Buck: Welcome back to the show, everyone. Today. My guest on Wealthformula Podcast is Jared Bibler. He’s a graduate of MIT, where he studied engineering. He’s also a CFA charterholder with nearly 20 years of broad experience in the global financial markets. He’s got a significant career in global financial markets in Boston, New York, Wall Street, and then ultimately, Jared moved to Iceland, where he was a banker, and then, after becoming a little unhappy with the situation, ended up being a major player in investigating the 2008 Icelandic financial crisis. Jared. Welcome to Wealth Formula podcast.
Jared: Thanks so much for having me on, Buck. It’s a pleasure to be here.
Buck: So, Jared, we were talking offline what’s interesting about the fiddling financial crisis to United States audience, and I think my conclusion on this is let’s take it back to where you started. Let’s start back in the US. And kind of trace your story from going from market to market and understanding some of the differences in what you were seeing.
Jared: Sure, yeah. I started out I was working for one of the biggest Wall Street banks early in my career, but not even glamorous. I was in the back office side. So I was seeing where all the money in the securities treasuries and stock settlements happened. We were rebuilding their back office. So I did that for about five years. So I saw the inside of Tokyo market and New York bond market, new York stock market, and some stuff in Europe as well. And that job was just a burnout job. I was there about five years, and I wanted a break. And I stumbled into a similar job in Iceland in 2004. So I was like, I’ll try it for a year. And so I went up there, and it was wonderful to live there. It became really my adopted homeland. But when I got there, it was the beginning of a real boom. And we had just had the.com bust. Right. So we just lived through that. That was pretty big. We forget about that now because of 2008. the.com bust was big. I think it was a 50% drop in the markets or something. Right. And you had a lot of people had been buying stuff like Pets.com, famously, a lot of these things that went to zero.
Buck: Like Luna.
Jared: Exactly. So we had just had that in the States. That was fresh on my mind. And also we had those big accounting scandals like Enron. Right. That book, The Smartest Guys in the Room, which is still probably my favorite business book of all time, that had just come out when I moved to Iceland. That’s the kind of inside story of Enron in the accounting frauds there and so it was all in my mind. And then when I got to Iceland, it was crazy because the stock market was going up 50, 60% a year for several years. And what had happened Iceland at the time when I moved there, I think we had 200 and 8290 thousand people, the whole country. But we had these three formerly sleepy savings banks. One of them focused on lending to the agriculture sector one of them focused on lending to the fishing sector which is huge in Iceland. But they were just small banks to serve a small population. But they had tapped into global capital markets in the early two thousand s and they were able to for a few years to kind of borrow as much as they wanted, grow as fast as they wanted and they kind of took over the stock market. So the three of them grew so fast that they were doubling in size for those years that I got there. And there was so much foreign cash flowing into this very small economy that suddenly there were just private planes everywhere. I mean, the place transformed. It had been Europe’s poorest country until the Second World War for like 1000 years. Very difficult place to live. And then after the Second World War with some changes and modernized fishing and so on, the country became fairly prosperous. But then what I saw when I moved there was crazy.
Buck: Was there like a noise? Because I just spent a little bit of time this summer in Scandinavia and I’m always struck still but generally it’s not a particularly capitalist society, right? It’s pretty, you know, socialist kind of feeling people wise and there’s not a lot of doesn’t seem to be a lot of interest in being showy with wealth and that kind of thing. And I presume Iceland is the same. I’m curious what happened in that regard in Iceland because I don’t think Iceland is famous for being a particularly flashy society with money. Right?
Jared: Well, that’s true, it hadn’t been. So one thing about the rest of the Nordics is they view Iceland as the Wild West, the crazy cousin in a way, which it is in comparison. But it was at least for the top echelon, the top bankers and so on, it was very flashy. So we had Elton John being flown in for a 50th birthday party of a senior businessman who was actually later charged and found guilty of some of the crimes that are in the book. But yeah, it was absolutely nuts. And I had grown up around Boston and I had seen private jets occasionally on the ground at Logan Airport or something. But in Reykjavik, which is kind of the size of a fishing village, you’re seeing a few go over every afternoon. And I said to my new co workers like what’s going on here? And they were like, what? Aren’t you from America? Like, you guys have private jets. I was like, there’s something very strange here. So I was a bit uncomfortable initially with like, how are these banks making money? And those type of questions. But I got worn down after two years working in this back office software job. I thought, why don’t I just join them? So I became an asset manager at Lensbunkie, which was the second biggest and the oldest of the banks and the second biggest of the three. And I was there for a couple of years during the height of the boom, but we were managing a lot of private client money and also managing money for the pension funds. I was structuring a hedge fund of funds, private equity investments, so on, for these type of clients. But even the way that we were handling those clients was causing me sleepless nights.
