Comments on: Zombie banks Scandinavian edition and the threat of too big to fail http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html Finance, Economics and Markets Fri, 10 Feb 2012 00:37:00 +0000 hourly 1 By: Edward Harrison http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-57237 Edward Harrison Tue, 06 Oct 2009 00:53:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-57237 You probably saw this: http://www.creditwritedowns.com/2009/10/sweden-prepares-for-financial-collapse-in-latvia-and-major-bank-losses-at-home.html Notice the Nordea exposure is fairly large - though not fatal as I said here. You probably saw this:

http://www.creditwritedowns.com/2009/10/sweden-prepares-for-financial-collapse-in-latvia-and-major-bank-losses-at-home.html

Notice the Nordea exposure is fairly large – though not fatal as I said here.

]]> By: The case against feeding the Fed more power » New Deal 2.0 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-6227 The case against feeding the Fed more power » New Deal 2.0 Thu, 03 Sep 2009 16:21:45 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-6227 [...] structure, it’s unregulated financial institutions operating outside the regulatory umbrella and too big to fail institutions inside the umbrella taking on too much [...] [...] structure, it’s unregulated financial institutions operating outside the regulatory umbrella and too big to fail institutions inside the umbrella taking on too much [...]

]]> By: ketzerisch http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56981 ketzerisch Wed, 02 Sep 2009 08:46:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56981 Thanks for the link. Here are some more voices in favor of this or similar ideas: Henry Blodget in „Why Are We So Afraid To Fix Banks The Right Way?„ http://clusterstock.alleyinsider.com/2009/1/why-are-we-so-afraid-to-fix-banks-the-right-way Luigi Zingales in „Yes we can, Mr Geithner http://www.voxeu.org/index.php?q=node/2807 Renaud de Planta: Debt-equity swaps: a capitalist solution to the crisis http://www.ft.com/cms/s/0/6748e9d4-e315-11dd-a5cf-0000779fd2ac.html?nclick_check=1 James Baker: How Washington can prevent ‘zombie banks’. http://www.ft.com/cms/s/0/b3f299a6-0697-11de-ab0f-000077b07658.html?nclick_check=1 Felix Salom is not convinced: „Insolvent Banks: Why a Debt-for-Equity Swap Won’t Work„ http://www.portfolio.com/views/blogs/market-movers/2009/01/19/insolvent-banks-why-a-debt-for-equity-swap-wont-work?tid=true Thanks for the link. Here are some more voices in favor of this or similar ideas:

Henry Blodget in „Why Are We So Afraid To Fix Banks The Right Way?„
http://clusterstock.alleyinsider.com/2009/1/why-are-we-so-afraid-to-fix-banks-the-right-way

Luigi Zingales in „Yes we can, Mr Geithner
http://www.voxeu.org/index.php?q=node/2807

Renaud de Planta: Debt-equity swaps: a capitalist solution to the crisis
http://www.ft.com/cms/s/0/6748e9d4-e315-11dd-a5cf-0000779fd2ac.html?nclick_check=1

James Baker: How Washington can prevent ‘zombie banks’.
http://www.ft.com/cms/s/0/b3f299a6-0697-11de-ab0f-000077b07658.html?nclick_check=1

Felix Salom is not convinced:
„Insolvent Banks: Why a Debt-for-Equity Swap Won’t Work„
http://www.portfolio.com/views/blogs/market-movers/2009/01/19/insolvent-banks-why-a-debt-for-equity-swap-wont-work?tid=true

]]> By: ketzerisch http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56980 ketzerisch Wed, 02 Sep 2009 08:28:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56980 I agree. The point is also to take away the incentive of bailing from the politicians. With the current insolvency scheme, a politician face the threat of a second Lehman Brothers if he doesn't bail. With a new insolvency scheme the threat is that a few bondholders will become shareholders. Not exactly the thing a politician is afraid of. Once the politicians don't bail, the market will ask higher interest on the bonds and the leverage of the banks will come down to more sustainable levels due to market discipline. I agree. The point is also to take away the incentive of bailing from the politicians. With the current insolvency scheme, a politician face the threat of a second Lehman Brothers if he doesn’t bail. With a new insolvency scheme the threat is that a few bondholders will become shareholders. Not exactly the thing a politician is afraid of.

