Bond Market Blackmail

By James Kwak

Like probably most people, I have not been following the saga of Iceland and its banks’ foreign depositors, so I was grateful for Planet Money’s podcast last week on the topic. The background, as I understand it, is something like this:

  1. Iceland’s banks offered high-rate savings accounts to depositors in other countries, notably the United Kingdom and the Netherlands. These accounts did not have an explicit government guarantee.
  2. In 2008, the global financial system nearly collapsed, Iceland’s banks failed, and depositors got more or less wiped out.
  3. Iceland, unlike Ireland, did not guarantee its banks’ liabilities. It did, however, choose to bail out domestic depositors in those banks — but not foreign depositors.
  4. The U.K. and the Netherlands both chose to bail out their citizens who had deposited money in Iceland’s banks.
  5. The U.K. and the Netherlands then tried to get the Icelandic government to pay them back. They negotiated a settlement, but that was rejected by a popular referendum in Iceland. Then they negotiated another settlement (which would have cost Iceland about $6,000 per person), but that was also rejected.

Now, there is a legal question about whether or not Iceland has an obligation to bail out foreign depositors in its banks. Remember, there was no explicit government guarantee. The question is whether bailing out domestic but not foreign depositors is illegal discrimination under international law.* Apparently that’s a close question, but it’s not relevant for my purposes.

The economic question, as the podcast framed it, is whether paying off the U.K. and Dutch governments will help Iceland attract foreign investment in the future. They had a bond investor from Vanguard — ordinarily just about my favorite financial institution — saying that a vote against the settlement would make investors less likely to lend money to the Icelandic economy in the future.

Now, this may be true (although I doubt it). But think about what this is really saying.

Some people — largely retail investors — lent money to Iceland’s banks, either deciding that the high interest rates made up for the lack of a government guarantee or not bothering to check if there was a government guarantee. They lost their money (or they would have, if their home governments hadn’t bailed them out). The lesson I think people should learn from this is: MAKE SURE THERE’S A GOVERNMENT GUARANTEE!!!!! In other words, lenders should be smarter in the future.

Vanguard Bond Guy is saying something different, however. He’s essentially saying that foreign investors will only lend money to some country’s private institutions if that country promises to bail out foreign investors should those private institutions fail. That’s the only light in which his statement makes any sense. In the future, lenders to Icelandic institutions will only care about the chances of their future loans being paid back. Whether Iceland pays off the U.K. and the Netherlands now can only matter as a signal about Iceland’s future behavior. And the only signal it could possibly send is that Iceland recognizes some hitherto nonexistent obligation to bail out its private institutions whenever they default.

This is both obnoxious and crazy. It’s obnoxious for the same reason the campaign against strategic homeowner defaults is obnoxious. If you made a zero-money-down loan to someone and he walks away, it’s your fault. The lesson you should learn is that you shouldn’t make zero-money-down loans; you shouldn’t suddenly invent some principle that people should pay debts they no longer owe when it’s not in their own interests.

And it’s crazy because — what does it say about capitalism? The theory of the financial markets is that they allocate capital to the places where it will be used most efficiently. If Bond Guy is right, that’s not true: they allocate capital to the places where the government provides the strongest implicit guarantees. You want capital? Then your government has to bail foreign creditors out of their bad decisions. How is that good?

Now, maybe the credit markets will refuse to lend money to Icelandic companies, which would be bad for Iceland. I don’t know; I don’t have their phone number. But if so, then the credit markets are not doing what they are supposed to be doing, at least according to their most ardent defenders. Instead, they will be punishing Iceland for lenders’ failure to read the terms of their contracts carefully.

* What international law? you may ask, especially since Iceland isn’t (yet) a member of the EU. I don’t know.

78 thoughts on “Bond Market Blackmail

  1. By definition, “laws” must be written by somebody and interpreted by somebody.

    Who are those somebodies for “international law”, and how are they chosen?

    Nice post. Not sure why you decided to focus on Iceland refusing to bail out retail investors in the U.K. rather than Ireland agreeing to bail out megabanks in Germany… But still, nice post.

  2. I believe it’s the EEA directive 94/19/EC. Act 98/1999 formally adopted the EEA regulation into Icelandic law.

  3. The issue is a bit more complicated as the Icelandic authorities did nothing when the branch (not subsidiary) advertised its deposit scheme as being insured.

    There was also no indication from the Icelandic government beforehand that the deposit insurance fund wouldn’t back up the banks. They also spouted the same mantra of a sound system that would be backed up if needed as every other country. They also had many meetings with investors and UK and Dutch authorities where they never once hinted that they wouldn’t pay the 20k Euro minimum.

    They basically wanted to enjoy the fruits of investors’ expectation of an implied bailout but not bear the cost if it actually happened.

    I think the podcast gets it right in the end as investors would question the intentions of Icelandic authorities and not believe their rhetoric. It would be a different issue if it had been clearly stated all along that the authorities wouldn’t back the scheme, but that’s clearly not the case.

  4. > They basically wanted to enjoy the fruits of investors’ expectation of an implied bailout but not bear the cost if it actually happened.

    And “investors” (i.e. depositors) expected an 8% return from a savings account with zero risk. Cry me a river.

