Why were We the People left holding the bag? Because the economy depended on it. Key financial services companies had become too big to fail, and had we let them go down, we all would have gone down with them. You and I would have gone to our ATMs to withdraw money from our banks and nothing would have come out. That actually happened for a while to depositors in America's oldest money market, Reserve Primary. The $64.8 billion fund held $785 million in short-term commercial paper, issued by Lehman Brothers. When Lehman filed for bankruptcy in September 2008, Reserve Primary couldn't pay back its customers in full—$1 for every $1 they had on deposit—and had to close its doors for a period. "When the balance sheet of a company does not capture the true costs and risks of its business activities, and when that company is too big to fail, you end up with them privatizing their gains and socializing their losses," Nandan Nilekani, a founder of the Indian technology company Infosys, said to me. That is exactly what played out. Thanks to its huge losses in the derivatives market, AIG alone required more than $170 billion in taxpayer support of one kind or another to stay afloat, as of summer 2009.
Alas, though, we Americans were not alone in thinking that we could fly. Other countries quickly copied us. It was inevitable. In a flat world, where connectivity is getting tighter and faster every day, and where the electronic herd of capital is moving around everywhere and anywhere looking for higher and higher returns, lots of people wanted in on this game. And it did not matter how small you were; anyone could open a global casino in their garage. Just ask Iceland.
Iceland's Banks and Melting Ice
Iceland turned itself into a hedge fund with glaciers. The government, together with the country's biggest banks, in which it had a large stake, saw the phenomenal returns to be gained from investment banking and decided to get a piece of the action by radically deregulating its economy in order to attract huge sums of foreign capital. For a short time, Iceland, with its 300,000 people and its traditional economy, became one big wild offshore bank. Michael Lewis vividly described what happened in Vanity Fair (April 2009):
An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, "We can do that." For a brief moment it appeared that they could. In 2003, Iceland's three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland's G.D.P. that it made no sense to calculate the percentage of it they accounted for. It was, as one economist put it to me, "the most rapid expansion of a banking system in the history of mankind . . . From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. Reykjavík real-estate prices tripled. By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry."