“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
Economically speaking it would have made more sense to have borrowed money from the mafia than financial institutions in the past few years in Iceland.
To pay back loans at 15-28% interest PLUS seeing the capital rise by 20% annually is something the mafia would consider a good business.
I’ve heard an interesting story of a group of friends who are going to pay one of their friends to “buy” all their homes. The guy is going to get himself bankrupt, but the others are going to escape.
They will be indebted to their friend for life instead of the bank forever.
Say you found out that in the year running up to its worst financial crisis in history, a country’s Central Bank Governor had extremely important information which was critical to the financial survival of the country and its banks, effectively foreseeing the economic disaster.
And then you found out that same Central Bank Governor had not met the Minister of Business Affairs for a whole year leading up to the crash?
Would you take that country seriously?
Would you believe either of those men should be allowed to keep their jobs?
Then welcome to Iceland where the Minister of Business Affairs, Bjorgvin Sigurdsson, has revealed that this is exactly what happened. Shortly after said Central Bank Governor, David Oddson had told the press that he had repeatedly warned the government of the impending crisis?
Who on earth did he talk to? And why did the message not reach the Ministry of Business Affairs?
And why are those two men still in their jobs?
But the most despicable thing that has gone on in Iceland, and continues to go on, is the corruption and abuse of power. The saying “it’s not what you know but who you know” does not ring any truer than it does here in Iceland. The politicians, bankers and high profile businessmen are all good mates. It’s all in the family.
Iris Goeman’s blog, Iris is an Australian living in Iceland
David Oddson says in an interview with a Danish newspaper that he intends to sit in his chair as Central Bank Governor until he is prepared to leave himself. If he is forced to leave then he will enter the political arena again.
In the same interview he says that he repeatedly tried to warn about the dangers in the economy.
Isn’t that what terrorists usually do, at least in the movies, call in their threats beforehand?
This is a scenario faced by Icelandic employees these days.
A select group of people were given the banks by the Icelandic government.
They were under no restrictions of owning businesses in other genres so they invested heavily, with loans from their own banks in all sorts of industries.
When the going got tough they dumped debts into some companies, assets into other companies.
The banks failed and the government took them over, and was basically stuck with the indebted companies while the selected businessmen kept the ones with the assets.
Those couldn’t be taken from them because the Independent Party does not believe in taking “rightful assets” from their owners. At least that’s how Birgir Armansson, MP explained the situation.
The indebted companies are all of a sudden beholden of the nationalized banks. Now, the businessmen who owned the banks are conveniently tied to the people who still work in the bank, they used to be their employers remember, employers who showered their staff in champagne, not something government banks are readily prepared to do.
So now the indebted companies are being sold off in pieces, assets are being sold on the cheap, without auctions or advertising that they are for sale. Only a select few are privy to the information and therefore are running off with bargains, while leaving the debts, yes wait for it, with the taxpayers.
What about the employees? They are basically left to rot. Their current companies are left bankrupt, all operations are moved to a different newly founded ltd. company and those who want to keep their job are going to have to negotiate a new, and of course lower, contract.
The rest who are not prepared to swallow the pill have to go on unemployment benefits right away, and file claims with the bankrupt company in hope of getting their compensation package, 3-6 months depending on rank.
If that story doesn’t get you into the Christmas spirit then I don’t know what would.
Tonight, Vesteinn Gauti Hauksson, self proclaimed “little guy from Hafnarfjordur” was interviewed on Kastljos, the State Broadcasting Company’s nightly talk show.
Vesteinn and his wife have decided to stop paying off their home loans. They have been trying to sell their apartment for 35 million ISK while they have loans of 28 millions. With 20% inflation, the loan will soon be 35 million ISK.
Vesteinn has calculated all possible outcomes and he has found that the cheapest way to survive being a home owner in Iceland is to let the bank auction off the home and pay back the difference, even if it is several millions. And from that point onwards, rent their apartment.
Meanwhile Bjorgolfur Thor and Bjorgolfur Gudmundsson are waiting in the wings to re-invest in the Icelandic economy. Their company Samson is bankrupt, the state has taken over their bank, Landsbankinn but their company Samson is still the owner of Iceland’s strongest investment bank Straumur. They are investing 40 million Euros in a fund which is supposed to part-take in the revival of the Icelandic economy.
Confused? Well, Samson Global Holdings is not Samson. So unlike Vesteinn, the “little guy from Hafnarfjordur” who will end up paying all his debts, Björgolfur and Bjorgolfur Thor got rid of theirs courtesy of the taxpayers of Iceland. And got to keep their assets.
‘Customers would come in and we would apply for credit online for them, a 100 per cent loan, and they can drive away in their new Range Rover. It took ten minutes, it was very easy. But 60 to 70 per cent of those loans were in foreign currency, Japanese yen or Swiss francs, and they have gone up 90 per cent as the krona burns. A car worth 5 million krona now has a 9 million loan on it; how are people going to make those payments?’
Economic Disaster Area 