The Crisis of Credit Visualized

[Bud]

For a short, concise, and visually entertaining explanation, you might want to check this out: http://bit.ly/Ltn6F

[Coda]

You can tell this person put a lot of thought into simplifying the information. But even this simplified explanation makes my head spin!

[scielle]

That's actually a pretty good summary.

I use to do the 'collateralizing and tranching' of CDOs (collateralized debt obligations) and ABS' (asset-backed securities) in my last job - as analyst at a hedge fund - and it's all relatively simple stuff. Problem is there are so many layers of legal entities between the various parties involved, that there's a lot of 'passing on the hot potato' going on.

Anyway, now I'm doing M&A at an Icelandic bank... (That would be the last Icelandic bank - every other one has been nationalized.) I sure know how to pick the winners...

[Bud]

Thanks, scielle, for your first person insight into the financial crisis! I was wondering what you'd think of the video given your occupation.

[Coda]

The story of Iceland's economic collapse doesn't get too much coverage here in the States. Scielle, what do Icelander's say about the strong parallels between their economic woes and the U.S. economy? (A reliance on tax cuts and deregulation.) I hope Iceland can recover soon.

[scielle]

The problem with Iceland is that it’s a tiny, young country which was basically run as a highly-leveraged hedge fund. The Icelandic billionaires got rich young and quick, by taking ridiculous risks and leveraging their companies to the hilt. When it came to refinancing that debt, they found themselves in a bind once credit got scarce.
It’s an entire generation that’s never seen a downturn – they pretty much skipped the industrial revolution and went straight from fishing to gung-ho, Viking-style banking. And the 3 major banks – which held large chunks of debt of pretty much all the major retail names in the UK – all had a tremendous amount of cross-holdings in each other (propping each other up like a house of cards until they could do so no more).
I continue to be astonished at the Icelandic spending culture – I’ve never been there, still, but work with plenty of 20-something bankers who don’t think twice about spending £100/head on a regular Monday evening dinner… they’ve been so ridiculously overpaid for most of their young lives that they don’t know any other way.
I haven’t heard any comments from Iceland re. the US situation – I think they’ve got their hands full at home – but there is a dire lack of leadership in the country right now (the entire government and central bank are run by very young, inexperienced people – and lately nobody wants to take the job of cleaning up the mess). It looks like they’ll have to go back to their natural resources to save the day – fishing, geothermal, tourism, etc.