I recently saw an ad by AIG. It's actually sickening. This company failed. Their assets should have been taken over by good insurance companies who managed their risks properly and did not engage in speculative instruments.

By rewarding bad actors like AIG, moral hazard has been introduced into the markets. Anybody who says they support free markets and capitalism must surely agree that AIG should have been allowed to fail. Yes, it would have caused chaos but that's why lawyers and bankruptcy courts exists.

With politicians picking the winners and losers, it's no wonder lobbying is such a popular business.

GM should have been allowed to go into bankruptcy (given the Feds wanted to kill Buick, the best seller for GM in China) and dig out themselves.

[edit] although Iceland's bank and AIG are totally different scenarios

Also, large insurance companies are incredibly complex, and take a very long time to build up. It would be very silly to let something like that go under for short-sighted reasons.

I agree. AIG shouldn't have been so short-sighted. But since they were, they deserve to fail like every other business who doesn't adequately plan for the future.

Oh wait.

Not when it means keeping the ill-handled, tax payer killing investment company. It failed and we did a massive disservice to the tax payers by keeping it open.

    > What Iceland did is subtly different. It lets foreign
    > banks to fail, to bear the consequences of their own
    > risky and stupid investments, and refused to tax its own
    > people to cover foreign bankers loses.

Hundreds of thousands of personal depositors across Europe saw their money go poof in Icelandic banks, and their local governments had to pick up the bill. If you are a tax payer in the UK, for example, you got a gigantic FU from the Icelandic government who said "nah, we're not going to bail out our banks, you guys should instead".

You can start with: http://en.wikipedia.org/wiki/2008–11_Icelandic_financial_cri...

You are Engla, the mother of little Johnny. One day, at Johnny's school shows up a little girl called Bjork. Bjork seems to come from a nice family, and you like her Mom, Icelandi.

One day Johnny comes home from school and says Bjork is running some kind of saving scheme, and can he put his pocket money in it? You remember some of the older kids at school doing something similar one time, so you say sure, because besides, Icelandi seems like a nice lady, and you're sure she's got her eye on it.

Johnny gives a bit of his pocket money to Bjork every month, and Bjork's little saving scheme seems to be going really well. Bjork seems a little better dressed these days, and Icelandi is driving a new car. Icelandi is always prattling on at the PTA about how clever little Bjork is.

One day, Johnny comes home in tears. Apparently Bjork showed up at school and said she'd lost track of her accounts, and she no longer had any money to give him. You ring up Icelandi, furious, and ask her to refund little Johnny's money.

"No no", says she, "I think you'll find it's all on Bjork, and not my responsibility". You note she still has her shiny car. Later that day, you find out Icelandi completely refunded Thor, Bjork's little brother, for all the money he had lost, but every other child at school also lost all their money.

Icelandi is hailed on the internet as some kind of popular hero.

Seems sort of relevant to an analogy about international finance around this time since the economies are so interconnected.

Very American though to insist that the banking crisis was at its heart an American crisis.

The crisis was not 'American' in any way, it was international, as is finance. If one group monkeys with the system it causes issues everywhere (even worse if it is a concerted effort by multiple groups). This is especially true if 'trust' in the system is shot to hell which is what derivatives are built and traded upon.

The parent comment offered a simplifying model, that explained fairly clearly that the government Iceland treated classes of bank creditors(i.e. depositors) differently, and thus it was not fully correct to say either that they were bailed out, or they were let to fail. It all depended on where you sat.

Your comment offered no further elucidation, no further relevant information and strained the analogy past the breaking point.

Credit is built on trust (credo = I believe); derivatives are built on contracts.

It sounded like you were attempting to imply that there was ignorance of finance being international (or so it seemed... I could be wrong there) and I was pointing out that was not true.

Also contracts and trust are not opposing ideas nor do they address the same aspect of a thing. I'd venture to say that the entire market is (at least to some extent) based on 'trust' that it is not being heavily gamed and information is not being outright falsified.

Edited: For clarity!

It's important to note that Icelandi didn't refund Thor out of her own (Icelandi's) own pocket. Instead, she took the money to reimburse Thor from what remained of the pool of money that Bjork had collected from everyone.

In effect, Thor was reimbursed in full at everyone else's expense.

If you look at a graph of Iceland's GDP, you can see a gently upwardly-curving trend from 1960 thru today, with a massive, abberrant spike sticking up from the trendline from 2004-2008. That's how Icelandi bought her shiny new car.

But really... If bailing out all the foreign investors with the Icelandic public's money (who by and large didn't court the foreign investors in the first place) is the other option... It seems sort of obvious what a country that cares about, or pretends to care about, it's public at large (rather than just its banking elite and financial industry in general) would do.

Not saying it's 'right' or 'wrong' really, but when people invested large amounts of money overseas (into Iceland from wherever) they were gambling and hoping for a gain they couldn't get at home. Sometimes you get burned when you take risks. Sometimes you don't.

People saved money with Icelandic banks that had opened branches in the UK and the Netherlands. We're not talking about investors - we're talking about depositors, who were supposed to have been protected by a deposit guarantee scheme in the banks' home country.

Iceland protecting their public (at the expense of their financial industry) and actually prosecuting (some) of those at fault seems a damn sight better than just having everyone pay out the nose (which happened anyway) and letting gamblers get off with no risk.

Weren't many of those branches of Icelandic banks seized/nationalized/prevented from repatriating any capital to Iceland all over Europe ?

Edit: How is that fair to the kids who weren't involved and now have less money for lunch?

Or perhaps the people investing in the Icelandic banks were not investing? Was this some sort of special investment where you get a better rate than the regional banks without any sort of risk?

When the entire game is rigged, and you're hoping to make a few quid out the side, you're probably going to get totally screwed somewhere, at some point. It totally sucks, I agree, but are you surprised that if someone could insulate themselves they would?

Also there have been consequences for Iceland, particularly in terms of trust, and there won't be a lot of foreign investment in their financial structure anytime soon.

Yes, in fact, that's pretty much it. The infamous Icesave accounts were savings accounts, not investments in the way you'd normally think of them. They were savings accounts that paid higher interest rates than just about anyone else in town (about 6% in the UK), but they still had the equivalent of FDIC protections (for the American readers out there).

The problem is that the Icelandic equivalent to the FDIC had nowhere near enough money to actually pay back all the guaranteed deposits that were lost, so they said, "We'll pay the Icelanders back first and then....hey look! A squirrel!"

The UK and the Netherlands stepped in to cover the losses of their own citizens, but they also took Iceland to the European Court for failing to honor the required guarantees. The importance was somewhat lessened as the assets of the failed Landsbanki bank that had offered these accounts could cover quite a lot of the debt owed to the UK and the Dutch, but yeah, Iceland did sort of screw them. Not that they had much choice, but there you go.

In real life they were not.

You then ask these people to forgo everything they have worked for the last ten years in order to pay a debt for some spoiled little bitch they have no contact or control over.

oh, and as others have mentioned, you also glossed over the fact that Icelandi "repo's all of Bjork's stuff" and effectively "kicks her out of the house".