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Nathan Hunt: This is The Essential Podcast from S&P Global. My name is Nathan Hunt. In the depths of the panic of the great financial crisis, a few news articles touched glancingly on the meltdown of a group of Icelandic banks. The tone of these articles was mostly one of surprise that a country of just over 300,000 people, had a large banking sector and that its collapse was considered to be a threat to the financial sector in the U.K. and Germany.

At the time, I assumed that the issues in Iceland were similar to the issues at German, Swiss and U.K. banks, namely that these banks had speculated in mortgage-related assets and been caught up in the general liquidity crunch. As it turns out, that's not the story or at least not the whole story. The truth about what was going on at Iceland's banks is much more bizarre.

My guess today is Jared Bibler, author of Iceland's Secret: The Untold Story of the World's Biggest Con. Mr. Bibler has worked in finance in New York, Boston and Reykjavík. After the financial crisis, he led a special investigation team at the Icelandic markets regulator. His account of the financial crisis and its aftermath in Iceland is shocking and gripping.

Jared, welcome to The Essential Podcast.

Jared Bibler: Thanks so much for having me on, Nathan. It's a great pleasure to be here with you.

Nathan Hunt: Let's not bury the lead here. Why did the 3 biggest banks in Iceland collapsed in late 2008?

Jared Bibler: Well, they probably collapsed because they were insolvent, but they were probably insolvent by one executive's later quote since 2005. They had been very small. As you've mentioned, Iceland had at the time about 300,000 people. Today, it's about 350,000. It's actually growing fast population, but still a small country.

They had these small, very sleepy almost savings banks. One of them was called Búnaðarbanki, which means the agriculture bank. So they would give loans to the Icelandic farmers. Another one specialized in loans to the fishery sector. But Iceland was a small place and very closed. It had been kind of cut off from the world for like 1,000 years almost. So these were very small institutions.

They got hastily privatized in the early 2000s, and they met the Germans in probably 2001 or 2002. And the Germans, as you know, never met a loan they didn't want to give. And Iceland was off to the races, the Icelandic banks were able to actually, for a few years anyway, to borrow as much as they wanted and to grow as fast as they could.

It didn't make them great lenders. In fact, in the early years, they were just kind of lending to their own -- it's kind of a very small business community. So bankers were lending to their cronies or to their buddies for local projects. And when the loans weren't really paying off well, they had an easy escape and that they could just borrow more money and grow their way out of that trap.

And so that's kind of -- that's the story of the banks for 2000 -- let's say they were privatized in '98, beginning in '98 and finishing in 2003. And the story of those few years of the decade was rapid growth. They would brag about it, too. They would say, we doubled our balance sheet every year for 3 years, which I don't know if that's a great -- I don't know if that's a great brag, but they did a -- you can look this up actually, saw on YouTube. They made a promotional video in '07 or '08 right before the end where they take clips from all these adventure and gangster movies and put them together with a British voice announcer kind of saying, "We thought we could double in size every year for 3 years, and we did."

So they grew very fast but they had to -- as you know, to borrow money from -- I mean even from the Germans, you can't show them a terrible balance sheet or anything like that. So I mean, they had to do window dressing. And one of the things that they really were very conscious of from the very early years, even as I was wrapping up the book, I saw that it went back to even 1998 for one of the banks. How was there share price?

And they didn't really like it when the shares went down. And so they very early on, started using bank money to -- effectively to defend the share price or to manipulate the share price. And that was kind of baked into the DNA of the banks from 1998 until they collapsed in 2008. By keeping a robust and growing share price, healthy-looking share price, they were then able to go out and borrow on the debt markets kind of as much as they wanted for a few years.

Nathan Hunt: So just to level set here, there's a commonly accepted practice of share buybacks. I looked this up, JPMorgan Chase rebought some of its own shares as recently as March 31 of this year. What was different about what the Icelandic banks were doing prior to the financial crisis?

