EXCERPT: 'Hot, Flat, and Crowded,' by Thomas L. Friedman

The country's entire economy got warped. Students fled from traditional careers in fishing or engineering for the economics of making money from money. When the laws of gravity finally kicked in, and Iceland's three brand-new global-size banks collapsed in October 2008, said Lewis, "Iceland's 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child."

How did little Iceland get in so deep? Basically a small group of people in key financial positions drank the same Kool-Aid that bankers in London and on Wall Street drank. They adopted the same model of excessive leverage and nothing-can-go-wrong risk-taking and grafted it onto their little country. You know the old saying: When you are in a poker game and you don't know who the sucker is, it's probably you. It was probably Iceland. Or as Lewis put it, citing an analysis by the Danske Bank, Iceland both spawned and was driven by "this incredible web of cronyism: bankers buying stuff from one another at inflated prices, borrowing tens of billions of dollars and re-lending it to the members of their little Icelandic tribe, who then used it to buy up a messy pile of foreign assets. 'Like any new kid on the block,' says Theo Phanos of Trafalgar Funds in London, 'they were picked off by various people who sold them the lowest-quality assets—second-tier airlines, sub-scale retailers. They were in all the worst [leveraged buyouts].'"

But along the way, naive little Iceland took in and took down a lot of other naive people as well. One way Icelandic banks imported so much capital was by creating online savings accounts, the most popular of which was called Icesave.com, which attracted savers from all over the world because of the high rates of interest they offered—including some 300,000 savers from Great Britain alone. And it wasn't just individuals who got taken in. Indeed, when Iceland's banks collapsed, London's Daily Telegraph reported (October 14, 2008) that, according to an official government analysis, more than a hundred British municipal governments, as well as universities, hospitals, and charities, had deposits totaling well over $1.1 billion stranded in blocked Icelandic bank accounts. This included, the Telegraph said, "more than a quarter—116— of the 411 local councils in England and Wales [who had] at least £858 million in Icelandic banks. They include some of the largest authorities in the country, among them Kent County Council with £50 million, Nottingham City Council, at £42 million, and Norfolk County Council with £32.5 million." Cambridge University alone had about $20 million deposited there, while fifteen British police forces from places like Kent, Surrey, Sussex, and Lancashire—had roughly $170 million frozen in Iceland. Yes, even the bobbies were banking in Iceland! So was the bus company. Transport for London, which runs London's famous bus and tube services, reportedly had some $60 million on deposit with Kaupthing Singer & Friedlander, a UK subsidiary of Iceland's bankrupt Kaupthing bank.

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