  5. Nemo,

    That may well be, but those were the rules of the time. If you think deposit insurances are morally wrong or whatever then that’s fine, lobby for a reformed system in the future. But you don’t change the rules retroactively.

  6. Nice post.

    These so called “capitalists” are revealing their true nature with the Icelandic and Irish banking collapses. They are revealing to us that they are little more than economic predators, siphoning off a nation’s wealth by paying off different governments.

    The bad news, of course, is that some of these same financial institutions are in the upper echelons of the US government and the privately-held Federal Reserve Bank.

    The scales are falling off James. Good work!

  7. But if the purpose of government is to maintain the wealth and power of the wealthy and powerful then the Icelandic government has to compensate the wealthy and powerful people who have been affect by this.

  8. @Bagofhot: “But you don’t change the rules retroactively.” Really. Isn’t that what some municipal and state governments are threatening to do to the pensions of certain public employees? Please tell me if I am mistaken.

  9. I continue to salute the people of Iceland as the one and only populace which has shown any real vigor in fighting back against history’s worst criminals.

    What international law? you may ask, especially since Iceland isn’t (yet) a member of the EU. I don’t know.

    IOW no law whatsoever. The Bailout has been Hobbesian improvisation, every step of the way.

    On the other hand, when we contemplate the banksters and the rest of the criminal pseudo-elites, we should be very interested in the indictments and judgements enshrined at Nuremburg in 1946. That’s the only appropriate model.


    But you don’t change the rules retroactively.

    1. There are no “rules” in dealing with thieves. We should shoot them down like rabid dogs.

    2. If #1 is too harsh for you, then there’s the fact that the criminals change the rules retroactively at will, the second any rule becomes inconvenient for them.

    We’ll never begin to liberate ourselves until we return blow for blow, and treat these criminals exactly the same way they treat us.

    The Work to Rule philosophy teaches that we must stop acting as altruists toward corporations and government, but instead act toward them in nothing but a purely egoistic, capitalistic manner.

    So hell yes, let’s do as they do and retroactively change the rules, but to our own advantage this time!

  10. As someone above pointed out it is the case that only bank from countries which did guarantee deposits were allowed to offer UK retail accounts (or retail in any EU country).

  11. @Bagofhot
    “But you don’t change the rules retroactively.”

    Righhht. Nobody has EVER changed the rules retroactively for big finance. They wouldn’t stand for it, even if it means collapsing.

    Big finance is a bunch of bullies. That’s why virtually ever commoner like myself hates them and supports any democratic process that resists them. People hate bullies.

    You can paper over their actions with big words but even an idiot knows when he is being bullied. Good for Iceland.

  12. There’s one born every minute… non-Icelandic people and institutions will lend to Icelandic people and institutions again. After all, we lend to Peru now, after their refusal to pay. Argentina attracts money too.

  13. whether paying off the U.K. and Dutch governments will help Iceland attract foreign investment in the future

    I don’t buy this phony concern (not necessarily espoused here) that investors will be perpetually scared of Iceland. Investors are greedy. If they perceive that some investment in Iceland could make them money, they will pursue it. Maybe they will put more effort into vetting the investment, but that’s it.

    If you throw chum in the water, the sharks will come, whether or not one of their kind was speared and finned last time.

  14. regarding the “* What international law? you may ask, especially since Iceland isn’t (yet) a member of the EU.”-question:

    iceland is member of the “European Economic Area” (EEA) which is the EU-attached leftover of the former “European Free Trade Association” (EFTA).

    iceland is therefore not subject to european union law, but as the hole purpose of the EEA is to enable nonmembers to participate in the common market, the EEA has an identical legal framework (called the acquis communautaire) as the EU.

    EEA members are not subject to decessions of the ECJ, but there is a court for the EEA ( applying one of the central principles of EU law: of non-discrimination of native-born citizen and other EEA-foreigners.

    furthermore there is the problem, that those banks that went belly up offering accounts in the UK and elsewhere, where subject to the regulatury supervision of iceland and not the UK, or any other european supervisor. iceland may therefore also face the blame of being negligent which is an arguement for a state liability.

  15. If I were Icelandic, my question would be “can my family & community have a decent life without benefitting from foreign investment?”

    If the answer is we’ll have food, clothing, and shelter of a decent quality, plus a little extra for entertainment and a gadget here and there…. who needs these investors?

    Economy, after all, exists to serve the humans. Not the humans to serve a sector of the Economy.

  16. Carla,

    I don’t see how the two things are related. If one wrong example of retroactive legislation is a valid argument for another then I’m going to hire Simon Johnson and James Kwak to rewrite financial regulation as of 2000 so we can prevent the crisis of 2007-2008.

  17. “What does it say about capitalism?” It says everything, friend. It is a predators’ game. All these convolutions and complications and weird one-way rulings are just stripes on the tiger, camouflage.

  18. “The Allusion of a Weasel Wording Tactician” – a grammatical error, or assumption of a full faith contract that is a similitude (mirror image) of Goldman Sachs (GS), “ABACUS” debacle?