Jared Bibler: A traditional buyback -- first of all, JPMorgan announced that like you were able to go look at that up. That's already a big difference because they never announced this because this could not be announced. I would have brought things down very fast, I think. And in a traditional buyback, I believe that JPMorgan probably wouldn't have its own prop desk running that buyback, they'd probably outsource that to avoid the appearance of a conflict.

What the Icelandic banks were doing was never announced, and it was so pervasive as to be, on some trading days in 2008, 100% of the market volume, the buyer was the same trader ID and it was a prop trader in his own bank, in his own shares. As with most Ponzi-like schemes, the further it goes, the crazier the measures need to be taken. Like in the earlier days in like, let's say, 2004, I don't remember the numbers exactly, but there will be months where in 2004, over the month, they would buy like 20% of the trading volume of the exchange but that was still huge.

That's by, any other country standards, that's crazy, right? But that was like the early days. And by 2008, they were single months where Kaupthing bought, I want to say 73% of all the market volume, that's all the trades going across the stock market of Iceland which at the time was is not some unknown market, it was NASDAQ running it. And I think it still is. Anyway, so 73% of all the trades in that bank shares were actually bought by the bank itself directly.

Nathan Hunt: It feels like or felt like from reading the book that the business of the banks was increasingly just to prop up their own share price.

Jared Bibler: Yes, that's true. That's a very important point because the expense of this was huge. These banks were not small. So let's talk about that for a second. The banks were each about, on a balance sheet perspective, asset perspective, each of the banks was about the size of Enron, when Enron collapsed. Just imagine having 3 Enron collapses in such a small society.

But anyway, putting that aside, in order to keep the share price from falling for something that big, you need to actually spend a lot of money. They had -- at least for a few years, they had enough cash to do it. They had a really unique situation because from the European lenders, German and French and then later others, they had as much cash kind of as they could use, and they had a very small and easily manipulatable local market.

And so it was perfect. It was a perfect storm for them to be able to go in and do this. But as the years went on, it became more and more expensive because they had to buy a bigger and bigger percentage of the trades so that by the last year, they each spent about USD 1 billion, just in this tiny market in Iceland that you've probably never thought about just buying their own shares.

And as you mentioned, this activity corrupted eventually every department in these banks was somehow involved because the biggest problem for the banks was at the end -- just like with Enron or just like with other famous financial frauds, is always the end of the financial quarter where things really have to be squared off. And at the end of each quarter, the proprietary trading desks that were doing the buying, they were sitting with such a huge volume of their own shares that they should have been flagged also to the exchange when they cross 5% self-ownership, for example. They didn't do that.

But the problem was like how are we going to put this in our books, they couldn't go in their books. And they didn't want the auditors to see it and so on. So they needed a way to get rid of the shares. And this was -- when I was doing the investigations, this took a while to figure this out because we couldn't figure out where the shares were going.

What they were doing is just hiding them generally offshore, in offshore companies that they created and that they basically controlled. They would just lend those companies bank money and get their shares off their balance sheet. But that involved then, in some cases, the General Counsel, the CFO, of course, the brokers and definitely the credit desk who would extend the credit for these huge purchases. And so like a bank's business is making good loans. And here, the bank's loan book over time just became loans to shady companies you've never heard of, 100% collateralized with their own shares on the other side of the ledger.

Nathan Hunt: Let me see if I understand here. Each of these 3 banks is essentially using their prop desk to maintain a higher valuation of their equity. But they can't hold on to that equity because that would look too suspicious.

Jared Bibler: The other difference of buyback is generally the shares that you buy back are retired. They're struck off. So if I start with 100 shares and I buy 10 back, the reason the buyback is better than a dividend because in a dividend, you pay out cash to the shareholders, and they have to pay taxes on that dividend. But if I just use the same amount of money to buy back shares, well, I'll just strike off the shares that I bought back. Then in theory, every other share should be that amount more valuable. But they couldn't do that because then they would have to admit that they were the main traders in their own equities.

