Sweden: Carnegie Investment Bank AB Emergency Liquidity Program, 2008

In 2007, Carnegie’s securities division was one of the largest participants in equity trading within the Nordic region, which includes Denmark, Finland, Norway, and Sweden. By September 30, 2008, as the Global Financial Crisis worsened, Carnegie had around SEK 2.5 billion of deposits from more than 4,000 depositors in Sweden (EC 2008). Authorities at Sweden’s Riksbank believed Carnegie’s disorderly failure could result in damage to the broader Swedish financial system; They were, in addition, focused on insulating Sweden from the turmoil of the GFC broadly and the crises in the Baltics and Iceland specifically.

The poor interbank lending conditions in fall 2008, combined with a third-quarter earnings report showing an exceptionally large credit exposure of SEK 1 billion in a single engagement, created a need for liquidity at Carnegie that the market was not meeting (EC 2008). Carnegie’s credit exposure consisted of a credit line to a Swedish financier that was collateralized largely by shares of a public company, Hexagon, whose value had dropped by 35% between August and September. Figure 2 shows the share price of the stock used as collateral. Carnegie became noncompliant with the regulation limiting the size of individual exposures as a result of the decline in value. Carnegie also had other ongoing cases with the FSA at the time regarding governance and control concerns (Riksbank 2020).

Source: Yahoo Finance, ticker = HEXA-B.ST.

The Riksbank granted Carnegie a loan of SEK 1 billion on October 27 to help the bank with liquidity issues and to “reduce the risk of a serious disruption to the financial system” (Riksbank 2008a, 1; Riksbank 2008e). The decision to provide liquidity was made on October 26 and announced on October 27 (Riksbank 2008a; Riksbank 2008c). There were also concerns that a suspension of payments by Carnegie could damage confidence in Sweden’s payment system (Riksbank 2008c). The Riksbank increased the size of the loan on October 28, at Carnegie’s request, to a maximum of SEK 5 billion, of which the bank drew SEK 1.4 billion, bringing the total amount drawn to SEK 2.4 billion (Riksbank 2008b).

At the time, the Riksbank and the FSA viewed Carnegie as a solvent institution (Riksbank 2008a; Riksbank 2008b). When announcing the increase in the size of the credit line to SEK 5 billion on October 28, the Riksbank noted that the decision was based on an assessment “that the bank is suffering temporary liquidity problems, but that its solvency is not threatened” (Riksbank 2008b, 1).

On November 10, 2008, the board of directors of Carnegie’s parent company, D. Carnegie, presented a solution to the NDO, the Riksbank, and the FSA to issue new shares of SEK 1.2 billion and to appoint new principal owners for Carnegie. That same day, the FSA decided to revoke Carnegie’s banking and securities licenses (Carnegie 2009; Wenne 2014). The FSA’s announcement about the revocation noted that the plan had elements of uncertainty that made it difficult to determine if it could succeed (FSA 2008). The government also considered injecting capital by purchasing preference shares in D. Carnegie but decided there was too much uncertainty associated with that path as well. Additionally, the NDO considered allowing Carnegie to go through liquidation proceedings while the state guaranteed “protectable” creditors against liquidation-related losses but decided against it on the basis that a prolonged liquidation process would have led to a rapid decline in Carnegie’s value (Riksgälden 2008b, 2). Such a decline would potentially have borne significant costs to the Swedish state owing to the associated guarantees and violate the NDO’s mandate under the Support Act to minimize the state’s costs when supporting credit institutions (Riksgälden 2008b).  

Riksbank governor Stefan Ingves said in a speech on November 13, 2008, that once the FSA withdrew the banking license, the Riksbank had to withdraw liquidity assistance because Carnegie no longer qualified for that type of credit. The NDO subsequently repaid the Riksbank for Carnegie’s loan and assumed ownership of the bank. Ingves applauded Sweden’s highest legislative body for giving the NDO the power to take over banks that were ineligible for Riksbank assistance, had to default on its obligations, and were a threat to financial stability (Ingves 2008).

Carnegie was eligible for Sweden’s programs for deposit guarantees and debt guarantees (Engbith and Kiernan 2020, 917). Carnegie issued bonds worth SEK 935 million under the government's debt guarantee program (Carnegie 2009).

The Riksbank granted the loan under the authority of Chapter 6, Section 8 of the Sveriges Riksbank Act. The provision states that, in exceptional circumstances, the Riksbank can grant credit to banks and companies supervised by the FSA on special terms with the purpose of supporting liquidity (Riksbank 2008a). The Riksbank Act does not define exceptional circumstances or specify a solvency requirement for aid. However, the press release specified that the Riksbank and the FSA viewed Carnegie as solvent (Riksbank 2008a; Riksbank 2010).

