Category Archives: Business

Michael Lewis (2009):Frozen Assets.In: Vanity Fair, Issue14.12.2009

Demonstra tors in front o f Iceland’s parliam ent building, in Reyk javík’s Austurvollur Square , on January 31. Photographs by
Jonas Fredwall Karlsson.
Wall Street on the Tundra
Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P.,
its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—
resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to
decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are
men, and the women seem to have completely given up on them, the author follows the peculiarly
Icelandic logic behind the meltdown.
ust after October 6, 2008, when Iceland effectiv ely went bust, I spoke to a man at
the International Monetary Fund who had been flown in to Rey kjav ík to determine
if money might responsibly be lent to such a spectacularly bankrupt nation. He’d never been to Iceland,
knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with
famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another.
Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations’
2008 Human Dev elopment Index), well-educated, historically rational human beings who had organized
themselves to commit one of the single greatest acts of madness in financial history . “Y ou hav e to
understand,” he told me, “Iceland is no longer a country . It is a hedge fund.”
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How did the economy get into this mess? Visit our archiv e “Charting the Road to Ruin.” Plus:A Q&A with
Michael Lewis.Illustration by Brad Holland.
An entire nation without immediate experience or ev en distant memory of high finance had gazed upon the
example of Wall Street and said, “We can do that.” For a brief moment it appeared that they could. In 2003,
Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic
product. Ov er the next three and a half years they grew to ov er $140 billion and were so much greater than
Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for. It was, as one
economist put it to me, “the most rapid expansion of a banking sy stem in the history of mankind.”
At the same time, in part because the banks were also lending Icelanders money to buy stocks and real
estate, the value of Icelandic stocks and real estate went through the roof. From 2003 to 2007 , while the
U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. Rey kjavík real-estate
prices tripled. By 2006 the av erage Icelandic family was three times as wealthy as it had been in 2003, and
v irtually all of this new wealth was one way or another tied to the new inv estment-banking industry .
“Ev ery one was learning Black-Scholes” (the option-pricing model), say s Ragnar Arnason, a professor of
fishing economics at the University of Iceland, who watched students flee the economics of fishing for the
economics of money. “The schools of engineering and math were offering courses on financial engineering.
We had hundreds and hundreds of people study ing finance.” This in a country the size of Kentucky, but with
fewer citizens than greater Peoria, Illinois. Peoria, Illinois, doesn’t hav e global financial institutions, or a
univ ersity devoting itself to training many hundreds of financiers, or its own currency . And y et the world
was taking Iceland seriously . (March 2006 Bloomberg News headline: ICELAND’S BILLIONAIRE TYCOON “THOR”
Global financial ambition turned out to hav e a downside. When their three brand-new global-size banks
collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for
$100 billion of banking losses—which works out to roughly $330,000 for ev ery Icelandic man, woman,
and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre priv ate
foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market.
The exact dollar amount of Iceland’s financial hole was essentially unknowable, as it depended on the v alue
of the generally stable Icelandic krona, which had also crashed and was remov ed from the market by the
Icelandic government. But it was a lot.
Iceland instantly became the only nation on earth that Americans could point to and say , “Well, at least we
didn’t do that.” In the end, Icelanders amassed debts amounting to 850 percent of their G.D.P. (The debtdrowned United States has reached just 350 percent.) As absurdly big and important as Wall Street became
in the U.S. economy , it nev er grew so large that the rest of the population could not, in a pinch, bail it out.
Any one of the three Icelandic banks suffered losses too large for the nation to bear; taken together they
were so ridiculously out of proportion that, within weeks of the collapse, a third of the population told
pollsters that they were considering emigration.
In just three or four y ears an entirely new way of economic life had been grafted onto the side of this stable,
collectivist society , and the graft had overwhelmed the host. “It was just a group of y oung kids,” said the
man from the I.M.F. “In this egalitarian society , they came in, dressed in black, and started doing business.”
iv e hundred miles northwest of Scotland the Icelandair flight lands and taxis to a terminal still painted
with Landsbanki logos—Landsbanki being one of Iceland’s three bankrupt banks, along with Kaupthing
12/14/2009 Wall Street on the Tundra | vanityfair.c……/iceland200904… 2/17and Glitnir. I try to think up a metaphor for the world’s expanding reserv oir of defunct financial corporate
sponsorships—water left in the garden hose after y ou’v e switched off the pressure?—but before I can finish,
the man in the seat behind me reaches for his bag in the ov erhead bin and knocks the crap out of me. I will
soon learn that Icelandic males, like moose, rams, and other horned mammals, see these collisions as
necessary in their struggle for surv iv al. I will also learn that this particular Icelandic male is a senior official
at the Icelandic stock exchange. At this moment, however, all I know is that a middle-aged man in an
expensiv e suit has gone out of his way to bash bodies without apology or explanation. I stew on this
apparently wanton act of hostility all the way to passport control.
