NEW YORK (Reuters) - Brashness, self-assurance and an entrepreneurial spirit -- those traits transformed Iceland from a tiny fishing nation into an outsized investment fund that blew up and briefly became the epicenter of the global financial crisis.
Asgeir Jonsson, chief economist of top bank Icelandic bank Kaupthing, details what happened in “Why Iceland?” (McGraw-Hill, $22.95), a very readable account that explains the financial engineering that led to Iceland’s boom and bust.
Iceland, an island the size of Kentucky with 300,000 people, laid the groundwork for its financial miracle in the 1990s, when the government enacted reforms like tax cuts, a flexible labor market and privatizations.
Cheap money abroad helped do the rest, as did top-notch credit ratings, hedge funds’ appetite for Iceland’s high-yielding krona currency, an ever-rising stock market and flamboyant entrepreneurs like Jon Asgeir Johannesson, who installed a 10-foot Viking statue with a sword and electric guitar at his London office.
Banks and entrepreneurs went on shopping sprees and created an ever-wider net of companies that bought stakes in each other at ever-higher prices. In the end, the nation itself had become a highly leveraged fund that borrowed foreign money to buy stuff at inflated prices.
A warning signal came with the “Geyser crisis,” named after the Iceland hot spring known for its violent eruptions.
Hedge funds had long borrowed cheap Japanese yen to invest in high-yielding currencies like the krona. They reversed this so-called carry trade in early 2006 when it became clear the krona had become overvalued.
A joint intervention by the central bank and private banks beat back the attack on the krona, and Iceland again went on its merry way. With regulators and politicians asleep at the wheel, the confidence of Iceland’s entrepreneurs turned to arrogance.
Where was Jonsson in all this? Did he see and warn of the coming crisis? The book doesn’t say.
“In hindsight, one can easily see I was too naive,” Jonsson told Reuters, adding that he did not appreciate how cross-shareholdings had created a house of cards. “Our main problem was over-ambition, wanting to be too big for a nation so small.”
The house came crashing down in 2008, after the fateful weekend of Lehman Brothers’ bankruptcy. Banks shut off the island’s credit lines; the UK confiscated Icelandic Internet savings accounts using anti-terrorist laws; and the government let its three main banks go bust and appealed -- in vain -- for Russian financial aid.
A former assistant professor of finance, Jonsson describes the sequence of events well, but provides almost none of the behind-the-scenes drama.
He does have plenty to offer: He was head-hunted from academia by Kaupthing’s CEO, a university buddy, to become “the only guy in the bank with a beard,” he said in the interview. His own father, now minister of fisheries and agriculture, agitated against “corporate greed” during the boom years.
Jonsson says he left out his personal experiences to follow Iceland’s tradition of writing history in a fair and detached way.
So when the crisis peaked in early October and Iceland’s leadership was holed up in a historical government villa for days, Jonsson doesn’t take us to the negotiating table.
He does summarize the government’s paralysis brilliantly when he recounts former Prime Minister Geir Haarde’s press statement after days of deliberations: “‘I haven’t really had a decent breakfast yet,’ he claimed, delivering an anti-climax for the ages.”
The only personal anecdote involves partying with a group of increasingly boisterous U.S. hedge fund managers in Reykjavik’s trendy 101 Hotel in early 2008. One of them -- “Joe,” who looks like a New York City cop -- sounds a prescient warning: Iceland will “be the place for the second coming of Christ, a new financial Armageddon.”
That story pretty much ends there, and the book returns to Jonsson’s usual sources of information: research reports, economic stats, official documents and press clippings.
Editing by Lisa Von Ahn