Iceland’s New Bank Disaster

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By Olafur Arnarson, an author and columnist at, Michael Hudson, a Professor of Economics at University of Missouri- Kansas City, and Gunnar Tomasson, a retired IMF advisor

The problem of bank loans gone bad, especially those with government-guarantees such as U.S. student loans and Fannie Mae mortgages, has thrown into question just what should be a “fair value” for these debt obligations. Should “fair value” reflect what debtors can pay – that is, pay without going bankrupt? Or is it fair for banks and even vulture funds to get whatever they can squeeze out of debtors?

The answer will depend largely on the degree to which governments back the claims of creditors. The legal definition of how much can be squeezed out is becoming a political issue pulling national governments, the IMF, ECB and other financial agencies into a conflict pitting banks, vulture funds and debt-strapped populations against each other.

This polarizing issue has now broken out especially in Iceland. The country is now suffering a second round of economic and financial distress stemming from the collapse of its banking system in October 2008. That crisis caused a huge loss of savings not only for domestic citizens but also for international creditors such as Deutsche Bank, Barclay’s and their institutional clients.

Stuck with bad loans and bonds from bankrupt issuers, foreign investors in the old banks sold their bonds and other claims for pennies on the dollar to buyers whose web sites described themselves as “specializing in distressed assets,” commonly known as vulture funds. (Persistent rumors suggest that some of these are working with the previous owners of the failed Icelandic banks, operating out of offshore banking and tax havens and currently under investigation by a Special Prosecutor.)

At the time when those bonds were sold in the market, Iceland’s government owned 100% of all three new banks. Representing the national interest, it intended for the banks to pass on to the debtors the write-downs at which they discounted the assets they bought from the old banks. This was supposed to be what “fair value” meant: the low market valuation at that time. It was supposed to take account of the reasonable ability of households and businesses to pay back loans that had become unpayable as the currency had collapsed and import prices had risen accordingly.

The IMF entered the picture in November 2008, advising the government to reconstruct the banking system in a way that “includes measures to ensure fair valuation of assets [and] maximize asset recovery.” The government created three “good” new banks from the ruins of its failed banks, transferring loans from the old to the new banks at a discount of up to 70 percent to reflect their fair value, based on independent third party valuation.

The vultures became owners of two out of three new Icelandic banks. On IMF advice the government negotiated an agreement so loose as to give them a hunting license on Icelandic households and businesses. The new banks acted much as U.S. collection agencies do when they buy bad credit-card debts, bank loans or unpaid bills from retailers at 30% of face value and then hound the debtors to squeeze out as much as they can, by hook or by crook.

These scavengers of the financial system are the bane of many states. But there is now a danger of their rising to the top of the international legal pyramid, to a point where they are in a position to oppress entire national economies.

Iceland’s case has a special twist. By law Icelandic mortgages and many other consumer loans are linked to the country’s soaring consumer price index. Owners of these loans not only can demand 100% of face value, but also can add on the increase in debt principal from the indexing. Thousands of households face poverty and loss of property because of loans that, in some cases, have more than doubled as a result of the currency crash and subsequent price inflation. But the IMF and Iceland’s Government and Supreme Court have affirmed the price-indexation of loan principal and usurious interest rates, lest the restructured banking system come to grief.

This is not what was expected. In 2009 the incoming “leftist” government negotiated an agreement with creditors to relate loan payments to the discounted transfer value. On IMF advice, the government handed over controlling interest in the new banks to creditors of the old banks. The aim was to minimize the cost of refinancing the banking system – but not to destroy the economy. Loans that were transferred from the old banks to the new after the 2008 crash at a discount of up to 70% to reflect their depreciated market value. This discount was to be passed on to borrowers (households and small businesses) faced with ballooning principal and payments due to CPI indexing of loans.

But the economy’s survival is not of paramount interest to the aggressive hedge funds that have replaced the established banks that originally lent to the Icelandic banks. Instead of passing on the debt write-downs to households and other debtors, the new banks are revaluing these loan principals upward. Their demands are keeping the economy in a straight jacket. Instead of debt restructuring taking place as originally hoped for, the scene is being set for a new banking crisis.

Something has to give. But so far it is Iceland’s economy, not the vulture funds. With the IMF insisting that the government abstain from intervention, the government’s approval rating has plunged to just 10% of Icelanders for floundering so badly while the new owners call the shots.

The New Banks have written off claims on major corporate debtors, whose continued operations have ensured their role as cash cows for the banks’ new vulture owners. But household debts acquired at 30 to 50 percent of face value have been re-valued at up to 100 percent. The value of owners’ share equity has soared. The Government has not intervened, accepting the banks’ assertion that they lack the resources to grant meaningful debt relief to households. So unpayably high debts are kept on the books, at transfer prices that afford a windfall to financial predators, dooming debtors to a decade or more of negative equity.

