Icesave closes its doors
October 8, 2008 1:59 AM   Subscribe

Icelandic internet bank Icesave has closed its doors. The Icelandic government has told the UK chancellor that it cannot pay back the money of UK depositors.

With some 350,000 UK citizens investing over £4.5Bn, the Icelandic savings protection scheme has "no intention of honouring their obligations here," according to Chanceller Alistair Darling. There have been rumours of instability at Icesave since early this year. The British Government, on the same day as announcing a £50Bn 'partial nationalisation' of major British banks, has agreed "in these exceptional circumstances, we will stand behind those depositors so they can get their money back". Questions still abound however.
posted by Happy Dave (84 comments total) 6 users marked this as a favorite

 
At least one of my family members has been caught up in this, and is currently a little freaked. Scary stuff.
posted by Happy Dave at 2:00 AM on October 8, 2008


Your headline is a little misleading.
It's not the bank that isn't honouring its obligations, the bank is in receivership. Apparently the Icelandic government won't be guaranteeing any of the deposits.

"The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here," said Mr Darling.

"Because this is a branch of a foreign bank the first call would be on the Icelandic compensation scheme which, as far as I can see, hasn't got any money in it.


It looks to me like a disagreement over which compensation scheme should cover this.
posted by atrazine at 2:04 AM on October 8, 2008


Cod War Round Four!
posted by Abiezer at 2:05 AM on October 8, 2008 [1 favorite]


Agreed, sorry, it is a little misleading - mods, feel free to edit for accuracy.
posted by Happy Dave at 2:10 AM on October 8, 2008


Jesus, what the hell happened in Iceland. Last year it was the best place to live and now it's Argentina in 2002 with a lot of blondes.
posted by PenDevil at 2:15 AM on October 8, 2008 [3 favorites]


PenDevil: Reckless shortsightedness, and gambling.

The banks made significant profits, and relied on working short-term financing to cover profitable long-term out-loans. When the capital market dried out, the banks were fucked.

There's a lot of complicated stuff, but basically those in charge of very large sums of money didn't anticipate the worst case being as bad as it could be, nor that it would actually come to it.
posted by krilli at 2:20 AM on October 8, 2008


Time for some gunship diplomacy.
posted by zemblamatic at 2:55 AM on October 8, 2008


"We guarantee that no depositor will lose any money as a result of the closure of Icesave," said a Treasury spokesman.

"The British scheme would top that up to £50,000, but people over and above that would lose out," he added.

"But I have decided in these exceptional circumstances that we will stand behind those depositors so they get their money back."

Details of the government's plans will be announced in the Commons later on Wednesday.


I can understand everyone is on a short trigger given the current state of things. However, please do some reading and thinking before making post with a catchy but misleading headline like this. We don't need some idiot stumbling on this site, reading this post, and think OMGWORLDMELTDOWNBBQ.

Thanks for owning up HappyDave.
posted by phyrewerx at 2:55 AM on October 8, 2008 [1 favorite]


I told somebody on ask.mefi not to put money there back in August. I'm curious what he did in the end.
posted by dhoe at 2:57 AM on October 8, 2008 [2 favorites]


The party's over for Iceland, the island that tried to buy the world
posted by fearfulsymmetry at 3:00 AM on October 8, 2008 [1 favorite]


I'm also curious, dhoe. I rememb this question on AskMe from last year, too. That was the first time the extremely high interest rates in Iceland really came to my attention and seeing this news now does not surprise me.
posted by empyrean at 3:03 AM on October 8, 2008


rememb, all the kids are saying it these days. That 30/60/120 sec edit function sure would come in handy right about now.
posted by empyrean at 3:03 AM on October 8, 2008


I think it's a little unfair that dhoe didn't even get a best answer for what might be the most prescient and useful answer ever in the history of AskMe.

Also, I hope Sigur Ros are alright.
posted by flashboy at 3:11 AM on October 8, 2008 [13 favorites]


We don't need some idiot stumbling on this site, reading this post, and think OMGWORLDMELTDOWNBBQ.

Because that never, ever happens.
posted by aeschenkarnos at 3:14 AM on October 8, 2008 [1 favorite]


Vacapinta has kindly edited the opening link for accuracy.
posted by Happy Dave at 3:16 AM on October 8, 2008


It was in this MeFi thread that I first heard anything about the problems with Iceland's banking system. I don't know if I would have put money into Icesave anyway, but it certainly made me check out how well they were covered by the FSCS, and decide to keep my savings in something fully covered by the UK compensation scheme. Thanks, MeFi, for saving me from freaking out this morning.
posted by penguinliz at 3:49 AM on October 8, 2008


I blame the annoying trumpet player from The Sugarcubes.
posted by bardic at 3:50 AM on October 8, 2008 [4 favorites]


Does this mean no more Kerry Katona?
posted by fire&wings at 3:51 AM on October 8, 2008 [1 favorite]


And now ING Direct (which is Dutch, I think) has acquired deposits from UK investors in Kaupthing Edge and Heritable Bank, two other Icelandic-owned banks.
posted by penguinliz at 4:17 AM on October 8, 2008


As usual, winter will be dark and cold in Iceland.
posted by gman at 4:24 AM on October 8, 2008 [2 favorites]


cross posted from the other Iceland thread, as it seems relevant here as well ... best of luck to anyone who has funds on deposit with one of these institutions ...

