Iceland banks didn't collapse, the government nationalized them to prevent their collapse. (Edit: as another poster mentions a portion of the debt was paid down by other states too. Again, that's a detail, not a fundamental difference).
Some foreign-deposit operations did collapse but the bulk of the banks, their shares and national operations, were protected by the state.
"The Financial Supervisory Authority (FME) has acted to "ring-fence" the Icelandic operations of Landsbanki and Glitnir, stating its aim of "continued banking operations for Icelandic families and businesses."[126] NBI (originally known as Nýi Landsbanki) was set up on 9 October with 200 billion krónur in equity and 2,300 billion krónur of assets.[127] Nýi Glitnir was set up on 15 October with 110 billion krónur in equity and 1,200 billion krónur of assets.[128]
Talks with Icelandic pension funds to sell Kaupthing as a going concern broke down on 17 October,[129] and Nýja Kaupþing was set up on 22 October with 75 billion krónur in equity and 700 billion krónur of assets.[130]
The equity in all three new banks was supplied by the Icelandic government, and amounted to 30% of Iceland's GDP...."
You are so wrong on so many levels that it's scary.
> Iceland banks didn't collapse, the government nationalized them to prevent their collapse. (Edit: as another poster mentions a portion of the debt was paid down by other states too. Again, that's a detail, not a fundamental difference).
It is a fundamental difference. When Iceland took over its banks, it basically said: your deposits are insured if you are a tax-payer. Customers living elsewhere, share holders and (non-Icelandic?) bond holders were wiped out; they were owed something one day, zero the next, and it matters little to Icelanders who may have generously picked up the tab -- they didn't. The banks were recapitalized when needed, and a few bank execs got thrown in jail for good measure.
I beg to ask how this is in any way similar to what happened in the US, the UK or Ireland. Or Greece, for that matter.
Are you sure non-Iceland people were wiped out? I know someone who had an account at Kauphting and, after freaking out for months he eventually got all his money back.
Here, for example, in english it says: "Credit agricole and Keytrade save Kauphting's client" and explains how the 21 000 belgians who had accounts at Kauphting didn't lose a dime.
They were subsequently bailed out by foreign governments and/or entities, but from Iceland's standpoint — which is the important one when it comes to their taxpayers' finances — they were wiped out.
That is why the UK and Holland, in particular, were so pissed at Iceland and threatened to block EU-entry negotiations at one point. They spectacularly footed the bill, and I presume so did other countries. They then sent it to Iceland.
Iceland, on its end, raised its middle finger. Slowly.
Not just once, either.
The politicians tried to sneak the debt back in to be accommodating. And twice, a popular vote was organized and the referendum yielded a big fat no by a massive landslide.
If you look in Wikipedia article, you will notice a variety of bank shares were also guarantee because that too was necessary to prevent the financial system from collapsing.
Icelanders, Americans and Greek have all experienced a sharp reduction in their standard of living (Icelanders, like Greeks, experienced this through a large currency devaluation). Both Icelanders and Americans live more or less under the same system that existed before the crisis.
Bernie Madoff was not a bank exec and was not involved in or the cause of the financial crisis, he was just exposed by it as the tide went out.
All the devils are here has a nice history of this financial crisis, I thought, and no-one who was involved in the fraud which caused the collapse of AIG, for example, was convicted, though there have been some investigations, AFAIK.
Also Iceland defaulted on its external debt and only protected national interests - the UK and US didn't really do anything similar, they have chosen to inflate their way out of debt instead.
I don't think it was fraud that caused AIG problems, it was making really bad business decisions. Meanwhile, Joseph Cassano the guy at AIG FP London responsible for a lot of the problems walked away with at least $280 million
Well, GS knowingly sold AIG junk CDOs days before the collapse, while shorting those same CDOs to make money on them. I'd call that fraud. I think they were fined less than they made on the deal, and no-one was punished. Of course AIG deserves blame, but so do those who tricked them into buying junk.
In Liar's Poker Michael Lewis describes his time as a bond salesman for Salomon Brothers and the realization that everything he was selling was junk, after all, it the bonds that he was selling were a good investment why would Salomon Brothers be selling them?
[Edit: He also describes the right of passage for new bond salesmen - when you bankrupt your first client....]
> Well, GS knowingly sold AIG junk CDOs days before the collapse, while shorting those same CDOs to make money on them. I'd call that fraud.
That's not fraud. It's probably unethical, but businesses selling customers products they know are shit is more or less legal, or at most the subject of a civil action by the purchaser. I mean, look at the software industry. How many software companies sell products that are buggy crap, that they know are buggy crap? And when it comes to investments, that basic dynamic is at the heart of a lot of sales. If I think this investment is a great deal that's going to just go up and up, why would I sell it to you?
I'm willing to entertain the idea that what GS did crossed the line in terms of the standard of ethics people expect of investment professionals, which maybe should be higher than for businesses generally. Maybe we should put such standards in place and make them enforceable,[1] but it wouldn't be fair to throw people in jail for what they did before those standards were in place.
[1] For example, it would be punishable ethical breach for a lawyer to represent a client then take a financial position adverse to the client's interests.