With the preparatory work done, the time has come for the Vultures to cash in through re-sale of New Bank equity shares by yearend. The New Banks have kept their corporate cash cows afloat while window-dressing owners’ equity with unrealistic valuations of consumer debts that cannot be paid, except at the cost of bankrupting the economy.

There is a feeling that Iceland’s government has been disabled from acting as an honest broker, as bank lobbyists have worked with Althing insiders – now backed by the IMF – to provide a windfall for creditors.

The problem becoming a global one. Many European countries and the United States face collapsed banks and derailed banking systems. How are the IMF and ECB to respond? Will they prescribe the Icelandic-type model of collaboration between Government and hedge funds? Or should the government be given power to resist drive by vulture funds to profiteer on an international scale, backed by international sanctions against their prey?

The policy danger now facing Europe

An economic crisis is the financial equivalent of military conquest. It is an opportunity for financial elites to make their property grab as Foreclosure Time arrives. It also becomes a political grab to make real the financial claims that had become uncollectible and hence largely fictitious “mark-to-model” accounting. Populist rhetoric is crafted to mobilize the widespread financial distress and general discontent as an opportunity to turn losers against each other rather than at the creditors.

This is the point at which all the years of financial propaganda pay off. Neoliberals have persuaded the public to believe that banks are needed to “oil the wheels of commerce” – that is, provide the credit bloodstream that brings nourishment to the economy’s moving parts. Only under such crisis conditions can banks collect what has become a fictitious buildup of debt claims. The overgrowth of mortgage debt, corporate debt, student loans, credit-card debt and other debts are fictitious because under normal circumstances there is no way for them to be paid.

Foreclosure Time is not sufficient, because much property has fallen into negative equity – about a quarter of U.S. real estate. And for Ireland, market value of real estate covers only about 30% of the face value of mortgages. So Bailout Time becomes necessary. The banks turn over their bad loans to the government in exchange for government debt. The Federal Reserve has arranged over $2 trillion of such bank-friendly swaps. Banks receive government bonds or central bank deposits in exchange for their bad debts, accepted at face value rather than at “mark-to-market” prices.

At least in the United States and Britain, the central bank can print as much domestic currency as is necessary to pay interest and keep these government bonds liquid. Public agencies then take on the position of creditor vis-à-vis debtors that can’t pay.

These public agencies then have a choice. They may seek to collect the full amount (or at least, as much as they can get), as in the case of Fannie Mae and Freddie Mac in the United States. Or, the government may sell the bad debts to vulture funds, for a fraction of their face value.

After the September 2008 crash, Iceland’s government took over the old, collapsed, banks and created new ones in their place. Original bondholders of the old banks off-loaded the Icelandic bank bonds in the market for pennies on the dollar. The buyers were vulture funds. These bondholders became the owners of the old banks, as all shareholders were wiped out. In October, the government’s monetary authority appointed new boards to control the banks. Three new banks were set up, and all the deposits, mortgages and other bank loans were transferred to these new, healthier banks – at a steep discount. These new banks received 80 percent of the assets, the old banks 20 percent.

Then, owners of the old banks were given control over two of the new banks (87% and 95% respectively). The owners of these new banks were called vultures not only because of the steep discount at which the financial assets and claims of the old banks were transferred, but mainly because they already had bought control of the old banks at pennies on the dollar.

The result is that instead of the government keeping the banks and simply wiping them out in bankruptcy, the government kept aside and let vulture investors reap a giant windfall – that now threatens to plunge Iceland’s economy into chronic financial austerity. In retrospect, none of this was necessary. The question is, what can the government do to clean up the mess that it has created by so gullibly taking bad IMF advice?

In the United States, banks receiving TARP bailout money were supposed to negotiate with mortgage debtors to write down the debts to market prices and/or the ability to pay. This was not done. Likewise in Iceland, the vulture funds that bought the bad “old bank” loans were supposed to pass on the debt write-downs to the debtors. This was not done either. In fact, the loan principals continued to be revalued upward in keeping with Iceland’s unique indexing designed to save banks from taking a loss – that is, to make sure that the economy as a whole suffers, even suffering a fatal austerity attack, so that bankers will be “made whole.” This means making a windfall fortune for the vultures who buy bad loans on the cheap.

Is this the future of Europe as well? If so, the present financial crisis will become the great windfall for vulture banks, and for banks in general. Whereas the past few centuries have seen financial crashes wipe out the savings and creditor claims (bonds, bank loans, etc.) that are the counterpart to bad debts, today we are seeing the bad debts kept on the books, but the banks and bondholders that provided the bad loans being made whole at taxpayer expense.

