Revisiting and Revising History: 10 Years After the Financial Crisis

October marks the tenth anniversary of the complete collapse of the Icelandic banking system. Several weeks after Lehman Brothers’ September 2008 bankruptcy, all three of Iceland’s recently privatised banks fell over the course of a matter of days. It was one of the world’s largest banking failures.

Ten years on, the basic story is familiar to all of us who lived through it: before the crash, Iceland’s banks had liabilities ten times the country’s gross domestic product. Shortly after the crash, Prime Minister Geir Haarde addressed the country in an infamous speech explaining what was happening. He ended the speech in a very un-Icelandic way by saying “God bless Iceland.”

Other ministers and members of Parliament tried to calm the public that night. Emergency legislation was passed by Parliament that effectively put the banks under state control and imposed capital controls. As the crisis unfolded, the governor of the Central Bank of Iceland (CBI), Davíð Oddsson, extended dubious and doomed loans to the banks and tried to peg the króna to foreign currencies. The currency had been falling throughout 2008, and the peg only lasted a few hours.

Let’s be clear: Iceland did not exactly “let the banks fail,” as international media so enjoyed reporting. The banks were divided into domestic operations that the state rescued, and foreign operations went into bankruptcy procedures. Average Icelanders lost little on paper. Foreigner investors and depositors lost much more, but most were wealthy individuals or funds. The only exception was the infamous IceSave Bank. That is a long story for another day.

Rewriting History

As the decennial of the crash approaches, a controversial and publicly-funded report on the causes of the financial crisis was released. The report was written by the well-known conservative political science professor Hannes Hólmsteinn Gissurarson over the past four years. It was commissioned and funded by Bjarni Benediktsson, who has been Finance Minister, and briefly Prime Minister, for more than five years. Hannes has close ties to Bjarni’s Independence Party, which led the privatisation of the banks and government at the time of the collapse. You can probably guess where this is going.

“Hannes essentially restates the discredited belief that foreign actors caused Iceland’s collapse. He sidelines the role of his friends in the party and the policies they all supported.”

Hannes essentially restates the discredited belief that foreign actors caused Iceland’s collapse. He sidelines the role of his friends in the party and the policies they all supported. Instead, he holds the coalition partner of the time, the Social Democratic Alliance (SDA) and its leaders, responsible.

This is not a surprising move for Hannes. He was successfully sued by Halldór Laxness’ widow for plagiarizing her husbands’ work. He also has particular ire for the governments of the U.K. and the Netherlands, on account of anti-terror legislation the former utilised against Iceland in an attempt to seize the assets of one of the failed banks operating in the U.K.

Hannes takes care to defend the CBI governor at the time of the crisis—a personal friend of his—Davíð Oddsson. Davíð was one of the most powerful politicians in modern Icelandic history, memorably dubbed “Dabbi kóngur” (King Dave) in a comedy song, and served as Prime Minister for thirteen years. Under his leadership, Iceland embraced neo-liberal policies, most consequentially the privatization and deregulation of the banking sector around the turn of the millennium. His term saw the banks grow exponentially and unsustainably. He was removed as governor but was hired as editor of Iceland’s largest newspaper, Morgunblaðið, soon after. The paper lost a significant number of subscribers in the following months. He also ran for president in 2016 but came in fourth. King no more.

Responsibility Without Consequences

Hannes’ conclusions conveniently leave out the underlying causes that were detailed in the well-respected 2010 Special Investigative Commission (SIC) report, that concluded that the main causes of the crash were the structure and operations of the banks.

The commission was set up with little fanfare and low-expectations but ended up defining a nation’s understanding of the crisis. The commission had broad powers, a large staff, and independence to conduct its work objectively. It was able to examine previously confidential information and compel witnesses to testify before the commission in closed session. These extraordinary powers are the reason the commission was able to uncover the causes for the crash.

The SIC’s findings included the fact that the banks were controlled by a small group of shareholders who seemed to have little knowledge of banking or international finance. They would lend money to clients who then reinvested in the same bank or one of the other Icelandic banks. This scheme was the basis of the successful prosecutions for market manipulation for executives from all three banks. All of the banks had favoured clients, to whom they extended extraordinary lending terms. The banks would often have to take a loss while the clients walked away. The pace of growth meant that the CBI and other regulators could not be an effective check on the banks. The banks had grown from 1% of the GDP to 1000% in less than a decade. One of the key functions of a central bank is to be the lender of last resort. There was no way the CBI could play that role.

The commission found that Davíð and his deputies met the legal definition of negligence. Prime Minister Geir Haarde and two fellow ministers, including one from the SDA, were also determined to be negligent. Geir was the only one ever charged with the crime. He was found guilty but never sentenced, but appealed the case all the way to the European Court of Human Rights, which upheld the conviction earlier this year. He is now Iceland’s ambassador to the United States.

One Down, Two to Go

Two of the three banks, Landsbankinn and Íslandsbanki, are still owned by the Icelandic state. The state’s minority share in the third bank, Arion Banki, was sold earlier this year. The coalition agreement of the current government states it will sell all of its shares in Íslandsbanki and a majority of its shares in Landsbankinn. The law requires these sales to be done publicly with notifications, and the Minister of Finance will oversee this process. Several years ago, Landsbankinn privately sold a credit-card processing company to the Minister of Finance’s father, who then sold it for the twice the price on the open market. Bjarni claimed to have no knowledge of the sale but scrutiny will be much higher now.

It is often said that history is written by the winners. With the Independence Party still the largest party in the country, Bjarni still serving as Finance Minister, and now a long-time conservative releasing his own conclusions about what caused Iceland’s crash, that truism may be put to the test.