Is the United States finally going the way of Sweden's 1992 bank nationalization plan, as some have been urging? And how does it compare with the UK's own recent plan to inject capital into its financial sector?
The broad sweeps of the three plans are similar: The government pours money into a bank in exchange for shares, which it can hopefully sell off at a profit in a few years' time. But the differences are in the details, and they are significant. The first is relative size. Though the Swedish bailout's $17.5 billion (in current dollars) and the UK plan's $64 billion are chump change compared with the U.S. Treasury's $250 billion plan, the first two represent significantly larger interventions. Sweden completely nationalized many of its banks, and while it has sold off most of its holdings, Stockholm still owns 20 percent of Nordea. Likewise the UK plan will probably result in London taking a majority stake in at least the Royal Bank of Scotland (RBS), one of the three participating banks (the other two, Lloyds TSB and HBOS, are in the process of merging). But the given the size of American banks and the number of them involved in the plan, $250 billion won't buy the Treasury anything close to nationalization.
The second difference is in the plans' goals. The Swedish plan was a bailout in the most literal sense: Sweden's entire banking sector was effectively insolvent. A complete takeover was therefore necessary. Fears of a similar outcome in Britain forced Prime Minister Gordon Brown to take a similarly drastic step over the weekend. But in the United States, the fear is less over the solvency of the banking system than it is over frozen credit markets. Most banks are fine; the problem is they don't trust each other. When the original $700 billion Paulson plan didn't work, direct injections of capital were seen as the only way to warm the credit markets up.
Because the Swedish and British plans are much more aggressive, they demand a lot more from the banks. The Swedish plan, for example, forced banks to write down losses and to spend whatever money they did have before accessing the government coffers. Likewise the UK plan will likely allow the British Treasury to appoint three new directors to the RBS board and two to Lloyds-HBOS's; it will also place restrictions on executive pay and require banks to continue making loans to home buyers and small businesses. Finally, the British plan requires participating banks to stop paying dividends until they exit the program, a recipe for increasing the government's power, as private investors will have less incentive to buy shares.
But the U.S. plan, other than some limits in executive pay, don't have any of these sorts of restrictions. Whether they should or not is a debatable point, though too many controls would likely have scared away those banks healthy enough to survive without government help (and apparently Henry Paulson had to twist some arms to make them participate anyway). It's also worth mentioning that Treasury's plan to directly inject capital into the banking sector is only one part of a multi-plank strategy. The government will guarantee all bank-issued senior debt over the next three years, and the FDIC is insuring non-interest-bearing accounts with no limit.
--Clay Risen