Thinking about the rise and fall of Iceland's three banks, I'm reminded of something I was told by a big businessman and leading citizen from Wisconsin: never get heavily involved in real estate development deals where you don't have some local political clout.
He reflected back on a deal that had worked out for him several decades earlier, when as a young up-and-comer in the Wisconsin business world, he'd been invited to participate in the financing of an enormous complex of apartment buildings on Chicago's Near North Side. He drove down, looked around, figured that there'd be a lot of demand from proto-yuppies for apartments convenient to work and to shopping on Michigan Avenue, so he chipped in some money.
And it turned out very profitably for him. Subsequent investments in other states, however, didn't turn out as well. Permits didn't get approved, and other types of sand got in the gears. It was only years later that he knew enough about Chicago to work out that the other investors in that Chicago group he had participated in were not just random people with some money, but a carefully assembled coalition of the Friends of Mayor Richard J. Daley and of other power players in Cook County and the state of Illinois. (Presumably, they had some long-term rationale for inviting him in involving future deals in Wisconsin.)
So, how can you beat the market consistently in lending or investing?
- Inside pull. You can get your developments fast-tracked because you know the right people.
- Inside information. You know people who know people.
- Inside information about inside pull. You know people who know who are the right people to know.
- You are backed by a huge, rich government. So, you can take bigger risks than the competition because you presume that your government will bail you out if they blow up. Privatize profits, socialize risks.
- A sense of what the public wants next. This is Peter Lynch's notion of investing in, say, the little donut chain that you really like.
- Economies of scale in investment. For example, you can make money at tiny arbitrage opportunities if you have enough money to play with so that you don't experience gambler's ruin in the short run. Or, if you are Warren Buffett, you can make a nice living as a white knight investor who buys companies threatened by hostile takeovers.
There are lots of other items that should be on this list. But my point is: Iceland's money boys were at a disadvantage on everyone of these points. A quarter-million people out on an island in the middle of an ocean were spectacularly ill-suited to play the game of high finance the way it's really played. The Icelanders figured that because they were as good as anybody at whipping up an Excel spreadsheet of the Black-Scholes option pricing model, they could compete globally.
They were naive.
He reflected back on a deal that had worked out for him several decades earlier, when as a young up-and-comer in the Wisconsin business world, he'd been invited to participate in the financing of an enormous complex of apartment buildings on Chicago's Near North Side. He drove down, looked around, figured that there'd be a lot of demand from proto-yuppies for apartments convenient to work and to shopping on Michigan Avenue, so he chipped in some money.
And it turned out very profitably for him. Subsequent investments in other states, however, didn't turn out as well. Permits didn't get approved, and other types of sand got in the gears. It was only years later that he knew enough about Chicago to work out that the other investors in that Chicago group he had participated in were not just random people with some money, but a carefully assembled coalition of the Friends of Mayor Richard J. Daley and of other power players in Cook County and the state of Illinois. (Presumably, they had some long-term rationale for inviting him in involving future deals in Wisconsin.)
So, how can you beat the market consistently in lending or investing?
- Inside pull. You can get your developments fast-tracked because you know the right people.
- Inside information. You know people who know people.
- Inside information about inside pull. You know people who know who are the right people to know.
- You are backed by a huge, rich government. So, you can take bigger risks than the competition because you presume that your government will bail you out if they blow up. Privatize profits, socialize risks.
- A sense of what the public wants next. This is Peter Lynch's notion of investing in, say, the little donut chain that you really like.
- Economies of scale in investment. For example, you can make money at tiny arbitrage opportunities if you have enough money to play with so that you don't experience gambler's ruin in the short run. Or, if you are Warren Buffett, you can make a nice living as a white knight investor who buys companies threatened by hostile takeovers.
There are lots of other items that should be on this list. But my point is: Iceland's money boys were at a disadvantage on everyone of these points. A quarter-million people out on an island in the middle of an ocean were spectacularly ill-suited to play the game of high finance the way it's really played. The Icelanders figured that because they were as good as anybody at whipping up an Excel spreadsheet of the Black-Scholes option pricing model, they could compete globally.
They were naive.
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14 comments:
Very impressive analysis.
