Today in the economy

[Kirkland Laing]

Kirk,

Can you describe the "Sweden Solution" in regards to banking in layman's terms? Specifically, what is a bank's level three and what is meant by writing down a loan?

Sweden had a bunch of insolvent banks so it took them over, wipred out the existing shareholders and bondholders, converted the debt owed by these banks after assets had been accounted for into equity (new shares) and sold the shares to new investors who then owned the new cleaned-up banks.

edit : This explains it well and briefly :

http://www.nytimes.com/2008/09/23/bu...s/23krona.html

Level three assets are stuff that is difficult to value and are generally valued by the bank's own financial models. A financial model is basically a computer simulation designed to represent the earning performance or value assets within certain economic parameters.

If you bought an asset for a hundred dollars but the market subsequently only values it at fifty, then you'd write down your asset to fifty to reflect market value. Or if your asset was dodgy mortgage securities you'd tweak your financial model to claim that property prices were going to rebound in a few months and then not write down your asset at all.