Iceland: Bankers Convicted, Unemployment Down

Yves here. Correlation is not causation. However, as this post makes clear, Iceland had a vastly worse bubble than the US did and prosecuting the executives of banks that went bust was an important component of its post-crisis recovery program. Iceland is on the mend and unemployment has fallen considerably. And the contrast between Iceland’s results versus those of Ireland, which also had an outsided banking system that went bust, are striking (although Ireland was crippled by a traitor, the head of its central bank, who effectively sold out his country to increase his odds of garnering a more important post in the EU. There was no reason not to let the Irish banks go bust, but the government was pressured to backstop them, which meant dumping costs on taxpayers. Why were Irish citizens victimized this way? The likely reason was blowback to Germany. Hypo Bank, which was not exactly the most solid institution, bought Irish “specialist” lender Depfa. Hypo was nationalized by Germany. Sticking Irish taxpayer with the cost of the entire unguaranteed banking sector was a way of getting them to pay for part of the cost of the Hypo rescue. And who helped push this toxic arrangement over the line? Timothy Geithner).

If nothing else, the Iceland example challenges the hypothesis that busting the top bankers will undermine confidence in the system. Anyone who remembers September 2008 to March 2009 will recall that confidence in financial institutions was so deservedly low that it could hardly go lower.

And please, spare us any talk of how hard it would be to prosecute bank executives. Plenty of people have set forth legal theories with supporting evidence, including Charles Ferguson in his book Predator Nation and yours truly in this blog.

By Kenneth Thomas. Originally published at Angry Bear

Remember Iceland? During the high-flying early 2000s, its three main banks went berserk, paying high interest rates to international investors that accumulated deposits equal to more than 100% of the country’s gross domestic product (GDP) and making loans equal to 980% of GDP. When the collapse came, Iceland took a route not taken by Ireland, Spain, and other EU countries: Rather than bail out the banks, the government simply let them go bankrupt. The value of the krona fell by about half, the country was embroiled in disputes with the Netherlands and the United Kingdom over paying off Dutch and British depositors, and it had to take an International Monetary Fund (IMF) loan just to stay afloat.

When we last checked in, there were indictments and criminal investigations of the officers of all three banks, and Icelandic banks were forced to forgive all mortgage debt in excess of 110% of a home’s value. Iceland’s 2012 unemployment rate was 6.0% compared to Ireland’s 14.7%. But that was two years ago; what’s happening now?

In December 2013, four top officials of the country’s formerly largest bank, Kaupthing, were sentenced to jail terms ranging from five and a half years for its chief executive to three years for one of the majority owners. While their cases are currently under appeal, they were indicted this July for further fraud charges. Various bank and government officials have had final convictions as determined by the Supreme Court of Iceland; Wikipedia has a handy rundown on where numerous cases stand, all based on Icelandic-language sources so I cannot read them myself.

Homeowners are still in difficulty in Iceland, however. This is because mortgages in Iceland are usually indexed to the inflation rate; that is, the amount of principal is increased by the rate of inflation. Iceland’s inflation rate was 5.2% in 2012 and 3.9% in 2013, while Ireland’s inflation was 1.7% in 2012 and a near-deflation 0.5% in 2013. That is a pretty hefty load for Icelandic homeowners. The current conservative government has instituted a new round of mortgage relief, but there are a lot of devils in the details. Almost half of the “relief” comes in the form of people being allowed to use their retirement savings  (which are tax-advantaged like U.S. individual retirement accounts) to pay down their debt. Yeah, it’s great to pay your mortgage with pre-tax dollars, but it’s still your own money you’re paying, which will no longer be available for retirement. The IMF has raised doubts about the plan’s overall effect on government finances, too.

As I mentioned in my last post, unemployment in Iceland stood at 4.4% in July, versus 11.5% in Ireland (navigate to Labour Force Statistics, then Short-term Statistics, Short-term Labour Market Statistics, then Harmonised Unemployment Rates). And, as I also mentioned in the post, Ireland’s unemployment rate has been artificially lowered due to net emigration from the country.

While Iceland suffered a great deal from the crisis and is by no means out of the woods, it looks like the country made the right call by not bailing out the banks. The economy is growing and unemployment is down to less than half of its peak crisis level. As Paul Krugman has emphasized, having your own currency to devalue helps as well, although it substantially raised inflation and mortgage balances. Iceland was dealt a bad hand by its bankers, but it’s making at least some of them pay for that, which is more than we can say in the United States.