Buck: Talk a little bit about that, because I think that ends up sort of helping to answer the question of how this may be relevant across the board, globally.
Jared: Well, let’s take it back to the US. I mean, the mutual fund industry in the US. Has been a bastion of corruption for sure. Even back in the Roaring 20s, there were scandals in the mutual fund industry where insiders were able to know the closing price and sell or buy before the public at the day before price or the day after price. I can’t remember how it works. But there was big problems in mutual funds. Typically, asset management everywhere. If you’re a wealthy person and you go with it’s rife with conflicts of interest. If you’re a wealthy person and you entrust, I won’t name a bank, but let’s say your bank has an asset management branch or Arm, and you say, okay, you give them a mandate. Okay, I’ll give you a million dollars to manage for me. If that’s a captive asset management Arm, which is what we were in ATLANT’s Bunkee. The temptation is to take deals that the bank could not place. Let’s say they’re underwriting some syndicated loans, and they’re supposed to sell these to clients, anything that their external clients don’t buy from them. The big temptation is to place that in one of the asset management products. So for your listeners, these are the type of questions you want to ask as a wealthy person who is delegating some of that money to a bank. In my opinion, this is not financial advice. Of course your lawyers can. But I would not go to an organization that’s captive of a larger bank, someone that has other business interests, someone that’s doing their own trading for their own book, or someone that’s involved in underwriting deals, placing securities. Because the temptation is so great to use your internal asset management arm as a sandbox, a dumping place for stuff that you stuff. So that was some of what was going on. The other thing that I was seeing was if you’re a sales guy working in an asset management department and you want to bring in a big fish and you want to bring in a big client, the temptation to give that guy a special price or a break that comes at the expense of the existing people in the fund is also huge. Right. They’re incentivized on how much they bring in each year, each quarter. Right. And so there were things in our funds where they really wanted a big pension fund to come in with one of our new funds. Maybe the pension fund would put in. These aren’t huge numbers because it’s Iceland, but 20, 40 million into the new fund. But maybe the fund already had current investors of that same size. Right. Sometimes there were things like, we’ll give you last month’s price when you do that. Let’s say you know that the fund closed at 110 per share last month and now we’re almost through the next month. It’s a monthly entry fund. And now the fund price is looking like it’s going to be about $120. So you get that guy in at 110 and he gets an immediate return of almost 10% for the month. Right. So that’s a huge incentive for him to come in. But who pays for that? That’s not a lossless proposition. Who pays for that is all the other investors. Right. Because that comes out of their returns ultimately. They never know. Right? They’ll never know.
Buck: Right, exactly. So are you seeing this kind of because, again, going back and forth to what was unique about the Icelandic situation versus your experiences in the US? Was this just sort of magnified, just a lot worse, but sort of the same kind of stuff?
Jared: I’ve never been a fund manager in the US. So I can’t speak to that. But I know that the incentives are there. And these type of things were easier to see in Iceland because people were a little more naive. The sales guys wouldn’t cover their tracks when they did stuff like this. They were very brazen about it. But those type of things do happen. So the whole book is like this. You’re going to see kind of the worst examples of financial crime in a small society where it’s easy to see them, but those examples apply wherever you are.
Buck: So then you get sick of it. Yeah, talk about that and what happens next.
Jared: Yeah, so I got sick of it. I couldn’t sleep. Stuff in one particular fund was getting worse and worse. I finally resigned and my last day was October 3, 2008, which probably doesn’t mean anything to you. It was a Friday. But the next week is famous in Icelandic history because on 6th, 7th and 9th. So Monday, Tuesday, Thursday of the following week, the three banks collapsed. Now, the reason I brought up Enron before is, each of those banks was about the size of Enron when it collapsed. And Enron was a famous story. Right. Enron was the 7th largest American company when it collapsed. Now, in Iceland, which has one 1000 the population of the US. Yes. We had three Enron collapses in a week.
Buck: Yeah. The biggest collapse in magnitude per capita in history.
Jared: You guys would have needed 300 Lehman Brothers collapses in 2008 to equal what happened there. Oh, wow. And it just gutted the country. Sure. And to my mind, the country hasn’t recovered.
Buck: Tell us what it looked like.
