How Iceland's Financial Vikings Ran Aground

PHOTO: ICELAND

For centuries, Iceland was a simple fishing society, largely shut off from mainland Europe. The people survived off the sheep in the meadows and the fish in the sea. For cultural sustenance they had elaborate sagas -- intricate tales of fairies and goblins, heroes and ghosts -- that would inspire J.R.R. Tolkien and other fantasy writers.

Then a modern saga began to unfold -- that of a nation of fishermen who became millionaires, only to lose it all and return to the seas.

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In the early 21st century, Iceland experienced one of the most spectacular cycles of boom and bust in history.

"I don't think it happened overnight, that suddenly somebody woke up and said, 'Here's an idea,'" said Olafur Arnarson, who wrote a best-selling book on the meltdown. "It didn't happen that way."

Instead, the saga began gradually. In 2002, the government decided to take the state-owned banks public and list them on the Icelandic stock exchange. Foreign investors swooped in and bought big stakes in the banks, flooding the country with capital.

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"The buyers, they were not bankers," Arnarson said. "They did not have any experience in the world of banking. They were investors. And you could argue that they were speculative investors."

Iceland never had seen anything like it before.

"Greed came into the back door, and when that happened, people started to lose control," said Bubbi Morthens, one of Iceland's most prominent folk singers.

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Iceland: The Boom

Suddenly, in a modest land that had never known truly rich people, some Icelandic bankers were pulling in $1 million a month.

During the high times, the streets of Reykjevik were packed with Range Rovers and expensive German sports cars. The bars were filled with fashionable people, and movie stars and pop icons flocked to the capital. Someone paid Elton John $1 million to sing two songs at a party.

"I kind of felt like I had arrived in Pottersville in the movie 'It's a Wonderful Life,'" said Arnarson. "Everything had changed so much, so fast. ... It had become one of the destinations of the jet set, and, well, it was a lot of fun in Iceland."

Even the fishermen got in on the action. Stefan Alfsson left his fishing boat and started trading commodities for an investment bank.

"We could do more. I got a bigger house, bigger and more cars, better snowmobiles," said Alfsson.

Some fishermen even sold off their seasonal quotas -- their livelihoods, which propped up the economies of small villages -- in order to have cash to invest.

While Reykjevik was booming, the Icelandic bankers went forth into the world, a generation of financial Vikings searching for plunder.

Some call it an "outvasion." Icelandic investors bought shares in foreign companies, supermarket chains and soccer teams. Money was no object and they overpaid for most of their assets, as the bubble grew larger.

Iceland: The Beginning of the End

Back home, prices were going up. The government raised interest rates in an attempt to control inflation, but it didn't work. People realized that they could borrow Japanese yen or Swiss francs, put them in an Icelandic bank and make 10 percent without even trying.

Geir Haarde, prime minister at the time, could only watch as his nation grew fabulously, if dangerously, wealthy.

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