This is not how economic democracy was expected to work during the 19th-century drive for Parliamentary reform. And by the early 20th century, social democratic and labor parties were supposed to take the lead in moving banking and credit along with other basic infrastructure into the public domain. But today, from Greece to Iceland, governments are acting as enforcers or even as collection agents on behalf of the financial sector – as the Occupy Wall Street movement expresses it, the top “1%,” not the bottom 99%.

Iceland stands as a dress rehearsal for this power grab. The IMF and Iceland’s government held a conference in Reykjavik on October 27 to celebrate the ostensible success in their reconstruction of Iceland’s economy and banking system.

In the United States, the crisis that Obama Chief of Staff Rahm Emanuel celebrated as “too good to let go to waste” will be capped by scaling back Social Security and Medicare as soon as the autumn Doomsday Clock runs down and the Congressional Super-Committee of 12 (with President Obama holding the 13th vote in case of a tie) gets to agree to make the working population pay Wall Street for its bad loans. The Greek austerity plan thus serves as a dress rehearsal for the U.S. – with the Democratic Party playing the role as counterparts to Greece’s Socialist Party that is sponsoring austerity, and expelling labor union leaders from its ranks if they object to the grand double-cross.

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  1. Fraud Guy

    Rule #1–never let the IMF dictate any terms.

    Rule #2–if you think the terms are good, see rule #1.

    And I thought Iceland was the new poster child on how to handle bank crashes. Guess we’ll have to move on to debt jubilee.

    1. R Foreman

      At the time they did it, they thought it WAS a debt jubilee.

      Seems like the debt merchants have weaseled back into government and convinced the weak public servants that they’ve been horribly wronged by the evil icelandic people.

      1. Fraud Guy

        Apparently, the only true debt jubilee is cancellation; not writedown, but elimination; not haircut, but somewhere above the collarbone and below the jawline.

        Then you have to make it illegal to collect on destroyed debt, and enforce it.

        So we are now dealing with zombie banks, vampire squids, and ghoulish collectors. But it’s past Halloween!

    2. okie farmer

      Rule #3: when in doubt, consult the Bank of North Dakota.

      Its possible that Iceland’s ‘left’ govt was suckered in this deal. Someone commented in an earlier thread that the left has historically not been very knowledgeable about finance and macro. I’m open-minded that the IMF came in all smiles and happy talk, possibly invited themselves “to help”, and structured their typical bullshit deal for the folks, and put creditors as near to in-charge as they could.

      Back to rule #1.

      1. Steve

        Protection Racket Stage #1 – Covert Extortion

        When a mafia protection racket starts (i.e. the mafia ‘covertly’ sends their terrorists into the streets to shoot up the place creating fear) the shop owners are initially naive. The shop owners gladly pay the mafia for protection.

        Protection Racket Stage #2 – Overt Extortion

        The shop owners aren’t total sheep, eventually they figure out that their terrorists and their protectors are one and the same, the mafia. At this stage the shop owners pay increasingly more while the mafia ‘overtly’ threatens increasingly more severe consequences if the shop keepers resist.

        We all know the IMF is the mafia. We also know that Iceland must be well into Stage #2 by now. Surely the IMF overtly threatened Iceland with massive international sanctions (e.g. “you’ll never get back into the world economy…”) if Iceland didn’t do everything the IMF/bankers demanded. This can’t be a case of stupid people being duped again and again… there must be guns-to-heads… the mafia overtly terrorizing.

        This article in VERY important. Unfortunately, like everything Michael Hudson writes, I’m left desperately wanting/needing more detail. It all makes sense but there’s numerous missing links in the chain.

        Please Dr. Hudson continue. As it is, I get the impression that the mafia bankers magically transferred 70% of their liabilities to the government while increasing their assets two fold? At one point you say that the government bought the assets at face value but then somehow the banks end up with the assets at a 70% discount.

        This article is fantastic… but it leaves me very frustrated… looking at a fuzzy image of something I desperately want see clearly.

      2. Astraea

        Yes! I agree with you Steve – I too struggle t get it really really clear – but mostly because the language seems to me to be so full of the jargon of economists. I wish it could be just plain English. Economists expect us all to just understand what “CPI” or “the index” means. I DO understand those things, but I hate them! It seems to me that just to talk of prices for food and clothing and necessities rising is a lot more helpful I HATE the jargon – but Dr. Michael Hudson is my favourite economist, all the same!

    3. richard wilson

      Yes, I commented about Iceland’s dire condition a week ago here at NC, and on other blogs.

      People at more “sophisticated” blogs than NC called me an uninformed idiot. All are convinced that Iceland is doing wonderfully, yet they cannot explain why Icelanders continue to emigrate in search of jobs.

      Iceland’s people voted two different times by referendum to not go into 50 years of debt servitude to pay off the private speculators’ debts connected with Icesave. Therefore England effectively declared Iceland a state sponsor of terrorism. When that didn’t work, Iceland’s corrupt Social Democrat government brought in the IMF to “correct” the insolent masses.