    Ref: “The Dictionary of Cliche’s ” by James Rogers
    Quote: “Weasel Words. Ambiguities; a statement that the speaker or ‘writer’ hopes will enable him to wriggle out of a difficult situation. The phrase (applicable today as yesteryear) was probably originated by Stewart Chaplin in the Century Magazine (1900):
    ‘Why, weasel words are words that suck the life out of words next to them, just as a weasel sucks the eggs and leaves the shell.’ The phrase was popularized by Theodore Roosevelt in 1916, when he was criticizing President Wilson:

    ‘In connection with the word training,’ the words ‘*universal voluntary’ have exactly the same effect as an acid has on alkali – a neutralizing effect. One of our defects as a nation (sovereign[?]) has been a tendency to use what have been called ‘weasel words’….If you use a weasel word after another there is nothing left of the other. Now you can have **universal training or you can have *voluntary training, but when you use ‘voluntary’ to qualify ‘universal’, you are using a weasel word; It has sucked all the meaning out of ‘universal’. The two words flatly contradict each other.”

    How long has the language of “Caveat Emptor” been around? It seems that Iceland has gifted the bond ghouls a “White Elephant”!
    Iceland’s major trading partners are the EU, US, and Japan. Iceland is by far a great fish processing country that Japan needs now more than ever. Europe and the United States need its “Rare Earth” (eg. aluminum, diatomite, and ferrosilicon), and not to forget animal products.
    Basically its a trade off, with the flood devastation to Australian dirt!

    Great post James

  19. As far as I remember, it was perfectly clear that IceSave deposits were not insured. I didn’t think they were, and that’s why I (small UK saver) didn’t make one, although I did consider it. I don’t remember whether I read the details or just thought the interest rate looked a bit too good to be true. I’m kind of annoyed to find that other people got the interest rate *and* the insurance. Ok you can make a case for retroactively insuring the capital on deposits up to a certain amount – it might have been all of somebody’s savings, and it did look a lot like an ordinary bank deposit if you didn’t look too closely – but why should anyone have got the interest back as well?

  20. HOORAY Icelanders!!… stood up where so many others kept to the couch. Congratulations to you all, you are inspirational.

    I still can’t believe the audacity of former PM labeling ICELAND a “TERRORIST STATE”, if they didn’t buckle under these outrageous extortion demands! No wonder people are so disgusted with these so-called “leaders”.

    Another commenter suggested earlier here “Icelandic authorities” had KNOWLEDGE that branch locations were advertising insured deposits. What evidence is there to support this assertion?

    Second, is the following hearsay:

    ” They also had many meetings with investors and UK and Dutch authorities where they never once hinted that they wouldn’t pay the 20k Euro minimum.”

    Again, where you at these meetings, and do you have firsthand or empirical knowledge, as opposed to anecdotes?

    Moreover, depositors entered into contractual agreements with the depository banks, which specify terms and conditions of the relationship. Why haven’t these come forth?

    No, it’s tough t*tty where I come from, and the depositor-investor needed to cowboy-up from the start.

    Let the British and Dutch authorities can go to hell; too GD bad.
    The making-whole of their subjects is ON THEM, not on the Icelanders.

    And try not to make us laugh with international law nuances….that’s the sickest joke out there, among many.

  21. If you look back at old versions of the Icesave web site (just Google “Internet History” and follow your nose) you will see the come-ons to savers which were published. I agree that there was no explicit government guarantee, but a government guarantee was certainly implied. If that was false and misleading, which it certainly was, then the Iceland government should have stopped it.
    I can feel for the families in Iceland whose future has been crushed by all this. And I am opposed to bailing out any kind of bank or bankers, foreign or otherwise, so I agree with the Icelandic voters rejection of that settlement. But Icelanders have to recognize that their own incredible hubris – their leader wrote a book in 2007 extolling their god-like virtues as the reason for their clear superiority to everyone else; view the YouTube Max Keiser Icelander interviews circa 2007 – led to their pain.

  22. James, with all due respect, you are too… literal, or legalistic. The market is a social construction, whereby the entity with the scarce supply dictates the terms of the trade. We may do well to ignore the rest.

    That being said, I don’t see a market problem in what the investor said. It’s rather a symptom of hubris and of the financial tail wagging the dog of the real economy. Yes, they stopped even pretending long ago–you surely recall the hight figure in Clinton’s team who said he wanted to reincarnate as the bond market–or something to that effect.

    In any case, the main reason for my entry is that it’s going to be the trader, and everything he stands for, who’s going to take the fall. As I read through this thread, the minerals Iceland has should make it desirable trading partner for a handful of up and coming countries, which would be so eager to oblige; except that the Icelandic people may have to accept yuans, or barter.

    If one looks closer at the situation in Iceland, they’ve had an historical problem with the Danes, and a perceived security need, so far satisfied by the US.

    If we balance the previous two paragraphs, we come down to the question: Who gives a rat’s arse for the myopic and narrow view of a clown impersonating a trader? As for the UK and Dutch depositors, they should take notice next time and read the fine print. A fine education it’s always worth the fees.