The Swedish NDO’s loan replacing the Riksbank’s loan was based on the Support to Credit Institutions Act, which was passed on October 29, 2008, to support financial institutions undergoing reconstruction and prevent a major disruption to the financial system (EC 2008; Riksbank 2020).  The legislation made the NDO, rather than the Riksbank, responsible for providing assistance to banks in distress (EC 2008). The NDO’s normal roles included managing central government debt, government loans and guarantees, bank support, and deposit insurance (Government Offices of Sweden n.d.). The EC approved the Support Act in a State Aid decision published on December 3, 2008 (EC 2008).

Sweden’s FSA has authority to revoke an institution’s licenses under Chapter 15, Section 1, Paragraph 2 of the Banking and Finance Business Act (Ministry of Finance of Sweden 2004).

The EC concluded that the aid from the Riksbank and the NDO was State Aid and that it was compatible with the common market pursuant to Article 87(3) (b) of the EC Treaty (EC 2008).

Carnegie applied for special liquidity assistance from the Riksbank for the initial loan of SEK 1 billion and again for a further line of SEK 4 billion, bringing the total ceiling to SEK 5 billion (Riksbank 2008c; Riksbank 2008e). On November 10, 2008, the NDO signed a loan agreement with Carnegie totaling SEK 2.4 billion, which equaled the amount Carnegie had borrowed from the Riksbank plus interest and costs associated with the loan agreement. This was done so that the NDO loan to Carnegie could directly repay the Riksbank and shift the credit exposure to the NDO. The NDO could provide a maximum liquidity of SEK 5 billion, and the collateral and interest rate stayed the same as established under the Riksbank liquidity aid  (EC 2008). The Riksbank said it would be more appropriate for the NDO to handle the assistance to Carnegie given the new legislation around bank support (see Key Design Decision No. 3, Legal Authority) (Riksbank 2008d). The same day, after the withdrawal of Carnegie’s bank and securities licenses, the NDO took ownership of the collateral and became the sole shareholder of Carnegie and Max Matthiessen (EC 2008).

According to Riksbank governor Stefan Ingves, there was significant coordination between the Riksbank, the FSA, and the NDO to keep Carnegie stable during the process of liquidity support, state ownership, and privatization. Ingves said the three authorities followed an “almost minute by minute” plan to ensure Carnegie's stability and compliance with all legal requirements. Ingves also said that the Riksbank coordinated closely with Carnegie, particularly with respect to raising its loan limit from SEK 1 billion to SEK 5 billion, which he said required “many hours of intensive work” within the Riksbank and between the Riksbank and Carnegie.

The Executive Board of the Riksbank approved the amount, price, and maturity of the loan, while assigning two board members to jointly decide the detailed terms (Riksbank 2008c; Riksbank 2008e).

The Riksbank provided the initial loans, and the NDO took over following new legislation that made the NDO, instead of the Riksbank, responsible for banks in distress (EC 2008). A 2022 Riksbank press release described the NDO’s current functions as managing banks and credit institutions with the goal of maintaining financial stability and protecting the taxpayers. The FSA handles supervision of financial institutions and analyzes and counteracts risks in different areas of the financial system (Riksbank 2022a).

In 2007, before the issues  that precipitated government involvement in 2008, the FSA fined D. Carnegie for failure to supervise its traders and asked that the entirety of the board of directors step down (NYT 2007). In November 2008, the FSA made the assessment that Carnegie should not have a permit on the basis of the ongoing issues around internal governance and the failure to come up with a plan that the FSA believed would succeed. Carnegie offered a plan involving a new share issue, but the FSA said it had elements of uncertainty that made it difficult to assess  (FSA 2008).

The FSA revoked Carnegie’s licenses on November 10, 2008, and the bank was taken over that day by the NDO per the loan agreement between Carnegie and the NDO in which the bank was posted as collateral. Afterward, the FSA reversed its decision to withdraw Carnegie’s licenses and noted the ownership change and sufficient guarantees addressing governance issues as rationale for why the bank could be allowed to continue operating (EC 2008).

Sweden informed the EC about the aid to Carnegie on November 26, 2008. The EC wrote a report on the aid and found it compatible with the common market under Article 87(3) (b) of the EC Treaty (EC 2008).

The Riksbank announced in press releases the initial SEK 1 billion loan to Carnegie on October 27, 2008, as well as the increase of the line up to SEK 5 billion the following day (Riksbank 2008a; Riksbank 2008b). The decision to provide liquidity was made on October 26 and announced on October 27 (Riksbank 2008c). The Riksbank said the loan was collateralized and without a preset end date. The press release also briefly described Carnegie’s operations and the liquidity problems the bank faced as well as the Riksbank’s authority for granting such a loan. The release included a quote from the Riksbank’s governor, who said the liquidity assistance was put in place to “reduce the risk of a serious disruption to the financial system” (Riksbank 2008a, 1).

The Riksbank’s 2008 annual report disclosed the size of the loans to Carnegie as well as the profit earned from the operation and the ultimate transition of the loan to the NDO (Riksbank 2009, 30–31, 43). The Riksbank is required to report information including its balance sheet and profit and loss in its annual report (Riksbank 2010).