      Now, New York-based vulture speculators own two of Iceland’s banks, and are squeezing the masses for all they can get.

      As I had noted before, Iceland’s labor unions (e.g. Confederation of Icelandic Employers, and the Confederation of Labour) had invested a lot of their money in Icesave-related instruments, and they wanted to be paid after the bank collapse. So they got the government to pass a new law that hooked all debts (including mortgage debts) to the consumer price index. When the banks collapsed, the krona currency collapsed (i.e. was devaluated), causing the price of imports to skyrocket, and with it, the consumer price index — and with that, the amount of debt owed by average people.

      Thus the labor unions (plus vulture speculators who bought bonds and securities for pennies on the dollar) will not only get paid the full original face value of bank-related instruments, but twice and even three times that, with all proceeds coming out of the hides of the masses. Since this move was unconstitutional, the government simply suspended the constitution. After all, this was a “crisis.”

      Now, every house in Iceland with a mortgage is underwater. In many cases, homeowners owe two or tree times what the house would sell for on today’s market.

      Further, the government’s deal with the IMF was supposed to an end late last year, but financial insiders got it extended to 2013, with no exit strategy.

      I totally believe in referendums, but they are useless when the politicians ignore them, and continue to play ball with creditors in return for being put on the creditors’ payroll. Iceland’s 300,000 people are all related to each other by blood in one way or another. Hence, effectively, their own family sold them out to the bankers.

      Michael Hudson is correct. People who think Iceland is “just groovy” need to check again.

      Oh, and if Greece had actually held a referendum, then the Greek government would have followed the example of Iceland’s government. Just ignore it.

      And so we come back to the same issue. Always the same issue. Until we permanently take the power to create money back from the private bankers (which Americans surrendered in 1913) we will be slaves. Until we replace creditor sovereignty with State (i.e. public) sovereignty, nothing will change.

      All other economics issues are trivial by comparison.

      1. Astraea

        YES! YES! YES! From the early civilizations of Mesopotamia there was a Jubilee and all debt was written off – permanently and completely. How can it be otherwise? It is sensible and sane and seems so obvious.

        If you can, read a book by David Astle “The Babylonian Woe.” It is free on line and though the English is a bit labored (it seems it was the only book he wrote and he did not get it properly edited.) It is about how usury began in our World – OUR World.

    4. marie mc donald

      Jubilee must be he answer. We are told we owe money. Well who owes what to whom? Looks like a merry go round in the ether. Stop the carousel, clear the decks, stop the gambling on the Stock exchange with the currencies of other counties and let us all start agai with a clean slate.

      1. Astraea

        That was meant to be a reply to your post Maria – about Jubilee. You are so right. Lets start making the word “Jubilee” very familiar everywhere – and especially in all the Occupy cities.

  2. Foppe

    Yikes. Thanks for this, though I’d hardly call it hopeful. How was the conference with Krugman and Johnson?

  3. K Ackermann

    I honestly thought Iceland was doing well. I thought they were the ones who gave the finger to the IMF and went on to do well.

    Looking at how wreckless and fraudulent the Iceland banks behaved, I can’t understand for the life of me why anyone should be on the hook for those banks.

    1. Fraud Guy

      Actually, now that I think about it, this makes sense. Some companies have figured out how to take advantage of the “Swedish Solution”.

      1) Country staggering under weight of failing banks takes them into receivership.

      2) “Good” banks are spun off, with sustainable debt and valuable assets.

      3) Bond and other holders of “bad” banks get stuck with 1% of value and 99% of debt (give or take).

      4) Selling 1% for par, they get out, and the “bad” debt buyers look at legal code of bank country.

      5) Finding loophole (7 year window to collect debt, GPI used to increase debt value, leverage with politicians/regulators/IMF, etc.), they begin aggressive efforts to parlay 1% investment into 30% value, or more.

      6) Misrule of law by rules laywers begins, throw in a handy group of lawmakers or compliant judge, and, voila! 3000% profit.

      1. Ignim Brites

        Wait till Los Zetas get into this business. Then things will really get interesting. Watch developments in AZ, NV and SoCal.

      2. spooz

        There has got to be a way to stay one step ahead of the gamers. You need the best of them on your side heading regulatory agencies.

  4. worldwidepleb

    Bankers must realise that eventually they will be on the receiving end of a bucket of petrol and a lit zippo for this kind of behaviour. I look forward to the day!

    1. Fiver

      That’s why those despicable drones are being deployed all over the world – we’re up against Sauron.

  5. Linus Huber

    I simply cannot accept that a government can act in such a way against their own country and people. What kind of people are they and why did they get elected? Why remains the population docile when facing such abhorrent behaviour by such activities. It is heart breaking and disgusting.

