When Jared Bibler visited Iceland for the first time in 2002, he couldn’t imagine that one day he would become an Icelander himself. A native of Massachusetts in the US, he was working for an Icelandic bank when in the autumn of 2008 the country’s financial sector hit an iceberg. His stint as investigator at the Financial Supervisory Authority (FME), the regulator that sent some of the main culprits to prison, helped him discover how a country of reticent fishermen became a global banking powerhouse and then lost everything. In Iceland’s Secret: The untold story of the world’s biggest con, a mix of personal diary, travelogue and financial thriller, Bibler narrates with gusto the Scandinavian saga of a nation that briefly went mad. He tells World Finance’s Alex Katsomitros how Icelandic banks collapsed, why he left the country disappointed and what’s the next bubble that may crash.

What went wrong in Iceland? Was it the system or the people who were responsible for the crisis?
A bit of each. Surely there was naiveté on the part of the people. Money was a relatively new idea there – they started using it a few generations ago. Before that, money was something the Danish overlords had and Icelanders didn’t. So having money in itself is already exciting in Iceland. We spend it with almost adolescent exuberance. Bars and clubs are full at the first and last weekend of the month when everyone gets paid. People spend what they get each month. But maybe that makes sense, given the high inflation history of the country.

Did the fact that it’s a small society play a role?
I didn’t write the book to pick on Iceland. It’s a much bigger story. There is, however, something I did not like. In every country conflicts of interest can arise in business, but in Iceland people use the small-society argument as an excuse to run towards conflicts of interest instead of avoiding them. It’s like “there are so few of us, so I have to give my cousin a discount.” There’s a level of person-to-person corruption. People love to get around the system, which is human nature, but in this case the system is a small society, so you are just cheating your neighbours. But Icelanders don’t see it that way.

The other piece you can’t ignore is the role of big global creditors pushing money into the country. Early on mainly German banks, but later from all over the world; Japanese housewives had ISK investment funds. The economy could not handle the amount of liquidity. In a place where people were not used to having money, suddenly they could borrow as much as they liked. Many went crazy, buying cars they didn’t need with foreign currency loans.

The biggest crime was happening inside the banks. Ordinary people did benefit, but in the end they paid the price. People often say to me: “But Iceland came back.” But nobody gave me my house back. Macroeconomically things look good, but individually, many people like me lost a lot. It set me back for my whole life. My retirement savings were zeroed out in my mid-30s.

It’s clear that you fell in love with Iceland and became an Icelander yourself, but you don’t hesitate to be critical of the culture. For example, you criticise the financial regulator. You argue that they did 10 percent of what they could have done and currently they are understaffed and not independent anymore. Some of the regulators were even involved in scandals. Would it be right to assume that you left Iceland with a bittersweet taste in your mouth?
I’m glad that that my disappointment came through in the book. Some readers told me that it wasn’t the market manipulation that shocked them the most. It was what happened at the regulator. It shocked me too. I think the regulator completely fell down on its obligations, because under Icelandic law only the regulator was authorised to originate criminal cases of market crimes, not the state prosecutor or the police. But they didn’t. What the regulator did at the end of 2011 was to effectively shut down the investigation team, reassigning its members or not restaffing when people resigned. Then they gave a triumphant press conference, saying that all cases from the crisis were investigated and closed.

That’s completely untrue, because I had a huge list of investigations that we hadn’t even opened yet. Those investigations usually take six months to a year each. There’s no way that they could have opened and resolved all of these. I don’t know where the pressure came from, but there was pressure to move on. I sometimes hear the criticism that my motivations are to punish people, but that’s not the case. What I want to see is due process. If there’s a potential crime, it needs to be investigated. Most of the people involved in the crisis got away with it.

I was quite bitter at the way the regulatory team was dismantled, because the regulator was left without an enforcement capacity, which most regulators have. A regulator needs a special team that’s set aside from the day-to-day tasks, taking up potential criminal or civil cases against market participants. You can’t have the person who’s calling every month to get a loan spreadsheet be the same one who’s investigating potential misconduct, because the majority of regulatory employees have to be on good terms with the people they oversee. A special team is required for this. Iceland never had such a special team and after we established what could have become that, it got dismantled. And today the regulator has become part of the central bank, which is cause for concern because they have even less independence.