It's dancing right on the line of fraud, isn't it? The elements of a fraud case are (paraphrasing model jury instructions) (a) a false statement, (b) intentionally made, of (c) a material fact that (d) someone reasonably relied on and (e) was injured (usually, financially) by.
The only thing missing from a fraud case in the "selling shit products" story is "knowingly making false statements", right?
grey-area's summary of the WSJ article isn't accurate.
GS knowingly sold AIG junk CDOs days before the collapse
GS didn't sell CDOs to AIG. GS didn't actually sell anything to AIG. GS bought insurance (in the form of credit default swaps) on the CDOs from AIG and apparently sold at least some of those swaps on to other banks for a profit.
If Goldman had done something to accelerate the deterioration of the value of the CDOs (something like insuring a house and then burning it down), then you could probably claim GS was in the wrong. AIG would have known it was insuring subprime mortgage CDOs. There also isn't anything in the article asserting that GS misrepresented the quality of the loans or anything like that.
Thanks for the correction. My contention is that they knowingly screwed over their client by recommending one thing while they played the other side of the deal. They were fined for doing so, but it doesn't seem a very effective punishment to me.
They're potentially using insider information on deals and risk in order to profit; I'm not sure they should even be allowed to bet against their clients, because it gives them all sorts of perverse incentives. But it's a complex area, and I'm no expert in it...
I agree it would be hard for that to end in a fraud conviction, and as you say perhaps more regulation would be required for that to even be possible, but perhaps more regulation of this area is required.
I'm not sure they should even be allowed to bet against their clients, because it gives them all sorts of perverse incentives.
You have to consider that when an investment bank sells you a structured product it then naturally has the opposite position. If you want something that pays off if interest rates rise, an investment bank can sell you something like that in the form of an interest rate swap. You are now long interest rates and the bank is short them, but there wasn't anything malicious there. The bank just sold you the product you wanted. Now the bank has to hedge somehow or sell the swap on to someone who wants to be short interest rates. It may have clients that are interested in that sort of exposure.
I'm not trying to defend Goldman here, but when people say things like "banks are betting against their clients" it usually shows a misunderstanding of the business.
I think your link and the actual SEC charges [1] are saying slightly different things. The portfolio backing the synthetic CDO was constructed by a Goldman client (Paulson and Co, a hedge fund) specifically so they (Paulson) could short it. That's fine. But the marketing material [2] for the CDO they used to sell the long end to clients makes no mention of Paulson and it specifically says that the portfolio was selected by another company (ACA Management) and that ACA had "commitment to long-term bondholder and counterparty security". If you flip through the slide deck (it's actually pretty readable) you find many slides dedicated to talking about ACA and its bona fides.
That was the fraud. It told its clients the portfolio had been created by someone who was trying to put together a reasonable-ish CDO when in fact it had been put together with the exact opposite in mind. I will also point out that there are no claims by the SEC that Goldman itself was short the CDO.
Thank you, your description does make Goldman Sachs sound to me like a boiler room operation to identify marks (or muppets if you prefer), who can be sold doomed products in order to make money for GS and their real customers (people like Paulson). I can't imagine why anyone does business with such sharks unless they have to, and it does sound like it could be legislated against. I'll have a read of the documents so I understand it better though.
That a portion of their debt was paid by other states is the key. Ireland swallowed all of the bank debt, and Iceland did not. There is not a day that goes by in which that is not considered in Ireland.
No, it's not Icelands debt paid by other states, it is a debt of Icelandic private bank that is paid out by other states. Why do you think that Iceland has more obligation to pay up a debt of icelandic _private_ bank than, say, Romania or Zimbabwe?
Iceland never claimed any kind of insurance of foreign deposits, so was not in any way obliged to pay them up.
The UK's position (AIUI) was that membership of the European Economic Area means that Iceland can not treat its own citizens' savings differently than those of other EEA member states' citizens. Hence the whole squabbling about repayment and such, which is still ongoing.
Yes, UK's position ;) But I guess UK's position is based on interests of affected UK citizens, and doesn't have to be valid. I guess there are different ways to read these EEA treaties and regulations than what UK and Netherlands says, otherwise Iceland would be kicked out long ago for non-compliance.
Iceland banks didn't collapse, the government nationalized them to prevent their collapse. (Edit: as another poster mentions a portion of the debt was paid down by other states too. Again, that's a detail, not a fundamental difference).
Some foreign-deposit operations did collapse but the bulk of the banks, their shares and national operations, were protected by the state.
"The Financial Supervisory Authority (FME) has acted to "ring-fence" the Icelandic operations of Landsbanki and Glitnir, stating its aim of "continued banking operations for Icelandic families and businesses."[126] NBI (originally known as Nýi Landsbanki) was set up on 9 October with 200 billion krónur in equity and 2,300 billion krónur of assets.[127] Nýi Glitnir was set up on 15 October with 110 billion krónur in equity and 1,200 billion krónur of assets.[128]
Talks with Icelandic pension funds to sell Kaupthing as a going concern broke down on 17 October,[129] and Nýja Kaupþing was set up on 22 October with 75 billion krónur in equity and 700 billion krónur of assets.[130]
The equity in all three new banks was supplied by the Icelandic government, and amounted to 30% of Iceland's GDP...."
http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_finan...