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On loan takers being held responsible

In the comments to the last post, a few readers expressed their views — which note bene we have heard before — that the people who took the foreign currency loans were really the ones to blame and should be held accountable for their actions. It was they who failed, not the system. Others, more prudent, should not be made to pay for their mistakes. After all [the theory goes] Icelanders were “well versed” in the fluctuations of the Icelandic krona and should have been aware of the risk they were taking.

It is interesting to me that these comments come pretty much exclusively from outside Iceland. I have not heard one single Icelander express this opinion. Personally, I strongly disagree with this view. I did not take out a currency basket loan and have not been subject to the same nightmare as those who did; however, not for a moment do I begrudge those people this ruling, even if it means I have to carry some of that cost indirectly and even though I still have my mortgage, which is indexed to the rate of inflation, and for which there appears to be no correction in sight, unlike that for the currency basket loans.

Clearly we have opposing viewpoints here, and I tend to avoid trying to convince people of something they clearly have a fixed opinion about, since everyone is entitled to their viewpoint. [Plus I’ve learned it’s not worth the aggravation.] That said, Lára Hanna today bumps up a comment from one of her readers [from this post], who I feel gives excellent insight into the situation from the Icelandic point of view. He/she writes:

1.Those who took the currency basket loans did not do so to make money, but rather to save money. One shouldn’t pay more for a product/loan than one has to, and the currency basket loans held more economical interest rates for the longer term. It was supposed to be a good option for those who could stand normal exchange rate fluctuations. The decision [to take a currency basket loan] was not based on risk taking or greed, but was a well-calculated and sensible decision, taking into account the household budget. In some cases the currency basket loans were the only loans offered.

2. People who took currency basket loans did not cause collapse of the krona, the banks did. The banks worked against the interests of their customers, engaged in unscrupulous business practices AND offered illegal loans. Exchange rate fluctuations were calculated as part of the currency basket package, BUT the entire premise on which those loans were based collapsed in this country. The banks and politicians LIED about what was really going on, the owners of the banks robbed them, and the entire financial system melted down. This is what you call the collapse of a premise [ísl: forsendubrestur]. The takers of the loans did not have the same information as the banks/politicians. You could just as well say that all Icelanders were thrill seekers/risk addicts for having lived within a system that was bound to collapse in the end.

3. The unity between debtors was broken when the people with the indexed loans agreed to sacrifice those who took the currency basket loans.* Both groups were given unfair treatment, but those who received a little less unfair treatment agreed to sacrifice the others. Putting everyone in the same boat was not even under discussion. Can they demand justice now? YES of course! EVERYONE can demand justice, but the problem is with the bank, that is where the injustice lies, not in that one got off a little better than the other. If someone breaks into the homes of two neighbours and steals more from one than the other, should you be angry with the thieves or the neighbour who was a little more fortunate? The mean-spirited would be angry at the neighbour; others look to the thieves and the root of the problem.

4. I made my bank an offer to pay off our currency basket loans as if we had taken an Icelandic indexed loan. The bank rejected the offer and made my spouse and myself responsible for their ISK 30 million exchange rate loss, threatened to go straight for our co-signers, and showed the most crass arrogance in all their interactions. Do these people really think we are prepared to make a deal now? No thankyouverymuch, hell will freeze over before we cut that bank any sort of slack. What goes around comes around.

5. I wish those who hold indexed Icelandic loans all the best in their struggle and hope we can stand united against injustice, not as divided and mean-spirited individuals. People who laugh at the misfortunes of others and allow injustice to prevail until it comes knocking on their door do not have many allies when the chips are down. Let us not allow that to be the fate of the Icelandic people, we are really all on the same team here.

* Must confess: I’m not sure what this person means here.

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  • Lissa June 22, 2010, 12:52 pm

    This is the kind of thinking that Krugman calls privatized profits and socialized loss. It assumes that a) private citizens can get the same data that the banks can get, and can analyze it (patently false); b) private citizens should and can do due diligence on every interaction with a bank or other corporation; c) regulation to protect private citizens is always bad; d) corporate profit is always good and e) money is a sign of ability and skill.