  23. I believe that one reason Icelanders rejected the proposed settlement was that there are assets to be sold and the funds are to be used to reimburse depositors. The Icelandic feeling is that first determine how ‘short’ these funds will be to reimburse depositors and then vote on the amount necessary to make the depositers whole.
    If Icelanders were to agree to pony up the money now there is no incentive for the liquidators to work hard to recover as much as possible because Iceland would have given, in effect, a 100% recovery guarantee. Since the depositors want all their money back they will put pressure on the liquidators to recover as much as possible because Icelanders have vetoed a blank check settlement. With the recovery step completed, and with the Icelandic ‘liability’ known (and a lot less than 100% of the UK/Dutch claim) Iceland can vote on the new, reduced settlement. With the claim materially smaller it is much more likely that Iceland will vote to make up the shortfall.
    Icelanders have behaved as prudent business people while their government has behaved as a profligate state prepared to mortgage the future of the voters for decades into the future to curry potential favor from the UK and Netherlands. A salute please to Iceland’s sensible voters.

  24. @Bruce:

    I’ve just finished watching the film at your pointer. Twenty years later and nothing has come out of the film-maker’s warning, ‘or else.’ Or nothing yet.

    Now, how come people in the west have cut the number of children to unsustainable levels, whereas the rest grows so fast? Whose responsibility should be to slow the natural growth in these places where opportunity is scarce? Yes, I know that we consume several times our proportional share of resources from the world, so we cannot go on growing forever, but the poor would do better if fewer.

    So, can we consume less and the poor to be less?

    As for how the debt keeps everything in motion, what can I say? You rightly call it SCAM, I say, AWFUL! Each time one walks through Zurich or Geneva, one should understand that all that perfection is due not only to Swiss industriousness, but also to that much more misery in that many more places unseen and unknown to the civilized burghers/citoyens.

  25. The entire premise of this blog post is flawed.

    As has been pointed out by two posters already: Iceland participates in the European Common Market, and as such it cannot legally treat its own citizens different than other citizens of the EU/EEC area. Like the other EFTA states (Switzerland, Norway and Lichtenstein), Iceland has entered into an agreement with the EU that gives those countries access to the Common Market, in return for which they have committed to enact the EU legislation into their national laws (which Iceland has done, also in this case).

    For most practical purposes, the EFTA states are EU members without voting rights. They even contributeto the EU budget. The reasons are mostly that politicians from the EFTA countries have sought a “back door in” when nationalist sentiments have blocked formal membership. Iceland now wants full membership, a bid that is made difficult by the Icesave issue.

  26. PS: “…cannot legally treat its citizens different…” in my post above refers specifically to this case. Of course they treat their citizens differently in some respects (they tax them, for instance). :)

  27. “But you don’t change the rules retroactively.”

    Bagofhot, I’m glad you agree. There was no indication that the government would or wouldn’t back up foreign depositors at their banks. Of course the bank said it was “backed up” in an ad – that’s been the language of all banks everywhere for decades. And if the depositor had bothered to read the fine print, the contract explicitly states that foreign depositors are not backed up. Oops.

    Another phrase in ads that are being touted as the defense of Europe’s attempt to get Iceland to pay? “Terms and conditions apply.”

    Why, exactly, should Iceland pay for the lack of due diligence of someone in another country?

  28. Meltdown Iceland: Lessons on the World Financial Crisis from a small Bankrupt Island. by Roger Boyes 2009 (Bloombury Press …–_their_outsized_influence_must_be_stopped?page=entire

    “If we don’t bust up Big Finance, there soon will be another financial crisis that will destroy what’s left of our middle-class way of life.”

  29. “If we don’t bust up Big Finance, there soon will be another financial crisis that will destroy what’s left of our middle-class way of life.”

    NOBODY OWES US OUR MIDDLE-CLASS WAY OF LIFE, neither the planet, nor our amorality. So, we ought to return to work–to the drawing boards before most everything else.

    We should seek to avert war(s), for they begin as distraction and end as destruction. This would give us time to go back to the assumptions built deep into our socio-political-economic machinery, bring them out in the open, and expose the causal chains that have brought us from them to here.

    The caps are not directed at any one in particular, but meant to serve as springboard for action.

  30. @ Bruce E. Woych

    Ref: Case II

    The Office of Thrift Supervisory (OTS) and Federal Deposit Insurance Corporation (FDIC), and other orphaned agencies give good currency too the “Weasel Word Shuffle Syndrome”? That is to say, “You dispute in a circle what all logicians know. – Quote: Henry More (1647)”
    Noteworthy: These regulators (guys and gals) aren’t flying under, over or through the radar…they are in control, as in the “Master Technicians Radar Police”, constantly modifying the UFO’s (Unidentified Fraudulent Obfuscations) co-ordinates?

    PS. Watch “Bernanke” (Don Quixote [Quixotic?]) today in a first non-scripted open {closed [?]} dossier about the Federal Reserve Banking System total transparency. But, because of “National (Financial) Security” his canny and hubris vagueness will be totally oblique and in control? This is a classical Timmy (Good Cop/ Bad Cop[?]) and Ben showcase of “Weasel Word Tapestry Theatre” – a panacea to Homers’,Iliad Tragedy’s!
    Thankyou James and Simon

  31. Game Theoretical Perspectives on a Common Theme:

    “If we don’t bust up Big Finance, there soon will be another financial crisis”

    …the assumption being that another financial crisis is the worst thing that can happen, or that they want to prevent a financial crisis at all costs. What if our top brass is working to prevent a worse crisis, whatever that means in their world, by precisely gearing up as many as possibly into another financial crisis?

