William Black, Associate Professor of Economics and Law at the University of Missouri – Kansas City School of Law and author of The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry. He came to Iceland where he’s given a pair of lectures on what led to the banking collapse, and has been very popular with the local media for his frankness. He took the time to talk to Grapevine about the banking collapse, the SIC report, and how Iceland went from boom to bust.
A lot of the press coverage here in Iceland expressed a great deal of surprise when the economy collapsed, while institutions such as Moody’s and Standard & Poor’s had been issuing warnings in 2005 and 2006 that the economy was overheating, and now was the time to step in and do something. Why do you think these warnings, from these respected institutions, went ignored?
Because the Icelandic government at that time was an almost literal cheerleader for the industry. That included the Prime Minister [Geir H. Haarde], that included the Central Bank chairman [Davíð Oddsson], and that included the regulatory agency. I went back, as part of my research before coming to Iceland, to statements that the [financial supervisory authorities] had made, and if you have that mindset, you can’t be an effective regulator.
That mindset being?
The mindset of just mindless praise. The banks were wonderful; they could do no wrong, et cetera. You have to be more objective. For financial institutions to work well, you need trust, and the paradox is you need somebody who is sceptical. And there was nobody. Nobody in the senior ranks that was sceptical.
You read the English portions of the SIC report. What was your opinion of the work the commission did?
I think the work is extremely impressive. There are very substantial and fairly sophisticated efforts at what underlying facts we need to look at. I’m particularly impressed, for example, that they went and surveyed a sample of loans to look at re-financing. That is dead on. So, as I said today, the irony is it’s precisely because they were so good at so many things that we can know that analytically they were very off when it came to blaming bad luck versus deliberate policies.
Where do you see that the investigative process could have been stronger?
It’s not even so much the investigative process. The chairman here made the remark that he felt SIC hadn’t reached the issue because that wasn’t its mandate. My point is they actually did reach the issue.
And that issue is?
And that issue is, they said, “Well, it’s bad luck”. The perfect storm, all these gambling metaphors, all these luck-type metaphors. See, they didn’t just say, “Here are the facts and we’re not going to do any analytics on what happened.” They said, “Here are the facts, and gosh, it just must’ve been a perfect storm.” In the introduction in English, they say, “This is a story of excessive growth.” That’s all their emphasis is up front. These institutions grew very rapidly, and that creates lots of risk. But you have to ask why these institutions grew rapidly, and whether it’s risk or is it a sure thing, which is what I’ve been emphasizing. That the policies they followed made record fictional profits a sure thing, and made real catastrophic losses a sure thing. So for me, it’s a bit like coming to the scene of an airplane crash. And you’re the investigator, and you say, “The thing that killed these people is that they were going 350 miles per hour when they hit the ground.” It is true, but it’s not the important part of the story.
One thing that grabbed my interest in the talk you just gave was that if these banks had been allowed to continue doing what they were doing for another two years Iceland would have ceased to exist. Can you elaborate on that?
I say it’s an existential threat to Iceland, and the reason is these banks were already approximately ten times the size of the GDP. They were growing roughly 50% per year. That means you’re going to double in size extremely quickly. So now take ten times to twenty times the size of the GDP, in about twelve to fourteen months. And now take it another year out. And you’re at 40 times the GDP, and you have 60% losses.
Well, then we can just call up the IMF to come rescue us.
Right. And everybody in Iceland has an EU passport. And you say, “We can be part of a nation where I can start out and my kids can start out their lives with about a million dollars per person in debt, or, I can go somewhere else.” And in general, who’s going to leave? The best educated and often the younger people, because it’s a lot easier to leave the country when you’re 25 than when you’re 85. In Iceland’s case, [emigration] would have been fast, with a very high percentage and in many cases your most economically productive members of society. There’d still be some people living in Iceland, but there’d be no more Iceland in Iceland.
And this brings up the “blessing in disguise” of the economic crash happening when it did.
Yeah, well, I don’t want to push that too far. The point is the alternative was far worse. The big three banks, with the collapse in 2008, destroyed the entire economy. Had they gone forward another two years, they would have destroyed the entire nation.
Now that we have this tremendous pile of information in front of us from the SIC, where do you think we should start first, in terms of digging deeper?
Well, the first thing is the commission did an excellent job of looking at a sample of the re-financing of the loans. Now you need to look at the universe of all of the cronies, all of the insiders, to see what was done in the re-financing of the loans. And you want to look at not just the dates and the dollar amounts, but you want to look at whether the lenders knew that the borrower was in trouble.
How would you be able to find this out?
What the special prosecutor should want to do next is build on what SIC has done, but get the universe of the re-financing. And they should not just be looking at records, but also talking to people.
If there are these gentlemen’s agreements and verbal deals going on among the higher ups, how are investigators going to find this out?
You have to give orders, of the kind of “Get it done”, and when people are confronted with absurdity; they tend to send memos upstairs. In the modern era, e-mails are much more frank. So if you investigate, you will find. And that’s what you need to do: investigate comprehensively. All the cronies and the insiders.
A lot of people in this country, as you may have noticed, have been very busy putting responsibility on everyone else but themselves. I won’t ask you to lay the blame at the feet of any one institution or person, but in your opinion, what institutions need the most serious re-working?
This was a political decision of the Icelandic government, to privatize [the banks] and to give control of one of them to someone who has a record as a convicted fraudster. What do you think will happen if you put frauds in charge of financial institutions in situations where there are no effective regulations at all? You’ll have a disaster. So, certainly the ruling political parties at that time, if you had to start with accountability, that’s where you would start.