    In simple words, if I can cheat you and I do, I deserve to keep my ill-gotten gains. You should have known better.

  • Andy D June 22, 2010, 1:04 pm

    Rank hypocrisy coming from Iceland yet again. How many times have we heard the people who put their savings into Icesave (which was marketed as being just the same as any other savings account) called greedy and that they got what they deserved, and yet those Icelanders who took advantage of a complicated foreign currency loan are now somehow poor innocent naifs who were conned by the bankers. I particulary like the conceit that ‘I didn’t take out a foreign currency loan to make money, I did it to save money’. As Benjamin Franklin said, a penny saved is a penny earned.

    Pathetic.

  • Michael Schulz June 22, 2010, 1:06 pm

    Very well stated (my mantra): “…The takers of the loans did not have the same information as the banks/politicians. … ” The banks must and can pay; politicians must be held politically/morally accountable, and to the extend there was criminal intend neither shall be above the law. I would not be willing to pay 1 ISK, neither directly nor in-directly.
    Cheers,
    Michael

  • Tom Harper June 22, 2010, 1:08 pm

    I agree with you completely, Alda. I also think that the “outside Iceland” phenomenon may be due to the fact that, elsewhere in the world, the crash went slightly differently. While I do blame sub-prime lenders for being irresponsible with their money, I also feel next to no sympathy for a sub-prime borrower whose house is being foreclosed. These were people who clearly overextended themselves financially. In the US and UK, some of this is due to the socially-driven need to own a home as soon as possible, and people were giving away the money to buy them.

    I also think that, globally, some of the sentiment about consumer responsibility comes as a reaction to so much blame on the banks. People say “the banks destroyed our economy”. Okay, maybe, but no one is absolved from thinking for themselves. The people who put their money in Icesave, for example. If you thought about it at all, it was clear there was a higher risk being incurred, no matter how the banks marketed themselves.

    In Iceland and abroad, the banks certainly deserve a fair portion of blame. But let us not forget that the regulatory frameworks that we were supposed to trust to keep these banks safe is what really failed us. And yes, consumers should have known more about 1) the risks they were taking and 2) their financial ability to cope with such liabilities. That being said, I’m sick of hearing about “moral hazard” in this crisis, especially for the consumer. No one here has the moral high ground; the government that is bailing out all of these banks is just as much as fault as the banks themselves! They enabled this behaviour in the first place! And consumers are not all economists, so they all place SOME trust in the banking system. As for the banks, if you EVER thought that a bank would not do whatever it reasonably can to make money, you are overly naïve. They do not possess any more of a moral imperative than any other corporation, and acting as if they should have been more “trustworthy” just because they are banks is silly. If you want to keep banks from doing something, make it illegal, at the very least.

  • Veerle June 22, 2010, 1:14 pm

    I’ve been defending the Icelanders ever since the crisis with one main arguement: people trusted their bankers, the system obliges you to trust them. You can’t put your money in a sock anymore, can you? People here seem to think that our banks on’t do these things. Yeah right…

    Dunno how it is in Iceland, but in the EU the percentage you get on your savings book is so low (because of taxes) that people are forced to take risks. They’d better put taxes on the risky stuff…

    And indeed you can access the necessary financial information, but personally I do not understand what it all means. It’s not because there’s a bunch of medical information on the internet, that I can diagnose myself when ill. You need specialists for that.

  • andy June 22, 2010, 1:18 pm

    these FX loans were possibly mis sold. whilst ignorance is no defence in UK law, we have presumptions about what are knowledgable investors, and what are not. There is also a presumption that the individual needs support bin their relationships with large commercial entities (even if the UK FSA was useless).

    On this basis, the loans may be mis sold and all should be placed in the position as if they had taken ISK / Index loans from the beginning. banks are dead in the water anyway.