Y ou can tell a lot about a country by how much better they treat themselv es than foreigners at the point of
entry . Let it be known that Icelanders make no distinction at all. Ov er the control booth they’v e hung a
charming sign that reads simply, ALL CITIZENS, and what they mean by that is not “All Icelandic Citizens” but
“All Citizens of Anywhere.” Ev ery one is from somewhere, and so we all wind up in the same line, leading to
the guy behind the glass. Before y ou can say, “Land of contradictions,” he has pretended to examine y our
passport and waved you on through.
Next, through a dark landscape of snow-spackled black v olcanic rock that may or may not be lunar, but that
looks so much as y ou would expect the moon to look that N ASA scientists used it to acclimate the astronauts
before the first moon mission. An hour later we arriv e at the 101 Hotel, owned by the wife of one of
Iceland’s most famous failed bankers. It’s cry ptically named (101 is the city ’s richest postal code), but
instantly recognizable: hip Manhattan hotel. Staff dressed in black, incomprehensible art on the walls,
unread books about fashion on unused coffee tables—ev ery thing to heighten the social anxiety of a rube
from the sticks but the latest edition of The New Y ork Observer. It’s the sort of place bankers stay because
they think it’s where the artists stay . Bear Stearns conv ened a meeting of British and American hedge-fund
managers here, in January 2008, to figure out how much money there was to be made betting on Iceland’s
collapse. (A lot.) The hotel, once jammed, is now empty, with only 6 of its 38 rooms occupied. The
restaurant is empty , too, and so are the small tables and little nooks that once led the people who weren’t in
them to marvel at those who were. A bankrupt Holiday Inn is just depressing; a bankrupt Ian Schrager hotel
is tragic.
With the financiers who once paid a lot to stay here gone for good, I’m given a big room on the top floor
with a view of the old city for half-price. I curl up in silky white sheets and reach for a book about the
Icelandic economy—written in 1995, before the banking craze, when the country had little to sell to the
outside world but fresh fish—and read this remarkable sentence: “Icelanders are rather suspicious of the
market sy stem as a cornerstone of economic organization, especially its distributiv e implications.”
That’s when the strange noises commence.
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Ste fan Alfsson: A fisherm an turned
banker, who wa s laid o ff from his
trading job in O ctober and now
might re turn to fishing.
First comes a screeching from the far side of the room. I leav e the bed to
examine the situation. It’s the heat, sounding like a teakettle left on the
stove for too long, straining to control itself. Iceland’s heat isn’t heat as
we know it, but heat drawn directly from the earth. The default temperature of the water is scalding. Ev ery
y ear workers engaged in street repairs shut down the cold-water intake used to temper the hot water and
some poor Icelander is essentially boiled aliv e in his shower. So powerful is the heat being released from the
earth into my room that some great grinding, wheezing engine must be employ ed to prev ent it from
cooking me.
Then, from outside, comes an explosion.
Then another.
s it is mid-December, the sun rises, barely , at 10:50 a.m. and sets with enthusiasm at 3:44 p.m. This is
obv iously better than no sun at all, but subtly worse, as it tempts y ou to believe you can simulate a
normal life. And whatev er else this place is, it isn’t normal. The point is reinforced by a 26-year-old
Icelander I’ll call Magnus Olafsson, who, just a few weeks earlier, had been earning close to a million dollars
a y ear trading currencies for one of the banks. Tall, white-blond, and handsome, Olafsson looks exactly as
y ou’d expect an Icelander to look—which is to say that he looks not at all like most Icelanders, who are
mousy-haired and lumpy . “My mother has enough food hoarded to open a grocery store,” he say s, then
adds that ever since the crash Rey kjav ík has felt tense and uneasy .
Two months earlier, in early October, as the market for Icelandic kronur dried up, he’d sneaked away from
his trading desk and gone down to the teller, where he’d extracted as much foreign cash as they ’d giv e him
and stuffed it into a sack. “All ov er downtown that day y ou saw people walking around with bags,” he say s.
“No one ev er carries bags around downtown.” After work he’d gone home with his sack of cash and hidden
roughly 30 grand in yen, dollars, euros, and pounds sterling inside a board game.