Nathan Hunt: They have to find a way to get rid of these shares. So they set up a company somewhere offshore in a location with perhaps looser governance standards. They then lend money to that company in order to buy their own overvalued shares.

Jared Bibler: Yes, yes, yes. And the genius is that the company, everything is tied to the share price, which they have been setting. So as long as they can keep that thing going up to keep it stable, they can keep this party going. And on their loan book, now they have new valuable because for a bank, it's the loans it makes are its assets. So now they have new valuable assets because they have loans to investment companies.

And I know this is in the book, there was a WikiLeaks document of the loan book of Kaupthing. I think it's still out there. It was one of the first things leaked on WikiLeaks, as I remember. And you can go through, it's a PowerPoint deck. And it's like amazing, it's all their biggest exposures and almost all of them are capitalized with share prices. They were places that they had to stuff their shares to hide them away basically.

Nathan Hunt: So speaking of keeping the party going, there's a quote that is frequently attributed to Warren Buffett that goes something like this. "You never know who's swimming naked until the tide goes out." In 2008, the tide goes out. Absent that global meltdown, could the Icelandic banks have kept on with what they were doing?

Jared Bibler: They were really trying because for us, actually, the real crisis was probably 2006. And now it's called the mini crisis in Iceland because -- but at the time, it was huge. That's when the European continental lenders -- there was a few critical credit analyst reports about Iceland and the banks. And there was also that year, a critical IMF report about the country's economy. And at that point, the sleepy guys in Frankfurt woke up and realized, maybe we are too exposed to these Icelandic banks.

And kind of at that point, it was very hard for them to borrow any more in the European debt markets. And that would have been the time for them to take a step back and that could have been the time where they collapsed and they would have been much smaller. I think they would have been half the size that they were in 2008. They would have been smaller and the collapse would have been less dramatic, if they had.

But what they did is they used this really unbelievable EU program called the passport, which is still, I believe, active. It means that if you have a bank license in one EU country, you can open branches in another country. And those branches will not be regulated by that other country, but they'll be regulated by the home country.

They were very clever, and they said, "Look, we can open branches in like -- at the time the U.K. was in the EU, we can open branches in the U.K But they won't even be physical branches, they'll just be an Internet savings account site, and we can take money from regular people and town councils and get funding that way, and that is what they did.

So that led to this huge push into Europe to take the money of common people to keep the party kind of going. But look, they were really in trouble for years. If it wasn't Lehman collapse, some other little butterfly wings flapping into the Philippines or something would eventually have brought them down. They were on such thin ice for so many years.

Nathan Hunt: You moved to Iceland to work at essentially a fintech and then you took a job at one of the 3 big banks. At the time did it strike you as odd that such a small country had such a big financial sector?

Jared Bibler: So I had just lived through the dot-com crash, which was kind of a formative thing for me in my early, early career. Then I had just been reading books about Enron, like one of my favorite books of all time, which is The Smartest Guys in the Room. I actually read that in 2004 when I got to Iceland, and I started to see the parallels. That's probably why I keep bringing up Enron.

I saw very strange things when I got there. And I couldn't -- of course, some of it was just being new in a new country. The experience I was going for was to have a real experience by being a real foreigner and kind of an exotic place. And I got that experience. A lot of it was just, hey, this is a new place with very different culture, different rules.

But the banking and the financial machinations that were going on every day, they didn't make much sense to me. And I would always ask my coworkers in this fintech what they thought, and they -- everyone was a cheerleader. And eventually, I became a cheerleader, too. I mean when the party goes on so long, I mean 2 years after that, like you said, I joined the asset management department at Landsbanki, and I just joined in the party. And got a huge pay raise and was flying all over the place talking to hedge funds and it was fantastic.