    1. R Foreman

      The debt merchants are insidious. Read some of the writings of President Andrew Jackson. At the time we didn’t have debt-based money, but the bankers believed their script, their loans to each other and to borrowers, represented currency, so they did everything possible to get into the currency business. Eventually they won in 1913 (the Federal Reserve Act).

      1. Lyle

        Once again an old problem pops up again during the period between 1783 and 1790 the revolutionary war debt went for cents on the dollar at best, as well as warrants for pay for those who served in the army. In 1790 as Hamilton worked to get US finances in order, he proposed to pay revolutionary war debt at par. Many thought that the vultures who had bought the debt at pennies on the dollar, should only get that much, but Hamilton did not. Essentially the same argument occurs again. So its a problem as old as the US constitution (at least) and since it has not been solved yet is unlikely to be solved now.

        1. Gerard Pierce

          You’re right, but your description misses a few things.

          Hamilton had no interest in clearing up Revolutionary War debt until his cronies had bought up most of that debt.

          You might also have mentioned that the federal government lacked the money to pay this debt. The source of revenue to pay off the banksters of the time was to tax Whiskey and beggar the farmers of western Pennsylvania.

          George Washington himself led the militia that suppressed the Whiskey Rebelion.

          1. reslez

            The government may have lacked the physical gold to pay the debt, but that too was a point of contention. Many in the Whiskey Rebellion supported paper currency.

    2. Qix

      I simply cannot accept that a government can act in such a way against their own country and people. What kind of people are they and why did they get elected?

      Compare the nation of Iceland’s military to the USA and “allied” militaries.

      Now, picture yourself sitting in the leader’s chair, who are you more afraid of, the people of Iceland, or Iceland’s creditors?

      Why remains the population docile when facing such abhorrent behaviour by such activities.

      The whole point of a massive military machine is to make people “docile”.

  6. Maju

    There’s one solution for this: one person = one home and no real state property as in Cuba. All their property accumulation ended suddenly by a red law. After all it’s just something written on a paper and protected by an accomplice state.

  7. Pat

    At last we get an article that tells the truth about the Icelandic economy.
    Iceland is no miracle recovery, no success story — just stalemate and stagnation as a large portion of ordinary citizens struggle along in a web of debt. Some 80-100 thousand persons (out of 340 thousand) are in families burdened by inescapable mortgage and other loan debts. Unemployment may be low, but a very large number of citizens are deep in debt, houses have lost 50% of their value, wages do not keep up with inflation, savings have lost real value (since the currency has dropped maybe 50%), and what money they do have cannot be transferred out of the country due to the currency restrictions. And the only reason unemployment is low is because employers know that anyone who gets fired must leave the country.

    The basic problem is this: Icelandic mortgages are non-recourse (meaning no homeowner can walk away from that debt), and Icelandic doesn’t have a real personal bankruptcy law. This means that homeowners can never escape their mortgage debt (on houses that have lost about 50% of their value, with mortgages linked at high CPI rates). If they walk away from their houses, the bank creditors can hound them for the rest of the debt. And because there is no real bankruptcy law, they cannot wipe out the debt through chapter 7. Mortgage holders are debt serfs for the rest of their lives — the only solution is to leave the country. Businesses, on the other hand, can declare bankruptcy, simply by changing their equivalent of a Social Security number. This means that businesses (about 70% of which are technically insolvent) can carry along paying only what they can or want to the creditor banks. If the creditor banks get too aggressive, businesses can simply declare bankruptcy.

    (The only bright spot here is that the vulture funds that own the banks cannot take the money out of the country due to currency restrictions. However, this will change if restrictions are lifted, as the government has discussed doing.)

    The solutions are relatively simple:
    1) Force the banks to readjust mortgages to the written-down value that the banks acquired them at
    2) Change the bankruptcy law to allow for real personal bankruptcy, with both a chapter 7 (total bankruptcy) and a chapter 11 (reorganization, with courts allowed to do mortgage cramdowns)
    3) Change the laws to make home mortgages recourse instead of non-recourse
    4) Change the laws to force banks to rewrite current mortgages into debt-for-equity mortgages: the banks write down mortgages, but take a share of resale profits (in the US, shared-appreciation (SAM) mortgages have been adopted successfully).
    5) Abolish or reform CPI-mortgage indexing
    6) Go after the money that the criminal oligarchs stole from the economy, through real prosecutions (instead of the current inept foot-dragging investigations) and asset seizures, and/or allowing class-action or shareholder derivative lawsuits, with piercing-the-corporate-veil theories adopted as a matter of law (as Lithuania has done)
    7) Change the tax laws to reinstate progressive taxation, at previous rates, and change capital gain rates to 40-50% instead of the current 10-20%.
    8) Political changes: allow for personal elections instead of slate elections

    Why won’t Iceland adopt any of these changes?
    Because of political corruption and croneyism, and rigid IMF pro-creditor policies.
    (And, to be fair, an inability of the Icelandic population to mobilize and demand change. Some 40% of the population still support the old corrupt croney parties. And when there are demonstrations, only a few thousand bother to show up, in a country where 75% of the population live within 15 minutes of the parliament building where the demos are held.)