Once the politicians don’t bail, the market will ask higher interest on the bonds and the leverage of the banks will come down to more sustainable levels due to market discipline.

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56979 Edward Harrison Wed, 02 Sep 2009 00:52:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56979 And, Willem Buiter is singing the same tune that you are. I will be linking to this post in the links tomorrow morning: http://www.ft.com/cms/s/0/76e13a4e-9725-11de-83c5-00144feabdc0.html Of course, he also sees this as a too big to fail issue as well. And, Willem Buiter is singing the same tune that you are. I will be linking to this post in the links tomorrow morning:

http://www.ft.com/cms/s/0/76e13a4e-9725-11de-83c5-00144feabdc0.html

Of course, he also sees this as a too big to fail issue as well.

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56976 Edward Harrison Tue, 01 Sep 2009 20:14:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56976 ketzerisch, the debt equity swap idea is a good one. One has to ask how we can get bondholders to eat losses before taxpayers. However, to say it leads to a grey area between solvency and insolvency is a bit of word parsing. If I loaned a company money, I expect payment in full, not a bunch of PIK preferred shares (a common thrown-in for high yield bond issues). Clearly, the swap is a default, which I see as technical insolvency. The problem you present is how is it that bondholders have inserted themselves in the capital structure ahead of US taxpayers. The answer is bailouts. In a bankruptcy or liquidation, bondholders would take haircuts or debt/equity swaps. So by bailing out institutions, taxpayers get stuffed but bondholders do not. And as we know, only too big to fail institutions got bailouts. ketzerisch, the debt equity swap idea is a good one. One has to ask how we can get bondholders to eat losses before taxpayers.

However, to say it leads to a grey area between solvency and insolvency is a bit of word parsing. If I loaned a company money, I expect payment in full, not a bunch of PIK preferred shares (a common thrown-in for high yield bond issues). Clearly, the swap is a default, which I see as technical insolvency.

The problem you present is how is it that bondholders have inserted themselves in the capital structure ahead of US taxpayers. The answer is bailouts. In a bankruptcy or liquidation, bondholders would take haircuts or debt/equity swaps. So by bailing out institutions, taxpayers get stuffed but bondholders do not.

And as we know, only too big to fail institutions got bailouts.

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56975 Edward Harrison Tue, 01 Sep 2009 20:06:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56975 Thanks for the Nordea links. It does help put some of this in perspective. Thanks for the Nordea links. It does help put some of this in perspective.

]]> By: ketzerisch http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56974 ketzerisch Tue, 01 Sep 2009 18:53:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56974 Great analysis. I don't agree totally that size is indeed the problem. The problem lies in the fact that insolvency or not insolvency is a digital - zero or one - decision. Make it smooth and allow values in between and the problem will be drastically reduced. They way to do it: Make a law that all insolvency of a bank leads to an automatic debt-equity-swap of the last bond issued. If this is not enough to recapitalize the bank, convert more and more bonds until it is. Other deposits, like retail accounts, should be strictly senior to the bonds and each bank has to hold x-times (x=1?) the amount of retail money it takes. Great analysis.

I don’t agree totally that size is indeed the problem. The problem lies in the fact that insolvency or not insolvency is a digital – zero or one – decision. Make it smooth and allow values in between and the problem will be drastically reduced.

They way to do it: Make a law that all insolvency of a bank leads to an automatic debt-equity-swap of the last bond issued. If this is not enough to recapitalize the bank, convert more and more bonds until it is. Other deposits, like retail accounts, should be strictly senior to the bonds and each bank has to hold x-times (x=1?) the amount of retail money it takes.

