Get Those Terrorists!
October 12, 2008 — nahummer
Quick. Which nation is a terror threat: Iceland or North Korea? If you answered North Korea, you’re sane, but, unfortunately, wrong. At least if you ask the US or UK governments. Yep, while the US government has removed North Korea from the list of state sponsors of terrorism, the UK government has used anti-terrorism laws to seize some of its UK-based banking assets and legally punish the Icelandic government for “completely unacceptable behaviour“. The world has truly gone mad as both world powers seek to maintain their respective positions of global dominance through threats and coercion.
Poor Iceland. It seems like only yesterday that the UN named it the most developed nation on Earth, sliding past Norway to claim the number one spot on the UN Human Development Index (HDI) for 2007/08. Suddenly a financial crisis in which somehow tiny Iceland is caught on the fault line, exposing giant cracks in its over-extended banking system. The Icelandic government has been forced to take control of three of the nations banks in the past week: Kaupthing, Landsbanki and Glitnir. In doing so, the government has guaranteed the deposits of its citizens, but in a move that the UK finds unacceptable, they have failed to guarantee the several billion pounds of British deposits and investments. So, because the Icelandic government won’t promise to refund investment losses of British citizens and companies, the UK government has responded by invoking the Anti-Terrorism Crime and Security Act 2001 to freeze the British assets of Landsbanki, estimated to be about £7 billion. Why stop there? The government is contemplating freezing all Icelandic investments. Faced with a loss in confidence in their currency, the Icelandic government is seeking a reported €4 billion loan from Russia to help avoid national bankruptcy and the Brits expect them to guarantee £8 billion of deposits for foreigners! Referring to the move by the Brits, the Prime Minister of Iceland, Geir Haarde said, “I told the chancellor that we consider this to be a completely unfriendly act.” Understatement.
Meanwhile, North Korea, a country which exploded a nuclear bomb a couple years ago, is no longer being called a terrorist, by the US government, this week anyway. The removal fulfills a promise the American administration made to Pyongyang over a year ago but is obviously highly contentious. Critics include John Bolton, members of the office of Vice President Dick Cheney, and even some members of the State Department’s verification and compliance office. But, at least Dubya and Condi can say they did something, right? So, what is today’s lesson? You got it, blow up bombs and threaten the very existence of the world, but never, ever mess with someone’s money!
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October 12, 2008 at 5:52 pm
Unfortunately for Iceland, and all of the customers it aggressively attracted, it’s local banks joined the Alice in Wonderland “modern” banking system, now epitomized by non exchange traded derivatives like Credit Default Swaps and others to the tune of maybe 60 trillion in notional value, up from maybe 100 billion 10 years ago.
Because there is no visibility into these contracts, no transparency, no one knows who is the financial institution who has to make good on these individualized, customized bad bets that some other institution, the counter party, is relying on, thus the freezing of the credit system.
Witness last weeks auction of some Lehman CDS, where the “obligation”, like an insurance product, but cleverly avoiding the word insurance and also the accounting reserves insurance would require. Iceland went from an old fashioned local banking system 10 years ago, to an international one offering various “modern “banking services to the world, with similar asleep common sense, far dwarfing other countries banks in the amount of a from of “leverage” it imposed on it’s 300,000 citizens,
Thus Iceland is an ironic poster child for near criminal banking in the looking glass. It’s unwillingness to even try to protect all it’s depositors is the Achilles heal to the present moment G20 et al, attempts for coordinated world wide actions.
If other international banks, like the big three in Iceland, did that, the world would have no chance to stabilize the world’s economic system. Yet, like everything else, it’s really not Iceland’s fault, right?
October 13, 2008 at 2:58 pm
You’ve got a good point JJ. I’d definitely categorize the behaviour of many of the world’s banks, especially those in Iceland, as criminal. What I don’t get is the actions of the UK government in using anti-terror laws to castigate the nation. My belief is that when you are an investor, you should shoulder a share of the risk, and in the case of bank deposits, if the contract doesn’t guarantee your funds, part of those risks include losses.
October 13, 2008 at 3:59 pm
I really have no inside information of course, but thinking about “bailouts” in general, they rely on those entities most involved to voluntarily group together and make up some new initiative that supports what they think needs supporting. So UK probably used the only tool they have to try to keep from having an obvious leak in the ad hoc dike being build internationally. In addition, think how UK citizens might feel when they realize their “bailout” money might be somehow protecting foreign citizens , including potentially those from Iceland. If UK citizens revolted, the leak might be too big to fix and lead to certain failure of the largest “bailout” in history. Of course, “bailout” is the wrong word because it is so non specific as to allow anyone to fantasize their own meaning. I just do not know a better, succinct word without same failing. TIME OUT in kindergarten, perhaps?