Iceland's Irreplaceable Geniuses

In Iceland, as in America, the same financial "experts" who destroyed our economy remain in charge of the banks they ruined, by and large. Just as the AIG traders who created the credit default swaps that threaten the global economy's stability have not only remained at their posts, but been rewarded with million dollar bonuses, the executives of Iceland's investment banks retain control of the country's finances and have effectively prevented any serious investigation into their alleged insider trades, political back-scratching and gross incompetence.

Rumors started circulating soon after the banks collapsed that top bank officials had taken out massive loans in order to buy bank stock before the collapse (using the stock as collateral for the loans) and that the banks had written those loans off after the government took them over. The purported explanation for this was that it would otherwise be impossible to staff the banks' executive suites, because bankrupt persons were statutorily barred from working in banks.

Within the banks and political circles, everything humanly possible is being done to prevent access to necessary documents, so it is perhaps not strange that, in the five months since the collapse, the government's only official investigator has not provided any information about these accusations. In fact, he stated in a recent television interview that he had interviewed at most ten people and had not found probable cause to undertake any further investigations. The tornado has ruined the farm, but "Don't see nothin' the matter here, Ma. Ain't it grand the wind stopped blowin'?" The special economic crimes prosecutor, Ólafur Þór Hauksson. The Icelandic government has four people working on investigating the country's economic collapse, probably one of the most complicated criminal financial schemes in modern times. That "is a joke," said French-Norwegian Economic Crimes Investigative Magistrate Eva Joly, who has agreed to advise the Icelandic government in the matter. Photo credit:

Economists Jón Daníelsson, of the London School of Economics, and Gylfi Zoega, of the University of Iceland and Birkbeck College, write that: "Limited and often contradictory information is available about events leading up to the crisis, what was known, and who had the responsibility to take action. The little public information available seems to originate from foreign institutions, and the information originating in Iceland generally takes the form of Icelandic public officials or politicians leaking to the press, or being interviewed in the media, possibly for reasons of self interest, rather than any desire to inform the public."

Since Iceland has parliamentary elections in five weeks--and information about how these politically connected bankers managed to ruin our country would seem highly relevant in deciding who to vote for--the rumored explanation appears to be the only plausible one.

Iceland's current situation was not merely the result of the current global credit crisis, as many in Iceland claim. Danske Bank foresaw the inevitable problems in 2006: "We look at early warning indicators for financial crises and conclude that Iceland looks worse on almost all measures than Thailand did before its crisis in 1997, and only moderately more healthy [sic] than Turkey before its 2001 crisis." It accurately predicted that the Icelandic economy would experience a hard landing if Icelandic policymakers did not take appropriate actions.

The Icelandic banks reacted ferociously. Glitnir's research department stated that the "DB report presents a grim view of the economy, contains numerous errors and omissions, assumes a worst case scenario and presents a highly implausible forecast of a financial crisis and subsequent deep recession."

Landsbanki's experts disparaged the DB report, concluding that it "severely over dramatises macroeconomic imbalances in Iceland and the likelihood of a hard landing in the economy. The report also contains numerous statistical inaccuracies and omissions all of which put the Icelandic economy in a bleaker light than is warranted."

Kaupthing's executive chairman, Sigurdur Einarsson, assured shareholders that the DB report's doomsday pronouncements were nonsense: its "prediction did not take into consideration the flexibility of the economy, which allows for adjustment without threatening future economic growth or the health of the banking system." He assured them that the bank "had effectively decoupled itself from the Icelandic economy." Ásgeir Jónsson, the bank's chief economist, stated that: "The forecast in the report is based on inaccurate data which seems almost to be willingly misread."

2009-03-21-sigurdureinarsskaupthing.jpg Kaupþing Bank Chairman, Sigurður Einarsson took out 500 billion ISK (approx. $1 billion) in loans to himself and four other bank owners three months before the banks collapsed. Many of the "businesses" to which the loans were granted, are offshore in the Brithish Virgin Islands. Photo credit:

This obliviousness continued to the bitter end. As late as September 17, 2008--two weeks before the bank was effectively taken over by the government--Glitnir's research department expected "the bank system to get through this adversity without significant difficulties." Landsbanki's experts stated on September 24, 2008 that "High living standards, strong infrastructure, a debt-free treasury and plenty of unexploited natural resources are among those characteristics which make Iceland's long-term prospects enviable. They should also help the economy to regain its balance in a time of international financial turmoil."

Inexplicably, nearly all of the bank executives, board members, and "experts" remain. Although the government has nationalized all of the banks, it has made no apparent effort to control or investigate the individuals who provided such stellar advice. They are obviously indispensable.

Simon Johnson and James Kwak wrote in the New York Times that the lesson of the 1997 Asian financial crisis is that "when insiders have broken a financial institution, the most direct remedy is to kick them out. ... We should not let people think that the best way to guarantee job security is to lose lots of money in a really complicated way."

The world contains many honest, competent bankers who could clean house and build Iceland's banks up from the ground as the professional institutions needed to sustain the country's financial prosperity over the long term.

Although, as Danielsson and Zoega note, "any officials responsible for mistakes must take responsibility, possibly by resigning," that has not happened yet and doesn't seem likely to happen anytime soon. One doesn't know whether to laugh or cry at the government's hideously incompetent investigative efforts. Until the responsible parties are forced to divulge the extent of their misdeeds and until the government brings in impartial bankers, international investors are unlikely to have any faith in Iceland, and our depression will continue.

Charles de Gaulle once said that "The graveyards are full of indispensable men." No one is indispensable; a lesson the Icelandic government has yet to learn. In the meantime, Icelandic taxpayers continue to endure anguish and injustice, and foot the bill, but the scoundrels laugh all the way to the bank - in Tortola.