    This is like the mutually assured destruction (MAD, indeed), the doctrine that some argue had kept the world safe from nuclear conflict. In the grand scheme of things, the atomic episodes at Hiroshima/Nagasaki, and the Soviet detonation tests of the H-Bomb (1949-53), framed the game for many years to follow. Each side in the conflict had won the credibility of the other, and the world.

    Apparently, the Greek episode was not enough to persuade the rest of the world about their interest in the US dollar. In other words, how do we credibly convince the rest about the necessity of the dollar/US?

    Could it be the next crisis?

  32. “They basically wanted to enjoy the fruits of investors’ expectation of an implied bailout but not bear the cost if it actually happened.”

    Implied?? LOL!!!!

    A contract says what it says.

    I’m sure I’d get far in court with the argument
    “No, Your Honor. It’s not in the contract, but I swear that they implied it”.

  33. @via fCh : it was James Carville as I recall.

    As to the statement by Vanguard Bond Guy: I think he was saying something even more insidious. He was basically saying that no one would lend money to the Icelandic government because they were not to be relied upon to uphold the implicitly expected but never agreed to obligations to insure foreign lenders.

    After all (thinks VBG to himself), if the Icelandic people can kill a deal to pay back the UK by a referendum, they can probably retroactively kill a government bond issue the same way.

    Never mind that an explicit guarantee on a government bond is very different from an implicit guarantee on a private obligation that only you think exists!

  34. “If you made a zero-money-down loan to someone and he walks away, it’s your fault. The lesson you should learn is that you shouldn’t make zero-money-down loans; you shouldn’t suddenly invent some principle that people should pay debts they no longer owe when it’s not in their own interests.” Great!

  35. A technical question (perhaps more for Simon), but wouldn’t it make more sense for Iceland to agree to pay some sum – to be negotiated – in Icelandic krona? If the UK/Dutch governments asked for too much, it would likely drive down the krona, allowing Iceland to export more (and become a reasonable credit again).

    I haven’t worked through this all, but denominating the amount in Euro makes little sense. Iceland’s government can try to make good on foreign debts in its own currency, but not pick up the tab in Euro.

  36. @GA — this might work, but since the krona has already fallen by about 80% since 2008, it is unlikely.

  37. @engineer27: good re-call.

    “even more insidious: […] no one would lend money to the Icelandic government because they were not to be relied upon to uphold the implicitly expected but never agreed to obligations to insure foreign lenders.” –>

    And my point was, who does he think he is, the agent of the almighty? Why do we take these simpletons, who feed on speed and crowd adulation, at face value? For sure it can’t be their abysmal record.

    Of course Iceland wouldn’t get again the money it did, for I’m assuming the Icelanders learned their lesson, for a generation or two. If/when they can show money is needed to yield positive return, money will show up.

    Now, financing welfare-state liabilities in the post-modernity could prove to be a little more difficult, but that’s the backdoor through which we’ve deified the sc(a/u)m on Wall Street, or the City of London.

    If we wanted to talk serious bond business, I’d try to listen in to the top two guys at PIMCO. I’d also pay attention to the moves of Germany and China, among others. Which, btw, brings me to the following: there is growing European consensus about having the Italian Draghi (a Goldman Sachs alumnus) follow Trichet, a French cast in the image of the Germans.

    @GA: Whom would it make sense for? The outcome of ANY such negotiation won’t make more prudent bankers, just hurting Icelanders. At the end of the day, the Brits and the Dutch could only see if they would get the US to pressure Iceland…

    As a bit of background on the Iceland crisis, their then-politicians had been hand in hand with the top banksters. Perhaps everybody knew it was a rotten scheme; even the institutional investors in the UK and Netherlands–e.g., from that pink newspaper in the UK. But the foreign banksters must have thought of the political class in Iceland the same way, say, the French did about us when they took dollar for dollar from AIG. The smaller and more homogenous country, the faster and more complete political change…

  38. @Gaute: please explain.

    “Iceland now wants full membership, a bid that is made difficult by the Icesave issue.”

    I guess, after all the mess in the EU, to want to join it before things are sorted out is yet another sign for a different kind of bubble. In which case, the Icelanders deserve it all and so much more.

  39. @David Merkel

    Are you kidding?!?!?!?! The likes of Rick Santelli and Baseline commenter “Bondgirl” will be slobbering all over themselves, knifing at each other’s feet for the chance to charge usury rates and claim people’s property. But don’t worry, they’ll have their pre-written lecture sheet on the evils of “deadbeats” tucked in their back pocket. I guess they will have to “suck it up” as the Lubrizol loser Charlie Munger often likes to advise the village natives.

  40. Your understanding of the facts and especially the legal background is mostly very poor. Which makes that this article had better not been written. It only confuses and doesnot add anything.

  41. @ David: You find a way to mix candor and responcibly for a company to a mandate of State law, and then run with it to accomplish fiducuary responcibly when it is in (you)/your companys best interests. Pityful, just pityful!