Another lesson from The History of Finance - this is something we last saw in a some of the South American nations in the early 90's (e.g., Venezuela, Ecuador, etc), or Russia in the late 90's:

"...we're already seeing signs that people don't want to accept krona in transactions on Iceland.'' .

So the people living in Iceland are losing confidence in their own currency. Interesting. Gotta think about how to play this one.
posted by Mutant at 4:30 AM on October 8, 2008 [2 favorites]


I really don't get it. I really don't. I am not someone who follows financial news very much, and yet I know I've read, here and elsewhere, warnings, for months if not years, about subprime, about CDSs, about over leveraging, about low and middle income people overspending on homes, cars and credit cards, about freaking Iceland. 90% of it is common sense and everyday fiscal prudence, take risks but cover yourself business practices. So how did it get so bad? How can even diehard freemarketers be so fucking greedy and stupid? I just don't get it.
posted by nax at 4:33 AM on October 8, 2008 [1 favorite]


Potentially it might fire&wings, Iceland the superstore is partially owned by icelandic interests so if their economy goes tits up who knows what the knock on effects are.
posted by biffa at 5:01 AM on October 8, 2008


[Joke about Bjork]
posted by Uther Bentrazor at 5:31 AM on October 8, 2008


nax writes "How can even diehard freemarketers be so fucking greedy and stupid?"

Because many of the people at the top appear to be greedy and amoral. Getting their billion dollar bonus is all they care about. Have even one of these failing bank execs pulled a Lee Iacocca and refused anything but a nominial $1 salary for this year or next?
posted by Mitheral at 5:33 AM on October 8, 2008


nax -- "I really don't get it. I really don't. I am not someone who follows financial news very much, and yet I know I've read, here and elsewhere, warnings, for months if not years, about subprime, about CDSs, about over leveraging, about low and middle income people overspending on homes, cars and credit cards, about freaking Iceland. 90% of it is common sense and everyday fiscal prudence, take risks but cover yourself business practices. So how did it get so bad? How can even diehard freemarketers be so fucking greedy and stupid? I just don't get it."


nax it was a bubble. One that is rapidly deflating. I can't answer your question, nor (probably) can anyone else in finance at present. This event reminds me a great deal of Monday, October 19, 1987, Black Monday; specifically, when the equity markets crashed back then nobody really had an idea what had caused it. After perhaps six months we saw the first theories advanced (Portfolio Insurance), and while these are generally accepted now as the cause we argued over this explanation for perhaps two years.


Now, in fact we teach that The Crash of 1987 was indeed caused by Portfolio Insurance in business school (more properly, a disconnect between the cash equities and futures markets which caused a feedback loop, as low futures prices drove spot market selling which drove down futures prices ... ). But can anyone today detail, point by point, how we saw a 22% single day drop in The Dow? Nope. It's a fairly complex problem, one in fact many academics still disagree on, and what we're going through now is perhaps an order of magnitude bigger, and thus more complicated.

But in terms of asset bubbles, we have seen many elements of this one before. We observe asset bubbles on average about once a decade, regardless of the political system, regulatory environment or currency. We've got a long history of asset bubbles to draw up, and after each we do in fact try to learn as much as we can, to shore up the regulatory system so at least it can't happen that precise way again.

Now arguments about the massive wave of financial system deregulation aside (which is indisputable, but not germane to my point), we can look back to the crash of 1929 for many, somewhat eerie parallels.

For example, Galbraith's The Great Crash mentions that a key cause of that stock market collapse was lax securities ("non existent" by today's rigorous standards) supervision and associated problems.

For example, at one point 1928 margin requirements were only 10%! In other words, if you'd like to own $1000 worth of shares you'd only have to stump up with 10% cash, or $100. Does this remind anyone else of "no money down real estate" deals?

Just to show that we've learned from that crash, today most stocks have an initial margin of 50%, sometimes higher and oftentimes the shares are simply NOT marginable. The required margin is a function of multiple variables and changes often. As I'm very risk averse, I never trade on margin myself, so one of you reckless cowboys (just kidding!) please correct if necessary.

And what was worse than the unrealistically low stock market margin requirements, folks could borrow the necessary deposit money from their broker to purchase securities. THE SAME BROKER YOU'D BUY THE SECURITIES FROM. Meaning all you needed was a view on the markets and a broker and you too, could load up on all the securities your tolerance for risk (or broker) would allow. No need to pony up your own cash, no messy credit checks. Worse case - you'd lose your securities. That you purchased with 100% credit. Again, we've seen this same stuff, the same general themes in the real estate bubble, both in the United State and UK.

Also - as strange as this sounds now - there were minimal laws in place regarding the disclosure of information related to the shares you purchased; companies (and brokers) made up all sorts of rosy pictures about the firms future prospects. Is anyone else thinking ratings agencies here?

Finally, The SEC had no teeth back then; banks were getting away with all sorts of conflicts of interest - forming companies to be taken public, forecasting earnings, pitching the shares to the public, lending money to the retail crowd to purchase securities, holding positions as they hyped up the shares and selling at the top, on and on. All sorts of crazy stuff, totally out of control, total madness. Once again, today we've seen banks with off shore and thus invisible to shareholders SIVs, firms structuring CDOs with perhaps unrealistic hurdle rates, capitalised with rather shaky mortgages, credit enhancement techniques employed to drive the tranches rating to AAA but dependent upon all too optimistic assumptions about both the business and credit cycles.

