Boomerang: Travels in the New Third World (4 page)

In spite of all this, when Tony Shearer was pressed by the House of Commons to characterize the Icelanders as mere street hustlers, he refused. “They were all highly educated people,” he said in a tone of amazement.

HERE IS YET
another way in which Iceland echoed the American model: all sorts of people, none of them Icelandic, tried to tell them they had a problem. In early 2006, for instance, an analyst named Lars Christensen and three of his colleagues at Denmark’s biggest bank, Danske Bank, wrote a report that said Iceland’s financial system was growing at a mad pace and was on a collision course with disaster. “We actually wrote the report because we were worried our clients were getting too interested in Iceland,” he tells me. “Iceland was the most extreme of everything.” Christensen then flew to Iceland and gave a speech to reinforce his point, only to be greeted with anger. “The Icelandic banks took it personally,” he says. “We were being threatened with lawsuits. I was told, ‘You’re Danish, and you are angry with Iceland because Iceland is doing so well.’ Basically it all had to do with what happened in 1944,” when Iceland declared its independence from Denmark. “The reaction wasn’t, ‘These guys might be right.’ It was, ‘No! It’s a conspiracy. They have bad motives.
’
” The Danish were just jealous!

The Danske Bank report alerted hedge funds in London to an opportunity: shorting Iceland. They investigated and found this incredible web of cronyism: bankers buying stuff from one another at inflated prices, borrowing tens of billions of dollars and relending it to the members of their little Icelandic tribe, who then used it to buy up a messy pile of foreign assets. “Like any new kid on the block,” says Theo Phanos, of Trafalgar Asset Managers, in London, “they were picked off by various people who sold them the lowest-quality assets—second-tier airlines, sub-scale retailers. They were in all the worst LBOs.”

But from the prime minister on down, Iceland’s leaders attacked the messenger. “The attacks . . . give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system,” said Central Bank chairman Oddsson in March 2009. The chairman of Kaupthing publicly fingered four hedge funds that he said were deliberately seeking to undermine Iceland’s financial miracle. “I don’t know where the Icelanders get this notion,” says Paul Ruddock, of Lansdowne Partners, one of those fingered. “We only once traded in an Icelandic stock and it was a very short-term trade. We started to take legal action against the chairman of Kaupthing after he made public accusations against us that had no truth, and then he withdrew them.”

One of the hidden causes of the current global financial crisis is that the people who saw it coming had more to gain from it by taking short positions than they did by trying to publicize the problem. Plus, most of the people who could credibly charge Iceland—or, for that matter, Lehman Brothers—with financial crimes could be dismissed as crass profiteers, talking their own book. Back in April 2006, however, an emeritus professor of economics at the University of Chicago named Bob Aliber took an interest in Iceland. Aliber found himself at the London Business School, listening to a talk on Iceland, about which he knew nothing. He recognized the signs instantly. Digging into the data, he found in Iceland the outlines of what was so clearly a historic act of financial madness that it belonged in a textbook. “The Perfect Bubble,” Aliber calls Iceland’s financial rise, and he has the textbook in the works: an updated version of Charles Kindleberger’s 1978 classic,
Manias, Panics, and Crashes.
Aliber is editing
the new edition. In it, Iceland, he decided back in 2006, would now have its own little box, along with the South Sea Bubble and tulip mania—even though Iceland had yet to crash. For him the actual crash was a mere formality.

Word spread in Icelandic economic circles that this distinguished professor at Chicago had taken a special interest in Iceland. In May 2008, Aliber was invited by the University of Iceland’s economics department to give a speech. To an audience of students, bankers, and journalists, he explained that Iceland, far from having an innate talent for high finance, had all the markings of a giant bubble, but he spoke the technical language of academic economists. (“Monetary Turbulence and the Icelandic Economy,” he called his speech.) In the following Q&A session someone asked him to predict the future, and he lapsed into plain English. As an audience member recalls, Aliber said, “I give you nine months. Your banks are dead. Your bankers are either stupid or greedy. And I’ll bet they are on planes trying to sell their assets right now.”

The Icelandic bankers in the audience sought to prevent newspapers from reporting the speech. Several academics suggested that Aliber deliver his alarming analysis to Iceland’s Central Bank. Somehow that never happened. “The Central Bank said they were too busy to see him,” says one of the professors who tried to arrange the meeting, “because they were preparing the
Report on Financial Stability
.” For his part Aliber left Iceland thinking that he’d caused such a stir he might not be allowed back into the country. “I got the feeling,” he told me, “that the only reason they brought me in was that they needed an outsider to say these things—that an insider wouldn’t say these things, because he’d be afraid of getting into trouble.” And yet he remains extremely fond of his hosts. “They are a very curious people,” he says, laughing. “I guess that’s the point, isn’t it?”

Icelanders—or at any rate Icelandic men—had their own explanations for why, when they leapt into global finance, they broke world records: the natural superiority of Icelanders. Because they were small and isolated, it had taken 1,100 years for them—and the world—to understand and exploit their natural gifts, but now that the world was flat and money flowed freely, unfair disadvantages had vanished. Iceland’s president, Ólafur Ragnar Grimsson, gave speeches abroad in which he explained why Icelanders were banking prodigies. “Our heritage and training, our culture and home market, have provided a valuable advantage,” he said, then went on to list nine of these advantages, ending with how unthreatening to others Icelanders are. (“Some people even see us as fascinating eccentrics who can do no harm.
”
) There were many, many expressions of this same sentiment, most of them in Icelandic. “There were research projects at the university to explain why the Icelandic business model was superior,” says Gylfi Zoega, chairman of the economics department. “It was all about our informal channels of communication and ability to make quick decisions and so forth.”