    Iceland’s wounds have been largely self-inflicted, but even so, it is shameful that the vulture funds and IMF, aided by a corrupt political elite, continue to exploit the situation for profit. This is Shock Doctrine in action.

    The IMF may successfully block mortgage write-downs, but there is nothing they could do if Iceland were to adopt the same personal bankruptcy laws that the USA has, or changing tax rates to USA levels.

    1. jh

      Yet, in the end, to enact the reasonable solutions you
      propose would require cooperation of the corrupt political
      structure. Or is corrupt political structure redundant?
      When government has devolved into collection agency, the
      task of reinventing representation should be the first objective. To serve the will of the people – not seeing
      much light in that tunnel.

    2. Tom Mc Cool

      Pat, you have your terms backwards. Non-recourse means the lender has only the collateral to look to. And good luck changing all of the laws. Not going to happen.

  8. Moneta

    Vulture fund names please. Would be nice to know who is sucking everyone dry… is it the 1% or large underfunded pension plans?

    1. richard wilson


      Vulture funds are companies that seek to profiteer by buying up the debts of heavily indebted poor countries at a cheap price, then trying to recover the full amount by suing through the courts, or by bribing the local government (as in Iceland’s case). Such companies often describe themselves as ‘distressed debt funds’.

      Some target failing companies. Others target poor countries.

      At least 54 companies, many based in tax havens, are known to have taken legal action against 12 of the world’s poorest countries in recent years, for claims amounting to $1.5 billion.


      We can’t find out the names, because these companies are quite secretive. They are in a very dirty business, and they don’t like publicity. Most are based in tax havens. Some are owned by large (often US-based) financial institutions, such as hedge funds. Most are totally hidden. Some could even be drug cartels working with regular hedge funds.

      Often they are set up simply to pursue one debt, and then shut down again like a boiler room collection team with no actual office. And when they make deals with a country like Iceland, they agree to buy financial instruments (at pennies on the dollar) on condition that the government keep the people involved totally and permanently anonymous.

      So we don’t know who the vulture funds are, and how many there are. We can only track them when they file lawsuits to collect, but even then the vultures use masks and front companies in court, and the proceedings are often sealed from public scrutiny.

      We do know that there have been at least 40 lawsuits by commercial creditors against heavily indebted poor countries, many still outstanding. For instance, in 2003, the Big Food Group, owner of Iceland supermarkets and other companies, sued Guyana for over £12 million.

      Donegal International Limited, the company that sued Zambia, is registered in the British Virgin Islands. Its only business is to pursue the Zambian debt. The court in London failed to discover who are the ultimate owners of Donegal, and of other sister companies such as Walker International, which sued the Republic of Congo. Donegal’s sole director is a man called Michael Sheehan, who owns a company called Debt Advisory International, based in Washington DC, USA.

      Who are the vulture funds with Iceland? I don’t know, but I’m going to start digging…

  9. deeringothamnus

    I don’t understand why anyone cares about Iceland, a fly speck country with hardly any people, and, why on earth anyone took them seriously enough in the first place to let them blow such a big hole in the world financial system

    1. Eleanor

      Iceland was a tiny country that maintained a Scandinavian standard of living with almost no resources. (Cod? Sheep? Lava?) It showed what could be done with very little; and now it shows what happens to a working economy under late stage capitalism.

      As far as caring about Iceland goes, why should we care about any country? It’s only capitalism. It’s only human suffering.

      1. jake chase

        I read somewhere that Iceland is energy independent. I have no idea where the energy comes from. Perhaps geothermal?

        As to the IMF, I suppose it offered new financing to an insolvent government with the usual quid pro quos.

        Why doesn’t Iceland print its own money, distribute it prorata to the population, impose a hefty tax on the vulture funds when they collect on their mortgages and get everyone back to work?

    2. Praedor

      Uh, hello sociopath. How about BECAUSE THEY’RE PEOPLE?

      Banks and corporations are NOT people. Who gives a flying fuck about them? It is the real people that matter.

    3. richard wilson


      Your question is legitimate. Iceland is a microcosm, a model, an example of the corrupting influence of money. It is an object lesson in how political corruption and cronyism overrules mass referendums in any nation. Iceland reminds us that without government complicity, the banks could never have gotten away with creating these nightmares. Hence the culprits are not only predatory banks and vulture funds, but politicians.

      Iceland is a special laboratory, because in a nation of 300,000, most people are related by blood in one way or another. Hence their own “family” sold them out.