Indeed, Galbraith's view of the 1929 disaster was reinforced by passage of The Securities Act of 1933 and further tightening in The Securities Act of 1934, both of which laid the foundations for the highly regulated system we've got in place today.

A system that has been chipped away and, and torn open in places, but the broad framework is still there. All we need now is the national will to drive forward a political manadate, repairing what's been damaged the past decade or so, and shore it up in areas where it is clearly needed. To prevent this type of bubble from happening again.

For example, I'd like to see more regulatory activity in I don't know what else will shake out of this. One things for certain - many people are going to be making careers out of insuring something like this NEVER happens again.

For any folks out there interested in banking - forget trading - Regulatory is the boom industry now. My phone's been ringing non stop since this crap started, and I'm not even circulating my CV.
posted by Mutant at 5:36 AM on October 8, 2008 [52 favorites]


There's definitely, definitely, definitely no logic
To human behaviour
posted by kcds at 5:48 AM on October 8, 2008 [12 favorites]


Just curious...is it not uncommon for folks in the UK (or Europe in general) to deposit large sums of money in banks in other countries? I'm from the US, and it would never occur to me to do such a thing....not sure why, it just never would.
posted by brandman at 6:03 AM on October 8, 2008


brandman - icesave is an internet bank, and is (was) backed by Landsbanki, one of the three big Icelandic banks. It offers accounts to people in Iceland and the UK (there is(was) a lot of Icelandic money in British businesses), so it's not really offshoring.

They were offering (now clearly illusory) very high interest rates on savings accounts (i.e. 7%).
posted by Happy Dave at 6:16 AM on October 8, 2008


Thanks Happy Dave...I didn't quite get that from a quick read of the first link. The impetus behind my question was whether there could be a "run" of sorts on offshore bank accounts if folks were concerned that the country in which the bank was based would not guarantee offshore deposits.
posted by brandman at 6:23 AM on October 8, 2008


thanks mutant!
posted by zwemer at 6:28 AM on October 8, 2008


But would you put your money in a bank in another U.S. state? I realize it's a facetious comparison, but I think it's fair to say that Europe now is closer to a U.S. style federation than to a region of wholly sovereign and independent states.
posted by AwkwardPause at 6:30 AM on October 8, 2008


I think it's fair to say that Europe now is closer to a U.S. style federation than to a region of wholly sovereign and independent states.

Well, not really. Europhilia or scepticism aside, we're closely tied, but we're not a federal superstate quite yet.

It's more like someone opening an account with HSBC in the US. Foreign bank, global presence.
posted by Happy Dave at 6:33 AM on October 8, 2008


brandman Iceland is part of the European Economic Area (EEA). As such, it is bound by most EU regulations and part of the EU internal market. EEA banks can freely compete in other EEA countries, and they often do.

Now, the question is: will this lead to Iceland being ejected from the EEA? On one hand, such a small economy as Iceland certainly cannot afford isolation. Indeed, apparently there are strong calls in Iceland to get into the EU outright, adopt the euro and dump the krona. On the other hand, with their currency now worth about as much as pocket lint, and their credit down the toilet, they'll be hard-pressed to trade with anybody, EEA or no EEA.

So far, the Icelandic government, in search of economic rescue and apparently upset with what it sees as abandonment by their Scandinavian cousins as well as the Brits and the Americans, seems to be throwing itself into the arms of Mr. Putin. The geostrategic consequences of such a strategically-located NATO member being in debt with Russia can hardly be overstated.
posted by Skeptic at 6:40 AM on October 8, 2008


strict Federal Laws requiring 30 year FIXED rate mortgages with 80% LTV for one's primary residence. If folks are gonna purchase a home then we've gotta force some financial discipline on them and make sure they can AFFORD it. Heartbreaking to lose one's home. Financially devastating also. This simply can not happen.

I disagree completely with this one. I can't save for beans. I just can't do it. I don't have the financial discipline to leave money alone. But I can quite happily dump half my wage into paying off a loan. I've never had a car or personal loan last more than half of what the original term was.

I'm quite capable of paying something off and rapidly. Why the hell should I suffer when I want to get a house just because other retards can't handle the hole they dig for themselves?
posted by Talez at 7:31 AM on October 8, 2008


Don't get me wrong, I haven't stopped trying to save. A long standing bank here in Western Australia is paying 9% on savings plans (A$50-$500/mo over a year) so I'm going to give it a shot dumping $500 a month into that and see how I do.
posted by Talez at 7:33 AM on October 8, 2008


On the other hand, all those cool places in Reykjavik might be a lot more affordable next spring -
posted by newdaddy at 7:51 AM on October 8, 2008 [1 favorite]


But would you put your money in a bank in another U.S. state?

HSBC has branches all over the US but is hq'd in the UK.

