In an interview with the Sunday Times, Eva Joly – the judge working with the Icelandic government on the investigation into the collapse of the country’s financial system – compared the implosion of the island’s banks with Bernard Madoff’s Ponzi scheme.
In Ms Joly’s view, the parallels between the two relate primarily to the failure of regulators to, well, regulate:
international regulators ignored a series of red flags about Iceland’s financial health, just as the American authorities did with Madoff.
The Financial Services Authority, which had an obligation to monitor the health of the Icelandic banks operating in Britain, has to take a share of the blame, she added. The Netherlands, where the Icelandic banks were also active, was also culpable.
Moreover, Ms Joly said, the warnings of Iceland’s own Markopolos-equivalents were also ignored:
The Icelandic central bank made it quite clear in 2007 that it would not be able to stand behind its banks if they had problems. There were other analysts, too, who pointed out all the obvious problems. It was exactly like Madoff – the warnings were there.
There are other parallels, such as investors who lost millions, myriad and complex litigation, but the main lesson is clear: territorially-focussed regulation and a lack of cross-border communication (to say nothing of cooperation) facilitate, rather than stymie, financial crimes and systemic risk.
Instinct says Judge Joly is dead right here.
Related links:
Who will stand up for Iceland? We will – FT Alphaville
How to break the law, a guide by Bernard Madoff – FT Alphaville