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What Happened in Iceland

In: Business and Management

Submitted By hoddigylfa
Words 1805
Pages 8
What happened in Iceland 2008?

1/2/2012

Introduction

Iceland was hit by a financial crisis that no country had ever got in to in Oct 2008. I´m from Iceland and I know everything about it, what happened, what went wrong and why did it happened and I think everyone in this class are curious about the topic. There is a lot to cover to get all the answers, but I am so fortunate that my presentation is after many of my co students have made their presentation. I can then just have a brief overlook what happened whit out having to explain the detail of headlines like, Hedge, Forwards, Currency trade, Leasing, Mutual Funds and etc.

Iceland First a little bit of a history about Iceland. The first permanent settler in Iceland is usually considered to have been a Norwegian chieftain named Ingolfur Arnarson year 874. He was Viking, (man how is known as a Viking is not a good man, Arnarson was wanted in Norway for burglary, theft etc.) When he was considering a name on this Nordic country he comes up with Iceland, why? It was because he didn´t want other Norwegian come over the see too this beautiful land. The only thing he was wondering, why is this land almost in the Arctic so green. Now we know, it´s because of the hot Gulf Stream coming from America. Because of that stream in the sea around Iceland the little rock in middle of the Arctic Ocean is green and has one of the best fishing spot in the world around it. Around 2000 the nation counted 304.000 people with 180.000 working hands. Iceland is a fisherman country and 75% of our foreign trades are fish and has been that from 900 and all the way to 2002. What happened after 2002? Yes, the paper is all about what happened from 2002 – 2008, only 6 years.

Iceland is on the top of the world It can say that for sure that Iceland was on the top of the world year 2002. Everything was going in our way that time. There were a lot of good fish in the sea they were big and fresh. Because of it the government was always increasing the benchmark and allows fishermen to go and cats more and more fish. The demand for it was enormous in the Europe and always more and more fish was shipped to USA, because of that the price went up. Iceland was heading to be one of the riches countries in the world, in national wealth and in all other comparison. (wikipedia)

Largest Bank in Iceland privatized In the end of year 2002 the Largest Bank in Iceland Landsbankinn was privatized. The buyers were three Icelandic men how had sold their Beer Company Bravo in Russia to Heineken one of the largest beer company in Europe. The story was that they had earned in this deal about $ 1 billion but the actual deal was not open to the public to see. They came to Iceland like heroes with half of that money and paid with cash for 45% share of Landsbankinn. The Icelandic government used this money to pay down all their sovereign dept. Iceland was only one of few countries in the world that had no sovereign debt. The year after all banks in Iceland was privatized and the government was not only free of sovereign debt but money flooded in and the currency was strengthening too much. All the rating agencies gave Iceland and all the Icelandic Bank the highest rating AAA. The Federal Bank had no chose than higher the interest rate to 15%. Try to cool of the economy that was overheating. (Rannsoknarnefdin, 2009) http://www.rannsoknarnefnd.is/ Hydropower Plant Money was flooding and government decides to build one of the largest Hydropower Plant in the world. And Alcoa was going to buy all the power to use in aluminum plant that they would build in Iceland. This was like put oil on an unmanageable fire. Iceland has only 180.000 working hands, now everything blows up in our hands Iceland have to hire foreign workers to build this power plant and the aluminum plant. And the foreign money flooded to Iceland and the currency strength was absurd strong and the Fed was worry. The Power Plant and the aluminum plant were started beginning of the year 2008 in full motion. (wikipedia)

