Iceland meltdown

People falling over each other to boost returns by taking on risks they don't understand, then looking to governments to bail them out. Investment bankers making dodgy housing loans? No, British savers sticking their life savings into Icelandic banks.

It looks as if their gamble is going to pay off, too. The UK government has announced that it will make sure that all investors in Icesave, owned by Landsbanki, get their money back. Two other institutions operating in the UK, Kaupthing and the weirdly-named Heritable Bank, a sub of Landsbanki, have had their deposits taken over by ING.

I can't say I'm happy about this. The risks of putting money into banks you've never heard of in a country with the same population as a mid-sized UK city, paying improbably high rates and with dodgy deposit insurance, should have been evident to anyone. Sadly, the money sections of the weekend newspapers regularly touted these as the best deals available -- even last weekend the Sunday Times was recommending deposit accounts with both Kaupthing and Heritable.

The Icelandic economy is a huge shell game. I recall being amazed when West Ham FC was bought by an Icelandic billionaire "biscuit manufacturer". Just how many digestives do you have to sell to a country of 300,000 to become a billionaire? The banks used funding from investors around the world, including UK savers, to make monster loans to biscuit boy and his ilk, who then used the money to buy stakes in a wide range of foreign companies, including some of the biggest names in UK retailing. (They even own Woolworths, Lord love 'em).

There's nothing illegal about this, but it beggared belief to think that Iceland's government could properly regulate a banking industry that had slipped its leash so spectacularly, let alone stand behind it when things got rough. Sure enough, Iceland's government has blithely told Alastair Darling that it will do nothing to help Landsbanki's UK customers -- it even seems likely to renege on the relatively limited amount of deposit insurance that it was supposed to provide, leaving the UK treasury on the hook for the whole lot. The UK is planning to sue Iceland, but as the country is effectively bankrupt, I'm not sure what good that will do. Russia is reportedly stepping in to help Iceland with a loan, which doesn't exactly surprise me, given my suspicions of what's been behind the explosive growth in Iceland's banks.

I suppose the Uk Government feels that having bailed out savers with Northern Rock and Bradford and Bingley, it has to do the same for the Icesavers. I'm not sure why it feels it owes loyalty to people who've shown no loyalty to the UK banks, but maybe that's old fashioned of me. At the very least, I hope that when the dust settles the Government ensures that this can't happen again in the future. No longer should spivvy banks be allowed to offer online deals to savers while making no contribution to the deposit insurance scheme. It would also be nice if the newspapers stopped giving these characters free publicity every week, but I guess we shouldn't expect miracles.