Jared: What happens when you’re holding let’s talk about the market. The market lost 95% of its value that year because the three banks had become the market. They had grown, they had crowded everything else out. They were so huge in a small market that they made up most of the market cap of the market. So imagine if the Nasdaq would lose 90%, 95%. What that does to your 401. So that was one thing, but what that does to the currency is that everyone wants to sell their assets in that country. Right. So the currency loses its value quickly against other currencies. People want to get rid of the Icelandic crona and they want to buy back their dollars or whatever else, euros or whatever else. So the currency just is in freefall. This also happened in the Asian crisis to the Asian tai bots. And these currencies, the currency goes into freefall. What that means for someone who lives in the country is that the buying power of it isn’t what it was. So you have massive inflation if you live in the country. The hard numbers is, in 2007 it was 60 Icelandicrona to get you one dollars, and then during the crash, it went to $200 or something. So what had cost you anything you wanted to buy from the States costs you three or four times as much. So that effectively means you stopped buying American cars. In fact, we stopped buying all cars in Iceland. Nobody bought any cars for two years.
Buck: No jets either, I guess.
Jared: Yeah, that went away too. That was really devastating. And we also had most people in Iceland had inflation indexed mortgages, so let’s put that into perspective for you. So this is true in some smaller economies where banks, they want to unload their inflation risk onto the borrower. In the States right now you guys have close to 10% inflation, right? Or 89%. So any bank who made a mortgage or car loan, they’re losing that eight or 9% because you pay back the nominal dollars, not the real dollars. So the banks, that’s a big loss for them.
Buck: Sure, absolutely.
Jared: In Iceland, what they’ve done, because the country has had high inflation for 100 years, is that whatever the inflation is, they just tack that on to what you owe them. We had a mortgage that was a few hundred thousand dollars and it went up by a few hundred thousand dollars because the currency lost half of its value. And so the mortgage doubled, basically, roughly. It was really dark. I mean, I never recovered. That not like someone comes and hands you that money back later. I mean, you just lose your house, you have to walk away, lose your car, lose your pension, retirement savings and so on.
Buck: How did you end up in the position of starting and helping to investigate what happened?
Jared: Well, that was kind of a luck for me because I had quit the bank and I was unemployed then also when all this happened. So I didn’t even have a job and I didn’t qualify for unemployment because I had quit. I wasn’t fired the next week. A lot of people got fired because the banks collapsed and they laid off a lot of people. But I had to then wait like six months. Anyway, I stumbled into a job at the financial regulator. I applied to them right away because I had this Wall Street experience. I had it experience from big banks. I spoke Icelandic by this point. I mean, not like a native, but not bad. And I said, look, if you need some help digging into this crisis because the feeling on the street when the whole population loses their houses, cars, savings also we were locked out of our savings, so we couldn’t even access some of the cash that we had in the bank. When that happens, people went to the streets. There were people on the streets in front of the parliament building every day for the whole winter, in the dark, cold Icelandic winter. People are out there demanding. And people really felt like they had somehow been screwed, like they didn’t know exactly how, but they knew something happened. And a lot of the top executives had left the country as well, relocated during the crisis. Like. They moved to Luxembourg and London. That didn’t look too good to people. And so I got hired, started six months later at the regulator and they said, we want to see if there’s any criminality, anything happened in a few days before the crisis. The first day my stomach sank because I thought, hey, this is a cool job. But I came in, it was just like an empty desk and a computer and a phone and they were like, okay, go investigate. And I was like, where do I start? I again got really lucky because the stock exchange sent us a letter during these months, six months between the crash and when I started, the stock exchange had sent a letter to the regulator and they said, we noticed in the three days before these banks collapsed some suspicious activity trading in their shares. And I had been doing trading and settlement. I thought, Well, I can look at this, I understand this. This is something I can look at. And so you get into the story a lot more in the book. But what was crazy about what was in the letter? Like I didn’t believe it. I thought, this is just crazy. What was in the letter was that for these three days, each bank had been the sole buyer of its own shares on the stock exchange. I don’t know. Let’s put this in us. Terms for you. Just imagine, I don’t know, what’s your favorite company, like IBM or I don’t know, imagine if every share, every share on the New York Stock Exchange for one day that traded hands, changed hands, that the buyer was IBM for IBM shares, okay? This is like a share buyback of, like you’re right.
Buck: It’s like privatization of a company or something, right?
Jared: Yeah. It’s like a buyback of the whole market volume.
Buck: Okay. And that’s the bank.
Jared: Yeah, the bank buying its own shares. Okay. In a buyback, you tell people, I’m going to buy back 5%, or whatever.
Buck: Why did they do that?
