Certain events are so unimaginable, they so intensely strain credulity that they would fail as works of fiction. Such events have to occur in reality to be accepted and even then, they boggle the mind. Enter Iceland. (Money Quotes)
…In the end, Icelanders amassed debts amounting to 850 percent of their G.D.P. (The debt-drowned United States has reached just 350 percent.) As absurdly big and important as Wall Street became in the U.S. economy, it never grew so large that the rest of the population could not, in a pinch, bail it out. Any one of the three Icelandic banks suffered losses too large for the nation to bear; taken together they were so ridiculously out of proportion that, within weeks of the collapse, a third of the population told pollsters that they were considering emigration…
They inhabited their remote island for 1,100 years without so much as dabbling in leveraged buyouts, hostile takeovers, derivatives trading, or even small-scale financial fraud. When, in 2003, they sat down at the same table with Goldman Sachs and Morgan Stanley, they had only the roughest idea of what an investment banker did and how he behaved—most of it gleaned from young Icelanders’ experiences at various American business schools. And so what they did with money probably says as much about the American soul, circa 2003, as it does about Icelanders…
A handful of guys in Iceland, who had no experience of finance, were taking out tens of billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets—the banks, soccer teams, etc. Since the entire world’s assets were rising—thanks in part to people like these Icelandic lunatics paying crazy prices for them—they appeared to be making money. Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets…
How could this have happened? Why? Who was lending Icelanders such ungodly amounts of money? Why? What did they know about the Icelandic financial system? Growing up, I always assumed that in the West, if a person were in a position of prominence, that person had to be competent. It seemed like a no-brainer. Who, in their right mind, would entrust a complete moron with decisions that could have life and death implications? Suprise, surprise – apparently, this stuff happens all the time! (Gasp!) The Iraq war banished my childhood assumption and now the financial crisis has plunged the dagger through its heart. Never, ever assume competence.