  10. Ye Olde Eric

    It seems as if the payday loan, rent-a-crap, numbers and protection rackets have moved out of the shanty towns and onto the world stage. We need to stop legitimizing them by calling them banks, credit markets, stock markets, and governments. How did so many low-lifes get into positions of such responsibility?

  11. Schofield

    Is it permissible to dream that maybe one day human societies will have a money creation system that isn’t controlled by sociopathic politicians, bankers, lawyers and economists.

  12. Susan the other

    Greg Palast in an article in The Guardian (a couple of years ago) exposed a really disgusting vulture fund in the NYC area, maybe out toward the Hamptons, and their office looked to him to be in disrepair. Palast was not received. He put together the facts without an interview and these were the facts: This Vulture Fund, let’s call them FH Fund, bought up some very down and out African bonds (Nigeria maybe? sorry) for 3 cents on the dollar. They then strong-armed this country to pay up in full. This demand was well known to be totally impossible but it didn’t slow FH down. They harassed this country and filed international lawsuits to collect until finally an appeal was made in an international forum (? maybe the same lawcourt) and FH was forced to back off and take 3.5 cents on the dollar. We are led to believe it did not cover their rotting costs. Good. So question: Why isn’t this debt sold to the debtor to begin with?

    1. Blunt

      I like the notion of selling the debts to the debtors rather than third parties. I would suspect, just suspect mind you, that the holding entity would get a better %age from the actual debtor than from the vultures anyhow.

      Debt paid off because, what, am I gonna dun myself? OTH, also makes a toxic environment for the sociopathic scum who run collection agencies and vulture agencies of any sort: payday loans, etc.

      Of course, in USA, that would mean a sea-change in the politicos who would demand and broker such deals. Can you imagine Obama or Rahm going for that notion eather than full 100%+ payback?

      1. ScottS

        This seems like an idea so simple maybe no one has thought of it for being too obvious.

        Why don’t distressed mortgagees buy their own debt at fair market value? Would it be possible to talk mortgage investors into selling the debt at par to a non-profit, who then works with the debtor to buy their own debt back at the reduced value? As long as you pried the title out of the servicer’s hands, it seems legal and would solve the clouded title issues.

        Ideally, it would give the investors more than they would get in a foreclosure. Homeowners are no longer underwater. Title is unclouded. If servicers won’t perform the mod, let’s take it out of their hands!

    2. richard wilson

      @ Susan the other

      You got it. Fortunately the news isn’t totally dreadful. On 8 April 2010, England (of all places!) passed a landmark Debt Relief Bill to restrict Vultures from using British courts to do their dirty work, suing distressed nations for full repayment of debts that the Vultures bought cheaply.

      In November 2009 two Vulture Funds were awarded $20 million in the High Court from Liberia – the second poorest country in the world – for a debt dating back to the 1970s.

      The British law is expected to make that verdict unenforceable.

      Note that most of the worst Vultures operate out of New York. Some are connected with Wall Street banks.

      For more information about how these creeps work, see this

  13. Francois T

    “On IMF advice” is synonymous with “Please do perform seppuku after ruining your family and descendants.”

    Is the Icelandic government THAT stupid?

  14. Tom Mc Cool

    In the United States, banks receiving TARP bailout money were supposed to negotiate with mortgage debtors to write down the debts to market prices and/or the ability to pay

    No, they were not. Who ever said that? The HAMP program was intended to assist that but the banks were never “supposed to” mark the loans to market.
    I did hear that Nevada changed a state law that if a vulture bought a mortgage note at discount, that discounted price was the maximum principal amount he could seek to recover. That theory has been tried in Federal bankruptcies but lost on appeal.

  15. ECON

    AAHHAAAA! We democratic people have been fooled again. Capitalism as practised owns government. We the people (99%) do not even own our government and through forced austerity we will not own our homes.

  16. Sunny129

    Why Icelandic authorities didn’t consult with Prof Bill Black who was Deputy Director of Resolution Trust for S&L in early 90’s? He would have been definitely pro Icelandic citizens!

    IMF wouldn’t have approved him but no surprise there!

  17. Fiver

    Great piece.

    I had wondered about the veracity of so many rosy references to the “Icelandic solution” over the last couple of years, but never researched it myself – foolish me. This is just appalling.

    As noted by others (always solid comments on NC) I also ask whether this was a case of good people on the “left” having no clue they were being screwed blue because they simply do not understand anything about finance/banking, or if their “left” is as thoroughly rotted out as it is elsewhere, eg., Papandreau’s “Socialists”. You would seemingly have to be dumb as a post or already corrupt to allow the IMF to set foot in the country at all WITHOUT independent, expert advice you could trust.

    Or are they good people who knew they were being screwed because they were told point blank by the IMF: “Iceland will be economically destroyed if you do not comply” as in the effective institution of financial/trade sanctions without the nuisance or potential embarrassment of having to go to the UN ?