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  1. John

    Iceland is also blessed because they have their own currency, does not answer to Brussels and has a more vibrant democracy than most.

  2. joegreen

    Major reason for Holder to leave the government – he has been giving “get out of jail cards” to all of his future customers or employers, now he can collect.

    We put a lot of executives in jail during the looting of the S&L, see:
    The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry [William K. Black]

    My vote is to replace Holder with Bill Black today.

  3. sd

    Things have improved significantly but only because of the huge influx of tourism dollars. “They jailed the bankers” didn’t happen. Still hasn’t happened and will never happen.

  4. walt

    Hey, wait a minute. I followed that ‘imf’ link, which turned out to be a news account with reference to imf: ‘The plan has triggered controversy in Iceland and abroad attracting warnings from the International Monetary Fund, the OECD and rating agency Standard and Poor’s, due to its high cost and uncertain economic consequences.’

    Reading between the lines of the news account, it appears the mortgages are held by Iceland’s banks, which are being treated as too-big-to-fail by the government going into debt to be paid by future tax payers. Sound like a country near you?

    1. Kenneth Thomas

      The three banks were split into separate domestic and international banks; it is the latter that are responsible for settling the bankruptcies with their foreign creditors. The new domestic banks indeed hold the mortgages. The big problem is the indexation of mortgages to the inflation rate. The Icelandic economist site I linked suggests that the government should have banned that practice when it passed the first mortgage relief, and I agree.

      1. sd

        Many of the mortgages were also taken out from foreign banks at a time when the krona was riding high so that when the krona collapsed, Icelanders suddenly found themselves owing twice as much on their houses.

  5. steelhead23

    Say What? Iceland, of all places, believes in the rule of law? Something must be done. We have to make that backward country “ready for looting”.

    Sarcasm aside, Iceland is quite appealing to this flyfishing fanatic. If the language weren’t so difficult, perhaps it would be a nice place to retire to.

    1. steelhead23

      Hmm, obviously I don’t know how to use HTML code, meant to write ready for democracy, strikeout, looting, and the rest of my comment stands.

  6. barrisj

    Parenthetically, Iceland’s own financial crisis and the conduct of its banks and banksters also provided fodder for contemporary crime novels by Icelandic writers such as Arnaldur Indridason, in whose book “Black Skies” the machinations and abuse of, e.g., carry trades (financed by laundered funds) were cogently explained and how discovery of such chicanery led to murder. Art imitating Life indeed.

    1. Glenn Condell

      I will look for a translation of the Indridason book, sounds tasty. Partly this is prompted by my enjoyment last year of Atom Station and Independent People by Halldor Laxness, wonderfully quirky stuff which helped me understand that the spirit that led to those tractors converging on the Althing a few years ago wasn’t a one-off. The Icelanders were none too happy with NATO/the US involving them in the Cold War in 1949 and made their feelings known:

      Of course Iceland ended up in NATO anyway, but it does the heart good to see resistance, however futile. The more futile the better, in one sense…