“We were always told that the Icelandic businessmen were so clever,” says university finance professor and former banker Vilhjálmur Bjarnason. “They were very quick. And when they bought something they did it very quickly. Why was that? That is usually because the seller is very satisfied with the price.”

You didn’t need to be Icelandic to join the cult of the Icelandic banker. German banks put $21 billion into Icelandic banks. The Netherlands gave them $305 million, and Sweden kicked in $400 million. UK investors, lured by the eye-popping 14 percent annual returns, forked over $30 billion—$28 billion from companies and individuals and the rest from pension funds, hospitals, universities, and other public institutions. Oxford University alone lost $50 million.

Maybe because there are so few Icelanders in the world, we know next to nothing about them. We assume they are more or less Scandinavian—a gentle people who just want everyone to have the same amount of everything. They are not. They have a feral streak in them, like a horse that’s just pretending to be broken.

AFTER THREE DAYS
in Reykjavík, I receive, more or less out of the blue, two phone calls. The first is from a producer of a leading current-events TV show. All of Iceland watches her show, she says, then asks if I’d come on and be interviewed.

“About what?” I ask.

“We’d like you to explain our financial crisis,” she says.

“I’ve only been here three days!” I say.

It doesn’t matter, she says, as no one in Iceland understands what’s happened. They’d enjoy hearing someone try to explain it, even if that person didn’t have any idea what he was talking about—which goes to show, I suppose, that not everything in Iceland is different from other places. As I demur, another call comes, from the prime minister’s office.

Iceland’s then prime minister, Geir Haarde, was also the head of the Independence Party, which governed the country from 1991 to 2009. It ruled in loose coalition with the Social Democrats and the Progressive Party. (Iceland’s fourth major party is the Left-Green Movement.) That a nation of 300,000 people, all of whom are related by blood, needs four major political parties suggests either a talent for disagreement or an unwillingness to listen to one another. In any case, of the four parties, the Independents express the greatest faith in free markets. The Independence Party is the party of the fishermen. It is also, as an old schoolmate of the prime minister’s puts it to me, “all men, men, men. Not a woman in it.”

Walking into the PM’s minute headquarters, I expect to be stopped and searched, or at least asked for photo identification. Instead I find a single policeman sitting behind a reception desk, feet up on the table, reading a newspaper. He glances up, bored. “I’m here to see the prime minister,” I say for the first time in my life. He’s unimpressed. Anyone here can see the prime minister. Half a dozen people will tell me that one of the reasons Icelanders thought they would be taken seriously as global financiers is that all Icelanders feel important. One reason they all feel important is that they all can go see the prime minister anytime they like.

What the prime minister might say to the Icelanders about their collapse is an open question. There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. Haarde, though, is a trained economist—just not a very good one. The economics department at the University of Iceland has him pegged as a B-minus student. As a group, the Independence Party’s leaders have a reputation for not knowing much about finance and for refusing to avail themselves of experts who do. An Icelandic professor at the London School of Economics named Jon Danielsson, who specializes in financial panics, has had his offer to help spurned; so have several well-known financial economists at the University of Iceland. Even the advice of really smart Central Bankers from seriously big countries went ignored. It’s not hard to see why the Independence Party and its prime minister fail to appeal to Icelandic women: they are the guy driving his family around in search of some familiar landmark and refusing, over his wife’s complaints, to stop and ask directions.

“Why are you interested in Iceland?” he asks, as he strides into the room with the force and authority of the leader of a much larger nation. And it’s a good question.

As it turns out, he’s not actually stupid, but political leaders seldom are, no matter how much the people who elected them insist that it must be so. He does indeed say things that could not possibly be true, but they are only the sorts of fibs that prime ministers are hired to tell. He claims that the krona is once again an essentially stable currency, for instance, when the truth is it doesn’t trade in international markets. The krona is simply assigned an arbitrary value by the government for select purposes. Icelanders abroad have already figured out not to use their Visa cards, for fear of being charged the real exchange rate, whatever that might be.

The prime minister would like me to believe that he saw Iceland’s financial crisis taking shape but could do little about it. (“We could not say publicly our fears about the banks, because you create the very thing you are seeking to avoid: a panic.
”
) By implication it was not politicians like him but financiers who were to blame. On some level the people agree: the guy who ran the Baugur investment group had snowballs chucked at him as he dashed from the 101 Hotel to his limo; the guy who ran Kaupthing Bank turned up at the National Theatre and, as he took his seat, was booed. But, for the most part, the big shots have fled Iceland for London, or are lying low, leaving the poor prime minister to shoulder the blame and face the angry demonstrators, led by folksinging activist Hördur Torfason, who assemble every weekend outside Parliament.

Haarde has his story, and he’s sticking to it: foreigners entrusted their capital to Iceland, and Iceland put it to good use, but then, on September 15, 2008, Lehman Brothers failed and foreigners panicked and demanded their capital back. Iceland was ruined not by its own recklessness but by a global tsunami. The problem with this story is that it fails to explain why the tsunami struck Iceland, as opposed to, say, Tonga.

But I didn’t come to Iceland to argue. I came to understand. “There’s something I really want to ask you,” I say.

“Yes?”

“Is it true that you’ve been telling people that it’s time to stop banking and go fishing?”

A great line, I thought. Succinct, true, and to the point. But I’d heard about it thirdhand, from a New York hedge fund manager. The prime minister fixes me with a self-consciously stern gaze. “That’s a gross exaggeration,” he says.

“I thought it made sense,” I say uneasily.

“I never said that!”

Obviously, I’ve hit some kind of nerve, but which kind I cannot tell. Is he worried that to have said such a thing would make him seem a fool? Or does he still think that fishing, as a profession, is somehow less dignified than banking?