Jared: Well, that is a good question. Well, clearly they were worried. Clearly they thought that by keeping up the appearance because even before the banks crashed, the share price didn’t move too much. So one of the things for us, looking at it as the crash was coming, was like, we’d look at the stock price and you’d say, okay, yeah, we’re down 5% since last month, but the bank still has as much market cap as it did two years ago. It’s still not in bad shape. And then when the crash happened, the shares went in one day from being worth, I don’t know, $90 a share to zero. Normally when a company is in trouble, even look at Lehman Brothers, it takes two years for the price so that by the time the second to last day comes, you’re already lost 90 or 95% of the value over the last year. You can really see the companies in trouble, but in this case, the companies still had quite a bit of value. Three banks. And so that was mystifying to everyone who worked for the banks and lived through the crisis, because it’s like, how could we go from one day being looking good, the next day, everyone’s the next day, the bank’s insolvent, right?
Buck: So were they propping up the market?
Jared: Yes. I looked at these three days and I was like, okay, well, this is clearly a bad look and probably illegal, but I couldn’t believe the volume was 100%. It’s like every share. Then I said, okay, well, maybe they started this the week before, so let me get a couple of weeks of trading data. But I wasn’t used to being a regulator. I didn’t realize I could just took me a day to realize I could just call the stock exchange and say, okay, send me the trades for these days. And so they did. And what I saw over two weeks was that it was basically the same. So for those hectic weeks before I quit my job, my own bank had been doing this behavior as well as the other two, basically every day. So then I went back like, all right, I’ll go back a few months because I want to see how this started, when did it start? And so I went back a few months and it was effectively the same. They weren’t buying 100% every day, but maybe 70% or still huge numbers. Very costly, by the way, very costly. I mean, to buy every stock that comes across the market, you have to pay for that. Sure. You’re bailing someone else out, you’re paying in full. So I eventually went back, I thought I was being really bold, I was like, all right, I’ll go back six months, I’ll go back to April 2008, then I’ll find it. But it was the same pattern for the six months. So now half a year of 2008, this whole process took a few weeks and I didn’t believe it and I couldn’t talk to anybody about it. This investigations were top secret, I couldn’t even talk to my wife about it at home. So just in my head. And so finally I went back like five years and that’s when I was able to see the beginning of the pattern. Effectively, from middle of 2004, about the time I moved to Iceland, they were already doing this with their own shares. And so all the years of the boom, all the years of the doubling in size, the Elton John birthday party, all this stuff was happening. And the background was the banks were ensuring that their stock kept its value. They were ensuring that they were the buyer of the last resort.
Buck: They were borrowing money and basically buying their own shares.
Jared: Yeah, when you’re a public company and you have decent share performance, then you can go get loans you could lever up ten times, 20 times. Right? And so that’s what they did do. They had these German banks that would lend them they would do huge bond issues. This market abuse. Okay. It’s tiny Iceland. But they were spending billions on their buying their own shares. Billions of dollars. Because they were able to for a few years they had this magic where they were able to borrow from the continent and from Wall Street. Large amounts. And then they’d have enough liquidity that on the small stock market of Iceland. They could just set the share price where they wanted it.
Buck: I’m curious when you think about that, these are individuals who are probably pretty bright, a lot of them. At some point they had to know this was not sustainable.
Jared: Yeah, I still think about this.
Buck: Yeah, I’m curious, what’s your take on that?
Jared: Well, but it was sustainable because they’ve been doing it for five years.
Buck: Well, five years, four years. I think Bernie Madoff was doing it for a little bit longer too.
Jared: Exactly. As long as the banks can keep growing, they could keep doing this. Nobody was looking out for this. But really it’s an incredible story because once I had the trades, the front side of the story, there was huge questions like why did anybody see this? Where did these shares go once they bought them for all this money? Because the shares were never flagged on the balance sheet, they were never shown and the volumes were large. So like in the last eleven months, the biggest bank, which is called Kiphing, they bought, I think, around 23% of all the shares outstanding as they came across the market. And they spent about a billion US dollars and they spent another 250,000,000 in Sweden on the same thing because they were listed, dual listed, but that never showed up on their audited financial statements. When you look at the treasury stock, which is where a company holds its own shares, they’re not there. And that was the even more intriguing piece of the puzzle. I don’t know, maybe I should just leave that for your readers, for your listeners, and they can give us a hand, they can figure out what happened to them. Let me just say that by the end of 2008, every department, every major department in these banks was involved in this activity. But to your original question, they were so siloed and actually this was so much in the DNA of the bank. They had been doing this for so many years that activity taken to buy and hide their own shares off the balance sheet had become normalized, had become the business model. And a lot of employees were young people. They’d never worked in a different bank, they never worked outside of Iceland. And it’s hierarchical in these banks, as many banks are. And it was kind of like you do what your boss tells you to do, he tells you to buy these shares, you buy these shares. But it’s still amazing to me that this went on for so long .