The press releases noted that both the Riksbank and the FSA viewed Carnegie as solvent (Riksbank 2008b). The Riksbank also released documents containing information on the maturity and interest rate for the loans (Riksbank 2008c; Riksbank 2008e).

The announcement that the NDO was taking over the loan came out the same day the decision to withdraw licenses was made and cited reasons for why it was appropriate for the Debt Office to be responsible for the loan given the new bank support legislation (Riksbank 2008d). News sources covered Carnegie’s objections to the takeover (Reuters 2008).

The Riksbank’s initial October 27 liquidity line was for up to SEK 1 billion, which Carnegie used that day. The Riksbank increased the line the next day to SEK 5 billion. Carnegie drew an additional SEK 1.4 billion on October 28 for a total of SEK 2.4 billion in liquidity assistance outstanding. The details of the collateral provided by Carnegie to the Swedish authorities was not disclosed but included all shares in Max Matthiessen and Carnegie Bank, repo transactions, all claims on Carnegie subsidiaries, and various bonds. It was noted that Swedish authorities took the uncertainty of the FSA’s investigation into account when moderately valuing the collateral (EC 2008).

When the NDO took over the liquidity line, it also granted a maximum of SEK 5 billion available and loaned out the amount Carnegie drew from the Riksbank plus the interest Carnegie owed to the Riksbank and costs incurred in providing the loan. That payment transferred Carnegie’s debt from the Riksbank to the NDO (EC 2008).

The rate for both the October 27, 2008 loan and the October 28 extension was set to the Riksbank repo rate plus 150 basis points (bps) (Riksbank 2008c; Riksbank 2008e). This would have been 5.75% total at the time given the Swedish repo rate of 4.25% on October 27 and 28 (BIS 2023). As of June 8, 2022, the repo rate is now called the Riksbank’s policy rate (Riksbank 2022b).

The EC noted that the 150 bps premium exceeded its guidance of 50 bps, but agreed with the Swedish authorities that the larger premium reflected the risks involved and was sufficiently high such that Carnegie would not draw on the loan more than was absolutely necessary (EC 2008).

Both of the loans were given a term of “until further notice” (Riksbank 2008c, 1; Riksbank 2008e). Carnegie repaid the Riksbank within a couple of weeks when the NDO took over Carnegie on November 10, 2008 (EC 2008). On the same day, the FSA decided to withdraw Carnegie’s permits for banking and securities operations (Carnegie 2009). Immediately afterwards, the NDO decided to take ownership of both Carnegie and Max Matthiessen which had been pledged as collateral (EC 2008).

Carnegie’s permits were reinstated later that day, and the FSA issued a warning instead (Carnegie 2009). The NDO appointed a new board of directors to Carnegie on November 14, 2008, at which point the office began the process of divesting the bank (Carnegie 2009; Riksgälden 2008a). The NDO announced the sale of Carnegie to investment firms Altor Equity Partners and Bure Equity AB on February 11, 2009 (Carnegie 2009). The sale went through on May 19, 2009, for a total of SEK 1.7 billion in cash and earn-out payments (FactSet 2009b). Altor Equity Partners and Bure Equity AB also acquired Max Matthiessen for SEK 500 million in cash, less any potential dividends owed to NDO (FactSet 2009a).

The Riksbank netted SEK 5 million in interest from its part of the operation (Riksbank 2020).

Ownership of D. Carnegie & Co.’s two subsidiaries, Carnegie Investment Bank AB and Max Matthiessen Holding AB, a holding company for Swedish insurance company Max Matthiessen AB, were pledged as collateral for the loan from the Riksbank. There was also collateral in the form of bonds, claims against Carnegie’s subsidiaries (Carnegie Bank A/S and Banque Carnegie Luxembourg S.A.), and claims related to repo transactions. The total of the collateral was valued in the billions of Swedish kronor, but the precise amount was not disclosed in the EC report. The Riksbank had the ability to call the loan at any time (EC 2008).

In the NDO arrangement, there was a clause that would allow the NDO to take over the collateral if the bank license was revoked (EC 2008). Carnegie objected to the NDO’s seizing of the collateral without a loan actually being due and without a valuation of the pledged shares. The NDO decided that it would be best to sell the two companies separately, given the differences in the potential buyers (Reuters 2008).

 The Riksbank’s aid to Carnegie also created excess liquidity in the interbank market. To address this, the Riksbank withdrew liquidity through its daily fine-tuning operations and by issuing Riksbank Certificates with a one-week maturity (Riksbank 2009). 

While there was no information regarding other conditions attached to the loan from the Riksbank, there were serious governance issues with Carnegie in 2007 that yielded a warning from the FSA. The European Commission report stated that it was clear that any new irregularities found would come with a large risk of the FSA revoking Carnegie’s bank and securities market licenses (EC 2008).