Before October the big-name bankers were heroes; now they are abroad, or laying low. Before October
Magnus thought of Iceland as essentially free of danger; now he imagines hordes of muggers en route from
foreign nations to pillage his board-game safe—and thus refuses to allow me to use his real name. “Y ou’d
figure New Y ork would hear about this and send ov er planeloads of muggers,” he theorizes. “Most every one
has their savings at home.” As he is already unsettled, I tell him about the unsettling explosions outside my
hotel room. “Y es,” he say s with a smile, “there’s been a lot of Range Rov ers catching fire lately .” Then he
For the past few y ears, some large number of Icelanders engaged in the same disastrous speculation. With
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local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they
wanted to buy something they couldn’t afford, was to borrow not kronur but yen and Swiss francs. They
paid 3 percent interest on the y en and in the bargain made a bundle on the currency trade, as the krona
kept rising. “The fishing guy s pretty much discov ered the trade and made it huge,” say s Magnus. “But they
made so much money on it that the financial stuff eventually ov erwhelmed the fish.” They made so much
money on it that the trade spread from the fishing guy s to their friends.
It must hav e seemed like a no-brainer: buy these ever more v aluable houses and cars with money y ou are,
in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must
repay are many times more expensive. Now many Icelanders—especially y oung Icelanders—own
$500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against
them. To the Range Rov er problem there are two immediate solutions. One is to put it on a boat, ship it to
Europe, and try to sell it for a currency that still has v alue. The other is set it on fire and collect the
insurance: Boom!
The rocks beneath Reykjavík may be igneous, but the city feels sedimentary: on top of several thick strata of
architecture that should be called Nordic Pragmatic lies a thin layer that will almost certainly one day be
known as Asshole Capitalist. The hobbit-size buildings that house the Icelandic gov ernment are charming
and scaled to the city. The half-built oceanfront glass towers meant to house newly rich financiers and, in
the bargain, block every one else’s view of the white bluffs across the harbor are not.
he best way to see any city is to walk it, but ev ery where I walk Icelandic men plow into me without so
much as a by -your-leav e. Just for fun I march up and down the main shopping drag, play ing chicken,
to see if any Icelandic male would rather div ert his stride than bang shoulders. Nope. On party nights—
Thursday , Friday , and Saturday —when half the country appears to take it as a professional obligation to
drink themselves into oblivion and wander the streets until what should be sunrise, the problem is
especially acute. The bars stay open until fiv e a.m., and the frantic energy with which the people hit them
seems more like work than work. Within minutes of entering a nightclub called Boston I get walloped, first
by a bearded troll who, I’m told, ran an Icelandic hedge fund. Just as I’m recov ering I get plowed over by a
drunken senior staffer at the Central Bank. Perhaps because he is drunk, or perhaps because we had actually
met a few hours earlier, he stops to tell me, “Vee try to tell them dat our problem was not a solfency
problem but a likv itity problem, but they did not agree,” then stumbles off. It’s exactly what Lehman
Brothers and Citigroup said: If only y ou’d give us the money to tide us over, we’ll surv iv e this little hiccup.
A nation so tiny and homogeneous that every one in it knows pretty much every one else is so
fundamentally different from what one thinks of when one hears the word “nation” that it almost requires a
new classification. Really, it’s less a nation than one big extended family . For instance, most Icelanders are
by default members of the Lutheran Church. If they want to stop being Lutherans they must write to the
gov ernment and quit; on the other hand, if they fill out a form, they can start their own cult and receiv e a
subsidy. Another example: the Reykjavík phone book lists ev ery one by his first name, as there are only
about nine surnames in Iceland, and they are deriv ed by prefixing the father’s name to “son” or “dottir.” It’s
hard to see how this clarifies matters, as there seem to be only about nine first names in Iceland, too. But if
y ou wish to rev eal how little you know about Iceland, y ou need merely refer to someone named Siggor
Sigfusson as “Mr. Sigfusson,” or Kristin Petursdottir as “Ms. Petursdottir.” At any rate, ev ery one in a
conv ersation is just meant to know whomever y ou’re talking about, so you nev er hear anyone ask, “Which
Siggor do you mean?”
Because Iceland is really just one big family, it’s simply annoying to go around asking Icelanders if they ’ve
met Björk. Of course they ’ve met Björk; who hasn’t met Björk? Who, for that matter, didn’t know Björk when
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she was two? “Y es, I know Björk,” a professor of finance at the Univ ersity of Iceland say s in reply to my
question, in a weary tone. “She can’t sing, and I know her mother from childhood, and they were both
crazy . That she is so well known outside of Iceland tells me more about the world than it does about Björk.”