And Iceland isn't part of the European Union.
posted by plep at 7:52 AM on October 8, 2008


This is obviously a huge concern for those with deposits in Icelandic banks, but the deeper issue is worldwide credit. Icelandic banks were more vulnerable than most, but even banks that do not fail will have much less money to lend. The best estimates I have seen so far indicate that, when all is said and done, losses to financial institutions worldwide will be $1.5 trillion. If you assume a capital to assets ratio of 12:5:1, this means there will be $19 trillion less in credit available worldwide. Because about $4 of credit is needed for every $1 of growth, we're looking at a 2% contraction of the worldwide economy, based purely on these write-downs. That's a very major recession. For those of you who are sick of reading posts about the economy, this is one of the major reasons why people in financial circles are so concerned about this stuff.
posted by A Long and Troublesome Lameness at 8:05 AM on October 8, 2008 [3 favorites]


A long standing bank here in Western Australia is paying 9% on savings plans (A$50-$500/mo over a year) so I'm going to give it a shot dumping $500 a month into that and see how I do.

Who? BankWest?
posted by Kwantsar at 8:15 AM on October 8, 2008


PenDevil writes "Jesus, what the hell happened in Iceland. Last year it was the best place to live and now it's Argentina in 2002 with a lot of blondes."

So, how's the rent?
posted by krinklyfig at 8:17 AM on October 8, 2008


Wouldn't Dutch bank ING, which has heavily advertised its internet presence in the U.S., be more comparable for U.S. customers to Icesave for U.K. customers than HSBC is?
posted by notashroom at 8:32 AM on October 8, 2008


The Dutch National bank is apparently trying to figure out who's going to cover dutch customers (like me).

Their website is overloaded at the moment, and I think their response will mean a lot for the trust the dutch will have in banking systems after this...
posted by DreamerFi at 8:43 AM on October 8, 2008


HMG will sue Iceland. I don't understand quite how that works.

It's a bit strange that Darling should offer, on the face of it, a better guarantee to people who put their money in an Icelandic bank, than to those who put it in a British bank.
posted by Phanx at 8:49 AM on October 8, 2008


What would happen if various western countries signed a treaty declaring these CDS contracts invalid, or invalid without the original supporting bond, and demanding repayment of premiums for the previous year? I realize this could vaporize massive amounts of wealth for the shorts, but this might also disentangle the financial system, no?
posted by jeffburdges at 9:24 AM on October 8, 2008


Wouldn't Dutch bank ING, which has heavily advertised its internet presence in the U.S., be more comparable for U.S. customers to Icesave for U.K. customers than HSBC is?

Well, ING in the US is an FDIC member. Hypothetically speaking, if it were to fail like Icesave, there's no doubt over whether the deposits are insured or not.
posted by sbutler at 9:34 AM on October 8, 2008


What would happen if various western countries signed a treaty declaring these CDS contracts invalid, or invalid without the original supporting bond, and demanding repayment of premiums for the previous year?

This wouldn't simply vaporize massive amounts of wealth for the shorts. It would make even currently healthy financial institutions who hedged via CDSs undercapitalized or insolvent. Vaporizing assets during deflation is like pouring gasoline on a fire.
posted by A Long and Troublesome Lameness at 9:35 AM on October 8, 2008


notashroom The difference is that ING is quite a large bank with a substantial homebase in the Benelux. Icesave, on the other hand, is an offshoot of only the second bank of a country with the current population of New Orleans. Also, I presume (but I may be wrong) the ING operations in the US are regulated by US law and subject to US deposit insurance, whereas Icesave was acting from Iceland and only regulated by Icelandic authorities under European Economic Area freedom of movement conditions.
posted by Skeptic at 9:39 AM on October 8, 2008


More about Icesave and EEA "passporting". It would appear that, by not honouring the minimum €20,000 deposit insurance, Iceland is reneging on its EEA obligations, which is quite a big deal. I don't think Iceland can afford to be expelled from the EEA, on top of all the shit they're going through. I guess they will try to muddle through, probably through some exchange rate shenanigans.
posted by Skeptic at 9:47 AM on October 8, 2008


Thanks, sbutler and Skeptic. Maybe I'm just confused, but aren't U.S. depositors with HSBC covered under FDIC as well?

My understanding (please correct me if I'm wrong; I'm honestly curious) is that Icesave and ING are both primarily or exclusively online banks, particularly in regard to their foreign (US/UK) cusomers, whereas HSBC is more of a traditional bank, with brick-and-mortar locations in the UK, US, and elsewhere. That was why I thought ING might be more analogous, though it is definitely good to hear that they look a lot more stable than Icesave.
posted by notashroom at 9:58 AM on October 8, 2008


phanx: The UK government is terrified that there's going to be a general run on the UK clearing banks. That's all the explanation you need.

Had they let the Northern Rock savers lose their money at the end of 2007, then Icesave probably wouldn't have received a penny of UK savers money which would have instead gone into shoring up the capital base of the UK clearing banks. But here we are.
posted by pharm at 10:23 AM on October 8, 2008 [1 favorite]


notashroom ING is a large "bricks-and-mortar" operation in Belgium and Holland. Anyway, the distinction between "Internet banks" and "bricks-and-mortar banks" is irrelevant. The only thing that matters is who insures the deposits. To accept US deposits, whether through local branches or the Internet, banks need FDIC coverage. Similarly, to take EEA deposits, banks need a minimum deposit guarantee of €20,000 provided by an EEA country. But they can (could) take British deposits with Icelandic coverage. The matter with Icesave is that Iceland the country is broke, and can't fulfill its deposit coverage obligations anymore. It's as if the FDIC went bankrupt.
posted by Skeptic at 10:41 AM on October 8, 2008 [1 favorite]