Banks 2003 – 2008 Now all banks in Iceland was already privatized and they begun to merge, in the end of 2006 it was almost just the big three left, Glitnir, KB bank and Landsbankinn . At this time 2006 the balance sheet was going in the wrong way the first time. Foreign investors were stop buying their bounds and banks were in the first time since they were privatized in a liquid problem. Now the CEOs have to make up a new strategy and they did. All three banks founded a savers account in United Kingdom, Holland, Ireland, Finland, Austria and Norway. It was with no problem that they could do that, because of the AAA rating from all the rating agencies. People saw new saving accounts that have high interest without RISK. Yes, there was no risk, how can that be? It´s because of the deposit insurance, all saving account is insured by the government for at least 20.000 Euro. People saw this opportunity and thousands of people put money in to this accounts. And the Banks were out of the liquid problem and now again the money was flooding in. But now the banks changed from being banks for the people in to being banks for the owners. They were now getting in the same trouble as the banks were in, liquid problem. All the major bankers owned a holding company that hold on their stocks in the bank and all kind of other investments good and bad.
Insider trade There was no large illegal insider trade in Iceland. They all had stock option to buy a stock in banks for little as nothing. CEOs are bright and to get around insider trade they all founded a holding company that held on all their stocks. In Iceland it´s illegal for bank to make a lone and the insurance for payment is the stock in itself. Good law, but the CEOs are all friends and CEO of Kaupthing went to Glitni and got a lone on his stock and then the opposite. This lone was not only for the purchase of the stock but also 80% leverage of the marked value. They never have to sell a single stock, if the price went up they just called the CEO and got more lone. It was not only the CEOs how play this game, almost every large stockholder did it and that is one of the reasons the stock price never went down. There were no stock to trade and the trades that was made was only the same rolling 10% and the banks let them roll fast between them self to let it shown that the stock were liquid, the scheme was perfect.

Mutual Funds In 2007 all holding companies were running out of liquid money. Then banks got also in trouble, holding companies was in a huge dept. CEOs are again bright, they start campaign on Mutual Funds how good they are and pull up all kind of funds that have on average make a profit for 40 – 50% a year for last 3 year. People believe bankers and start to invest in them like crazy. Mutual Funds then use this money to buy bound of the holding company. The liquid problem disappears and everybody is happy!!!

The Crash Oct 2008 Lehman Brother filed for bankruptcy protection September 15, 2008. (wikipedia) All liquid in the world freezes up and people rush in to the computer and drowse out money from Iceland saving account. All three banks CEOs come in the television and say that they don’t have subprime lone in their balance sheet. They have sold it all in the little liquid problem that they had have in 2006. That is why Icelandic banks are stronger that most banks in the world. Only two weeks later Oct 6, 2008 prime minister of Iceland came in national TV and told that all Icelandic banks were bankrupt. Now Iceland has to look deep in to our self and face the fact that Iceland will not be the same after this fact. Icelandic banker has made a terrible mistake that will hurt the Icelandic people for years to come. He also said that he and his team of experts has come up with a plan to minimize the true expect of this crash. It´s called the emergency law, it says that only Icelandic currency “Króna” is insured by the insurance law of deposit insurance, so there he was telling all the foreign people that they all lost their risk less saving. And in the end he just said “God bless Iceland”. (Hanna, 2009)

After this the head board member of the Federal Bank of Iceland came in news and told that Iceland people are not going to pay for reckless of private banks. Morning after the government in United Kingdom put Iceland in a list of countries for Anti-Terrorism, Crime and Security Act 2001. (wikipedia)

Ten largest bankruptcies in the world

Source: Financial Supervisory Authority – Iceland.

Conclusion

Iceland went down from being the world number one 2002 in all aspect of life. All because of 30 bankers dummies, but if I look back it was a big party that almost every Icelanders took part in. Like the quote say “it can take a lifetime to build up, but only a second to ruin”. Iceland was robbed by a few men, and like William K. Black said, “The best way to robbed a bank is to own it”. (Hanna, 2009)

Bibliography
Hanna, L. (2009, July 10). Eyjan. Retrieved 1 25, 2012, from Eyjan.is: http://blog.eyjan.is/larahanna/2009/10/06/i-tilefni-dagsins-2/
Rannsoknarnefdin. (2009). Retrieved January 25, 2012, from rannsoknarnefd.is: http://www.rannsoknarnefnd.is/ wikipedia. (n.d.). Retrieved January 24, 2012, from wikipedia.org: http://is.wikipedia.org/wiki/Listi_yfir_l%C3%B6nd_eftir_v%C3%ADsit%C3%B6lu_um_%C3%BEr%C3%B3un_l%C3%ADfsg%C3%A6%C3%B0a
Þorvaldur. (n.d.). Financial Supervisory. Retrieved January 25, 2012, from althingi.is: Financial Supervisory Authority

Table of contents Introduction 2 Iceland 2 Iceland is on the top of the world 3 Largest Bank in Iceland privatized 3 Hydropower Plant 4 Banks 2003 – 2008 4 Insider trade 5 Mutual Funds 5 The Crash Oct 2008 6 Ten largest bankruptcies in the world 7 Conclusion 7 Bibliography 8

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