  42. Not sure the narrow legal obligations but surely by Iceland availing of the EEA bank passporting provisions to allow their banks to gather retail deposits in other EEA countries they are then obliged (morally at very least) to treat EEA depositors in the same way as Icelandic depositors. Question: had UK or Netherlands intervened on prudential gournds to prevent those Icelandic banks entering their retail banking markets would the Icelandic government not have screamed blue murder? Iceland can’t have it both ways. It should be booted out of the EEA unless it plays by the rules of the club.

  43. @DonPedro: Very informative, indeed; many thanks for the link.

    I find it interesting that it’s been the organized labor insisting to join the EU/Euro. I don’t think anyone knows what they are getting into–for one, the EU is evolving; for the other, especially the labor should have learned about the effects of joining the EU has had on the labor movements in smaller countries. The big countries go in, buy anything of value, push labor out, and turn everybody but a small elite into customers on credit.

    Be it as it may, but the Icelanders should not ask for sympathy after joining bubble EU!

    And, please, don’t get me wrong, I think the EU has lots of merits, especially for its current big players, but the smaller ones have been taken in for a ride. In theory, all votes are equal, in practice, they are only few votes that count. Especially small countries would do better to join gradually, if not partially. Turkey, though no small country, might have figured that it’s not worth joining the EU with small country status.

  44. I followed the link from FT Alphaville. You are right, James – you don’t know.

    Rather than give the necessarily detailed answers to the many incorrect points made in the post and comments, I would refer readers to this blog post written just before the first Icesave referendum in March 2010, which answers all of them:

    As Rik wrote at 5.05 this morning, it would have been better not to have written this post, because a relatively widely read blog like yours can leave a lot of people with the wrong idea about this arcane but nonetheless emotional issue.

  45. You don’t normally think of a savings account as a loan to your counter-party bank. It functionally is, no doubt about it; so is your checking account, come to think of it. That said, it is rather difficult, in this day and age, to not have a bank account – to not make a loan to some counter-party.

  46. Like rebeleconomist, I also got here from the FT link, and I was stunned by how bad a post this was.

    I actually think it should be withdrawn and re-written. I’m normally a fan of baseline, so I was very disappointed by what I read.

  47. @RebelEconomist & jon livesey:

    I followed the pointer to the FT article and could not find the reason you fault James for. In fact, I’ve just come back from reading the main article and comments and here’s what I got out of them:


    The question I have is: under EU and Icelandic legislation, are Landsbanki UK deposits legally backed by the Icelandic deposit guarantee scheme? Even if that is the case, was this deposit guarantee scheme supposed to offer an unlimited guarantee, or was it limited to the amount in the guarantee fund? Unless the Icelandic government was legally on the hood for the full extent of the extra-territorial deposit liabilities of Landsbanki and other Icelandic banks, to expect them to cover them is unmoral. Even if that was the case it does not exonerate British and Dutch regulators for failing to spot the loophole in the system.”


    “Karl Snow

    Dear Editor
    This is the most balanced and reasonable article in any newspaper/media from UK that I have seen. Thank you very much for that.

    In Iceland you have never heard anyone denying responsibility, that is we have always been willing to fullfill our obligations according to the EU directive 94/19/EC of the European Parliament and of the Council. Nobody has denied that!
    The Directive ensures that the main elements of the deposit guarantee schemes are harmonized across the European Union (EU) (Act No. 98/1999). All Icelandic commercial banks and savings banks are obliged to be members of the Fund. The same applies to branches of such parties within the EEA.
    You can even find EU directives that ban nations to have bankgarantees! The deposit guarantee funds are supposed to take care of that.

    Faulty EU directives in the way they are unable to handle situations like what happened in Iceland, where we had a total collapse of the financial system, resulting in that the deposit garantee fund is totally unable to handle the situation. Even though every EU directive was fulfilled. Why should the state/the taxpayers then be responsible, for private banks and others when it’s evident that the EU directives are at fault?

    Therefore it should not be surprising for the EU countries, with these special conditions in mind, that the responsibility should be spread wider within EU and by changing the EU directives so they can handle situations like this. We need a broader solution to this grave problem, but we also need a result from the European Court of Justice on this matter.”

    Unless the Queen’s English (be that British or Dutch) reads differently, the whole mess is still an non-adjudicated mess, better left for the EU courts to sort out. I’m not sure how you can come out one way or the other without a court resolution!

    Readers may notice that I also raised a small question as how James framed the situation, but it was more along the lines of realpolitik rather than actual law. Those who take the side of the depositors want to use the law as trump card, yet that’s a preemptive move that’s doubtful at best…

  48. I don’t know the answer to this question, but I assume that if an insured US bank fails the FDIC will pay out to all depositors regardless of their nationality. If a government can, after the event, decide to compensate its own citizens, but not to compensate others, then in my book this is equivalent to a selective default in which some creditors (those without votes) are treated worse than others. Governments have done this in the past – but usually in the context of a war, when they have confiscated enemy property. It seems to me quite reasonable for investors to avoid countries which discriminate in this way: because it is politically tempting, this sort of selective default is much more damaging to reputation than one where the loss is shared equally.

  49. “Governments have done this in the past – but usually in the context of a war, when they have confiscated enemy property.”

    You mean like they did to the USA born citizens when the Federal Reserve Board took JOBS, taxpayer dollars, savings and homes?