The fear of runs has to be growing. The blanket media saturation of this, banks getting lower credit ratings etc, is bound to lead to a queue before long. And then we're off to the races. Again.
posted by bonaldi at 10:52 AM on October 8, 2008


notashroom: I understand your point. Maybe a better analogy is PayPal. It looks like a bank, a lot of people keep their money in it, and it's exclusively online. But whatever it is, it's not a US bank, and if it were to fail you can't count on eBay giving you your money back.
posted by sbutler at 10:53 AM on October 8, 2008


According to a gov't press release in Iceland, Landsbanki UK holdings will be liquidated and will be enough to cover most of the Icesave debt to account holders.
posted by krilli at 11:06 AM on October 8, 2008


And this is one I feel especially strongly about - strict Federal Laws requiring 30 year FIXED rate mortgages with 80% LTV for one's primary residence. If folks are gonna purchase a home then we've gotta force some financial discipline on them and make sure they can AFFORD it. Heartbreaking to lose one's home. Financially devastating also. This simply can not happen.

I'm sorry, but this is just horseshit. I can afford to pay a 15 year mortgage on my home. Why the hell should I be in hock for an extra 15 years, and paying significantly more interest over the lifetime of the loan?

Just curious...is it not uncommon for folks in the UK (or Europe in general) to deposit large sums of money in banks in other countries? I'm from the US, and it would never occur to me to do such a thing....not sure why, it just never would.

It's certainly common, from my experience of working in the UK, for people to have all sorts of weird and wonderful schemes to avoid tax (e.g. contractors who have all their income sent to nominal companies housed in tax havens and then paying themselves from those offshor companies); also, UK banks (when I lived there) had no fees but extremely low interest rates (a couple of percent), so a bank account offering substantial returns would look pretty attractive.
posted by rodgerd at 11:14 AM on October 8, 2008 [1 favorite]


I agree with Rodgerd. There is no way I would sign a 30 year note if I can do a 15 year note...and even then, I want strong, strong "no prepayment" clauses. No way in hell would I be willing to pay an extra 100k-300k to get a 300k loan. That's just stupid.
posted by dejah420 at 12:28 PM on October 8, 2008


I went to Reykjavik about 15 months ago for a stag-do and was astonished at the cost of things - a burger from a van in the street was about £8 (probably $14 at the time). It seemed totally unreal and unsustainable even then.
posted by runkelfinker at 1:28 PM on October 8, 2008


pharm:
Had they let the Northern Rock savers lose their money at the end of 2007, then Icesave probably wouldn't have received a penny of UK savers money which would have instead gone into shoring up the capital base of the UK clearing banks. But here we are.

26 February 2008, 8:50am:
Northern Rock attracted fresh controversy as it emerged that UK taxpayers could be subsidising attractive savings deals for the bank's savers in Denmark.

The Rock's less than tasteful Danish website, which has a fat pig image bearing the legend 'Swilling Interest', exhorts savers to take advantage of the government's cast iron savings guarantee.
In bold lettering, the site's opening page says: 'Your savings with Northern Rock continue to be safe and secure, protected by the UK Government guarantee arrangements.'


Northern Rock Bank Denmark ceased operating on 18 June 2008.

In other words, the UK helped out the Danish customers of a failed British bank, and now bails out the British customers of a failed Icelandic bank.
posted by iviken at 1:58 PM on October 8, 2008


Both your posts make sense, sbutler and Skeptic. I appreciate the clarification.
posted by notashroom at 2:01 PM on October 8, 2008


I went to Reykjavik about 15 months ago for a stag-do and was astonished at the cost of things - a burger from a van in the street was about £8 (probably $14 at the time). It seemed totally unreal and unsustainable even then.

As I'd said in the previous thread on Iceland's economy, there were plenty of people in Iceland who were aware of this, too. Unfortunately, none of those people were bank managers or conservative politicians (who comprise the ruling coalition). They said talk of the economy overheating was paranoid, and that the market would work itself out. Just look how rich and powerful we are, they said, since we privatized the banks, and have started businesses abroad, how aggressive and Viking-like we are on the world economic stage!

Well, the invisible hand of the market pimp-slapped the economy. But things are stablizing. The banks are more or less nationalized - uh, re-nationalized, that is - and foreign loans have helped keep the whole thing from collapsing. That it was regulation and nationalization which saved the day must absolutely infuriate the conservatives.
posted by Marisa Stole the Precious Thing at 2:16 PM on October 8, 2008 [1 favorite]


runkelfinker writes "a burger from a van in the street was about £8 (probably $14 at the time). It seemed totally unreal and unsustainable even then."

I don't know if that is a good indication of anything economy wise. Food in remote places where the majority of foodstuffs is imported tends to be very expensive. Anywhere in Canada within a couple degrees of the arctic circle has expensive food.
posted by Mitheral at 2:44 PM on October 8, 2008


Mutant 30 year FIXED rate mortgages with 80% LTV for one's primary residence.

Talez ... I can quite happily dump half my wage into paying off a loan. I've never had a car or personal loan last more than half of what the original term was. I'm quite capable of paying something off and rapidly. Why the hell should I suffer when I want to get a house just because other retards can't handle the hole they dig for themselves?

rodgerd I can afford to pay a 15 year mortgage on my home. Why the hell should I be in hock for an extra 15 years, and paying significantly more interest over the lifetime of the loan?