But I was always -- I kind of even wish I had kept more of that initial skepticism. At some point, I gave up and said, let's see where this takes us. But once I was in the bank, as you know, from the book, things were quite odd inside the bank as well. Nowhere near as odd as what I later discovered with the share price manipulation. That was huge. But I'm just -- on a smaller scale in the funds we were managing and so on, there was a lot of funny business, which didn't let me sleep very well at night.

Nathan Hunt: How did you go from being an employee of one of the banks to working in this investigation group for the regulatory agency.

Jared Bibler: So she was my fiancee at the time, but my wife, Hilda, who the book is dedicated to, she had like a prophetic dream. And she said, "Don't let those a******* fire you. You should quit. This was as things were starting to really unravel. I think Lehman had just collapsed and things were really going [Foreign Language], as we would say in Icelandic like off the rails.

She kind of saved me because I -- whenever she said something like that, I would do it, and she was always right. So I quit, but I thought I will have a job to go -- I will just get a job at one of the pension funds that we're working with that's -- I'll find something, no problem. And my last day was Friday, October 3, 2008. And on Monday, Tuesday and Thursday, the week after, the 3 banks collapsed. First, Glitnir, then Landsbanki, then Kaupthing.

So it was just literally the weekend after that I had like the farewell cakes in the office. And that was a dark, dark time then because the global financial crisis was just bad everywhere, as people said. But what was pretty bad in Iceland, it was probably analogous to what started happening in Russia after the sanctions maybe a few months ago, where there was just no -- suddenly, there was just no way to send money in or out of the country. The FX was very limited, and we immediately felt the effect.

Our cash accounts were available, but we had most of our money in a money market fund, which was frozen. And when it was finally unfrozen, we ended up with, in real terms, maybe we took a 70%, 75% loss on the money market fund because it turned out, by the way, that the money market fund was propping up shell companies that propped up the shares of the banks.

So we -- personally, we eventually had to give away our house and give -- and someone took over the mortgage so we lost our house. And there were just several years where nobody bought a new car in Iceland for -- for several years where just no cars were imported. And if I would travel in those years like to Europe, I would see cars that I didn't know existed because they just -- there was just like a blackout for 2 or 3 years.

It was really a difficult time. We even changed the things that we ate, the things that we bought, and we really had to make huge adjustments in our lifestyle at least in the first 6 months. And so that was very dark because I didn't have a job. Because I had a quit, I wasn't eligible for unemployment, I had to wait a long time for that to kick in.

I finally had like a -- I threw a Hail Mary pass early on to the financial regulator of Iceland, the FME, and I said, "Look, I have all this experience. I worked on Wall Street in the back office. I worked here. I know about software. Do you need my expertise?" And they didn't answer. And then like months later, they called me in for an interview.

Originally, they wanted one investigator to help them with some of these things after the crisis. And my boss told me that like they had 190 applicants for this one position. And they put us through a lot of -- it was a really good recruiting process actually because they put us through -- I mean they had their pick of people at this point. So the unemployment was so high and there was a lot of bankers who are unemployed.

So they gave us like these case studies and tests and everything. It was actually a really good recruiting process. And I guess I did well enough on that, and maybe they wanted me a little bit because I was an outsider as well, but she hired me and one other guy as 2 investigators. So we started around Easter 2009. So 6 whole months, a whole half a year had now passed since the crash when we started to dig in and to see if there's any possible criminal or several cases there.

Nathan Hunt: One point you make in the book is that for people who work in finance in the U.S., the SEC is, well, scary. No one wants a visit from the SEC or a letter from the SEC. What do you think makes the SEC relatively effective in a way that regulators in smaller countries struggle to be?

Jared Bibler: Well, I think here in Switzerland, we have FINMA. And I think people are fairly afraid of them as well, depending on which area maybe that you are in the bank or so on. I think in Iceland, the system had never been tested. Even the FME where I worked was only created in 1999 or 1998 alongside with the banks being privatized.

