Dr. John Tucker and Sigurn Davidsdóttir
Photo by W. D. Valgardson
Sigrun Davidsdóttir´s third Beck lecture was a smashing success. Luckily, Trish Baer and John Tucker had anticipated the crowd and had booked a regular room plus a larger room. Well before the lecture was to start, we all had to move to the larger room.
It may be that people love hearing about disasters. It may be Sigrun´s reputation. It may be that people are fascinated by Iceland and all the bits and pieces they´ve heard about the economic crash over the past four years. Maybe it was a bit of all three but the audience was intent and after the lecture, the question period went on for a long time. Sigrun is good at answering questions. Here answers were clear and to the point.
She started off saying that Iceland lost 80% of its financial sector from 2008-2011. That got people’s attention.
She called the story about the crash a saga with thirty protagonists, several hundred fellow travelers and a whole nation of spectators.
Her position, living in London, England, reporting for Icelandic radio, with a father and brother who were both bankers, gave her a unique position from which to observe and analyze what has happened.
She emphasized, once again, that the collapse of a bank or an economic system is not a natural event. It is an event caused by some people. No one person can do it alone so other people have to be involved. And, a lot more know what is going on but refuse to admit it.
There were the fellow travelers. The politicians, the people who worked in the banks, then there were the general population who saw what was going on but didn’t understand it.
As Sigrun talked about the Kreppa, I couldn’t help but think of the Costa Concordia. Ships don’t run onto the rocks by themselves. There was the captain. There were his senior officers. There were all the people who might have noticed something was amiss and there were all the people on the ship who were forced to be participants against their will.
Sigrun took us back in time and gave us an historical context for the crash. Iceland has several political parties. The Conservatives have been the political backbone of the system. The Independent party brought about changes to the Icelandic fisheries. Quotas could e bought and sold. This was done in such a way that quotas that hadn’t been purchased could be sold for large amounts of money. This brought an inflow of money into the Icelandic market.
As well, the banks were privatized in 2003. The banks had been controlled by political parties and many people thought the privatization would end the political influence but it didn’t. Other changes were made so that there could be international business companies that aren’t owned by anyone in the country. All these changes were part of a dream to make Iceland a financial centre.
Iceland, Sigrun pointed out, is a country of contacts. Who you know is critical to how well you get ahead.
Who you know if more important than what you know. From 2002-2006 there was record growth, record profits. But in 2006 the Geysir crises occurred. It was a mini crisis. Financial institutions outside of Iceland started to pay attention to what was going on in Iceland. Other banks started to give Icelandic banks bad reviews. The Icelandic banks were not being funded by the Icelandic people. Instead, bonds were being issued to outside organizations.
From 2006-2008 a difficult time started with short spells of things going well. The credit crunch had begun.
When she was working in Copenhagen she started having questions about the Icelandic economy because businessmen would contact her saying they were going to set up businesses but the businesses never were started. In London in 2005, 2006, Icelandic businessmen were happy but other business people dealing with them were not. One Swedish banker described Icelandic businessmen as teenagers.
I was amused by this description. I immediately remembered the year that Landsbanki representatives came to Gimli. They set up a display at Islindingadagurinn with the intent, I was told, of getting people to invest. Iceland was offering stupendous rates on its bonds while other countries were offering paltry amounts. I asked a friend if he was going to invest in the bank. He said no, he only had a few thousand dollars to invest and the people from Iceland weren’t interested in anything under a million dollars. The lecture brought back a host of memories from the years just before the crash.
Teenagers are known for their enthusiasm but they aren’t great managers. Not surprisingly, things started to come apart. There were attempts to save the banks. The Central bank was aware that the banks were running out of liquidity. The UK offered financial advice. It was ignored. One gets the impression of incredible arrogance on the part of the Icelanders involved. There was a meeting with UK authorities in 2008, the Icelanders promised all sorts of things to make the situation better. None of the promises were kept. After a meeting with the Icelanders about the ICE SAVE accounts, after the Icelanders left the room, the UK minister said to his people don’t believe anything these people say. Icelandic financial credibility was gone.
The banks collapsed. This created a power vacuum. For ordinary people there was a sense of relief by the end of December. There had been tremendous pressure for everyone to make money.If people weren’t making large amounts of money, they felt they were being left out and were failures. With the collapse, the pressure disappeared.
After Oct 2008, the banks were split into domestic and foreign. The foreign banks went bankrupt. Currency controls were put in place. A special prosecutor’s office was set up. A thousand page report on the crises was released. After that, it was not possible for the people responsible to say that they did not know what was happening.
What were the things that were done that brought about the crash? Sigrun gave us a list. It was shocking.
1. The banks had favoured clients.
2. There was unsecured lending.
3. Loans, when they came due, were rolled over.
4. There were no margin calls.
5. Clusters of companies were set up off-shore. They were given huge amounts of money.
6. There were big schemes and small schemes of various kinds.
For example, one man had 6 companies. The assets that were worth something were put into one of these companies and the debts put into another. The one with the assets he would keep and the one with the debts would go bankrupt and the bank and its depositors would lose.
The big losers in all this were the foreigners who had loaned the Iceland banks money. German creditors took a huge loss. Icelanders who had some money to invest, lost. People with foreign exchange loans. The pension funds.The all lost.
As vast as this credit crash was, with so many people both in Iceland and abroad affected, there were only a small number of people who directly caused it. Sigrun estimates about fifty. Many people at the centre of the crash haven’t suffered. They’ve managed to hang onto money through various schemes.
However, the law grinds slowly but it does grind and, it is inclined to grind very finely. The first charges have been laid. There will be others.
The lecture was packed with information. It sparked an array of questions. What more could one ask? The topic, of course, is so complicated and vast that it could be the topic of an entire semester’s course.
The Richard and Margaret Beck trust is a foundation set up by the Becks for lectures on Iceland.