Not to mention the elves. You try living in a country where little people comprise a large part of the loacal fauna. It really gets in the way.
On a more serious note, Iceland ought to be a subject that would be of great interest to you from a genetics standpoint. As an isolate people, they're absolutely fascinating in so many ways - it can be determined to a large degree of accuracy which one of eleven regions of the country a person comes from, their language hasn't been subject to the influence of the wider world until extremely recently, their culture hasn't been buffeted by waves of competing virtues and values and therefore tumbled along incestuously morphing only with what it had handy, etc. Pretty damn interesting people.
You know... your reputation pretty much assures that you will hardly ever get credit for interesting points of views... shame, cause even if people don't agree with all of your ideas, you do come up with some pretty spot on observations.
You really should come up with a 2nd anonymous blog to post your non "race" related posts.
From Looking for elves in Iceland:
"Belief in the unseen runs so high in Iceland that the Public Roads Administration sometimes delays or reroutes road construction to avoid what locals believe are elf habitations or cursed spots."
So be thankful, Steve, that elves and leprechauns aren't (yet) protected species in California. 'Cause if that infrastructure project near your house happened to hit one of their homes ... those sewer and water lines might end up being rerouted right through your front yard.
During bull markets everyone is a financial genius.
During bear markets it's clear that everything is rigged/fixed/unfair, and the little guy has no chance.
And then the bull market starts up again.
So don't worry everybody. Eventually you'll all be a financial geniuses again and no one, especially yourselves, will remember what you wrote today.
More a comment on psychology than finance, actually.
Leprechauns are a problem in 'Bama, as well.
http://www.liveleak.com/view?i=189_1187241905
Neshobanakni
This is an interesting story, but are you certain that a story is necessary here? I would suppose that in any financial catastrophe there is a certain random element; some people who did not act unusually stupidly will get hit unusually hard.
Can you demonstrate that Icelandic financiers did anything unusually stupid?
Iceland became a paradise of high returns, even for individual foreigners simply looking for a bank account. For instance, in July, Kaupthing's Isle of Man subsidiary offered 7.15% on one-year deposits.
http://tinyurl.com/a2nubk
The money flowed in attracted to the higher yields provided only by riskier assets which were the first to evaporate. The money fled in a panicked bank run and Iceland collapsed.
In an interview with the manager of an Icelandic fishing fleet he noted that they are a lean operation with very few back office positions so when the former banking personnel come looking for any job opening they will have to get wet.
I guess the moral is teach a man finance and he'll be fishing the rest of his life. Base a nation on free lunch finance for footing castles in the air and watch the tide roll away from the dock of the bay, inflatable flotation devices compliments rash poison Ivy League economic PhDs notwithstanding.
Sham-anism, ooh ee ooh ah ah.
Surprised no one mentioned this. Somewhat of a debunking of the Anthony Lewis article on Iceland in Vanity Fair:
http://nymag.com/daily/intel/2009/03
/reality_check_vanity_fairs_fis.html
"Can you demonstrate that Icelandic financiers did anything unusually stupid?"
Naah, economies go bust overnight completely by accident.
yes, Icelandic genetics has been studied on a massive scale with the results mined for medical applications. The guy who ran the study was Kari Steffensen, if I remember correctly.
Speaking of Iceland, the landscapes on that island are incredilble. See Viking Sagas shot on location in Iceland and available on NetFlix/Roku in HD.
It does for the north what Lawrence of Arabia did for Middle Eastern deserts. Of course Ralf Moeller is no Peter O'Toole. OTOH O'Toole never really had those Viking biceps.
The Icelandic cowboys weren't making bets that were any more unwise than the ones the i-bankers in the US and the continent were making. The difference is that their currency trades in thin volumes and due to its limited usage, is much more vulnerable to pressure than the USD or EUR. Plus, unlike GS, the Icelanders had no one to bail them them out when the bets turned sour.
Iceland, population 320,000, has too few people to be indicative of much. Its banks might have failed because of purely local problems, or because the undertow from the global depression brought them down. Also, in 2006 U.S. Naval Air Station Keflavik gradually shut down, so Icelanders might be suffering withdrawal symptoms from the loss of all those Yankee dollars.
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