  • Rik Hardy June 22, 2010, 1:42 pm

    A small illustrative case:
    Before the collapse, I had a financial advisor at the bank (not any more…!)
    When I told him I wanted absolutely minimal risk and preferably no risk at all with my investments, he expressed surprise and asked me if I was sure that was what I wanted, since I was potentially missing out on large dollops of interest.
    Only a few days before the bomb went off, I got scared enough to tell him I wanted to buy my home outright with the money I had in the bank (I pay attention to the news…). He then said he really thought it would be better to continue with the mortgage, since the money left over would enable me to do fun things like go abroad on holiday or buy a new computer/car/whatever.
    When I suggested that the money I would NOT have to pay on a mortgage would enable me to do exactly those same things, he finally admitted that I had a point.
    Now, although I pay attention to financial news, I freely admit that this guy knew more about money matters in general than I did, and yet that was the extent of the “advice” I got from him; moreover I paid his bank for the privilege of getting it.
    That taught me that your bank’s financial advisor will always have his bank’s interests at heart before he will have YOUR interests at heart, and he will even work AGAINST your interests if they conflict with his employer’s.
    Take my advice and save your money at home – or spend it all quickly.

  • Bromley86 June 22, 2010, 2:56 pm

    >That taught me that your bank’s financial advisor will always have his bank’s interests at heart before he will have YOUR interests at heart

    Yep, nothing is free. Want free banking? Then be prepared to have the bank teller try to sell you a loan/credit card every time you pop in to deposit a cheque. Happened to me today and all I was doing was posting a letter in the Post Office!

    As one of those comments from outside Iceland, I’d like to mention that I’ve never advocated hanging the consumer out to dry on this one. The government should have stepped in decisively to take on the exchange risk (either themselves or to pass it onto the banks/finance companies) irrespective of the legality of the loans. After all, wasn’t the fortress around the homes (or similar phrase) a key election promise?

    But they didn’t and now there’s an unholy mess with the possibility of people who took these sorts of loans not having to pay anything other than the excessively low rate of interest (or perhaps not even that – I’ve no idea what happens when two parties agree to a contract which is not legal).

    Although Alda doesn’t mind carrying a part of the cost, the question is should that part be the difference between the cost of a normal indexed loan and the FC ones, or should it be the entire financing cost? To my mind one is somthing a fair and reasonable state would have done 2 years ago and the other is rewarding those most to blame (other than the banks, who we can all agree were incompetent in the extreme).

    For those that haven’t seen it, Sigrun Davidsdottir’s blog is always well worth a read:
    http://uti.is/2010/06/hubris-and-the-demise-of-the-currency-basket-loans/

  • Mike Richards June 22, 2010, 3:39 pm

    I took out a mortgage just before the crash in the UK and because I was in a very expensive area I had to pretty much max out on the loan. At the time, the professional mortgage advisors were aggressively selling 100%+ mortgages. Every time I tried to turn the conversation to the normal mortgages they’d be telling me about the amazing discount rates on 100%+ mortgages, that I could have cash in hand to do up my new house, the lot. Eventually I settled on a regular mortgage and although I’ve ‘lost’ money on the house thanks to the fall in property prices at least I haven’t lost my shirt. Because a year later, that lender (Northern Rock) imploded and those people with the superficially attractive mortgages found themselves trapped – unable to shift their mortgages to other lenders and paying over-the-odds on their loan.

    I wonder how many people bought these products in what was supposedly a well regulated market like the UK. If Icelanders were getting the same sort of advice from professionals, no wonder so many took out these loans.

  • Virgile June 22, 2010, 4:03 pm

    Questions: How many lawyers did it took to make a contract that was totally illegal? I think those people should have they lawyer licence suspended?

    When we bought our car in 2007 ( a renault megan from 2005). We look for having a loan in Iceland monkey money (isk). The banks systematically refused it and only proposed us foreign loan. When asked why, the banks told us that it was the central bank policy….

    no need to look further…

  • Kris June 22, 2010, 4:19 pm

    IMO it’s predatory lending. Same thing going on everywhere just with a slightly different form. The only thing different is a judge has thrown the people a bone. It is upsetting to see someone else get a break.
    How about a new propaganda campaign? Too small to fail! Ordinary people are simply too important to be allowed to be turned into debit slaves, etc. Email this talking point to all the MSM outlets, create some twitter buzz and poof, no more moral hazard.
    When you take up a term like ‘moral hazard’ to describe what is happening you are playing into their game and can only lose. People who understand this know how important it is to shape the debate. To moral hazard or not to moral hazard, that is how the debate is being shaped. This is a TV-land misdirection.