One benefit of life inside a nation masking an extended family is that nothing needs to be explained;
ev eryone already knows ev ery thing that needs to be known. I quickly find that it is an ev en greater than
usual waste of time to ask directions, for instance. Just as y ou are meant to know which Bjornjolfer is being
spoken of at any particular moment, you are meant to know where y ou are on the map. Two grown-ups—
one a banker whose office is three blocks away —cannot tell me where to find the prime minister’s office.
Three more grown-ups, all within three blocks of the National Gallery of Iceland, hav e no idea where to find
the place. When I tell the sweet middle-aged lady behind the counter at the National Museum that no
Icelander seems to know how to find it, she say s, “No one actually knows any thing about our country . Last
week we had Icelandic high-school students here and their teacher asked them to name an Icelandic 19thcentury painter. None of them could. Not a single one! One said, ‘Halldor Laxness?’!” (Laxness won the 1955
Nobel Prize in Literature, the greatest global honor for an Icelander until the 1980s, when two Icelandic
women captured Miss World titles in rapid succession.)
he world is now pocked with cities that feel as if they are perched on top of bombs. The bombs hav e y et
to explode, but the fuses hav e been lit, and there’s nothing any one can do to extinguish them. Walk
around Manhattan and you see empty stores, empty streets, and, even when it’s raining, empty taxis:
people have fled before the bomb explodes. When I was there Rey kjavík had the same feel of incipient
doom, but the fuse burned strangely . The gov ernment mandates three months’ sev erance pay , and so the
many laid-off bankers were paid until early February , when the gov ernment promptly fell. Against a basket
of foreign currencies the krona is worth less than a third of its boom-time v alue. As Iceland imports
ev erything but heat and fish, the price of just about everything is, in mid-December, about to sky rocket. A
new friend who works for the gov ernment tells me that she went into a store to buy a lamp. The clerk told
her he had sold the last of the lamps she was after, but offered to order it for her, from Sweden—at nearly
three times the old price.
Still, a society that has been ruined ov ernight doesn’t look
much different from how it did the day before, when it
believ ed itself to be richer than ev er. The Central Bank of
Iceland is a case in point. Almost certainly Iceland will
adopt the euro as its currency, and the krona will cease to
exist. Without it there is no need for a central bank to
maintain the stability of the local currency and control
interest rates. Inside the place stews David Oddsson, the
architect of Iceland’s rise and fall. Back in the 1980s,
Oddsson had fallen under the spell of Milton Friedman, the
brilliant economist who was able to persuade even those
who spent their liv es working for the gov ernment that
gov ernment was a waste of life. So Oddsson went on a quest
to giv e Icelandic people their freedom—by which he meant
freedom from gov ernment controls of any sort. As prime
minister he lowered taxes, priv atized industry , freed up
trade, and, finally , in 2002, priv atized the banks. At length,
weary of prime-ministering, he got himself appointed
gov ernor of the Central Bank—ev en though he was a poet
without banking experience.
12/14/2009 Wall Street on the Tundra | vanityfair.c……/iceland200904… 6/17Bjarni Brynjolfsson: A fishing guide ,
who is back to hosting flyfishe rm en instead o f banke rs.
After the collapse he holed up in his office inside the bank,
declining all requests for interv iews. Senior gov ernment
officials tell me, seriously , that they assume he spends most
of his time writing poetry . (In February he would be asked
by a new gov ernment to leav e.) On the outside, howev er,
the Central Bank of Iceland is still an elegant black temple set against the snowy bluffs across the harbor.
Sober-looking men still enter and exit. Small boys on sleds rocket down the slope beside it, giving not a rat’s
ass that they are playing at ground zero of the global calamity . It all looks the same as it did before the
crash, even though it couldn’t be more different. The fuse is burning its way toward the bomb.
When Neil Armstrong took his small step from Apollo 11 and looked around, he probably thought, Wow,
sort of like Iceland—ev en though the moon was nothing like Iceland. But then, he was a tourist, and a tourist
can’t help but hav e a distorted opinion of a place: he meets unrepresentativ e people, has unrepresentative
experiences, and runs around imposing upon the place the fantastic mental pictures he had in his head
when he got there. When Iceland became a tourist in global high finance it had the same problem as Neil
Armstrong. Icelanders are among the most inbred human beings on earth—geneticists often use them for
research. They inhabited their remote island for 1,100 y ears without so much as dabbling in leveraged
buy outs, hostile takeov ers, deriv ativ es trading, or ev en small-scale financial fraud. When, in 2003, they sat
down at the same table with Goldman Sachs and Morgan Stanley , they had only the roughest idea of what an
inv estment banker did and how he behaved—most of it gleaned from y oung Icelanders’ experiences at
various American business schools. And so what they did with money probably says as much about the
American soul, circa 2003, as it does about Icelanders. They understood instantly, for instance, that
finance had less to do with productiv e enterprise than trading bits of paper among themselv es. And when
they lent money they didn’t simply facilitate enterprise but bankrolled friends and family , so that they
might buy and own things, like real investment bankers: Bev erly Hills condos, British soccer teams and
department stores, Danish airlines and media companies, Norwegian banks, Indian power plants.
