Corporate Governance

Iceland and Madoff: Private and Public Ponzi Schemes

By J. Robert Brown

The WSJ has a nice article on the collapse of the Icelandic banking system (and the global consequences).  Essentially, Icelandic banks offered attractive interest rates overseas (in the vicinity of 7%), attracted deposits in large quantities and was able to sell bonds, then collapsed.  Ultimately, there wasn't enough foreign currency in the country to pay off those who expected to have their debts repaid.

The article only gave glimpses of what happened to the money that flowed into Iceland, with some apparently invested in overseas acquisitions.  But one has to wonder whether the country operated a ponzi scheme that made Madoff look puny.  In effect, the banks were offering an interest rate that in a climate of low interest rates was unsustainable.  After all, the 7% interest rate wasn't all that different from the 10% or so offered each year by Madoff.

Sometimes a rate of return is too good to be true.  That's true with respect to private investments.  Its also apparently true with respect to banks, at least those from Iceland.

Full post as published by The Race to the Bottom on December 28, 2008 (boomark / email).