  • Michael Lewis June 22, 2010, 5:13 pm

    Likewise we’ve heard before the view that people should be let off these loans.

    People could have taken Icelandic krona loans – they didn’t – why? Because it saved them personally money. i.e. they made money.

    Its like me saying that I’m putting my salary through a Cayman Islands front company – not to avoid tax – oh no – I’m simply ‘saving my money’.

    @Andy
    “Rank hypocrisy coming from Iceland yet again. How many times have we heard the people who put their savings into Icesave (which was marketed as being just the same as any other savings account) called greedy and that they got what they deserved, and yet those Icelanders who took advantage of a complicated foreign currency loan are now somehow poor innocent naifs who were conned by the bankers.”

    Here I have to agree with you Andy. Whilst I think Icesavers took a UK funded bailout, its the same principle. And those arguing for the default want things both ways.

    Alda mentioned this as a non-Icelandic view. I have to say, honoring ones debts – that is certainly something that many people in the UK would feel obliged to do, regardless of law, maybe its a non-Icelandic view.

    Of course, some people simply can’t and reasonable and flexible bankruptcy (or non recourse loands, unemployment insurance etc…) should be made available , so that these people aren’t affected for life.

  • John June 22, 2010, 6:01 pm

    “it is interesting to me that these comments come pretty much exclusively from outside Iceland” – so was the warnings of the course Iceland had set for themselves in the year prior to 2008. So what is prudent is not a easy question.
    The lender of the last resort (the Iceland people) will have to bailout the banks again and with who’s money?
    What a nightmare Iceland have made for themselves.

  • Joerg June 22, 2010, 6:38 pm

    “Those who took the currency basket loans did not do so to make money, but rather to save money.”

    I have to admit that I don’t get the point here. Doesn’t saving money and making money both result in having more money available in the end? What’s the point of stressing a difference, which isn’t really there? Does it mean, if I put my money into an Icesave/Kaupthingedge account to “make money”, loosing this money in a bank crash is somehow well-deserved, while getting caught up in a debt trap as a result of taking up a currency basket loan to “save money” is not?

    I, personally, prefer to refrain from blaming people for their poor judgement on financial matters on either side – “making money” or “saving money” – as long as they have not obviously overstretched their financial means or taken unnecessary risks. Nevertheless, this ruling entails a new kind of injustice among those, who have indexed loans in ISK, real FX loans, currency basket loans or no loans at all. It will be interesting to see, if the general satisfaction about this verdict – seeing it as a blow against incompetent bankers and politicians – persists, when it becomes clear, who is profiting and who is not.

  • Andrew June 22, 2010, 6:45 pm

    Both sides are responsible. The banks’ dodgy loan schemes would have had no effect if no one had taken them. However, that said, the bankers share a greater part of the resposibility as they had more information about the game plan. Consequently they should bear the greater part of restitution.

  • RK in Los Angeles June 22, 2010, 7:33 pm

    “I have to say, honoring ones debts – that is certainly something that many people in the UK would feel obliged to do, regardless of law, maybe its a non-Icelandic view.”

    Oh yeah, your colonial history is full of this behavior. By the way – thank you for returning the Elgin Marbles.

    As for the rest – its completely mindboggling why there are so many non-Icelanders here with such strong opinions on a ruling that only affects the Icelandic nation and has no affect on our relationship to other countries.

  • alda June 22, 2010, 7:34 pm

    Does it mean, if I put my money into an Icesave/Kaupthingedge account to “make money”, loosing this money in a bank crash is somehow well-deserved, while getting caught up in a debt trap as a result of taking up a currency basket loan to “save money” is not?

