föstudagur, mars 12, 2010

some numbers

Yesterday I published an article in Morgunblaðið. Here is roughly the same article in English.

In the discussions about the collapse of the Icelandic banking system that have taken place since October 2008, very little has been said about the size of the collapse of the three banks, in either absolute or relative terms.

This is unfortunate, as without a sense of perspective for these large bank failures, Icelanders have a hard time understanding the magnitude of what befell our small economy. We also have a hard time explaining the size of the systemic failure when discussing the banking collapse with foreign parties. This does everyone a disservice, as these bank failures are historic events not just for Iceland, but for the whole world, and need to be understood in that context.

Here are a few numbers I have compiled, to put the crisis in some international perspective. At the end of June 2008, about 3 months before the banks fell, the combined assets of the three largest banks – Kaupþing, Landsbanki, and Glitnir – were 14 times larger than the gross domestic product of Iceland.

These banks were not just large relative to the GDP of Iceland – they were also large institutions by international standards. Let‘s first look at the three banks as one for a moment. After all, the three were often lumped together by many market participants outside of Iceland, and they all collapsed within days of each other. One way to measure their absolute size is their combined assets at failure. That amount as of June 2008 was 182 billion U.S. dollars. The size of these banks was thus very large even in a British or American context.

In autumn 2007, in a story that made news around the world, British savers queued in the streets to withdraw their money from Northern Rock bank. To stem that run on the bank, the British government was forced to step in and guarantee deposits. Ultimately Northern Rock was nationalized. The size of the Icelandic Three place them in a league with this famous British failure: the combined size of Iceland’s three banks was more than 80% as big as Northern Rock at the end of 2007.

On the other side of the Atlantic, the combined bankruptcy of the three Icelandic institutions would place them third in the all-time list of the largest U.S. bankruptcies. Only Lehman Brothers Holdings and Washington Mutual are bigger and those bankruptcies also unfolded at nearly the same time as the Icelandic collapse. If we compare the combined failure of the three Icelandic banks to pre-2008 bankruptcies, they would actually rank as by far the largest American bankruptcy of all time, 75% bigger than the collapse of WorldCom in 2002.

Taken individually, the absolute numbers are just as staggering. Kaupþing, for example, was almost 30% bigger than Enron, when that famous company went bankrupt, and Enron at that time was the seventh largest company in America. Landsbanki and Glitnir were each around 25% bigger than the recent bankruptcy of Chrysler.

To put this in some relative perspective, imagine if a crisis of similar magnitude had befallen the United States or the United Kingdom. What transpired in Iceland at the beginning of October 2008 would be the equivalent of more than 140 Northern Rock failures in the U.K., or the same size as almost 300 Lehman Brothers Holding companies going bankrupt all at the same time in the United States. (The size of the U.K. economy in 2008 was around 175 times bigger than that of Iceland, and that of the U.S. around 1100 times bigger.)

Between mid-September and the end of 2008, the S&P 500 Index in the United States fell from around 1200 to just below 900 points, and this was described as a horrifying market crash in the financial press. Imagine instead if that index had fallen to below 100 points. The FTSE 100 in the UK would have had to fall from over 5000 to below 500 points.

I am hopeful that these comparisons will help those of us here in Iceland understand the magnitude of the Icelandic banking crisis in world terms.


Anonymous Paul H said...

Wow. That puts things in perspective.

Blogger iris said...

I agree, I think my countrymen don't realize the magnitude of the swindle committed in the banks. The politicians of course, are clueless. The bankers, shameless.


Anonymous Nafnlaus said...

Thanks, Jared.
The really interesting question is: how much of the money that was lost was ephemeral money (i.e. market cap valuation losses, and "bubble" money) and how much was real money (i.e. hard currency from investors)? And since there is always an opposite party on every trade and money is never really lost, where exactly did the lost money go?

I recall seeing various numbers about the size of the banks and their assets in 2007-2008, estimated at something like $110-130 billion. Now, several years later, the true value of the banks' assets is somewhere around $10-15 billion (about 6-10 billion for Landsbanki, and $1-2 billion each for Kaupthing and Glitnir). How do you go from $110-130 to $10 billion? Well obviously, much of the assets consisted of assets (such as stock holdings) that declined precipitously in value in the worldwide crash of 2008. For instance, the shares in British retails stores owned by Baugur. And a good part of the paper assets consisted of shares of cross-holding Icelandic companies whose asset value consisted largely of bank shares.
So the $110-130 figure was never really an accurate figure of the amount of real money lost.
For that we can look to the creditor claims against the estates of the old banks, now in bankruptcy. I don't remember exactly what the total claims were but I would guess that they amount to $50-80 billion. Again, some these claims were by cross-holding companies, so that confuses the situation. But it seems fair to say that at the least some $50 billion was lost, and that most of this came from foreigners (such as Deutsche Bank), and that this money was "real" money, since it mostly came in the form of bonds and loans.
It is true of course that many Icelanders lost all sorts of money in various ways through the banks, eg decline in money funds, stock that became worthless, loss in real savings due to 50% haircut in the ISK, and so on. (No doubt, though, that much of the money that was lost had originally been made in the "boom" created by the banks and the trickle-down.)
But the real losers were the foreigner investors. If Icelandic investors had lost $50 billion the country would be completely obliterated.

Anonymous Nafnlaus said...

So, what happened to the real $40 billion or so that was lost?
Some of it flew off to money heaven in the bad investments made by Jon Asgeir, such as his shares in Saks (down by 90%) and American Airlines and all those purchases of British clothiers and eateries. That money ended up in the pockets of some fortunate British investors who sold the shares in 2003-2006.
Some of the money ended up in the hands of "friends of Iceland" like Kevin Stanford for their pet projects.
Some - perhaps a lot - was skimmed off by Landsbanki, Kaupthing, and Glitnir insiders who sold shares or made huge salaries and bonuses, and funneled it into offshare accounts. Some ended up in the hands of Icelandic company insiders.
Some was probably directly stolen by the Bjorgulfs and their friends, which may include Russian and Bulgarian mafia.
Some was skimmed off by accountants, advisers and deal-makers like Morgan Stanley, and some by foreign hedge funds shorting the banks and the ISK.
Some of the money went back to Iceland in the form of taxes and was spent in the boom years.

Money is never really lost, it just changes hands, though the usual pattern is that it goes partially from regular folks to insiders of various sorts - corporate directors and executives and wealthy "investors" and facilitators and predators of various sorts. In the case of Enron, much of the loss was in stock market capitalization, so there wasn't much real loss to the system. In the case of the Icelandic banks, the losses were not nearly as great as you would think from looking at paper valuations, and much of the loss was money that came (or will come) from German taxpayers.
Sure, there was probably $10-20 billion stolen by Iceland insiders and their foreign friends.
The solution would be a "claw-back" tax, just as is done in more overt Ponzi schemes like Madoff's. Or American-(or Danish)-style prosecutions that force the insiders to cough up the money. Given the politicized nature of Iceland society, I doubt that this could ever happen.

- Superman007

Anonymous baresytapas said...

I entered this site by chance, but I found very interesting. A greeting to all the people who visit this page.

Anonymous Nafnlaus said...

Don't stop now!

Anonymous Nafnlaus said...

I just found this blog and I'm really enjoying it. But then I saw that the last blog was in 2010. Is it done? Will you blog again?

Blogger JB said...

Hi there, I may pick it up again, we'll see. Circumstances surrounding my last employment made me feel that it was inappropriate to continue writing at the time.

Blogger TheBrockKids said...

are you still in Iceland? Here for a visit, love the place!


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