Sigrún Davíðsdóttir's Icelog

Who were the “muppets” of the Icelandic banks?

with 4 comments

Today, Greg Smith, a Goldman Sachs employee in London, suddenly shot to fame, at least in the banking world. He is leaving Goldman because he thinks its environment is “toxic and destructive.” But instead of just leaving in silence he penned a resignation letter as an Op Ed piece for the New York Times, published today, on his last day at work. It might well have been the most read serious piece in the media today.

He’s uncomfortable with the bank’s business ethics: Goldman sees nothing wrong in selling junk and rubbish to its clients, making the clients lose while the bank makes money. A lot of it. In the infamous Abacus case, Goldman actually ended up paying $550m to settle claims – without admitting it did anything wrong – when it failed to disclose that the product sold was designed to fail. A favoured Goldman client was allowed to make money on it, with the bank. Everyone else was magnanimously allowed to lose on it. But this case and other similar haven’t taught Goldman’s managers any humility, according to Smith. “Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail.”

Now, it’s normal in business that some lose, others gain. But, as Smith points out, it’s interesting if there is a pattern to it and if a bank thinks nothing of clients’ predictable losses. One of the striking thing about the Icelandic banks is to consider who lost and who profited. Or, in the Goldman thinking, who were the muppets?

There were quite a number of muppets among the clients of the Icelandic banks. There were for example plenty of ordinary people who trusted the banks with their savings and invested in the banks’ money market funds, not knowing that these funds were used to buy bonds and shares in failing holding companies. These clients didn’t know that the Icelandic banks ran their money market funds quite a bit differently from what is the acknowledged banking practice (even with Goldman). This is one of the many bad banking practices stories in the SIC report – a story the Special Prosecutor might one day show an interest in.

Then there are those who put some savings into shares in the banks – Kaupthing had some 33.000 shareholders. These people didn’t know that the banks were buying shares off some shareholders shortly before the collapse. These people were just allowed to lose the savings they put into the shares.

The most striking muppets were possibly the pension funds. They lost heavily because they could be led to manage their investments against the interest of the funds and their owners but in the interest of the banks and their largest shareholders. This is particularly clear from the fact that the funds invested in unlisted companies – and from the fact that the funds hedged their foreign assets (that in themselves hedge the funds’ domestic assets) with the banks. A report* from February on the pension funds concludes that after mid 2007 currency hedges turned very risky, the pension funds should have sought advice – and the banks should have warned the funds. But they didn’t. Losses from currency hedges are about 12-15% of the total losses – some have yet to be settled with the banks’ Winding-Up Boards.

It’s safe to conclude that much of the funds’ losses were incurred because the banks gave the pension funds (as others) wrong or misleading information. In a recent report (only in Icelandic) by an expert group, on behalf of VR, one of the biggest Icelandic pension funds, the experts conclude that VR “and other pension funds should consider suing those who possibly played a role in giving wrong information to shareholders, bondholders and others with an interest. Those who could possibly be sued are the managers of the banks and companies and their auditors. … It can be critcised that the pension funds haven’t taken the initiative here or shown any interest in doing so.”

The pension funds report shows close personal relationships between the banks and the funds though more work could have be done on that issue. The banks are no longer pullings strings – but perhaps personal relations and the wish to move on and away makes some people behave as if the strings, holding the muppets, were still in place.

*The English summary starts on p. 29. See here for an earlier Icelog on the report.

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Written by Sigrún Davídsdóttir

March 15th, 2012 at 2:25 am

Posted in Iceland

4 Responses to 'Who were the “muppets” of the Icelandic banks?'

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  1. Haarde knew exactly what he was doing. He just exploited muppets, Icelandic muppets, European muppets, any muppets. Haarde is a nasty piece of work by any neasure and still he floats. That signifies that the Icelanders are still muppets.


    15 Mar 12 at 5:23 am

  2. There were also those muppets who, having safely and happily trusted (the IOM branch of) the Derbyshire Building Society with their savings over many years, believed the latter’s firm assurances that nothing would change when they sold them down the river to Kaupthing at the end of 2007. Many of these puppets were not even aware that Kaupthing was an Icelandic bank, something the perpetrators of this act took great care not to advertise by persistently describing it as “a northern European bank” operating in 14 countries including … Iceland (in 4th place in an alphabetical list of the 6 Nordic countries).


    15 Mar 12 at 4:40 pm

  3. Sigrún,

    Your statement, “One of the striking thing about the Icelandic banks is to consider who lost and who profited. Or, in the Goldman thinking, who were the muppets?” indicates that you are unfamiliar with both Jim Henson’s Muppets and the way “muppets” was/is used by traders at Goldman Sachs and other alike Wall Street firms.

    For a quick intro to Muppets go to the muppet wikki: and its ‘characters’ index: , then select randomly to look through the variety of characters that populate the muppet world. For more depth find some of the videos or films, or “Sessame Street” episodes to watch. Seeing muppets in action, in stories, will give you an idea why Goldman execs referred to ‘the-man-on-the-street type people as “muppets”. You have to learn something of the Goldman/WallStreet trader perspective and world-view to comprehend the derogatory cast they gave the word, and their use of it to deprecate the “lesser mortal” population they perceived it to be their privilege to screw. To screw just for being naïve enough to trust.

    I don’t think you can call to mind any real instances of Icelandic bankers taking the attitudes of GS traders toward the clients of their banks.

    Yes, Icelandic bank clients and Icelandic bank investors lost when the Icelandic banks went down, and so did Icelandic bankers, and everyone else. The losses were business losses. They were not swindle losses. No one was treated as a ‘pigeon’ or a ‘mark’ or a ‘rube’ or ‘clown’or ‘clod’, or referred to as such, except the Icelandic bankers by their “sophisticated” counterparts in Britain — Look for Tony Shearer’s comments about them, in articles, letters, to the Treasury Committee, etc. for typical examples. One of the interesting aspects of reviewing the honesty of the Icelandic bankers in Britain through the 2008 crash is that they appeared to be honest, especially compared to the British of the same period, but their favorable standing in the comparison is skewed by the fact that they were not allowed into the “club” of British bankers, so they were always a bit the outcasts, and so not allowed the opportunities to be dishonest that the British bankers shared. In other words, they were the upstarts, the “yokels”, “the muppets” to their British counterparts, who, surprise, surprise, set them up to screw them. After all, what are “muppets” for but to take advantage of, you know…

    Greg Smith, I suppose you know, was with the London Office of Goldman Sachs.


    18 Mar 12 at 12:49 am

  4. Foreigner Dough does froth and flail: “The losses were business losses. They were not swindle losses…”

    Precisely! Well said sir! I agree with your incisive and bold diagnosis by at least 105,000%! Let us analyze the unfortunate business scenario. We took all the muppets’ money. Then flew off to a casion in Tortola. Where we lost it all on hookers, tips to Olafur Ragnar, pin-striped private jets, and a few spins at roulette–can that be construed as a swindle? Eh? No, of course not. These are business losses. Of course.

    Foreigner Dogh will now explain how the Titanic was holed by a fleet of UFO’s while transporting Hitler’s brain to Argentina.


    23 Mar 12 at 10:29 pm

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