Iceland ignored “too big to fail” – and won!

Iceland found another way to clean up the financial crisis…Unlike the U.S., the country let its banks fail and bailed out lots of consumers.


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❝ Last week, I was at an ETF conference in Reykjavík. As I was flying there, it dawned on me I know practically nothing of Iceland. What little understanding I had, had come second-hand, via Michael Lewis’ epic tale of Iceland’s financial collapse, “Wall Street on the Tundra.” His 10,000-word Vanity Fair missive is practically a Norse Saga of its own.

Lewis explores the Icelandic bubble in delicious detail. The short version is that the Icelandic banks scaled up their debts from a mere few billion dollars to over $140 billion, without growing the asset base at the same time. To quote Lewis quoting an economist, it was “the most rapid expansion of a banking system in the history of mankind…”

❝ Unlike here in the states or in Europe, the Icelanders told the bankers to piss off. Instead of bailing them out, they were sent into bankruptcy. The results were a fast and sharp decline, followed by a rapid, post-crisis economic recovery — faster and stronger than any other country in the world.

Excerpted from notes posted, today, on Barry Ritholtz’s blog…The Big Picture. At the end, he links to a larger piece he wrote for BLOOMBERG…Iceland Found Another Way to Clean Up a Financial Crisis. An interesting, educational read about an alternative solution to the Great Recession – that worked.

Completely separate; but, culturally important. Images of Iceland by Om Malik.

Apple offers great security with Apple Pay — banks aren’t doing as well

too big, too stupid

Apple Pay has proven to be a venue of convenience for criminals focusing on identity fraud, a new report suggests, with many fraudsters taking advantage of lax customer verification controls put in place by Apple’s partner banks to make brick-and-mortar purchases using stolen credit cards via the growing mobile payment service.

Apple Pay itself has not been exploited, according to The Guardian, with issues instead arising at the issuing banks. The problem centers around the processes those banks use to verify customers’ identity when adding a card to Apple Pay.

When adding a card, banks can reportedly choose to accept it immediately — using a so-called “green path” — or require additional verification, via a “yellow path.” Apple provides the banks with contextual information, such as the name of the device Apple Pay is being configured on, the device’s current location, and data about the length of iTunes transaction history, during setup to help identify cases where more stringent checks are required.

The yellow path processes have apparently been found lacking in some cases, with unnamed partner banks asking only for relatively easily-obtainable information, such as the last four digits of the customer’s social security number. Once approved, criminals can then use Apple Pay to purchase products at retail, later selling them for cash — with Apple retail stores apparently a particularly attractive target…

As part of their Apple Pay agreements, issuing banks agreed to accept liability for fraud through the platform. Thus far, that amount is thought to have risen into the millions of U.S. dollars, and banks are working on fixes.

You might think that banks – especially the big banks first on board with Apple Pay – might have something as basic as authentication of their own customers down pat. You’d be wrong.

Obviously, Apple figured banks might drop the ball. That’s why issuing banks have to accept the liability for fraud.

Meanwhile, Apple Pay works so well that crooks love it. Guaranteed to be another whine from the NSA and FBI next time they hand out press releases begging Congress to make Apple weaken security.

The officers heading our “Reputable” banks are the fraud risk

A recent study confirmed that control fraud was endemic among our most elite financial institutions…“Although there is substantial heterogeneity across underwriters, a significant degree of misrepresentation exists across all underwriters, which includes the most reputable financial institutions”…

Finance scholars are not known for their sense of humor, but the irony of calling the world’s largest and most harmful financial control frauds our “most reputable” banks is quite wondrous. The point the financial scholars make is one Edwin Sutherland emphasized from the beginning when he announced the concept of “white-collar” crime. It is the officers who control seemingly legitimate, elite business organizations that pose unique fraud risks because we are so loath to see them as frauds.

…The definitive evidence of control fraud that PSW2013 identifies is by mortgage lenders who made, or purchased, mortgages and then resold them to “private label”…financial firms who were creating mortgage backed securities… The deceit they documented by the firms selling the mortgage loans consisted of claiming that the loans did not have second liens. The lenders knowingly sold mortgages they knew had second liens under the false representations…and warranties that they did not have second liens. [The key is that the officers who control the banks do not have skin in the game – they can loot the banks they can control and walk away wealthy.] The PSW 2013 study documents that the officers controlling the home lenders knew the representations they made to the purchasers as to the lack of a second lien were often false…that such deceit was common…that the deceit harmed the purchasers by causing them to suffer much higher default rates on loans with undisclosed second liens…and that each of the financial institutions they studied – the Nation’s “most reputable” – committed substantial amounts of this form of fraud…

The central point we have been arguing for years is now admitted – and treated as a universally known fact: “mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth.” The crisis was driven by liar’s loans. By 2006, half of all the loans called “subprime” were also liar’s loans – the categories are not mutually exclusive…As I have explained on many occasions, we know that it was overwhelmingly lenders and their agents (the loan brokers) who put the lies in liar’s loans…

The greatest importance of the PSW 2013 study is that even the fraud deniers have to admit that our most prestigious banks were the world’s largest and most destructive financial control frauds. Given this confirmation that the banks engaged in one form of control fraud in the sale of fraudulent mortgages…there is no reason to believe that their senior officers had moral qualms that prevented them from becoming even wealthier through the endemic frauds of liar’s loans and inflated appraisals…

Though I sometimes labor to edit and sort Ritholtz’s paragraphs, his choice of words matches laughter with indignation. His conclusion to this piece calls out President Obama and Attorney General Holder for their faith in a “virgin” crisis, e.g., although we all are fuckees as a result of this crisis – there are no fuckers among the bankers.

Barry Ritholtz continues his campaign for the arrest and prosecution of Wall Street criminals.

Mitt and the half of America he calls moochers

The Republican Party has some potentially winning themes for America’s presidential and congressional elections in November. Americans have long been skeptical of government, with a tradition of resistance to perceived government overreach that extends back to their country’s founding years. This tradition has bequeathed to today’s Americans a related rejection of public subsidies and a cultural aversion to “dependence” on state support.

But Republican presidential candidate Mitt Romney and other leading members of his party have played these cards completely wrong in this election cycle. Romney is apparently taken with the idea that many Americans, the so-called 47%, do not pay federal income tax. He believes that they view themselves as “victims” and have become “dependent” on the government.

But this misses two obvious points. First, most of the 47% pay a great deal of tax on their earnings, property, and goods purchased. They also work hard to make a living in a country where median household income has declined to a level last seen in the mid-1990’s.

Second, the really big subsidies in modern America flow to a part of its financial elite – the privileged few who are in charge of the biggest firms on Wall Street…

No one has succeeded in the modern American political game like the biggest banks on Wall Street, which lobbied for deregulation during the three decades prior to the crisis of 2008, and then pushed back effectively against almost all dimensions of financial reform.

Their success has paid off handsomely. The top executives at 14 leading financial firms received cash compensation (as salary, bonus, and/or stock options exercised) totaling roughly $2.5 billion in 2000-2008 – with five individuals alone receiving $2 billion.

But these masters of the universe did not earn that money without massive government assistance. By being perceived as “too big to fail,” their banks benefit from a government backstop or downside guarantee. They can take on more risk – running a more highly leveraged business with less shareholder capital. They get bigger returns when things go well and receive state support when fortune turns against them: heads they win, tails we lose

RTFA for the history and analysis behind Simon Johnson’s conclusion. Project Syndicate once again rolls out a solid article on complex political economy.