If someone had told me that the Icelandic Financial System and all the large banks in Iceland would collapse 6 months back I would have laughed at them and said why that would not happen and I would have been very wrong…
Icelandic financial system has collapsed and all the major banks have been nationalized by the Icelandic Government. Over the weekend the Icelandic Government was discussing terms with the IMF to allow the financial restructuring organization to take control of the Icelandic system. It is a sad end to a fairy tale…
What really happened?
Well there are several articles written about what happened but the main reason for the collapse has not been discussed in the mainstream media. This is a small country got caught in the perfect storm of Credit Crisis, which means anyone who has borrowed money (read all businesses) is F#$%&*! You must have read the headlines, Lehman Brothers a 147 years old financial institution going bankrupt, Bear Sterns put up for fire sale, AIG forced to take bail out… US congress passing one of the largest financial packages to rescue the financial sector. A Republican President saying that Government owning part of the private bank is a good thing in this market etc etc etc
I can share what I experienced being part of my bank… I was in Iceland the week before all the events unfolded. I had moved to India to start our business development activities in India and here I was happy about the way that things were progressing met with the CEO, shared our progress in India and was happy to hear him say keep at it and figure out how we can start our banking operation in India! I meet my buddy who is incharge of the Treasury, telling me everything was fine but it was a tough situation out there. I did not put 2 and 2 together, we were having tough time with our lines of credit. You see banks in Iceland have grown fast by borrowing cheap money from USA and Europe´s financial institutions when the Subprime market collapsed a number of those institutions were folding their playing hand asking to get out of the game. That is what killed Lehman, when that happened we were in a very tight situation. We went to the institution of last resort for Iceland… the Icelandic Government. Unfortunately for us the Governor of the Central Bank of Iceland has no background in managing crisis like this or for that matter knows nothing about banking… he is a politician and politics won in the end. The news leaked out that we were working with the Government.
So here I was back in Mumbai, my wife noticing all the commotion in the press asked me to call someone, I tried calling but no-one picked up the phone. First thing on Monday morning I see the news in Bold: Glitnir being taken over by the Government of Iceland by buying 75% of Glitnir´s equity and all the current shareholders will loose 95% of the value in the bank!
Every shareholder cried foul, the Government has twisted the arm of the management to take over the bank… even one shareholder came out and said that this must be the biggest bank robbery in the history of Iceland.
I think the concept of helping the bank by buying into its equity was the correct solution but how the Government went about doing it really triggered a series of events that eventually resulted in the financial collapse.
The Governor of the Central Bank made a statement to the public that the Government will take 75% equity in Glitnir and be the largest shareholder but the tone of his voice was very similar to a hostile take over… the other creditors of the banks wanted to exit and they tried to exit and when there is a run on the banks you know what happens… every thing collapsed. Landsbanki was nationalized and after a couple of days of negotiation Kaupthing (supposedly the strongest of the banks in Iceland) was also brought under the administration and in the haste of things the Prime Minister of Iceland made some rather strange comments which lead to even more panic and the rest is history.
With regard to me… I am caught in the middle I had to come back to Iceland to sort out my status. I am still caught in between the Old Bank and the new bank. The administration of the bank formed a new bank and moved most of the people and assets from the old bank into the new bank to continue operations. While doing that they basically cut out all international operations. They have not discussed how it will be done and they are saying that they might not be able to honor all the severance contracts… with regard to me, I was given a 6 month severance but no communication has come to me yet. I am patiently waiting for the final word but it has been a frustrating experience the last couple of weeks.
Wish me luck and I will keep posting on the developments… it has been quite a ride, looking back my learning is when your gut tells you that something is going awry listen to it and act on it. My gut told me to quit when the old management of the bank was replaced but I did not listen… I guess thats my learning!