    — Just as I have never heard an Icelander criticize those who took currency basket loans, I have honestly never heard an Icelander say that depositors in Icesave / Edge “deserved” to lose money. I have, however, heard non-Icelanders say that those who deposited money in Icesave were greedy, etc. and should have known better. But I have not heard Icelanders use those words.

  • hildigunnur June 22, 2010, 7:38 pm

    Andy D, not all of us talked and thought about the Icesave account holders that way, please don’t bundle us all together like that! Iceland WILL pay for Icesave, too.

    I don’t see what the blogger means in that asterisked place either – don’t at all recall any gloating from the people that took ISK loans towards the currency basket ones.

    NB, I didn’t take a single loan at the time, neither ISK nor currency basket – but I’ll be paying through my nose anyway. For all those loans plus for the Icesave ones.

  • JP June 22, 2010, 7:44 pm

    “The decision [to take a currency basket loan] was not based on risk taking … but was a well-calculated and sensible decision”

    I don’t understand this logic. If debtors didn’t take account of currency exchange risk, then how could such a decision be well-calculated and sensible? Surely it’s the opposite.

  • Bromley86 June 22, 2010, 8:02 pm

    But I have not heard Icelanders use those words.

    Really? I haven’t heard it (never having knowingly spoken to an Icelander 🙂 ), but I have often seen it written. Not sure about “deserved”, but definitely “greedy”, etc. Whether they believed it in their heart of hearts, or whether they were just venting, I’m not sure.

    The lender of the last resort (the Iceland people) will have to bailout the banks again and with who’s money?

    As this is just so obvious, and as the result was likewise so obvious once one read the law, my suspcious mind makes me wonder why the government didn’t act back when it would have been easier to bailout a smaller percentage of the total debt (i.e. back when the debtors would have been grateful for anything).

    I can’t track down the phrase that was apparently used in government circles back in Oct 2008 to describe the Emergency Law, but it was a rather funny expression that translated literally as “shits with foreigners law” and meant something like “dump on the foreigners law”. I wonder if something similar is going on here, in that the government might be thinking that the creditors are all mostly owned by foreigners. Why try to fix the problem using Icelandic resources if, quite legally, the losses can be shifted out of Iceland.

    The only question the is can the Icelandic banks (which I believe are largely foreign owned) absorb the losses without risking going under, which would require a state bailout.

    Although, as a consequence of this, you might expect bank charges to increase to the maximum that the market will bear to enable the owners to recover losses, that’s presumably already the case after the initial collapse of the banks. So no real loss for Iceland there.

  • alda June 22, 2010, 8:18 pm

    its completely mindboggling why there are so many non-Icelanders here with such strong opinions on a ruling that only affects the Icelandic nation and has no affect on our relationship to other countries.

    Amen to that!

  • RK in Los Angeles June 22, 2010, 8:51 pm

    Alda I believe we just received our explanation:

    “I can’t track down the phrase that was apparently used in government circles back in Oct 2008 to describe the Emergency Law, but it was a rather funny expression that translated literally as “shits with foreigners law” and meant something like “dump on the foreigners law”. I wonder if something similar is going on here, in that the government might be thinking that the creditors are all mostly owned by foreigners. Why try to fix the problem using Icelandic resources if, quite legally, the losses can be shifted out of Iceland.”

    So thats what you believe. Hence the protest.

    As far as I know there is no information to support this. The loans were indexed to foreign currency, not drawn in foreign currency. In fact there was a statement made by one of the banks last week that the ruling did not apply to loans taken in foreign currency. The banks may be foreign owned now, but they werent at the time when these loans were given. Furthermore – whether the banks are foreign own or not they are operating in Iceland and their customer base Icelandic.

    ……..

    Quite honestly, there seems to be a lot of presumption here colored by anger over Icesave. This has nothing to do with Icesave. This is really just our business and completely futile if not simply silly to be nursing anger over this.

  • D_Boone June 22, 2010, 9:01 pm

    Alda said
    “its completely mindboggling why there are so many non-Icelanders here with such strong opinions on a ruling that only affects the Icelandic nation and has no affect on our relationship to other countries.”