  7. Michael Hudson

    I thought the article was TERRIBLE,unrealistic and derivative of pro-bank sources, so I and the leading Icelandic economist I know. Here’s what he wrote.
    This is very far from the truth – and the modest qualification that Iceland is not yet out of the woods does not begin to convey the true state of affairs.
    Most recently, next year’s budget allocation for the Office of Special Prosecutor is being cut to something like one-third its level of two years ago, having been trimmed substantially in the current year’s budget.
    There is a concerted PR campaign underway by the government side to question the integrity and fairness not only the Special Prosecutor but also the State Prosecutor, who was legally required to handle the prosecution of former Prime Minister Geir Haarde before the National Court (Landsdómur).
    Last week Prime Minister Sigmundur Davíð Gunnlaugsson called on a special oversight committee of Althing to call the State Prosecutor to appear before them to answer allegations made a few days earlier by a disgruntled former employee of the Special Prosecutor concerning taped eavesdropping on telephone conversations between (mainly) indicted bankers and their lawyers. The Prime Minister (our host the other year) appears to be overwhelmed by the burdens of his office, to put it mildly.
    The attacks on the Special Prosecutor come at a convenient time for the defense of bankers who have are appealing District Court judgments against them. So far, not a single banker has served a day in jail.
    Capital controls remain in place six years after their temporary introduction at the end of 2008. Last July the Minister of Finance recruited a team of foreign experts, including Lee Buchheit and Anne Krueger, to advise on how to handle the still-unresolved issue of how to settle the bankrupt estates of the collapsed banks. Reports indicate that the Minister of Finance prefers negotiations with creditors but the Prime Minister’s advisors would like to force the estates into formal bankruptcy proceedings, with the Central Bank taking over their foreign assets in exchange for kronur, with eventual payouts to creditors being made in kronur. The Central Bank would then sell them back part of the foreign assets of the bankrupt estates at a confiscatory exchange rate.
    The Minister of Finance says that major steps towards the removal of capital controls will be taken this year. Of course, it remains to be seen how the foreign creditors will react to the government’s ideas on how to settle the bankrupt estates. The government has repeatedly stated that any such settlement must not disrupt economic and financial stability. My own take on the situation is that this would require such a massive haircut, in one form or another, for foreign creditors that the initial steps by the government towards a solution are not likely to be deemed acceptable by the other side.
    This, in brief, are the main issues at present – other than a possible eruption of the Bárðarbunga volcano whose caldera is several kilometers wide, is covered by a few hundred meters of glacial ice, and is sitting atop a lava powder keg, so to speak.

    1. Kenneth Thomas

      Thanks for the information; I do not have access to Icelandic-language sources, so I was restricted to English-language ones which, as you note, are frequently finance-related sites like Reuters and Bloomberg.

      I guess it does not surprise me if the Special Prosecutor’s office is having its funding cut since the conservatives returned to power. You will note that I specifically do not say anyone has been jailed. My first article, more than two years ago, said they were being prosecuted. Now, there are convictions. The ones I mentioned are currently on appeal, as I say in the article. At the same time, the Permanent Secretary of the Ministry of Finance had a two-year sentence for insider trading upheld by the Supreme Court; other defendants in the investigation even had their sentences increased by the Supreme Court. Are you saying that none of these people have yet begun their jail terms, either? The Finance official, Baldur Gudlaugsson, had his sentence upheld over two years ago.

      And I agree with your implicit point that average Icelanders can still get screwed depending on how the negotiations with creditors go.

      1. optimader

        “Although the country has moved from recession to growth and unemployment has been reduced, household debt is still a big topic and the coalition government seems painfully at a loss as to how they can fulfil promises of debt relief and unshackle the country from capital controls. The small group of businessmen and bankers, who many think caused the crash, have lost jets and yachts, but are otherwise mostly doing remarkably well. Anecdotal evidence indicates that the Icelandic lesson from the collapse and the ‘kreppa’ is that loan agreements can always be changed, and nothing is ever final.
        “You Icelanders have done the right thing in letting the banks fail instead of bailing them out. And now Iceland is back to growth and unemployment is falling,” an Irish banker said recently, when discussing the status of the Icelandic economy. “The capital controls? No problem, they don’t touch ordinary people.” Right, but the capital controls do touch the economy. One economist calls the controls a “slow death.”
        Iceland will not have escaped the collapse of its banks in early October 2008 until the capital controls restricting outflow of foreign currency are abolished. ….
        There has been a lot of talk lately about the privatization of the Icelandic banks at the dawn of the century. It is said that the buyers did not have any experience in the banking business, and that better offers from more experienced candidates were turned down….
        … But it all ended quite differently: Icelandic investors with no experience in the banking sector bought the banks. Landsbanki was sold to a group of investors forming the Samson Holding ehf, which didn’t even bid the highest purchase price. But the leader of the group, Björgólfur Guðmundsson, was not only a member of the Independence Party, just like Davið Oddson and Geir Haarde, the latter being the Minister of Finance at that time,
        he amount of money Icelanders have put into tax shelters in places
        such as Cyprus, Jersey and the Caymans has increased about 40% in the
        past year, according to Morgunblaðið…
        …Iceland has invested somewhat heavily in Cyprus – the largest owner of Landsbanki before the crash last year, Samson Holdings, owned half of the Cypriot company Bell Global Investments.
        Quid pro quo
        Gudmundsson and his son Bjorgolfur Thor Bjorgolfsson set out for St Petersburg in 1993 with their friend and partner Magnus Thorsteinsson. They went into the brewing business.

