The official Landsbanki whitewash

After looking more at this interesting document called: Report on moratorium and other issues concerning Landsbanki Íslands hf. One chapter caught my attention more than others. Page 9 and 10 in the document is the explanation of the banking crisis and economic crisis in Iceland. Here is a part of it:

Quote starts


The favourable international financial markets which prevailed since the end of 2001, with a high supply of inexpensive funding, enabled LBI, together with banks everywhere, to finance its growth on good terms. In this international climate the three Icelandic commercial banks, LBI, Kaupthing Bank and Glitnir, grew rapidly from 2003 onwards, until eventually their total assets had become many times the GDP of Iceland.

Following the collapse of the US subprime mortgage market, credit began to flow less readily on foreign lending markets. Information disclosure by financial undertakings throughout the world on their situation was unsatisfactory, they mistrusted each other and were reluctant to lend one another. In the spring of 2007, a global liquidity crisis had developed and a shortage of available credit resulted in deteriorating borrowing terms.

Following the insolvency of the US investment bank Lehman Brothers in September 2008, the situation deteriorated drastically and the government of Ireland declared that the Irish state would guarantee all claims against its banks for the next three years. International financial markets were in turmoil and mistrust was rampant. Governments throughout the world imposed wide-reaching rescue measures to prevent the total collapse of the global financial system, as most financial undertakings were facing major difficulties.

The liquidity crisis had a major impact on the financial market in Iceland. Due to the size of the Icelandic banks, the state could not support them and the Central Bank of Iceland (hereafter “CBI”) lacked the financial strength to serve as a lender of last resort for foreign currency. During the first week of October, the operating environment of Icelandic financial enterprises became extremely difficult and it appeared they would not be able to meet their commitments. Credit lines and wholesale markets closed, preventing debt refinancing.

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This is correct up to a point. They stretch the explanation far by blaming the whole collapse in Iceland and of the banks on the international credit liquidity crisis or the credit crunch that went in free fall with the Lehman Brothers collapse.Whitewash Landsbanki

To say that this was the only reason is not only simplistic, but misleading as well. What about all the money leaving all the banks? What about all the loans and financial acrobatics to owners, offshore companies and strange business partners? What about all the investments abroad and in Iceland in companies and individuals without collateral?

To answer this so people understand: It is insane for the resolution committee to actually blame the whole system failure in Iceland on the international credit crunch. The fall of the Lehman Bros bank was only the last foundation to crumble in a very weak, corrupt and broken system called the Icelandic banking/financial system. Money lines to Iceland had long since closed when the Lehman Bros fell, and the US government, the British government, the Scandinavian governments and many other experts had warned the Icelandic government this fall was inevitable. Yet the government did nothing to save a bad situation, instead they claimed this was international envy and a clear image problem, not a “real” problem.

The findings do not mention either the incredibly fast growth of the banks, way beyond the capabilities of the Icelandic government and for their own good. They do not mention all the bad loans they gave away.

To put things in perspective:

If this official committee findings are correct, then it was just the lack of cash that caused the system to fail.  It is the same arguments as saying that Bernie Maddoff had not gone bankrupt were it not for liquidity shortage. If he could have paid his short term obligations, then things would have been perfectly fine.

BAD MANAGEMENT are the key words, and liquidity crisis is result of this, not the other way around.

It is pretty serious if this naive perspective of the committee report and the government is the official explanation of how and why things turned out as they did. There are three possible answers to this.

The first is pure denial of events.

The second one is cover up of their own incomptence (money men, lawyers, accountants and politicians).

The third one is to cover up all the criminal behaviour that has raged Icelandic money markets and the close knit business/political society for the last decade.


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