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What Iceland’s Spectacular Banking Collapse Teaches Us About Tether

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In 2008 and 2009, I was laser-focused on the global financial crisis. It impacted me directly because collapsing state budgets rugged my financial support just as I was finishing graduate school. Thanks to the shenanigans of low-rent mortgage originators and mercenary Wall Street bros, I wound up balancing writing my dissertation with flipping pancakes at a local greasy spoon.

But despite the personal stakes, the immense ramifications of the collapse were impossible to entirely track. One story that felt like little more than a footnote at the time was the collapse of the banking system in the European country of Iceland. There were breathless news reports when the nation’s stock market lost 90% of its value (compared to a 70% drawdown in the U.S.), but at the time the impression was that the Icelandic banks, like so many others, had simply been smashed to bits by the tsunami of unwinding U.S. mortgage instruments.

That, it turns out, was not what happened at all.

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As recounted in thrilling detail in the new book “Iceland’s Secret,” the Icelandic banking scandal was a beast all its own, a whole-cloth fraud that originated a full decade before the financial crisis. When the tide went out, though, it revealed an entire country had been swimming naked. The book’s author, Jared Bibler, had a better-than-front-row seat. An American-born Icelandic citizen, Bibler did time on Wall Street before eventually winding up at Landsbanki, one of the three major Icelandic banks, shortly before the financial crisis.

Bibler opens the book by describing how the rising stock price of the three banks transformed Icelandic life. Just a generation before, the desolate northern island had consisted of isolated clusters of literal sod huts and an economy based mostly on fishing. But the new Iceland, thanks to adventurous international banking, was full of imported SUVs, while Icelanders made regular shopping trips all the way to Boston to make the most of their new riches.

As you might have guessed, it was all a lie.

Bibler saw some of the warning signs during his time at Landsbanki, including dead-end real estate investments, a “spider web of interdependent ownership” on the bank’s balance sheet and extravagant spending that seemed impossible to justify for a bank serving just 350,000 Icelanders. By Bibler’s telling, he eventually listened to his gut and resigned from Landsbanki. It collapsed less than a week later, on Oct. 7, 2008.

Iceland’s other two major banks followed soon after. The banks made up most of the value of the small Icelandic stock market, which most Icelanders were invested in either personally or through government pension plans. Nearly the entire country’s retirement savings were next to wiped out: As bad as things were in America and elsewhere after the crisis, Iceland may have had it worst of all.

Iceland also, the new book makes clear, had it coming. Far from victims of forces beyond their control, Iceland’s bankers, enabled by a neoliberal government, crafted a brazen fraud whose endpoint was practically inevitable. Bibler saw this firsthand: He eventually wound up working at the FME, Iceland’s financial regulator, as part of a team trying to unravel the causes of the collapse.

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Bibler tells an enthralling tale, walking readers through a financial whodunit full of well-drawn scenes and personalities. I ripped through the first half of this 400-page book the day I got it, unable to put it down. (Bibler also holds off delivering the amazing final findings of his work until well into the book, so if you’d like to take that journey on your own, skip the rest of this review.)

What Bibler and the FME ultimately uncovered is truly gobsmacking. As early as 1998, the three major Icelandic banks were taking huge loans, including from Germany’s Deutschebank and from Credit Suisse. As early as 2003, they were indebted to the tune of €35,000 for every man, woman and child in Iceland.

This was clearly not sustainable, but the executives of the three banks figured out a devilishly simple way to, in essence, take the money and run. Using rich clients and a web of shell companies as fronts, the banks used the capital from big outside loans to buy their own stock, regularly and in large amounts. This earned executives lavish salaries and fat bonuses as the banks’ value appeared to ratchet up steadily.

The mechanics of the fraud also illustrate why some people are so worried about the dollar-pegged stablecoin tether, whose issuer is now in essence a $70 billion investment bank. Tether, the issuing company, has disclosed the mix of assets backing its stablecoin, which includes U.S. Treasury instruments, cash and short-term corporate obligations known as commercial paper. Commercial paper makes up roughly half of the stablecoin’s backing.

Tether has published “attestation reports” of its reserves from an auditor, but never a full formal audit of its backing. Most importantly, Tether has disclosed few details about its commercial paper holdings: We still don’t know what companies or even what regions the instruments come from. Perhaps the most detailed disclosure Tether has ever made was denying that it held debt from a single struggling Chinese firm, Evergrande.

This lack of transparency introduces the possibility that Tether is mimicking the leveraging trick that allowed Iceland’s tiny banks to look massive. The banks would loan funds to outside companies on the condition that those loans were used to buy the bank’s own stock. By sending tether to satellite, unrelated or even fictional firms in exchange for their commercial paper or bonds, Tether would theoretically be able to similarly pump up its balance sheet with pure hot air.

That kind of maneuvering kept the Icelandic banks’ stock prices going up for nearly a decade, which translated to the sense of wealth shared, for a brief time, by all the Icelanders invested in them. But it inevitably led to pure absurdity. When it collapsed just days after Landisbank, Iceland’s Kaupthing bank had a market capitalization of $80 billion – 30% larger than Enron at the time of its collapse after years of similar fraud. The collapse of the three Icelandic banks together would have been the third largest bankruptcy of all time, behind only Lehman Brothers and Washington Mutual, according to Bibler – and all of it built on a national population the size of a single Manhattan neighborhood.

Something was so clearly out of whack that the British Royal Treasury temporarily declared Iceland and its banks terrorist organizations to protect British clients and investors. It took years for Bibler and his colleagues at FME to unravel the entire mystery, but they ultimately notched some of the biggest wins of the crisis’ aftermath: The heads of the fraudulent banks actually wound up in prison, unlike the leading players on the U.S. side of the crisis.

“Iceland’s Secret” is a treasure trove for those trying to learn more about how such massive frauds are built and, inevitably, collapse – or just for those fascinated with the depths human duplicity can reach. If there is a flaw in the book, it is that Bibler often seems to position himself as the hard-driving, gimlet-eyed American trying to teach the basics of financial fraud to naïve Icelanders.

But there may also be some truth to that depiction. As Bibler details, not just modern banking but even the concept of money itself didn’t arrive in Iceland until after World War II. And the banks’ practices were so normalized among staff that a former insider reviewing Bibler’s meticulous evidence of an elaborate shell game could only respond in confusion: “This is just banking.”