What about European regulators?
They did try to act, but it was too late. In 2006 there was a mini crisis in Iceland, which was the beginning of the real crisis. The IMF came in and had some very strong words about Iceland’s overheating economy. In the summer of 2008 a meeting of central bankers was held in Basel and the Icelandic central bank governor got lectured by European central bankers to clean things up. Icelandic banks collapsed a few months later.

The world’s financial system is so piecemeal that there are always ways around prudence. The incentives of Icelandic banks to borrow as much as they could were fantastic for their executives. But there’s no incentive for prudence for the people lending to them.

The incentives for Icelandic banks to borrow as much as they could were fantastic for their executives

A big piece of this is ratings. Icelandic banks in early 2007 were briefly rated as AAA, as though they were the Icelandic government, which was always in good shape financially. This was not a sovereign debt crisis like Greece. But private banks grew to become eleven times the size of the economy in just a few years. They were highly-rated because of the government’s rating. That meant that international pension funds could buy their debt and it was deemed safe, like holding gold, which is horrendously irresponsible on the part of rating agencies.

The whole rating agency system is a case of badly aligned incentives. Even today, the issuer of debt pays for their own debt to be rated. The incentive for the rating system is to give high grades, because you have capital requirements for banks based around ratings. If it’s AAA rated, you can hold as much as you like. When Basel II came into effect it meant that these ratings mattered for banks, so if they are holding a certain level of AAA debt, it’s like holding cash. That created regulatory arbitrage: a demand, especially by European banks, to hold AAA bonds. Some of the subprime US stuff was actually packaging up junk in a way that could be rated AAA, so that German and French banks could put it on their books, and earn more yield than they would get from government bonds. That was an incentive to create more subprime junk. That’s a broken angle in the system.

Why didn’t alarm bells ring when Icelandic banks started providing consumer banking services in the UK and the Netherlands?
Iceland is an EEA (but not an EU) member, so it passes a lot of EU law into domestic law. So it has access to the EU passporting system, which is still active today.

This means that a French bank can open a branch in Germany and its activities would be regulated in France. It’s set up to help banks expand, but banks like Landsbanki, my former employer, used this rule to open up branches on the Continent.

They did this because they were running low on funding after the 2006 crisis and needed new sources of deposits. Previously, they had been criticised for growing entirely on wholesale funding and not taking deposits. So they said ‘ok, we’ll take deposits’ and opened Icesave. They were operating under the EU framework, so there wasn’t much concern over legal issues.

In early 2008, the British government began to pressure Iceland to force Landsbanki to create a separate company in the UK, regulated by the UK as a bank, and put Icesave into it.

But even the Icesave marketing material said ‘Icesave’ brand and only the small print mentioned ‘part of Landsbanki, Reykjavik, Iceland’. So the British people who were putting money into these accounts were actually funding a branch of an Icelandic bank that just happened to be situated in the UK! The collapse of Icesave should have been a wake-up call for the EU to do something about passporting, but I don’t believe they ever closed this loophole.

The UK government famously listed the whole country and its central bank as terrorists.
That was brutal. There is a theory about a link to Scottish independence. Gordon Brown and Alastair Darling were both Scottish Unionists. Scottish nationalists were comparing Scotland to the Nordics and arguing that it could be a successful Nordic country. So they {Brown and Darling} may have done it for that reason.

How come Icelandic media didn’t suspect that something was going wrong, since there were early warnings? Were they too close to the banks? Perhaps they didn’t have the necessary resources or expertise?
The two big newspapers are Morgunblaðið and Fréttablaðið. The former is the mouthpiece of the centre-right Independence Party, the most powerful one in Iceland. Traditionally, they are the nexus of business and political power. Davíð Oddsson, still the most powerful guy in the country, is currently Morgunblaðið’s editor. But he was also the prime minister who privatised the banks. The critical 2006 IMF report was published just three years after full privatisation, so there wasn’t much interest in Morgunblaðið to talk about the risks because it was too recent, and their party was still in the government.

Fréttablaðið was part of Iceland’s biggest media company, controlled by Iceland’s leading businessmen, who also owned a large piece Íslandsbanki, the third biggest bank. So there probably wasn’t much appetite to criticise the banks there either. When I describe who controlled the newspapers, people sometimes scoff at this as an example of Iceland’s provincial nature. But on the contrary: Iceland is really the larger world in microcosm. These kinds of conflicts of ownership hamstring media organisations all over the West, it’s just more easy to see these patterns in a smaller economy.