]]> By: aitrader http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56972 aitrader Tue, 01 Sep 2009 18:07:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56972 Found the Dry Ships info in English: "Dry Ships reaches final deal on debt ppayment" http://www.smartbrief.com/news/sifma/companyData.jsp?companyId=11659 Found the Dry Ships info in English:

“Dry Ships reaches final deal on debt ppayment”

http://www.smartbrief.com/news/sifma/companyData.jsp?companyId=11659

]]> By: aitrader http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56970 aitrader Tue, 01 Sep 2009 17:46:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56970 Some anecdotal headlines about Nordea's problems: "Konkurshot tvingar banker ta över Dometic" <i>Banktuptcy threat forces banks to take over Dometic</i> Explains how Nordea just became owner of a refrigerator maker after it defaulted and went belly up. http://www.dn.se/ekonomi/konkurshot-tvingar-banker-ta-over-dometic-1.936868 "Nyemissioner för 60 miljarder" <i>New stock issuance for 60 billion SEK</i> Several large firms on the Swedish OMX exchange have been forced to issue stock to the tune of 60 billion SEK recently. Nordea alone accounted for half of this amount. http://www.svd.se/naringsliv/nyheter/artikel_3319435.svd "Tuff höst väntar rederierna" <i>Tough Fall awaits shippers</i> Talks about Nordea's exposure to shippers and the bank's exposure to potential defaults. I recall reading that Dry Ships (NYSE:DRYS) had upwards of an 8 billion SEK loan from Nordea that it couldn't pay. Nordea suspended all but interest last Spring. Not sure what the situation is today - I suspect both interest and principal may have been suspended to keep the loan on the assets side of the books. Some anecdotal headlines about Nordea’s problems:

“Konkurshot tvingar banker ta över Dometic”

Banktuptcy threat forces banks to take over Dometic

Explains how Nordea just became owner of a refrigerator maker after it defaulted and went belly up.

http://www.dn.se/ekonomi/konkurshot-tvingar-banker-ta-over-dometic-1.936868

“Nyemissioner för 60 miljarder”

New stock issuance for 60 billion SEK

Several large firms on the Swedish OMX exchange have been forced to issue stock to the tune of 60 billion SEK recently. Nordea alone accounted for half of this amount.

http://www.svd.se/naringsliv/nyheter/artikel_3319435.svd

“Tuff höst väntar rederierna”

Tough Fall awaits shippers

Talks about Nordea’s exposure to shippers and the bank’s exposure to potential defaults.

I recall reading that Dry Ships (NYSE:DRYS) had upwards of an 8 billion SEK loan from Nordea that it couldn’t pay. Nordea suspended all but interest last Spring. Not sure what the situation is today – I suspect both interest and principal may have been suspended to keep the loan on the assets side of the books.

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56964 Edward Harrison Tue, 01 Sep 2009 11:44:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56964 Agreed, it is not lethal - hence the comparison to JPMorgan Chase. In my view, it is large given the amount of capital but I think this is a question more of style and semantics than substance. I take your point. Going back to the JPM comparison, Nordea has a lot of 'real economy' exposure in Scandinavia as you indicate. Similarly, I have pointed out the same for JPM. While, I believe both to be the healthiest large banks, another downturn would weaken the capital position. http://www.creditwritedowns.com/2008/11/jpmorgan-chase-large-exposure-to-real-economy-downturn.html The discussion about Nordea is a bit of a red herring. I used it to highlight the increasing concentration in bank sectors throughout Western Europe and North America resulting from this crisis. While we may believe the likes of JPM, HSBC or Credit Suisse are well-capitalised and this poses no problem, these banks could as easily become like Bank of America, RBS, or UBS, their less well-positioned big bank brethren. So, my concern is more SEB and Swedbank in Sweden (hence the zombie bank title), but large banks more generally. Agreed, it is not lethal – hence the comparison to JPMorgan Chase. In my view, it is large given the amount of capital but I think this is a question more of style and semantics than substance. I take your point.

