Lehman failure craters Iceland bank, maybe their economy too

(Icelandic salted cod. From Flickr.)

The US financial crisis is causing an implosion in Iceland, which is forcing a cascade into the European financial system.

Serious talk of a bank holiday and food hoarding has been heard.

Head of largest oil company says oil imports may cease because of lack of US dollars.

Glitnir, a large bank in Iceland, was way overextended on now-toxic real estate. They were already in trouble when Lehman, their primary line of credit, went under. They had no back up financing and soon could not pay bills. The government was forced to take over the bank, but now no one wants to deal with any Iceland bank. And they don’t want their currency, the krona, either. It has dropped 14% since Sept. 29 against the euro.

Hey, maybe we can go back to barter – frozen or salted cod for wheat and red wine. Worked in the 1930s.

The decision by Paulson and Bernanke to let Lehman die has, in retrospect, turned out to be a serious mistake. The unintended consequences have been huge. Iceland is but one example. Financial institutions have money in the billions they can not access because of the bankruptcy proceedings plus there are enormous amounts of shadow banking system transactions (CDOs, CDSs) that Lehman was a party to that are also frozen and may never be transacted.