Out of Pod Experience

I actually am very weary of what happened in Iceland, People who had money in Icelandic banks lost some or all of their money. If Icelandic banks did have some sort of FDIC like insurance on deposits then that money is guaranteed by the government and the government is on the hook should the banks fail. That is the contract made between the banks, the government and those with accounts. Cancelling that contract is a very hard decision to make, those with accounts loose everything, its not taken away its just gone, the government has a contractual responsibility to pay out the deposit insurance and the banks are never trust worthy again even if they survive the chapter 13. When the government is under the obligation to pay, which they are contractually liable to do, they must acquire cash in some way, it can be done though bonds or loans but it boils down to the governments revenue stream of taxes. So in essence, the icelandic people are on the hook for what the government insured.

Now if the government did no FDIC like program then the icelandic citizens should give the world a giant middle finger because they are not liable for "poor rolls" on a risk bound asset. But my understanding of the system was that the banks and the government were in it together to supply the insurance and attract foreign money. Which is not necessarily a bad thing, Monaco does much the same thing but they are better invested and have no had the default rates.

How? The people who profited off it was those in the banks in iceland, those people have now been zeroed out and put out of work with the bank failure, those who were making interest on their accounts now have lost significant portions of their principle.(money they had before the start of the account). Everyone involved got screwed on the deal, the ones with the most losses happen to be the ones with the most money numerically in the game to loose. If those losses were Eurozone or US, it does not matter, the accounts were secured and it is the responsibility of the insurance holder, the government who issued the insurance, to pay out. If their risk analysis is wrong and things go south in a big way as they did, well everyone looses, account holder, government and bank. As to governments getting involved this is actually covered in international trade law. A lot of cross boarder contracts designate the country in which suit can be filed, a lot of times this falls in the more civilized world such as Germany, Switzerland, France, England and the US. Courts in those countries then issue a judgement, so in this case a plaintive goes to a US court, which is pre determined in the body of the contract, and our court says that the contract hold the government liable if the bank goes under for the balance of the account. Our government then has the power to freeze assets here untill things are settled.

As to you statement that "the current attempt in Iceland is to try and hold people who profited off the collapse responsible". That is not stated in the article and if you are referring to Goldman Sacks and others who shorted mortgage backed securities, thats not really fair. They saw the data and made decisions on that data. Internal models showed that 40%+ of the loans in these bundles were made poorly and should not have been made. They simply said, "well we can short these because we think the price on a bundle is going down when people realize what they are actually worth". The only thing to get mad about here is the possibility that Goldman Sacks was using some sort of insider information but that is a totally different topic that should not be discussed in this thread.

welcome to the wonderful world of international finance

Making poor financial choices is not illegal and is actually a quite frequent event, though it usually does not burn down with such brilliance as we have seen recently from the financial sector.

Aug
15
2011

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Old news is old ?