“Students interested in economics and finance should closely follow this new Iceland saga, for it is the most dramatic story yet to illustrate how reckless bankers let loose in a free market can destroy entire economies.” – Uwe E. Reinhardt November 3, 2008
This could be more memorable than the Olympic silver won by the handball team this summer, although a lot less pleasant.
Paul Krugman of the IMF has suggested that getting Iceland back on its feet might turn out to be the most expensive restructuring in history adjusted for the size of the economy.
In a free market, those who grow their businesses responsibly and succeed are rewarded. At least that’s what we are taught in business schools.
In the Icelandic market those who borrow heavily, run their businesses irresponsibly and know the right people are rewarded.
Recently, Ardegi the limited company that owned the Icelandic franchises of fashion retailers Next and Noa Noa went bankrupt. A company named Arev N1 bought the stores from the bankrupt company for an undisclosed fee. The company’s stock of merchandise was bought by Arev N1 from Landsbankinn.
And now the owners of Ardegi have bough half of Arev N1 for an undisclosed fee.
We know what sort of management Glitnir is under. Birna Einarsdottir is allowed to manage the bank although she manages to lose track of 200 million of her own money.
We know that Glitnir’s owners borrowed money from the bank to finance leveraged acquisitions in other sectors, skewing the competitiveness of the market greatly. We also know they borrowed money to put into shelf companies that would then buy stock in the bank itself and FL Group which also belonged to the owners, creating artificial prices on the stock exchange.
An acquaintance is seething with anger. He lost his business because the interest payments became unbearable. Most businesses are unable to withstand interests on capital of 18-28%, and 30-100% fluctuations in the currency for a long period. For a while he just took it on the chin, accepting that he had failed in the business.
Now his is stunned to learn that while he and his group of investors borrowed 300 million ISK from Glitnir with expensive collateral on the line, some of which was lost when they lost the business, other people are apparantly able to walk into the bank and borrow 2 billion ISK without any collateral at all.
Free market? More like one middle finger firmly stuck in the air at those stupid enough to participate by the rules.
The Financial Authorities have cleared Birna Einarsdottir, the CEO of Glitnir of wrongdoings in connection with her purchase of 200 million ISK in Glitnir stock.
Apparently Birna was never charged for the stock and therefore did not lose any money when the bank collapsed in the autumn.
Which begs the question, would you bank with a bank whose CEO does not know whether she has been charged 200 million ISK or not for several months?
Glitnir’s explanation at the time didn’t ring any bells with the Financial Authorities either. They said the money was supposed to be deducted from her future bonus payments.
Which begs the question, would you bank with a bank where its managers are granted these special rights ahead of other investors. Besides, how fat were her bonuses supposed to be?
It all smells like a rat, but then again the Financial Authorities have appeared to be useless exterminators. Their CEO has not seen fit to resign, although he has been caught as the bus driver sleeping at the wheel.
So isn’t the Financial Authorities’ stamp of approval basically worthless today?