    In any case, no matter which way you cut it, it’s evident the one fight that must be won if anyone is to win anywhere is the one in the US – all Power’s strings lead to Rome.

  18. C

    I have an open question for the author. Could such a system work with the funds being purchased if rules were added to state that those buying the distressed debt cannot revalue it?

    I.e. suppose that the banks instead of selling stock in themselves directly sold the loans at current market value with the loan holder forced to modify the mortgage to said value?

    Would that prevent the kind of remarkup that is happening here?

  19. Michael Hoexter

    Even though Iceland is very small, this story is critically important and deserves a wider audience. Thank you to the authors for your careful analysis!

    Please consider making flowcharts/diagrams of these different Foreclosure/Bailout/Resolution scenarios so less economically literate people can understand the political economic landscape around this issue that effects us all. Without a broader popular understanding of the political economy, effective action will itself be foreclosed.

  20. Phil Segrave

    According to the media, Iceland repudiated the oliarchic IMF/private central bank debt and sent them packing.

    Where’s the banking crisis in Iceland?

    …’In the United States, banks receiving TARP bailout money were supposed to negotiate with mortgage debtors to write down the debts to market prices and/or the ability to pay. This was not done. Likewise in Iceland, the vulture funds that bought the bad “old bank” loans were supposed to pass on the debt write-downs to the debtors. This was not done either. In fact, the loan principals continued to be revalued upward in keeping with Iceland’s unique indexing designed to save banks from taking a loss – that is, to make sure that the economy as a whole suffers, even suffering a fatal austerity attack, so that bankers will be “made whole.” This means making a windfall fortune for the vultures who buy bad loans on the cheap.’…

    …’Whereas the past few centuries have seen financial crashes wipe out the savings and creditor claims (bonds, bank loans, etc.) that are the counterpart to bad debts, today we are seeing the bad debts kept on the books, but the banks and bondholders that provided the bad loans being made whole at taxpayer expense.’…

    Yes, that is what the TARP bailouts are, corporate fascism, where profits are privatized, but losses are socialized and the ‘too-big-to-jail’ bankers get their bonuses, but is Olafur Arnarson and Gunnar Tomasson (a IMF insider) saying Iceland’s the new IMF banking boss is the same as the old IMF banking boss?

  21. sharonsj

    Go read Greg Palast’s new book on the vulture funds. They specialize in buying government debt and then squeezing people in every possible way–including seizing goods meant to buy AIDS vaccines. If you think the finance industry isn’t looking for all the ways in which to get rich off of death and destruction, then you aren’t paying attention.

  22. marie mc donald

    Comments very enlightening. My head is spinning with all the information -and dis-information that has been coming through. Unfortunately, only those who are interested are taking the time and trouble to properly read and research, and even they are being shocked into disbelief. We must find ways of educating the rest of the 99 percent, as this is one war we must not lose. We can’t go back we must never go back, but how do we proceed from this point?

  23. Markar

    If Iceland’s govt is once again compromised, this time by the IMF how long before the public tosses them out? After all they are all in close proximity, and 300,000 still greatly outnumber the politicians running things.

    The Vikings were ruthless warriors. I can’t believe the animal spirits will tolerate enduring plunder by the IMF and ruling class forever.

  24. Youri Carma

    Some economical facts to draw your own conclusion:

    FACT: Banks are Insolvent

    FACT: Debt Technically and Practically Unpayable

    FACT: House Prices keep Declining/ Deleveraging Continues

    FACT: QE/Money Printing World Wide

    FACT: Inflation World Wide

    FACT: Dollar decline with other currencies/ The Valuta War

    FACT: Gold and Silver rise

    FACT: Austerity doesn’t work

    FACT: Unemployment Increases

    FACT: World Wide Economic Slump

    Italy is going to implement new austerity measures while Portugal’s Inflation rises on austerity measures and kills businesses in Hungary.

    Greece earlier fell victim to suicidal austerity politics and more to come …..Crazy!

    IMF Same Exact Four-Step Program:

    1.0 Privatization ‘Briberization.’

    2.0 IMF/World Bank capital market deregulation allows investment capital to flow in and out the “Hot Money” cycle.

    3.0 Market-Based Pricing, a fancy term for raising prices on food, water and cooking gas

    3.5 IMF and World Bank call their “poverty reduction strategy”: Free Trade- “The IMF riot.”

  25. pope john

    >On IMF advice the government negotiated an agreement so loose as to give them a hunting license on Icelandic households and businesses.

    Those first 3 words, “On IMF advice”, tells you all you need to know. How could Iceland have been so daft as to even let those vermin in the country after the collapse? And to then take advice from them?

    Iceland – kick them out, tell the vulture banks and funds they’re taking 100% loss and be a beacon of strength for the rest of us.

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