And it had never had to really flex any muscle. I don't know how it is now because I haven't lived there in a few years. But I heard from one of my team members in 2000 -- probably '14, '15, he said the culture inside the banks had totally changed. And they were very worried about how to comply with the law and how to do the right thing and so on. I think now it's a little bit back to the Wild West, unfortunately.

But I think in that case, it was just that the FME had never really had to do much. But -- a couple of things about regulators. There's really no incentive as a regulator to stick your head above the wall in most cases. And also as a bank employee, if you -- especially if you're trading or doing big deals, you're going to get a bonus when you close that big deal.

But as a regulator, if you find a huge case of malfeasance in a bank, it's maybe not going to be great for your career. It's just causing people difficulties. A lot of these people, they just want to go home at 5 and we bring them a big thing and like, what? I always say to people here in Switzerland, like if someone gets murdered or kidnapped, we count on that the police have a team. They have people who know how to handle that situation or if there's a hostage situation.

Those people are trained, they get called up they go into action. But for most regulators in the world, if you come in the door and you say, okay, look at this, guys. Look at this, I got a $10 billion insider case or a $10 billion manipulation or something. Often, there isn't a team like that. The Americans are probably -- they're seen anyway here in Europe is quite aggressive and as a beacon of hope in these things. And I think relatively speaking, they are.

But still, you see from the book, I mean, I took the SEC a pretty interesting case, I thought, from the Icelandic banks. They didn't get very far with them. And so I think that what's missing from financial regulation is a sort of a SWAT team, tiger team of investigation capability that really wants to go after and is really incentivized to take down big financial crime cases.

Nathan Hunt: It's clear from your book that you feel you left unfinished business at the financial regulatory agency in Iceland. What more would you have liked to accomplish?

Jared Bibler: Yes, I did feel that way. In Iceland, it was really an extreme case because we didn't even have -- most regulators do have something called an enforcement team. They do have people who know how to investigate. They may not be rewarded for bringing in huge cases, but they at least have a staff that does that work.

They need to have staff that are in daily contact with the entities that they regulate and they're on good terms with them. but those can't be the same people who then investigate when something comes up in one of those entities. You need aspiration there. Most regulators have that.

In Iceland, there was no enforcement team before the crisis. I thought for sure we would take a piece of our investigation team and make it the enforcement team, and that never happened. And then the regulator was actually folded into the central bank of Iceland, which I think is a terrible move.

But that even happened less than 2 years ago, I want to say. And as far as I know, there's no enforcement capability there. So even after all of what we went through, there's nobody who could try to keep the next crisis from happening there. And I think that's very unfortunate.

Nathan Hunt: I understand that you have recently been reading Cormac McCarthy's Border Trilogy novels. And there's a character in McCarthy's earlier novel, Blood Meridian, named Judge Holden, who is psychotically violent yet charismatic. He seems to create his own deviant morality around him like a force of gravity that draws in men of weaker will and leads them to do awful things. The corruption you write about in Icelandic finance was so deep and pervasive that it also seemed to create its own moral gravity. I am curious, Jared, how is it you were able to escape that gravity? And why don't you think more people who worked at those banks did?

Jared Bibler: That's a really good question, and I appreciate the reference to Judge Holden. I read that book twice, Blood Meridian. I think it probably is my favorite book, but it's so violent. It's so hard to read. But it's such a great writing at the same time. And he's -- he's one of the most compelling characters in all of literature, I think.

And by the way, there was a real Judge Holden. And there's some evidence that he did some of the things that are portrayed there. I think I was helped in the bank a couple of things. The main thing was just that I had experience from other places in my career. A big formative experience was I had worked for a software company. I won't name them, but this was a Silicon Valley and Utah startup during the dot-com era, and they were really playing fast and loose with their clients. They were selling software that -- and this is fairly common in big software, unfortunately.

Selling software that didn't really exist or didn't have anywhere near the features that these clients needed, and these were big deals, sometimes $5 million, $10 million software packages. And they were kind of cooking the books on the side and so on. And I was there as a very young person, very early in my career, and that really bothered me. And a lot of us inside -- I quit after about 8 or 9 months, I didn't last there.