Both of you would do just fine under Mutant's plan. As I understand it, what he's arguing for is that, if the customer proposes to buy a house in which to live, the customer is to be offered a mortgage loan of no more than 80% of the value of the house, with an interest rate that is fixed for 30 years.

Assuming you each wanted to buy a $400,000 house: Talez's concern is coming up with the initial 20%. He is unable to save up $80,000, but considers himself quite able to pay off a loan for that amount. So either he runs a game of a kind on himself and pretends he has a loan for that much and pays it off at half his salary for two to five years, and when he has "paid it off" he has the necessary deposit; or he takes out a separate personal loan (ie, not a mortgage) for that amount. Stopping him from doing so with regulation would be awfully difficult and IMO not worth it; Mutant's proposed 80% rule is there to strongly encourage the accumulation of a deposit.

Rogerd's concern is that he could get a better interest rate for a 15-year loan. Well, maybe he could, but his minimum repayment would be a lot higher. People don't get into trouble with loans because of overall total repayments being higher, they get into trouble because minimum periodic payments are too high. If I lent you $1000 and give you two repayments to choose from: you pay me back $20 a week for a year and a half (~$1500 total), or alternatively, you pay me back $100 a week for 11 weeks ($1100 total), but if you ever defauilt I break your kneecaps, which of these deals is better? If you can afford $100 a week, for sure, every week, then the shorter, lower-interest loan is better. But you must ensure you have $100 a week. If you don't, if you think you can repay $100 most weeks, but occasionally it might be as low as $80 or $50, you are far better off going for the second option, because of the consequences of the risk. Being kneecapped sucks. Being evicted because of mortgage default is a comparably bad experience. You are far better off--everyone is better off--with a loan that you are absolutely certain of being able to pay, all the time, every time. Now, you can of course pay me early, because I'm a nice loan shark; if you win $600 on the pokies, you can give it to me and I won't bother you for a long time. If you owed me less than $600 at the time, you can pay me outright, and I'll never bother you again. In fact I'll write a note saying "the debt is paid" and if anyone asks, I'll say you owe me nothing even though it's still within the 11 weeks or 18 months. The bank will do the same for your mortgage, if you pay it out early.

But the major reason you guys are stopped from doing exactly what you want to do is, for the benefit of others. If you create a demand for riskier mortgages, a supply springs up for them. That supply enters the market, people whose capacity to assess risk is lesser are encouraged to take these loans (because of the lower overall payments) ... and sooner or later we're back in subprime land again. Mutant's plan is perhaps overly safe. But it's a far better regulatory approach, to find the point at which the vast majority of people are safe, and require that. Your ability to engage in risky behavior should be curtailed in finance just as it is in traffic law, not because anyone cares about you in particular, or wants to restrain you from harming yourself, but because of the risks of harm to all involved from your actions.
posted by aeschenkarnos at 3:35 PM on October 8, 2008 [7 favorites]


I just overheard yet another person telling their friend that the bailout shoulda just been given to the taxpayers. Because it would be $8,000 to everyone! (It beats the $425,000 that was being passed around last week -- at least he was in the right order of magnitude.)

And his friend thinks for a second and says, "but there's only 300 million people in the U.S. -- isn't that more like $2100 per person?"

And I think hey, not bad -- not exactly right, but close.

But then the first guy says, "no, it's $8,000 per taxpayer." And the second guy nods like oh OK, now your stupid math makes sense.

And that is why we're in a financial crisis.

Because no one in this country understands basic math.
posted by spiderwire at 4:18 PM on October 8, 2008


Basic math? Like in the toilet?
posted by Smedleyman at 4:35 PM on October 8, 2008


Also at least 20 councils in England and Wales are known to have deposits in Landsbanki - some of tens of millions. "Ultimately this is council tax payers' money at risk and these are funds which are essential for the delivery of local services"
posted by Lanark at 4:36 PM on October 8, 2008


Assuming you each wanted to buy a $400,000 house: Talez's concern is coming up with the initial 20%. He is unable to save up $80,000, but considers himself quite able to pay off a loan for that amount. So either he runs a game of a kind on himself and pretends he has a loan for that much and pays it off at half his salary for two to five years, and when he has "paid it off" he has the necessary deposit; or he takes out a separate personal loan (ie, not a mortgage) for that amount. Stopping him from doing so with regulation would be awfully difficult and IMO not worth it; Mutant's proposed 80% rule is there to strongly encourage the accumulation of a deposit.

A personal loan. For $80,000?

Assuming I could actually get security for the personal loan, no credit institution is going to give me a $320,000 home loan when I have $80,000 @ 12% holding over my head.

Assuming I couldn't get security for the loan, no credit institution in their right mind will even think about giving me a $320,000 home loan when I have $80,000 @ 14% holding over my head.

Also, why the hell should I have to pay 20% of my loan out at a premium just because Dickhead McLooney decided an ARM with a massive balloon payment that had a monthly he could barely afford was a good idea.