    I think the answer may be:
    * Iceland is the lab rat of the financial world hence their interest. This blog deals with Iceland issues in English hence they tend to gravitate to this site.
    * Many here, directly or indirectly, have been adversely affected by the financial meltdown and when your pocketbook is hit you tend to have strong views
    * For my part I have friends and relatives both inside and outside Iceland who have been severely affected by the crisis. I suspect many others are the same.

  • Joerg June 22, 2010, 9:44 pm

    “But I have not heard Icelanders use those words.”

    I have – but never mind, this has also been the attitude of the German government towards German Kaupthingedge depositors after the crash. And this blame game is pretty universal those days and definitely not restricted to Iceland. The above distinction between making (bad?) and saving (good?) money was just some faint recollection of this for me.

  • Veerle June 22, 2010, 10:17 pm

    I wonder who was greedy? The Icelanders or those who put money with Icesave and Kaupthing. I only have experience with Kaupthing here in Belgium, so I can’t judge Icesave. Kaupthing was the only bank in Belgium that offered 6 % on a savings account. I was tempted too, but decided not to do it, because all the other banks here offered ‘only’ 4 %. I decided this was suspicious, but many people only saw the six percent …

  • Sebastian June 22, 2010, 10:51 pm

    Quote from Sigrun Davidsdottir’s blog:
    A source familiar with the situation pointed out to me that the ruling is yet another ‘thumbs down’ for the Icelandic banks. These loans could easily have been set up so that they would have complied to Icelandic law. It was just a matter of wording the loan contracts more precisely.
    http://uti.is/2010/06/hubris-and-the-demise-of-the-currency-basket-loans/

    Assuming this is true, the loans were only illegal because of a technicality.

  • Bromley86 June 22, 2010, 11:02 pm

    Assume away RK, but you’re wrong on almost all counts.

    I don’t “believe” it, I “wonder”. No protest from me. I am aware of the legal way to do a currency loan in Iceland, as you may remember from the other thread. It doesn’t matter who owned the banks when the loans were made, as they’ve already lost all their money and don’t own the banks now.

    Of course the banks’ customer base is Icelandic – try opening a branch abroad and see where that gets you 🙂 . My point was that the new owners have already lost billions when they took the equity for debt swap, so they’re already going to be squeezing that Icelandic customer base as hard as they can. As long as the effects of this ruling that fall on the Icelandic banks are not sufficient to significantly disrupt their liquidity, then there’s nothing that those foreign owners can do. Again, note the “wonder” – this is speculation.

    You’re right on one point though. I had presumed that the banks/finance companies entered into forex contracts on behalf of their customers, rather than just pulling the indexation out of the air. I suppose that it is possible that they didn’t, but that seems highly unlikely.

    Oh, and I’m not nursing any anger over Icesave, despite having strong views on that too. If I was an Icelander with a FC indexed loan though, I’d be mighty pissed off that the governments since Oct 2008 had done bugger all to help me. Especially as they had to know which way this was going to go.

    Bjarni is always a great source of info. It’s an oldie, but nothing substantive has changed. The relevent part:
    If you read the current laws 38/2001 on the books regarding interest and indexing, they clearly back the borrowers position.

    In articles 13. and 14. it is clearly specified that the only legal way to index loans, is to tie it to “vísitala neysluverðs” which is basically an Icelandic version of a consumer pricing index (CPI).

    Furthermore, in the accompanying law notes (most Icelandic laws contain explanation notes, that explain how to interpret them), it specifically states that these laws beyond any doubt, make it ILLEGAL to index any loans, issued in Icelandic kronas, to foreign currencies.
    http://www.icenews.is/index.php/2010/02/14/court-rules-in-favour-of-icelandic-foreign-loan-holders/#comment-115379

  • Bromley86 June 22, 2010, 11:44 pm

    Assuming this is true, the loans were only illegal because of a technicality.

    As I understand it, that’s entirely correct. If the customers were lent CHF/JPY (even electronically) and then converted it to ISK, then that loan would stand. The problem is that they were lent ISK that was then tied to a forex contract in order to make use of the low interest rates in Japan etc.