Buck: Insatiable, greed, flamboyant, crime, scheming, politicians, dish and clanging housewives. Okay, explain the housewives.
Jared: I already kind of alluded to that. That was people going out in front of the Parliament building every day in the winter. They would bring pots and pans to make noise and to disrupt. The Parliamentarians would have to come out and walk past these people clanging pots and pans.
Buck: So the actual meltdown ultimately ends up presumably then because lending dried up and they could no longer buy their own shares. Is that effectively what was the trigger?
Jared: Yeah, well, they couldn’t not only buy their own shares, but they were very reliant on foreign loans, foreign credit lines to stay afloat day to day, week to week, as many banks are big banks. This is the same thing happened to Lehman. They couldn’t borrow in the repo market even overnight. Nobody. Would lend them money just for one night. And so what happened is Lehman collapsed, actually. Now, my story that I tell in the book is not popular in Iceland, and I’ve been told, don’t come here without a bodyguard. Oh, really? Yeah, and this is not the narrative. The narrative in Iceland, which has been really propped up over the last ten years, and people have forgotten about this. The narrative in Iceland is that Lehman collapsed on September, I think, 17th, and that caused a tidal wave which knocked down our beautiful banks. That’s the story. But what really happened is Lehman collapsed and that did cause the tidal wave. I don’t know if you remember this, but banks were just everyone was worried about lending to each other, massive pullback in credit. And these banks, they were pretty thin already. They were pretty reliant on credits to keep going. Yeah. So they were ultimately killed by that. So maybe they’re right. They could have kept going and doing this for probably ten years
Buck: Tide goes in, you see who’s naked. Right? Well, that’s too bad to hear. So have you been back to Iceland since then?
Jared: Oh, yeah, I love Iceland, but I haven’t been back since the book. Okay, I haven’t gone back, but the book is also not popular here in Switzerland. People love it. It’s a page turner. It’s fun to read, I guess people tell me. But in Switzerland, I was at a conference about four weeks ago here, and I got stuck talking to a guy who was a friend of a friend, and at one point I was trying to get back, and I need some other people I need to catch up with. So I said to him, we’d been talking about the book and about what happened in Iceland, and I was looking for a way out of the conversation. Let’s keep in touch. Can I look you up on LinkedIn? And I started to get LinkedIn on my phone, and he had his name tag on his shirt and he had his lapel kind of his sport coat was kind of cutting across the tag so I could only read his first name. And I started to know your name. So I started typing his name and I said, oh, what’s your name? And he actually took his lapel and pulled it across the name tag. And I said, you don’t want me to know your name now, we’ve been talking ten or 15 minutes, right? It never happened to me. It never happened to me. You’re in a conference? Yeah. I said, you don’t want me to know your name? And he said, Listen, I still have to work in this industry.
Buck: Wow. How’s it been for you then? Like, because you’re in Switzerland, are you in finance? Are you in the private sector?
Jared: Yeah, I have my own consulting firm and I’ve been doing private consulting work. So it’s been okay. But I haven’t. Well, we’ll see. I think the notoriety and the positive effects of the book outweigh the other thing. But it is really interesting to see how, like, another person who’s really senior as a managing director in one of the biggest Swiss banks, he told me that he said, Jared, you weren’t writing about Iceland at all. This book is about Switzerland. And then I did some interviews last autumn with crypto guys, right. And they said, no, no, this book is about crypto. The story is universal. Right. And as you read it, as you read it, you’ll see that it’s really not about Iceland at all. Iceland is kind of a petri dish. It’s a small society. It’s a place. You can kind of easily see these things. But everything that’s in there is applicable to the States or to wherever else.
Buck: Yeah. Fascinating. So the book again? The book is called Iceland Secret the Untold Story of the World’s Biggest Con. And I presume, Jared, that this is available everywhere. I mean Amazon usual outlets. Is there an audible book?
Jared: Yes, I did the Audible. That’s why I have this nice mic. I did the Audible myself.
Buck: Well, I’m glad you read it yourself, too. I always think that’s much more effective for Audible audiences. Fantastic. And if we want to learn more about you, you have a website, Icelandsecret?
Jared: Actually, I need to make my own author’s site. But Icelandsecret.com is the site for the book, and there’s some info about me on there as well.
Buck: Fantastic. Well, Jared, thank you so much. This has been a really entertaining conversation, and we’d love to have you back when you write your next book.
Jared: Thanks so much. It was a pleasure.
Buck: We’ll be right back.