If anything balloon payments and massive rate resets should be made illegal.
posted by Talez at 5:50 PM on October 8, 2008


rogerd: prove me wrong, but I think Mutant meant that 30 years should be the *maximum* available mortgage term, not the only one.

aeschenkarnos: rogerd's concern is not that he will have to pay a higher rate, it's that the same rate over a longer term adds up to a lot more interest to be paid in total. Your argument is somewhat baffling - it's the first time I've heard anyone claim that paying debt off more quickly is risky to society.
posted by pascal at 5:58 PM on October 8, 2008


A personal loan. For $80,000?
House deposit loan, separate from the actual mortgage. I don't mean to imply it's a good idea to do that. I'm saying that if banks were forbidden by regulation from lending more than 80% of the value of the house, you could, but not necessarily should, obtain the remaining 20% through a loan. Mutant can speak for himself if he wants to come back to the thread. I merely mean to say that making it impossible for a person to buy a house with zero deposit would be infeasilble with the regulation as he proposed it.

Assuming I could actually get security for the personal loan,no credit institution is going to give me a $320,000 home loan when I have $80,000 @ 12% holding over my head. Assuming I couldn't get security for the loan, no credit institution in their right mind will even think about giving me a $320,000 home loan when I have $80,000 @ 14% holding over my head.
Looking at it in the context of a house deposit loan and a mortgage, it's equivalent to a 100% loan, except that 80% of it is regulated to be a 30-year fixed term, and the rest is a higher interest based on the fact that you don't have the deposit. I don't see the appeal to you of borrowing 100% of $400,000 at whatever variable rate and shorter term they want to put on you instead.

Also, why the hell should I have to pay 20% of my loan out at a premium just because Dickhead McLooney decided an ARM with a massive balloon payment that had a monthly he could barely afford was a good idea.
Because you don't have that 20% saved up as your deposit, and more to the point, you're not forced to pay the remaining 80% off at a premium too.

If anything balloon payments and massive rate resets should be made illegal.
In general people vastly underestimate risks put off to the future. They will happily agree to pain later to have pleasure now. I totally agree with you: taking advantage of that human psychological flaw should be regulated.
posted by aeschenkarnos at 7:46 PM on October 8, 2008


pascal rogerd's concern is not that he will have to pay a higher rate, it's that the same rate over a longer term adds up to a lot more interest to be paid in total. Your argument is somewhat baffling - it's the first time I've heard anyone claim that paying debt off more quickly is risky to society.
It's not him, it's people generally. Him paying off his loan quickly is great for him, not terrible for the bank, and generally speaking OK for everyone else. Him getting a shorter-term loan based on the greater ability that he has to pay it back sooner is good for him, good for the bank, but has a knock-on effect to everyone else: it makes loaning to him inherently more desirable, and loaning to others inherently less desirable. If the bank can get $500 a week out for twenty years of the rogerds of the world, why should they settle for $300 a week for thirty years from others?

Now to some extent, that's life, and of course personal circumstances are going to affect loan qualification. But housing is near-universally desirable. How can we ensure that the maximum proportion of people are able to actually afford to buy houses? Mutant's suggestion, unless I'm completely misunderstanding it (which isn't impossible), should have the effect that, if the banks are constrained to offer loans on terms that make almost anyone--especially those who would, under the 2004 regime, have qualified only for "liar loans"--able to pay them back, then the customers' exact personal circumstances become significantly less relevant to the question of whether or not they can afford to buy a house. Unless they're truly dirt-poor and up to their eyeballs in other debt, they can afford to buy a house. Without being induced or tempted to lie to do so, and in turn inducing or tempting banks to accept loans based on lying applications.

The price of that would be that rogerd and the rest of the upper middle class would have to pay more interest (but in smaller doses, for a longer time) than is strictly warranted, in order to keep the rest of the middle class, and the upper lower class, in a position where they can afford to buy houses; and in order to keep the banks in a position where they have a desire to lend to lower-income people, because (at a 30-year fixed rate) chances are extremely good of them returning a profit for it.
posted by aeschenkarnos at 8:05 PM on October 8, 2008


A long standing bank here in Western Australia is paying 9% on savings plans (A$50-$500/mo over a year) so I'm going to give it a shot dumping $500 a month into that and see how I do.
posted by Talez

Let's see here. This post is about a bank in Iceland that could pay high interest on savings because of the risky loans it gave out, and as a result folded. And as a result of this, you are going to put a bunch of money into another bank paying high interest at a time when the credit market is almost non-existent and we are heading into a recession?

Economics 101---Fail!
(Unless you are just using sarcasm, which often doesn't come across well in text unless you are explicit).
posted by eye of newt at 8:15 PM on October 8, 2008


[Joke about Bjork]

Not on my watch, pal!
posted by bjork24 at 8:35 PM on October 8, 2008


"If the bank can get $500 a week out for twenty years of the rogerds of the world, why should they settle for $300 a week for thirty years"

This is a false dichotomy, and I'm not sure you understand how interest works. Here's a real example using RBC's mortgage calculator. $100,000 @ 5% over 20 years costs $657.13/month, over 30 years - $533.70. In other words the bank gets $157,711 back over 20 years, $192,132 over 30. That's why banks "settle" for lending over longer terms - they make more money.
posted by pascal at 11:52 PM on October 8, 2008


This is a false dichotomy, and I'm not sure you understand how interest works.
I follow the maths. You're making the calculation, but that's not the end of the story. Consider the institutional psychology that the maths informs. Consider how the numbers look annually.