Going back to the JPM comparison, Nordea has a lot of ‘real economy’ exposure in Scandinavia as you indicate. Similarly, I have pointed out the same for JPM. While, I believe both to be the healthiest large banks, another downturn would weaken the capital position.

http://www.creditwritedowns.com/2008/11/jpmorgan-chase-large-exposure-to-real-economy-downturn.html

The discussion about Nordea is a bit of a red herring. I used it to highlight the increasing concentration in bank sectors throughout Western Europe and North America resulting from this crisis. While we may believe the likes of JPM, HSBC or Credit Suisse are well-capitalised and this poses no problem, these banks could as easily become like Bank of America, RBS, or UBS, their less well-positioned big bank brethren.

So, my concern is more SEB and Swedbank in Sweden (hence the zombie bank title), but large banks more generally.

]]> By: chegewara http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56963 chegewara Tue, 01 Sep 2009 11:24:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56963 my remark only related to this sentence: The company has HUGE residual exposure to unrealized losses in the Baltics. Nordea derives about 2% of revenues from the Baltics. Together Poland, Baltics and Russia are less than 6% of revenues. Of total assets, only 1.5% are in the Baltics. Baltics, Poland and Russia are together less than 3% of total assets. This is hardly HUGE, and even if there was a 100% writedown on Baltics this is not lethal. A bigger problem at Nordea is leverage: 180% LDR and a tangible equity ratio of less than 4%. Most of the Nordea's assets are in Finland (37.4%) and then in Denmark (23.5%), which unlike Sweden (36%) cannot depreciate the currency to aid their corporate sector. I fully expect Nordea to suffer on the basis of that. my remark only related to this sentence:
The company has HUGE residual exposure to unrealized losses in the Baltics.

Nordea derives about 2% of revenues from the Baltics. Together Poland, Baltics and Russia are less than 6% of revenues. Of total assets, only 1.5% are in the Baltics. Baltics, Poland and Russia are together less than 3% of total assets. This is hardly HUGE, and even if there was a 100% writedown on Baltics this is not lethal.

A bigger problem at Nordea is leverage: 180% LDR and a tangible equity ratio of less than 4%. Most of the Nordea’s assets are in Finland (37.4%) and then in Denmark (23.5%), which unlike Sweden (36%) cannot depreciate the currency to aid their corporate sector. I fully expect Nordea to suffer on the basis of that.

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56962 Edward Harrison Tue, 01 Sep 2009 11:12:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56962 If you notice, I never made any direct comparisons between Swedbank, SEB and Nordea. So, obviously, I am aware that Nordea is in a much better position than Swedbank or SEB on capital and exposure to the Baltics as I have written in the past. But, Nordea does still have large exposure ("Impaired loans in the Baltic region as a whole – including both non-performing and performing – have run up to 418 million Euros, equivalent to 550 basis points of total loans and receivables.") http://www.creditwritedowns.com/2009/07/earnings-results-at-swedish-banks-show-large-writedowns-in-baltics.html The comparison I did make was to JPMorgan Chase, the bank which is the best positioned of the large American banks, the point being that Nordea may be well-capitalized compared to its rivals and a likely buyer of banks like Fionia, but it is still too large. If you notice, I never made any direct comparisons between Swedbank, SEB and Nordea. So, obviously, I am aware that Nordea is in a much better position than Swedbank or SEB on capital and exposure to the Baltics as I have written in the past. But, Nordea does still have large exposure (“Impaired loans in the Baltic region as a whole – including both non-performing and performing – have run up to 418 million Euros, equivalent to 550 basis points of total loans and receivables.”)
http://www.creditwritedowns.com/2009/07/earnings-results-at-swedish-banks-show-large-writedowns-in-baltics.html

The comparison I did make was to JPMorgan Chase, the bank which is the best positioned of the large American banks, the point being that Nordea may be well-capitalized compared to its rivals and a likely buyer of banks like Fionia, but it is still too large.