That got me maybe seeing the world, looking for fraud or looking for things that didn't match up. So that helped me. And yes, I think just being an outsider in these banks. But look, I almost got caught up in it, too, like I said. And some of the things that we did with customer money at the asset management part of Landsbanki, I'm not proud of. I did always try to push back on those things. But things happen in my funds that I don't like, and you see some examples of that in the book.

I think it's really hard to keep your principles that the more money and the more sort of treasures that are laid around you, it becomes harder and harder to stick to something. And I think that's just human nature. I don't think I have any special abilities.

Nathan Hunt: When you look at finance today, is what happened in Iceland, in your mind, the exception? Or is it a more extreme version of the general trend?

Jared Bibler: I will tell you a story, Nathan, that just happened to me last week. I was at a conference here in Bern, Switzerland. And it's a nice conference in sustainable finance. At the end of the conference, they had what we called an [Foreign Language], which is light drinks. They had a little dinner set up for us, light supper.

So I got a plate of some fresh salads -- it's a nice summer weather here today. So we have like potato salad and nice stuff. I got a plate of food. I see an acquaintance who is standing at the table with another man. And the acquaintance waves me over and I go and start talking to them, there's probably 100 people milling around in this area. We start talking and this guy, the acquaintance, starts telling the other man about my book.

And then the acquaintance suddenly says that he has to go, meet his girlfriend for dinner or something. So he excuses himself. I'm kind of stuck talking to this guy. I mean the guy was okay. I talked to him for a few minutes. He's -- we're talking about the book. He's interested in the story and so on. He's a bit circumspect. He's not enthusiastic, but we're discussing this.

There were other people there that I knew and I wanted to go and talk to. I'm kind of looking for an out from this conversation. And so I asked him, I say, "Hey, well, how can we stay in touch. Could we connect on LinkedIn maybe?" And I'm looking at his nametag and he's got -- his nametag is like on his shirt, under his sport coat. So I can only read this first name. Oh, hey, what's your name, and I see his first name.

I start opening up LinkedIn on my phone to type in his name as people do know. And he moves his coat so that I could certainly not see his surname. And I said, "What's your surname, please?" And he moves his coat again and he says, "You know, I still need to work in this business." That's a very common -- that's -- I mean that's never happened to me.

Then I didn't even know how to respond. That was -- I think that here in Switzerland, the people who've read the book, it really touches a nerve. Someone very senior at one of the biggest banks here told me that -- privately that I was -- he said publicly somewhere, I think on LinkedIn, he said that this story sounded very familiar to him. He read it also like you, he read it in like a weekend.

But then privately, he told me, you weren't writing about Iceland, you were writing about Switzerland. I think everybody sees themselves -- like I did a lot of interviews last autumn when the book came out with crypto people. And everyone kind of sees themselves -- the book is kind of a mirror, like a Rorschach test. Everybody sees themselves in it.

So the crypto bros we're seeing the stories of crypto manipulation and so on and the Swiss bankers are seeing a cautionary tale for their financial system. Icelanders, of course, just see it as about Iceland, but the book is written to be kind of a morality play, and it's written to be a much broader story. If you think it's only about Iceland, I think you read the wrong book because -- or I didn't write it very well because I think as you read it, it should become clear that it's a much bigger story.

Nathan Hunt: That story once again, is Iceland's Secret: The Untold Story of the World's Biggest Con. Jared, thank you so much for joining me today.

Jared Bibler: Thank you so much, Nathan. It's been really a great time.

Nathan Hunt: The Essential Podcast is produced by Kurt Burger with assistance from Kyle May and Camille McManus. At S&P Global, we accelerate progress in the world by providing intelligence that is essential for companies, governments and individuals to make decisions with conviction.

From the majestic heights of 55 Water Street in Manhattan, I am Nathan Hunt, thank you for listening.