On September 15, 2008, a former Goldman Sachs chairman, US Treasury Secretary Henry Paulsen, deliberately triggered a predictable global financial meltdown when he decided to break precedent and let Lehman Bros, the fourth-largest Wall Street investment bank, go bankrupt. The reasons for his decision are for another time. The fallout from that traumatic financial crisis remains very much with the world financial system to this day, more than seven years later. One of the little-noticed casualties of that Lehman Bros. debacle was the worst banking crisis in the history of one of the world’s smallest countries, Iceland. How that country of 323,000 citizens chose to deal with the crisis is a model for the rest of the world. Instead of beatifying the criminal bankers responsible for worst world financial crisis in history, the people of Iceland did something quite different.
Iceland, a beautiful Nordic island in the far North Atlantic between Greenland and Norway, with active volcanoes, streams with some of the most delicious non-industrial and non-GMO wild salmon, self-sufficient in energy from thermal springs and hydroelectric power, got lured into the mad, greed-driven frenzy of the US sub-prime real estate crisis in a big way. In October 2008, amid the global financial Tsunami triggered by Paulsen’s Lehman act, the Iceland government nationalized the three largest private banks, Glitnir, Landsbanki and Kaupthing, following depositor panic withdrawals. The three banks, in a few short years after they were privatized had managed to amass debts ten times Iceland’s annual DGP.
When a group of sensible US economists proposed Paulsen nationalize the top Wall Street banks behind the crisis–JP Morgan Chase, Citigroup, Bank of America, Goldman Sachs– to restore order and keep credit flowing to the real economy, he replied that would be “socialism. We don’t do that in America.” Instead, Paulsen’s US Treasury used hundreds of billions of US taxpayer dollars to buy non-voting shares of the Wall Street banks, meaning the Government didn’t demand any say in the banks’ policies in return. That might be called bankers’ socialism–privatize the profits and socialize the losses.
By November 2008 the UK and Dutch investors in a now-defunct savings scheme of Landsbanki, Icesave, found their hundreds of millions of Pounds of investments were, indeed, frozen like ice—their savings were frozen ice. When the British government demanded of the Iceland government the repayment of the deposits in the UK branches of the formerly private Landsbanki bank, an international dispute, known as the Icesave dispute, erupted. The British government invoked anti-terrorism legislation against Iceland in order to freeze the UK-based assets of Kaupthing, Iceland’s biggest bank, bankrupting the bank. Iceland’s government turned to the IMF for a $5 billion bailout, the first European country since Italy in 1976 to do so.
Citizen revolt
The Governor of the Iceland Central Bank, David Oddsson went against the government of Geir Haarde, who had been complicit in facilitating the private bankers’s criminal Ponzi schemes, and stated on national TV, “Icelanders will not pay the debts of profligate financiers.” In January 2009 Haarde’s coalition was forced to resign following massive protests as unemployment soared from 1% before the crisis to over 9% in months. The IMF, as always, was demanding severe Greek-like austerity from the government as condition for its bailout. In September 2010, Haarde became the first Icelandic minister to be indicted for misconduct in office, and the only politician in the world to be charged with responsibility for the financial crisis. He stood trial before a special court for official offenses, the Landsdómur. He was convicted on one count.
The Haarde government had twice negotiated terms under which Iceland would repay the UK and the Netherlands governments, with interest, for the cost of bailing out Icesave savers. The IMF demanded it as condition for its money. And Parliament bowed. But Iceland’s staunchly independent voters twice passed popular referenda rejecting the UK, Dutch and IMF demands. Under the IMF austerity program, until it was ended in 2011, Iceland went into an economic depression. Disposable income fell by a quarter, and 30,000 people – one-tenth of the population – went into serious loan default; thousands of homes were repossessed.
In April, 2013, 38-year-old Prime Minister, Sigmundur Davíð Gunnlaugsson, was elected on promises of mortgage relief for every homeowner instead of relief for foreign bank bondholders in Iceland’s three failed banks. His government left international bondholders and depositors out in the cold, as his government and Icelandic bank administrators froze some 9 billion Pound sterling in foreign assets the three banks held at the time of nationalization.
The new Finance Minister imposed a 39% tax on Icelanders wanting to invest money abroad, as well as imposing capital controls, a move that stabilized the currency. Most tellingly, the government prioritized saving its people and economy and prosecuting and even jailing the private bankers and politicians responsible for the crisis, a 180-degree contrast to the US or EU where governments used taxpayer money to bail out the criminal banks responsible for the fraud in the first place.
Jail the corrupt bankers!
On November 15, 2015, Iceland courts convicted the 26th banker involved in the scandal that burst in September 2008. The bankers who have gone to prison were charged with crimes ranging from insider trading to fraud, money laundering, misleading markets, breach of fiduciary duties, lying to the authorities, market manipulation to embezzlement. Combined, the 26 jailed bankers will serve some 74 years behind bars. As well, to date criminal fines totaling $212 billion have been imposed on the 20 biggest banks. More bankers await trial.
By contrast, at the failed British HBOS bank group, the largest UK mortgage lending bank, taxpayers were forced to make a $29 billion taxpayer bailout. The UK Financial Services Authority’s only enforcement was against the head of corporate lending who was fined £500,000 and banned from the financial services industry, and loss, (the dishonor!) of knighthood for one HBOS director. In the failed Royal Bank of Scotland, also bailed out by taxpayers billions, Fred Goodwin, the head of Royal Bank of Scotland also lost his knighthood. He had been knighted in 2004 for awarded in 2004 for “services to banking.” In the USA, not even a whisper of criminal charges against the CEOs or directors of JP Morgan Chase or Goldman Sachs or Citigroup has been heard. Government fines against various banks are written off and the same criminals that Iceland put behind bars are left free.
The Iceland difference
Today Iceland is the successful model for the precise opposite of the IMF Greece model of squeezing blood from a stone with brutal austerity. It is the first and so far only European country to surpass the 2007 pre-crisis economic levels. GDP grew for the first six months of 2015 at an impressive 5.6%. Inflation went from 18% at the start of the 2008 crisis to 2% by 2015. National debt went from 88% of GDP in 2010 to 81%, below most EU levels. In March 2015, the government of Iceland officially withdrew its earlier candidacy to join the European Union, the only country ever to do so.
Paradoxically, Prime-Minister Sigmundur Davíð Gunnlaugsson was caught in the middle of the Panama Papers scandal and was forced to resign due to the fact that he didn’t disclose all the financial assets that were in his possession. His was the only Western politician who was directly mentioned in those papers, which seems odd at best. However, Iceland is still reluctant to back down.
Iceland’s President, Ólafur Ragnar Grímsson, explained the feelings of his countrymen: “We were wise enough not to follow the traditional prevailing orthodoxies of the Western financial world in the last 30 years. We introduced currency controls, we let the banks fail, we provided support for the poor, and we didn’t introduce austerity measures like you’re seeing in Europe. Why are the banks considered to be the holy churches of the modern economy? Why are private banks not like airlines and telecommunication companies and allowed to go bankrupt if they have been run in an irresponsible way? The theory that you have to bail out banks is a theory that you allow bankers enjoy for their own profit, their success, and then let ordinary people bear their failure through taxes and austerity. “
F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”.
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