]]> By: chegewara http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56961 chegewara Tue, 01 Sep 2009 11:00:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56961 while i agree that there will be problems in scandi bank space, your article has several mistakes: a) This pales in comparison to the well over $200 billion writedowns Fionia took which caused it to fail. surely u mean million here b) But, how healthy is Nordea really? The company has huge residual exposure to unrealized losses in the Baltics. I strongly encourage u to perform actual analysis. You might find that Nordea unlike SEB and Swedbank has minimal exposure to the Baltics. The ultimate problem of scandi is scandi itself. Corporates are too leveraged, there was a housing bubble. Banks are amongst the most leveraged in the world. Cheers while i agree that there will be problems in scandi bank space, your article has several mistakes:
a) This pales in comparison to the well over $200 billion writedowns Fionia took which caused it to fail.
surely u mean million here

b) But, how healthy is Nordea really? The company has huge residual exposure to unrealized losses in the Baltics.
I strongly encourage u to perform actual analysis. You might find that Nordea unlike SEB and Swedbank has minimal exposure to the Baltics.

The ultimate problem of scandi is scandi itself. Corporates are too leveraged, there was a housing bubble. Banks are amongst the most leveraged in the world.

Cheers

]]> By: aitrader http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56958 aitrader Tue, 01 Sep 2009 05:45:00 +0000 http://www.creditwritedowns.com/2009/08/zombie-banks-scandinavian-edition-and-the-threat-of-too-big-to-fail.html#comment-56958 Good analysis. The Swede on the street thinks the recession is over. The MSM here just called it a "ketchup recovery" meaning that it is surely coming but slower than expected (like the old Heinz ketchup commerical where it takes time for the ketchup to exit an upended bottle). The old Swedish Nordbanken merged with a Finnish bank and renamed the new entity spanning Finland and Sweden Nordea. They have tried repeatedly to gain a foothold in Denmark but have been rebuffed at each try by the Danes. The latest merger is a way for them to finally access the Danish market. I suspect they see the toxic asset problem as merely the price of admission. As you may recall I do not see Swedbank surviving. I think November is around the time we will see the toxic assets overwhelm their ability to patch up and hide them. Nordea has been suspending principal and in some cases even interest payments for their biggest loans for some time now to avoid having to report mark-to-market losses. Obviously they hope the global economy will recover and these customers can resume paying. In effect they have bet the farm on an early recovery. My best guess is they will lose that bet, though I think Nordea's problems will be papered over and covered by the Swedish, Finnish, and Danish governments behind the scenes and we will hear little or nothing about it in the media. Good analysis. The Swede on the street thinks the recession is over. The MSM here just called it a “ketchup recovery” meaning that it is surely coming but slower than expected (like the old Heinz ketchup commerical where it takes time for the ketchup to exit an upended bottle).

The old Swedish Nordbanken merged with a Finnish bank and renamed the new entity spanning Finland and Sweden Nordea. They have tried repeatedly to gain a foothold in Denmark but have been rebuffed at each try by the Danes. The latest merger is a way for them to finally access the Danish market. I suspect they see the toxic asset problem as merely the price of admission.

As you may recall I do not see Swedbank surviving. I think November is around the time we will see the toxic assets overwhelm their ability to patch up and hide them. Nordea has been suspending principal and in some cases even interest payments for their biggest loans for some time now to avoid having to report mark-to-market losses. Obviously they hope the global economy will recover and these customers can resume paying. In effect they have bet the farm on an early recovery. My best guess is they will lose that bet, though I think Nordea’s problems will be papered over and covered by the Swedish, Finnish, and Danish governments behind the scenes and we will hear little or nothing about it in the media.

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