  • Ed Santella June 23, 2010, 1:20 am

    The problem, I think, is larger than the specific and horrific crash in Iceland and the indexed loans. I live in Massachusetts and work for the government agency which pays unemployment. To say the least we are busy. There are 6 unemployed for each available job. That statistic does not even get to the issue of qualifications.

    There is a growing trend among politicians, both Republicans (where nonsense is expected) and (the allegedly more liberal) democrats to blame and punish the unemployed. Several Senators and Congressmen want to drug test the unemployed. (How much would that cost?) They argue that unemployment benefits (which are never more than half one’s previous wages and may or may not put the recipient above the poverty line) encourage people to refuse to work.

    The national legislature is deadlocked and cannot (as of this date) pass an extension of benefits for those whose benefits have or are about to expire, leaving them with nothing to live on. The chant is we need to balance the budget. (Yes, we need to pay down our debt but this argument is never raised when the bloated defense (war) budget comes up for a vote.

    There are the rich who are “too big to fail” and the rest of us who are too poor to care about.

    The issue is, I think, not only a question of finances, but a question of psychology: how do we avoid responsibility for the evils going on around the world? To lay responsibility on the rich is to lay responsibility on the system(s) they run and most of us are frightened as hell that the system may prove unworkable. The only people safe to blame are the victims. Not only can they rarely defend themselves, but we can feel good about watching them starve. The unstated goal is to feel secure about the system and good about ourselves.

    That many of the frightened are also victims is the making of a tragedy.

  • Knute Rife June 23, 2010, 1:27 am

    I rather nonplussed by all the rage over this decision. Even with my extremely limited Icelandic, I can see that the court’s ruling was correct and that these loans were illegal and void from the start. They could have been made legally, but that would have defeated the lenders’ purpose in making these loans, namely providing a big piece of one side of the currency arbitrage these lenders were playing, which was effectively the entire basis for the “Icelandic financial miracle.” The lenders knew or should have known they were making illegal loans, chose to make the loans anyway, initially profited from that choice, and are now paying. On the other side, I can not ascribe the same knowledge, intent, or return to the average, Icelandic schlub who was looking for a deal on a set of wheels.

    As for covering Dutch and British deposits in the failed banks, legally there similarities: The banks could have set up the foreign branches in a way that protected the Icelandic guarantee fund, they chose not to (and the government, being run by the Austro-Chicago Economics Party, chose not to make them), and so when they inevitably failed, the fund was on the hook. At this point, though, we need to distinguish between legal rights and real world powers. As I’m compelled to tell my clients from time to time, “Yes, you can sue them. Yes, you can get a judgment. But if they don’t have money, how are you going to collect?” The Netherlands and the UK can stamp their feet and demand payment all they want, but how they expect 300,000 people to pay a debt like that without turning the country into a crater is a question they should no longer be allowed to ignore.

    As for Cameron’s threat to blackball Iceland’s EU bid, given the state of the EU just now, it might be better if Iceland’s bid were slow-tracked. It wouldn’t hurt Iceland’s relations with Norway or the US or Russia. And given that Germany is now trying to warm up its own relations with Russia, Iceland could end up getting more EU benefits through that back channel than it could through the front door.

  • kevin oconnor,waterford ireland June 23, 2010, 1:42 am

    @Alda Naw I’m just jealous must be nice to have 20,000 euros in an Icelandic bank to lose it all dont suppose I will ever know that feeling.

  • kevin oconnor,waterford ireland June 23, 2010, 2:20 am

    A bit off topic but Icelandic related excuse the pun ha ha but check out wikileaks human rights in Iceland all those years ago

    http://web.uvic.ca/~becktrus/assets/text/jonsson_01.php

    And I thought you were nasty guys for beheading a catholic priest well how wrong I was.:)

  • RK in Los Angeles June 23, 2010, 5:22 am

    Bromley:

    I dont have time to read your answer thoroughly right now, I will later though and will give a response if I have one. But I can see right away that I need to clear one thing up which is the reason why I put a divider in my comment before was to distinguish between my comment directed to you specifically, and then my comment in general to those who have chimed in from outside Iceland. Sometimes Im not sure how to go about that and maybe that wasnt clear enough.