        In Russia in the early 1990s beer could be extremely bad for a person’s health. One brewing executive was walking through the kitchen of his apartment when a hail of bullets came through the window and killed him outright. Another was cut down as he stepped out of his Mercedes. A gunman walked up to him and coolly fired three bullets into his head.

        Other assassinations in the business and political sphere rocked St Petersburg, but Gudmundsson, his son and their partner stood their ground. Indeed, their Bravo brewery flourished, even as a fireraiser put paid to one of their main competitors.

        The partners eventually sold out to Heineken and, pocketing $400m, returned to Iceland to increase their wealth. While Mr Thorsteinsson went off nvest in an airline, Mr Gudmundsson his son Thor (always known as Thor Bjorgolfsson, using his patronymic as is Icelandic custom) set about the busis of becoming billionaires.

        And what better way than to buy a bank? As they were expanding their interests a few years ago, Iceland was privatising its banking industry. Father and son had prospered with their investment vehicle, Samson, and expressed an interest in Landsbanki, the country’s second biggest bank.

        My friend in Iceland , from government service, says basically the privatized banks were vehicles for Russian mafia money laundering. St. Pertersburg/brewing industry/mafia

        1. Kenneth Thomas

          Yes, great links, thanks so much. They do not answer one question that I raised in response to Michael Hudson: Has anyone who has had a jail term upheld by the Supreme Court actually gone to jail yet?

      2. Michael Hudson

        My informant is Gunnar Tomasson (He said I could release his name). He introduced me over breakfast to the current P.M. (before his election), who like many Icelanders has close relatives among the bankers.
        It’s not your fault that you must rely on English-language sources. Apart from what I’ve written for the Financial Times when they asked me to put in a corrective, the pro-bank Social Democrats and Greens paid Paul Krugman a bundle to represent their side of the story. (He didn’t realize he was not being realistic; only gullible. Big money does that to you.)
        The problem is that the banks are sitting on an entire year’s GDP of currency that they want to move out of the country — which of course would SMASH the exchange rate. Iceland has NOT solved its problem, but is hopelessly on the hook if it ever relinquishes its capital controls.
        Also, the identity of the owners of the “new” banks is not known. It’s a mess, still with heavy criminal behavior — and Icelandic politics is very family-oriented.
        Everywhere, its disaster is presented as a success story simply because the body has not yet hit the ground (on the way down from a great height).

  8. Steve13565

    The more rapid rise of inequality under Obama than under Bush is probably mostly driven by the huge bailouts to the oligarchy and our refusal to prosecute their financial crimes. Putting those two together (an action and an inaction) would probably be enough by itself to cause a huge increase in inequality without even considering anything else that drives it.

  9. ewmayer

    One aspect worth considering in the “politicians actually listening to the people now and again” vein is this: Anyone who has spent time in Iceland (outside Keflavik airport, that is) knows how small the island is, especially in terms of the capital, where over 90% of the populace lives. In a place like that it is difficult for the would-be-oligarchs to isolate themselves from their Mitbürger behind barricades and manifold layers of structured officialdom, as oligarchs are wont to do.

    I suspect the not-abstract threat of having furious citizens literally drag one from one’s home is a factor in play in Iceland, even if it’s “far in back of the headlines.”

    1. Kurt Sperry

      True, there are no places in Iceland to physically remove oneself from the hoi polloi, no gated communities of millionaires, no locked down physical financial district or elite ivied universities to create their own reality distortion bubbles to inhabit. The squillionaire has no fantasy playgrounds built for them in Iceland like exist in almost every other country. As I was walking by the Russian consulate in Reykjavik this May, a black armored Mercedes stretch pulled up in front of the building and regurgitated Very Important People dressed in 5000 dollar black suits and they looked as out of place and frankly ridiculous there as they would in some Iowa cow town. The same retinue of douchebags swaddled in their power totems would hardly even raise notice in Manhattan, DC or London etc.

      My first impression after a first day spent cruising around Reykjavik was that this is would be what Alaska would be like if it were peopled with actual smart people.

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