  50. @ mutant dog

    They know that – that’s why they affectionately took on as their totum a spider’s web – you’re going to be meat sooner or later…

    They’re controlling the eugenics of the situation through “bins” – first who went since 2008 were savers who played by the rules and had built up equity in their homes and small businesses – where’s the proof that job losses weren’t targeted at the real “Middle Class”?

    How come “hedge funds” now own the “industry” and the “jobs” created by engineers, scientists, and other classes of producers and wealth builders? Talk about a whole other level of “identity theft”…

    And how come the very fact that human beings use sophisticated language to communicate with each other is the most prolific area for “rent-seekers” who supposedly provide the “technology” of communication to the human species? And how quickly they went from facilitating communication to censoring it and using the technology to always know where their prey is…!

    Fiat currency, fractional reserve banking – the design is, in essence:

    More misery for others = More $$$ for ME ME ME

    Everybody SEES who was taken down first in the ‘hood – the GOOD people…

  51. Annie you keep assuming that the good people won’t eventually find a way to get revenge on the designers and their bosses. They shall, but first the good peoples children must come of age so that when the time comes, they have the advantage. Be patient and try to wait the 5 years, I don’t know why everybody had to do the 2 or 3 years without, but everybody will get revenge on fattie, trust me.

  52. @ Owens

    With all due respect, You have not looked back far enough into *history* to identify the origin of the Cult of Contempt, and even if you did look back into *history* you’d find the spin planted and not the truth.

    The scales tip in an instant – how does that Pink Floyd song go…?

    “…there’ll be no safety in numbers when the right one walks out of the door…”

    I’m not assuming, I have evaluated *the facts*.

    Your kids factored in the global mercenaries of Abu Dhabi?

    And consider this – how *good* are the self-proclaimed good people when they did not LIVE their goodness even when there were NO CONSTRAINTS on them preventing them from LIVING their goodness?

    In comparison to the science of viruses and bacteria, *psychology* is not science.

    You can’t access the resources of multi-national corporations even from within – a “corner office” brought back a bacteria from his globe hopping and the whole building within 2 weeks was coughing up olive green sputum – the FEAR of unfair psychobabble job evaluation check lists prevented anyone from marching over to the labs with a *green* sample to *target* the genetics of that bacteria


    yeah, medical research ain’t all that glamorous to have attracted so many “idealists” to push the $$$ around…

    But hey, feel free to prove me wrong – share the *facts* that have you and your kids *grounded*…

    Globalization is also a biological disaster – google “quagga” shipped in from the far east…

  53. Wreck a country, here, there, and everywhere. This is Bolshevik 2, with a dose of high tech on steroids, to rob, pillage, plunder, and kill. The badly named “PATRIOT ACT” was a device to accelerate this disaster.

    How many people can see the carnage on the wall>?

  54. Then there is Ireland.

    A generation of Irish (the children and young adults) who are required to repay debts they did not incur. They are asking why did no one go to jail for the debacle that ruined the irish economy?

  55. Quite the contrary Annie, and I don’t have the time to give all the details, but at one time there were only women in the universe. They could not find a way to rid themselves of their inner pain, so they actually created man to do half the job so they could concentrate on the other half of the problem. Well, they got their half done. But before even one could be rid of all pain for like over 130 years. Then he simply took over the entire scene in the name of his goals and now we have been battleing him and the problems he presented, in addition to the age old complications of her.

    The Gods rush from planet to planet to see how their plan is progressing on that particular planet, and weather or not to intervene. All the research has been done execpt the technology of man, so until we can reign that in here on this planet, we just have to put up with him until he meets his reward one way or the other. As for grounded, its temporary, until one gets a choufer or time runs its course, which it almost has, as can be seen around the world in the form of turmoil.

  56. Ah, the most subtle form of insult, Owens, the “sharing” of monkey brain imagination fiction as *fact*.

  57. But Annie, your facts only support your views, which are admittedly flat as a board, missing true feelings and subsequently drifting off course. So to take away the bread and butter of monkey brains people to feed the ancesters for whom the bread and butter were meant for, seems only resonable to me, me and me, but not to you. I understand.

  58. You’re back to stalking, aren’t you?

    Still have NO CLUE what you’re talking about – thank God.

    I asked a simple question – what about USA society made it so impossible for the economy to end up as anything other than PREDATORY.

    Bright olive green sputum indeed was a *fact* I used to support the often untold, unglamourous side of medical research.

  59. @ resident psycho under different name,

    “So to take away the bread and butter of monkey brains people to feed the ancesters for whom the bread and butter were meant for,”

    Come and get it, the computer thing-y was “virtual reality” – just a GAME…considering that whatever ancestors might want to claim you as their own no longer know how to make bread or butter even with the whole continent of Africa stretched out before them for 10s of thousends of years…

    well, I ain’t worried about “feelings”…

  60. Where’s Hollowood when you need them? Couldn’t they come up with a Moses to say to his peeps, “You know, maybe this wasn’t such a good idea to move back to this neighborhood…”


    Instead, we’re gonna invade ancient Persia no matter if USA – in total – ends up as collateral to whom…?