That's why banks "settle" for lending over longer terms - they make more money.
Overall, yes. In a given shorter period, such as a financial year, no. One year's repayments on a twenty-year loan look better than those of a thirty-year loan, because the repayments over the year are higher. The shorter the period, the more difference it makes.
posted by aeschenkarnos at 2:36 AM on October 9, 2008


So following your logic: if a 15 year amortization is 'worse' somehow than a 30-year, I guess that means a 14-year is worse than a 15 year, a 1 year amortization is pretty terrible for society, and paying cash should get you locked up.
posted by pascal at 9:02 AM on October 9, 2008


Okay, more details have emerged in the Icelandic media. No one in the Icelandic Finance Ministry told the British Treasury that the Icelandic government wouldn't cover deposits in Icesave. It was something the Icelandic former-prime-minister-turned-central-banker I mentioned in this recent post who said in a television interview when asked about British deposits in Icelandic banks that maybe the government would cover 5-15%.

Apparently he just made that up on the spot, this was never government policy. This reached the ears of Alistair Darling, who called the press conference which triggered the bank run. Now Iceland's three biggest banks have been nationalized. Politicians, including members in the social democratic party, the minority partner in a coalition lead by conservatives, are calling for the dismissal of the central banker.
posted by Kattullus at 10:25 AM on October 9, 2008 [1 favorite]


Let's see here. This post is about a bank in Iceland that could pay high interest on savings because of the risky loans it gave out, and as a result folded. And as a result of this, you are going to put a bunch of money into another bank paying high interest at a time when the credit market is almost non-existent and we are heading into a recession?

Economics 101---Fail!


The Australian banks have loan/deposit ratios around 120%, and Tier I ratios in the 8% ballpark, making them (next to the Canadians and the Swiss privates) just about the safest in the world.

Bank Credit Analysis 201-- Fail!
posted by Kwantsar at 1:45 PM on October 9, 2008


Kattullus If that wasn't official Icelandic government policy, nobody seems to have told Gordon Brown yet. And for God's sake, in such an emergency, if you are going to deny such momentous news, deny it immediately, don't wait for over one day to issue your denial, while the world's press is going berserk.
posted by Skeptic at 1:52 PM on October 9, 2008


One things for certain - many people are going to be making careers out of insuring something like this NEVER happens again figuring out how to do this all over again.

Fixed that for you.
posted by DarkForest at 2:16 PM on October 9, 2008


Kattullus Also, this Icelandic PM press conference doesn't appear particularly reassuring to foreign depositors. Cutting through the waffle, what he appears to say is:
"Oh God, we are in deep shit."
"Domestic depositors are covered. Foreign depositors? Erm, not so much...They'll be first in line in the banks' asset liquidations...if there are still any assets left to liquidate. And, if not, our Treasury will...er...try...to help compensate them (as if we could). Of course, if anybody else wants to pay in our place...what, no volunteers?"
posted by Skeptic at 3:34 PM on October 9, 2008


Gordon Brown demands £20 bn 'British money' from Iceland.

The use of anti-terrorism laws seems a bit dodgy:
Stephen Timms, Financial Secretary to the Treasury, confirmed in a casual tone that this was indeed the law which had been used, because “that’s where the power happened to be”, as if there was nothing odd in using such legislation for a purpose for which it cannot originally have been intended.
posted by JonB at 10:49 PM on October 9, 2008


There isn't anything odd about it, it happens all the time.
posted by Mitheral at 9:17 AM on October 10, 2008


JonB: The law is the law. Courts in the UK aren't permitted to look at the intention for which the law was passed - they just have to look at the words. Bizarrely, even a procedural irregularity doesn't invalidate a law that has been officially inscribed on the Parliamentary roll. It's that old devil called Parliamentary Sovereignty again.
posted by athenian at 11:31 AM on October 10, 2008


Here's a good article from the Sunday Times about the Icelandic financial meltdown. Excerpt:
A FEW days before the terrorist attacks of September 11, 2001, the then-prime minister of Iceland was in lyrical mood as he addressed a meeting of his country’s diplomatic corps.

David Oddsson was renowned for his literary interests. He wrote two plays in the 1970s, translated an Estonian history textbook and now he was quoting WH Auden, the British poet, who had written of Iceland half a century earlier: “Fortunate island/ Where all men are equal/ But not vulgar — not yet.”

Oddsson said his government’s aim was to “manage things so well” that future poets would return to Iceland to pay similarly handsome compliments. Instead, the 60-year-old former prime minister finds himself at the eye of the financial storm that last week swept away his country’s banks and provoked a decidedly vulgar outbreak of international rancour.

Oddsson stepped down as premier in 2004 and was rewarded a year later with a new job as chairman of the country’s central bank.

The appointment went largely unremarked at the time, but last week’s collapse of the Icelandic banking system — and the eruption of a nasty diplomatic spat with Britain — has caused many Icelanders to question the wisdom of handing effective control of a supposedly independent financial institution to a powerful, right-wing politician who enthusiastically espoused the free-market policies of Margaret Thatcher and Ronald Reagan.

Oddsson’s distaste for the euro and his rigid support of a high interest-rate policy aimed at taming inflation thrilled British savers and lured billions in inward investments.

Yet several analysts last week concluded that serious misjudgments by the Icelandic central bank had opened the door to meltdown and destroyed the national currency, the krona.
Is it me or is it rather strange to see The Times sneer at "the free-market policies of Margaret Thatcher and Ronald Reagan?"
posted by Kattullus at 10:47 AM on October 13, 2008


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