What’s really striking is that most people got away with it. One convicted politician later became an ambassador to the US
He’s the only one ever convicted of a crime against the Icelandic state in the country’s history. And still he was rehabilitated. Many of these guys, even those who were jailed, rehabilitated themselves. They kept a lot of money offshore, hired PR people in Iceland and abroad, and cleaned up their image.

The dominant narrative now is that Iceland had a great banking system and finance was the future of the country. Then Lehman Brothers collapsed, and took Iceland down. There are even rightwing politicians today who question whether there was a crash at all.

So should we be holding up Iceland as a success story?
It’s a success story insofar as we got some criminal convictions. That we briefly had the resources to do that can be seen as a mark of the public’s rage. It can’t be overstated how bad things were for a few months, especially after the banks collapsed and the UK terrorism law was enacted. We were frozen out of our savings and we were losing our houses and cars. That dark mood of struggle persisted for four years. The darkest times were the first six months, but it was an unfolding tragedy that just kept rolling. We couldn’t go on vacations or to a restaurant anymore.

Our lives became really hemmed in and very close to the bone. There were ads on TV telling people to only buy locally made products and showing how the stacks of coins would stay in the country. It was like we had become an agrarian society, a throwback to the 19th century. Because of that desperation, there was a movement to go after people. Whenever I told people at social gatherings that I was investigating banks, they would say ‘go get them’. The man on the street was sure that he had been swindled by a group of criminals. And he was right.

Have things improved now?
This March (2022) the government sold a 22.5 percent stake in Íslandsbank to a secret list of 207 bidders through an auction. Bidders got their shares at a discount of four percent to the market price. Oddsson’s successor and protégé Bjarni Benediktsson, oversaw this process as finance minister, although they created another agency at an arm’s length from the ministry to carry out the privatisation. They wanted to keep this process secret and said that the bidders were professional investors: hedge funds and pension funds. But then it came out that some bank employees were in on the deal as well.

So there was pressure to publish the list and eventually the finance ministry relented. It turned out that one of the successful bidders was the finance minister’s father! These bidders got a four percent discount and flipped their shares over the following days, basically printing money for themselves. There were foreign and domestic investment funds on the list who asked to participate and their emails were never answered. And the list of buyers includes many old names from the 2008 collapse, including people who went to prison.

So they’re still on it.
I think nothing has changed.

You said that there was a lot of anger, because people lost their money and jobs. How come there was no populism, an Icelandic version of Trumpism or Brexit?
This was 2009, so before those forces were unleashed. There’s more of that happening in Iceland now. And in 2008 it was obvious to most of us who the culprits were: the Independence Party that had run the country for decades and had privatised the banks, and even after the collapse refused to step down. That party was symbolic of the Icelandic elite. Davíð Oddsson had been the prime minister and then was made head of the Central Bank as a retirement gift and made some questionable decisions in the run up to and during the crisis. Trumpism and Brexit were anti-elite movements. In Iceland it was Oddsson, the Independence Party and the central bank that represented the elite.

But they were reluctant to let go of their power. Oddsson did not step down as central bank governor until six months after the crash. This was the biggest financial collapse in Western history, and the guy in charge was still there! There were people outside the parliament every day all winter long, banging on pots and pans. They wanted a new election. And we got one, as well as new parties in government. The Independence Party was kicked out of power, but only for a few years.

They came back in power along with their little brothers, the Progressive Party, as a coalition in 2013. They said that the last four years had been really hard not because they had run the country into the ground in 2008, but because of these other parties. So they promised debt relief on mortgages and came back in.

You are a ‘bubble expert’ now. Is there another bubble in the global economy that you think we should be worried about?
We have a huge bubble of global debt: the highest global debt-to-GDP ratio ever. That needs to be unwound somehow and that’s going to be a programme of probably 10–20 years, perhaps the rest of our professional lives. We are also seeing the beginnings of a new monetary system. The US dollar sanctions on the Russian central bank were a wake-up call for other central banks that their dollar assets are political footballs that can be frozen by the West. So there are moves away from the dollar. Asian countries are talking about a commodity-linked basket of currencies they could transact in. So with the pandemic and Russia sanctions we are seeing a shift in the global monetary order. I don’t know how all that will shake out, but current global debt levels are very worrying. It’s like the whole world is Iceland now.