    Burning bush, stuff laser-ed on crystal tablets – maybe suggestions this time instead of commandments…

    I’m surprised we haven’t had a miraculous message show up on someone’s e-Reader yet….lord knows tornado warnings are, officially, *acts of God* and God’s okay with sending out the warnings to get to cover in a good strong building – but hey, that don’t tie in with the jive in the book of revelations…

    The Kennedy Bros had it right after their crisis – it’s Men of Good Will who CHOOSE to find a way…

    We’ve got to keep *decoupling* – economic disobedience, constitutional convention for “men of good will”, and BURN THE PATRIOT ACT.

  61. Well elections are tomorrow and if Harper had his way we would be anouncing a different currency the day after tomorrow, so enjoy this so called freedom as long as you can.

  62. NO,he’s in the storage ned, I mean shed! Ho Ho. Hey, anyone want to jump off the cliff wit me?

  63. I tell ya, this plot line gets more ludicrous with the passage of time.

    Bad script, bad actors, awful production values.

    I’ve wondered all along whether the lead was a dues paying member of SAG.

    Sure, dance up and down, shout, and wrap yourself in Chinese cloth…..your masters think it’s hilarious.

  64. Boy, that Moses comment brought the full force of the Cult of Contempt on my head

    go figure :-)

    So, I’m wondering, how much 24/7 mass media and internet BinSpam is going to “feel” like enough to justify trillions of cost?

    Can’t go anywhere electronic without the *feed*…hanging off – it’s spring – warm evenings, lilac scented walks…

    Constitutional Convention for Men of Good Will

    and get the freekin’ Israeli Moussad off my ass – you got your permanent mercenaries, pay for them with something other than USA middle class tax dollars funneled in ALL ways to YOU YOU YOU

    health insurance
    bank bailouts
    military industrial complex

    enjoy India!


  65. Here, Here on the constitutional convention for men of good will.

    Actually the president acknowlodged that as a president he made different decisions than as a congressman because he had a different view point as president. With this in mind, it is easy to see that the administrations real job should be writing bills because they have better information to construct a bill, and fewer people to have to insert their local pork projects. Then simply send it to congress to be debated and passed (signed) by a majority of congressmen or send it back to be reconfigured. At the end of a term the citizens would be able to tell how sucessful the administration, and congress, was at constructing and compromiseing with the represenitives they sent to Washington. Too easy, I know.

  66. Icelanders are deadbeats with an asterisk. They are clearly deadbeats as they are a functioning democracy that willing enacted the referenced EEA directive; the plain reading of which tells you that there is a minimum obligation by the nation to cover deposits lost in failed institutions for depositors from within the EEA – which includes the UK and Holland. The asterisk is that their bankers and regulators were so reckless as to make the obligation effectively unpayable as it is simply too large for the nation to handle without extreme penury, leading to immigration and eventual depopulation. Don’t buy insurance from undercapitalized enterprises. But this is a long game and I’d be very surprised if 20 years from now Iceland isn’t a very sad place to live as money will have its revenge in all likelihood.

  67. Curious about this question:

    Would there be a violation of international trade law if a TBTF bank was in effect being subsidized by the government?

  68. I don’t think Iceland should pay them back….that would be 15 million dollars per person…ridculous…I also think that over here in the states we should have ripped the assets out of the bank and paid who they owed….then stripped the assets from those involved and then threw them in jail.

  69. @Deborah – it’s not possible for the individual to *produce* 15 million dollars – that’s how bad the self-proclaimed eCONomist’s math is…dumber than a molecule :-)

    My math could be wrong, but the whole concept of “earning interest” on “loaned” *money*

    evolved at the time in Occidental Civilization’s historical timeline when a consistent, year after year production of a surplus harvest of food was possible – last example of lush agricultural wealth was Czar Nicolai and Mother Russia –

    and we are now in a time and place where it is not possible to consistently produce a surplus – there are just too many daily meals to serve up globally.

    So it’s utter insanity to exponentially increase the terms of usury – did they do the math – 15 million from each Icelander?!

    And the other approach to this very real problem of being a consumer instead of a producer is brute force (war), but that math clearly shows that the cost of producing and maintaining that kind of force (death delivering force, not life-sustaining) to get someone else’s food when you didn’t produce a surplus yourself

    *costs* more than the food you capture – in short the cost of war is greater than the booty you steal through war…

    It’s a BIG situation we’ve got here…

    Not sure if anyone watches the TV series called “In Plain Sight”, but there was one episode where the entire business (extractive, of course) had no computers, calculators, or any other math aid – it had one person who kept all the numbers accurately in her head…about 50% of the people who talk *money* on the internet are in that idiot savant category of *math wiz* – if you want, I’ll go to Netflix and find the name of the episode…basically, the math wiz kids have no capacity to comprehend “….what they do…” in context…but the *employer* does know it’s simple:

    More misery for other = more money for ME ME ME

    and that’s okay because I am *god* and deserve it all…

    yikes!, right?

    We need to move on, they’re (the detail specialist) never going to get it…heck, even if they could, they don’t WANT to get it….to *know* what they do…

  70. @Deborah

    Still coming back to every Icelander needing to cough up 15 million…

    Looks like the Irish Tiger is waking up – DSK in Riker’s Island Prison – perfect.

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