The Swedish bank plan

It seems the contours of a Swedish bankplan is taking shape.
Given concrete bank and political measures, this is my speculative view of what is developing.

Fact; Swedbank and SEB are creating separate "toxicasset" subsidiaries in the Baltics.
Fact; Minister Odell is traveling with Swedish banks to the middleeast to try and raise capital in February.
Fact; The above mentioned bank stocks have taken a hard fall at the beginning of this year, being down more than 30% so far.


My take on it;
The Swedish government is starting to realise that there will be a let go of the Latvian currency board sooner rather than later and that this will wreak havoc with the Swedish banks. Therefore, SEB and Swedbank has been asked to set up subsidiaries with the toxicassets in them as a preparation for this.

To recapitalise pre "toxic assets" are lifted out, the government will have to prop up with capitalinjections and most likely take a main shareholderstake, alternatively provide very favourable loans, but this might be very sensitive from a political aspect, given the current public opinion.

To make sure all viable routes are checked out, the aforementioned middleeastern trip is taking place. I seriously doubt any middleeastern investor would get into any of the Swedish banks PRE "toxicasset offloading".

However I would guess that the middleeastern proposal will be for investors to take a shareholder stake in SEB, Swedbank or Nordea AFTER "toxicassets" have been lifted out into a separate company and spun off to the government at a huge discount. This would leave the Swedish banks clean, but undercapitalised.
Any potential investor would thus invest in a healthy bank entity and the probability of getting private capital would have increased massively.

Two main issues here though;
-At what price does the government buy the "toxic assets",
- Government basic financing for the "clean" bank. Any new investor will likely want some government guarantees of basic government financing before they invest, since otherwise there would be little incentive to participate. This as the bank would otherwise technically be bankrupt pre private capital investments.

At least that is what I would expect the impact to be once the toxic assets are properly "marked to market", leaving huge gaping holes in the balancesheet. One can be sure that the booked market value of these assets are very much higher than the "real" value if one were to realise these "toxic assets" into cash.

If this does not work, I suspect the government will have little choice but to simply take over the banks while otherwise structure it as described above. Roughly following the 1992 Swedish bank structure for collapsed banks.

The situation is much worse this time around than 1992 since this is a global meltdown, assets are much harder to value, there are many more assets held abroad and the system is generally more leveraged than in 1992.

Add to this the Private Equity dilemma where Swedish banks have lend in excess of 300 Bn SEK to Private Equity companies over the last 3 years plus normal recession credit losses in a housing market that has been pumped to the max and you realise that this is way more serious than 1992.

According to the Boston Consulting Group, they estimate that 20%-40% of all PE companies globally will go bankrupt within the next few years. That is HUGE. With Swedish banks in some cases having lend 90% for PE investments and with PE companies selling to each other, increasing the gearing levels along the way, many of these companies are now left high and dry.

Bled of their cash (paid out as dividends to the PE companies), massive debt (PE;s wanted gearing, gearing ,gearing) and negative cash flow in todays deflationary environment - thank you very much for that one. One does not have to stick ones chin out to claim that there will be HUGE creditlosses for the banks.

There is also an important point that seem to be forgotten when comparing the current circumstances with 1992 and that is the recovery phase. In 1992 the SEK was let go of the ERM and allowed to float freely. That immediately send the SEK 40% lower within a short period of time, boosting exports in the process.

This time around there is a very long line of governments that wants to dump their currencies and a very short line for governments that wants a stronger currency.
And oh, the rest of the world is deleveraging and selling assets as well, further increasing the recovery costs for the "toxic asset corp", the Government and the Swedish economy.



Summary;
Shareholders of SEB and Swedbank (and perhaps Nordea) stocks should have more suffering to look forward to, unless completely wiped out. Once "toxic assets" are lifted out and the banks starts anew with a "clean" balance sheet, Banks will get access to private capital for recapitalisation purposes.

Note; I am short SEB and Swedbank via options


As always, good luck







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