Sweden’s ‘Mr. Fix-It’ Bank Bailout May Be Model for U.S., U.K.

March 2 (Bloomberg) -- Bo Lundgren almost didn’t make it past security on Nov. 10 when he first visited the Swedish bank his National Debt Office had just seized.

“I’m the one who owns Carnegie,” he said he told the guards as he brushed past them and marched into the bank’s headquarters.

Lundgren has made a career out of overcoming obstacles at financial institutions. In the 1990s, he pulled the largest Nordic economy out of a banking crisis as Sweden’s minister for fiscal and financial affairs, winning the respect of former Federal Reserve Chairman Alan Greenspan and foreign governments. Now he’s leading the way again, cleaning up Carnegie’s toxic assets, reselling the bank and recouping the state’s investment in just three months -- sparing taxpayers any losses.

His efforts to ensure that Sweden emerges intact from financial turmoil may be a prototype for other countries -- including Germany and the U.K. -- grappling with failed banks.

Governments should “try and do what Sweden did,” said economist Nouriel Roubini, a professor at New York University’s Stern School of Business, who called the country’s 1990s plan the model bailout: Take over troubled banks, “clean them up and reprivatize them. Fudging it, guaranteeing the assets or buying the toxic assets is not going to work.”

Federal Reserve Chairman Ben S. Bernanke said Feb. 25 the U.S. government doesn’t plan “anything like” a nationalization of banks that would wipe out stockholders.

Second Crusade

Lundgren, 61, has made the National Debt Office the vehicle for his second crusade. Before he took over as director general in 2004, the agency was limited to issuing government debt. Now it oversees Sweden’s 1.5 trillion-krona ($167 billion) bank- guarantee program, as well as a 28 billion-krona plan for automakers Volvo Cars and Saab Automobile.

Lundgren is also in charge of a stability fund that will swell to about 2.5 percent of gross domestic product by 2023. Sweden’s economy may contract 1.6 percent this year mainly because of faltering exports, the central bank says, and the government wants to use the fund to inject as much as 50 billion kronor into the country’s banks. In the second quarter of 2008, Sweden slipped into its first recession in 15 years.

Lundgren “did a terrific job” in the 1990s, said Lars Thunell, who worked with him then and is now chief executive officer at International Finance Corp., the private-sector lending arm of the World Bank.

“One has to describe Lundgren as Sweden’s Mr. Fix-It, because he’s back in this situation,” Thunell said.

Election Loss

Lundgren’s new authority comes after he was forced to leave party politics six years ago when he failed to convince voters he could cut taxes without hurting a welfare system that has existed since the 1930s. He stepped down as leader of the Moderate Party, now headed by Prime Minister Fredrik Reinfeldt, after losing a 2002 election.

“You were lousy as party leader, but you’d make an excellent civil servant,” Lundgren said former Prime Minister Goeran Persson told him when Persson offered him the Debt Office job. Persson wasn’t available for comment.

While Lundgren’s focus on streamlining government may not have been a vote winner, it is breathing new life into the debt agency. He has overhauled departments, improved communication and won backing from Finance Minister Anders Borg, a government adviser during the 1990s crisis, to push for more clout -- which he’s used in dealing with the Carnegie Investment Bank and Max Matthiessen units of D. Carnegie & Co.

New Master

Sweden’s government gave Carnegie a loan on Oct. 27 to provide access to liquidity, only to expand the loan a day later. On Nov. 10, the Swedish financial regulator revoked Carnegie’s banking license. Lundgren brokered an accord with the watchdog: The bank could regain its license if his debt office seized it. That night, Lundgren walked into Carnegie and introduced himself to the bankers as their new master.

Within three months, his work was done. On Feb. 11, Sweden’s government agreed to sell the bank and Max Matthiessen, Sweden’s largest independent pension adviser, to Bure Equity AB and the Altor Fund III for a total of 2.28 billion kronor, recouping the state’s loan.

“The alternative -- not to have acted -- would have led to liquidation and a likely bankruptcy with significant costs to society and taxpayers,” Lundgren said at the time.

His mantra is that banks can’t be allowed to fail in a disorderly fashion, as was the case in the U.S. when Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15 after the U.S. Treasury Department and Federal Reserve refused to guarantee its bad assets so it could be sold. Its failure crippled global credit markets.

‘Free-Market Libertarian’

Stepping in makes “the cost you end up with, in the real economy, much smaller than if you let things escalate,” he said in an interview, adding that he is a “free-market libertarian, but in the case of a crisis, the state needs to be strong. If it decides to act, it should become an owner.”

Sweden’s banking system has so far avoided the severest fallout of the credit crunch, thanks in part to an absence of subprime assets on the banks’ balance sheets. Nordea Bank AB’s so-called problem loans, which comprise losses and impaired loans that are still performing, remained below 1 percent of total lending last year, Moody’s Investors Service said Feb. 13. Nordea is Sweden’s biggest bank.

Other Swedish financial institutions are more at risk. Swedbank AB and SEB AB, the two largest lenders in the Baltic states, face soaring loan losses in Estonia, Latvia and Lithuania as recession looms. Still, central bank governor Stefan Ingves, another key figure in dragging Sweden out of its 1990s turmoil, said Feb. 26 the banks are strong enough to cope with their Baltic losses.

Toxic Assets

Nordea is the product of a merger Lundgren orchestrated in 1993 between Nordbanken and Gota, two regional lenders that failed when Sweden’s real-estate bubble burst. Their toxic assets were thrown into a “bad bank” Lundgren helped create and Thunell ran.

Lundgren borrowed the idea from the U.S. savings-and-loan crisis of the 1980s, when the strategy was used to help revive some financial institutions as more than 700 failed.

Lundgren’s success has also come from his ability to create political consensus. He works closely with Borg and Sweden’s Financial Markets Minister, Mats Odell, who said lawmakers acknowledge him as a linchpin who ensures a coordinated government response to the financial crisis.

That contrasts with the U.S., where Democrats and Republicans fought in September and October over the cost to taxpayers of the Emergency Economic Stabilization Act of 2008, which delayed its implementation.

Lundgren is “a mature person with authority,” Odell said. “His handling of the last crisis gave Sweden a global reputation.”

To contact the reporters on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.netJohan Carlstrom in Stockholm at jcarlstrom@bloomberg.net

To contact the editor responsible for this story: Chris Kirkham at ckirkham@bloomberg.net