drawn. the first lesson is to perform a thorough due diligence to clarify the extent of the problem in the troubled bank. but, in line with my previous principle, ideally you need to do this fast. once you have a firm grasp of the bank ’ s difficulties, its time to carefully assess your support options. this assessment will, of course, include direct costs, but indirect consequences for the financial markets and the overall economy should also be taken into account. the second lesson is to opt for the least - cost solution. this may sound obvious, but many examples show that the lesson is not always heeded by decision - makers. in some cases, a least - cost solution means a state guarantee against losses on assets or a funding guarantee. but when that does not suffice, brokering a private solution – such as a takeover from another, sounder bank – is another option. this usually also includes some elements of guarantee in order to sweeten the deal for the acquiring bank. but guarantees may skew the incentive, so you need to tread carefully. such skewed incentives are, in fact, good examples of the indirect costs you need to weigh in your assessment of alternative solutions. if neither of these solutions is possible, you are simply left with one single option – injecting capital into the bank. textbooks in economics typically describe the functioning of central banks as lenders of last resort. a paraphrase can be used to describe the role of states in banking crises – states have had to become owners of last resort. but before the money goes in, make sure that the bank ’ s managers go out. you simply cannot rely on the same people who jeopardised the bank in the first place. it is also a signal to the markets that things are about to change in the way that the bank is run. of course, the bank should continue to be run on purely market - based terms, even though the state may become a major, or even the only, shareholder. another thing you must ensure, before you join the ranks of investors, is that the bank ’ s assets are conservatively valued. otherwise, you risk overpaying and instantly transferring taxpayers ’ money into the hands of existing shareholders. diluting the owners ’ share of the bank – or, in some cases, even taking over the bank completely – also ensures an equitable upside for the taxpayers over time. and this is important, as capital injection does not mean permanent ownership

- - - 5. 0 6. 0 3. 5 2. 5 trend in order to justify an upward shift in the p / e ratio from just under 15 to between 30 and 35, the expected real return has to be lower and / or expected earnings growth needs to be higher. a p / e ratio at the current level can be explained if, for example : the picture in sweden is somewhat different, with signs of a strengthening of the earnings trend in the period 1982 - 99, though this is not visible in the figure. the krona ’ s depreciation after 1992 seems to have been the main factor here. earnings per share showed little, if any, improvement from 1982 to 1990. however, cyclical fluctuations and changes connected with the krona ’ s marked depreciation should not be central issues for our discussion here. as the stock market trend in both the shorter and the longer term has been largely the same in the united states and sweden and the p / e ratio in both cases is between 30 and 35, there are grounds for assuming that the earnings trend has also been at least approximately the same. see gordon, m j ( 1962 ), the investment, financing and valuation of the corporation, homewood ( irwin ). the simple model is written p / e = d / ( k - g ), where p is the share price, e earnings per share, d the percentage dividend, k the expected return and g the expected dividend growth. – the expected real return has fallen from 6 % to 4 %, or – the expected real earnings trend has risen from 2. 5 % to 4. 5 % a year, or – a fall in the expected real return from 6 % to 5 % has been accompanied by an acceleration of expected earnings growth from 2. 5 % to 3. 5 %. has the expected stock market return fallen? let us begin with the possibility of a lower expected return. does it seem likely? for a long period the expected return, in the united states as well as in sweden, has been stable at around 6 %. so why should things have suddenly changed in recent years in a way that dramatically alters conditions for the long - term valuation of share prices? moreover, a lower expected return would mean that the real return on shares is much the same as on treasury bonds, for example. why would share investment be perceived as having roughly the same risk as investment in bonds issued by a sovereign? but there are