  • Joerg June 23, 2010, 8:11 am

    “its completely mindboggling why there are so many non-Icelanders here with such strong opinions on a ruling that only affects the Icelandic nation and has no affect on our relationship to other countries.”

    The entering into a foreign currency risk by taking up this kind of loan has been a symbol of poor financial judgement and rampant consumerism since the crash to many – may it be true or not. Just look at the comments in the past. There has been plenty of time to develop strong opinions.

    I think, the comments, posts and reports from Icelanders – like in Alda’s book -, which are focussing on explaining the reasons in a matter-of-fact way – why people acted as they did and why they were taking those risks – are more illuminating and helpful to foreigners than just telling them to be silly and to keep their nose out of Iceland’s business.

    It’s quite a different story that those loans have apparently been illegal from the beginning for technical reasons without any governmental action to resolve this issue. In my view this is the true scandal here and a good reason to appreciate the latest ruling.

  • Lissa June 23, 2010, 12:14 pm

    Why on earth are we focusing here on the behaviour of borrowers rather than on that of the bankers who willfully broke the laws and the politicians who let them? These are the responsible parties, the people who chose to violate the laws, not the borrowers who were doing what they were taught, and trying to choose between offers for the best bargain.

  • Thomas E June 23, 2010, 2:24 pm

    Bottom line, the banks knew these kind of loans were illegal when they made them, so I have no sympathy for them.

  • Bromley86 June 23, 2010, 6:23 pm

    the banks knew these kind of loans were illegal when they made them, so I have no sympathy for them

    I doubt many do Thomas. But, more to the point, the losses on these loans are real, so if the borrower is going to be protected then someone has to pay. Assuming for the moment that it is the Icelandic banks that will be paying it, then I would expect that that means another bailout.

    That means that those who took out normal loans, or those that didn’t take out any loans, will be paying for those that took lower rate but higher risk basket loans.

  • Sigvaldi Eggertsson June 24, 2010, 1:05 am

    Bromley86, when the banks were restructured they received the loans from the fallen banks at far below their original worth.
    So the losses have already been accounted and paid for.

  • Bromley86 June 24, 2010, 12:57 pm

    Good point Sigvaldi – back when we were talking about the old-new bank bonds over on IceNews, the legality of the basket loans wasn’t in question so we assumed the massive (60%?) write offs were solely due to poor lending practices/high corportate bankruptcies. It does seem likely that those valuing the assets/liabilities transferred could see which way this ruling would go and took this into account (so presumably the main Icelandic banks won’t need new capital to cover this).

    Which makes it all very odd then that the banks (& government) didn’t make use of the information asymmetry (nice term 🙂 ) over this issue to offer a good deal to those with basket loans a while back. But I suppose that would have effectively just transferred money from those Icelandic debtors to the old banks.

  • Bromley86 June 24, 2010, 2:33 pm

    Dammit, just when we reach consensus, it all gets confusing again. Omar Vladimarsson has a good article on it and it made more sense to cut and paste than to summarise:

    Icelandic banks may face a second crisis as a court ruling banning some foreign currency loans saddles lenders, mostly owned by international creditors, with losses on $28 billion of debt.

    . . .

    “If the decision means all loans in kronur linked to the value of foreign currencies are illegal, I can’t imagine the Icelandic banking sector will survive that,” said Oddgeir A. Ottesen, an economist at IFS Consulting in Reykjavik, in a telephone interview.

    . . .

    Islandsbanki said in an e-mailed statement today it can fulfill the FSA’s 16 percent capital requirement rule if the ruling only affects private loans. The government risks losing as much as 100 billion kronur ($781 million) in a “worst case scenario,” Economy Minister Gylfi Magnusson said in an interview today.

    http://www.businessweek.com/news/2010-06-24/iceland-s-creditor-risk-grows-as-banks-face-losses.html

    Bottom line appears (I guess) to be that even if the new-old bank bonds allowed for this, the support provided by the government to the new banks didn’t.