the offer, making the intervention seem toothless and tentative. That wouldn't have been an option in a Norwegian-style shoulder tackle. Bear would simply have become a government asset, to be nursed back to health through a few years of tough love.
Things aren't quite as bad in this market as they were in the early '90s in Scandinavia. Not yet, at least. Loan losses reported by the largest Swedish banks in the earlier crisis amounted to 12% of GDP, while American banks have reported only 0.4% of GDP in loan losses over the past 12 months. And not many of the major banks over here are as leveraged as the Scandinavians were. Yet.
Citigroup (NYSE: C ) stands at an equity-to-asset ratio of 5.3%, down from 7.5% two years ago. JPMorgan? Down from 9% to 8% over the same period. These are some of the worst offenders, of course -- other biggies like Bank of America (NYSE: BAC ) , Wachovia (NYSE: WB ) , and especially Regions Financial (NYSE: RF ) all have stable or improving leverage ratios. But it is troubling to see some of the nation's biggest banks sliding toward very low equity and insane debt leverages.
Is it time for a dose of the Swedish medicine? It comes totally unsweetened, and may make you sicker until you get better. But maybe that's exactly what this economy needs right now.