That was the biggest American financial lesson the Icelanders took to heart: the importance of buy ing as
many assets as possible with borrowed money , as asset prices only rose. By 2007 , Icelanders owned
roughly 50 times more foreign assets than they had in 2002. They bought priv ate jets and third homes in
London and Copenhagen. They paid vast sums of money for serv ices no one in Iceland had theretofore ev er
imagined wanting. “A guy had a birthday party, and he flew in Elton John for a million dollars to sing two
songs,” the head of the Left-Green Mov ement, Steingrimur Sigfusson, tells me with fresh incredulity . “And
apparently not v ery well.” They bought stakes in businesses they knew nothing about and told the people
running them what to do—just like real American inv estment bankers! For instance, an inv estment
company called FL Group—a major shareholder in Glitnir bank—bought an 8.25 percent stake in American
Airlines’ parent corporation. No one inside FL Group had ev er actually run an airline; no one in FL Group
even had meaningful work experience at an airline. That didn’t stop FL Group from telling American
Airlines how to run an airline. “After taking a close look at the company ov er an extended period of time,”
FL Group C.E.O. Hannes Smarason, graduate of M.I.T.’s Sloan School, got himself quoted say ing, in his press
release, not long after he bought his shares, “our suggestions include monetizing assets … that can be used
to reduce debt or return capital to shareholders.”
Nor were the Icelanders particularly choosy about what they bought. I spoke with a hedge fund in New
Y ork that, in late 2006, spotted what it took to be an easy mark: a weak Scandinav ian bank getting weaker.
It established a short position, and then, out of nowhere, came Kaupthing to take a 10 percent stake in this
soon-to-be defunct enterprise—driv ing up the share price to absurd lev els. I spoke to another hedge fund in
London so perplexed by the many bad LBOs Icelandic banks were financing that it hired priv ate
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inv estigators to figure out what was going on in the Icelandic financial sy stem. The inv estigators produced a
chart detailing a byzantine web of interlinked entities that boiled down to this: A handful of guy s in Iceland,
who had no experience of finance, were taking out tens of billions of dollars in short-term loans from
abroad. They were then re-lending this money to themselv es and their friends to buy assets—the banks,
soccer teams, etc. Since the entire world’s assets were rising—thanks in part to people like these Icelandic
lunatics paying crazy prices for them—they appeared to be making money . Y et another hedge-fund
manager explained Icelandic banking to me this way : Y ou hav e a dog, and I have a cat. We agree that they
are each worth a billion dollars. Y ou sell me the dog for a billion, and I sell y ou the cat for a billion. Now we
are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. “They created fake capital
by trading assets amongst themselves at inflated values,” say s a London hedge-fund manager. “This was
how the banks and investment companies grew and grew. But they were lightweights in the international
n February 3, Tony Shearer, the former C.E.O. of a British merchant bank called Singer and
Friedlander, offered a glimpse of the inside, when he appeared before a House of Commons committee
to describe his bizarre experience of being acquired by an Icelandic bank.
Singer and Friedlander had been around since 1907 and was famous for, among other things, giv ing George
Soros his start. In November 2003, Shearer learned that Kaupthing, of whose existence he was totally
unaware, had just taken a 9.5 percent stake in his bank. Normally , when a bank tries to buy another bank, it
seeks to learn something about it. Shearer offered to meet with Kaupthing’s chairman, Sigurdur Einarsson;
Einarsson had no interest. (Einarsson declined to be interv iewed by Vanity Fair.) When Kaupthing raised its
stake to 19.5 percent, Shearer finally flew to Reykjav ík to see who on earth these Icelanders were. “They
were v ery different,” he told the House of Commons committee. “They ran their business in a very strange
way . Everyone there was incredibly young. They were all from the same community in Rey kjav ík. And they
had no idea what they were doing.”
Hordur Torfason: An activist and a protest
organize r.
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He examined Kaupthing’s annual reports and discovered some amazing facts: This giant international bank
had only one board member who was not Icelandic, for instance. Its directors all had four-y ear contracts,
and the bank had lent them £19 million to buy shares in Kaupthing, along with options to sell those shares
back to the bank at a guaranteed profit. Virtually the entire bank’s stated profits were caused by its marking
up assets it had bought at inflated prices. “The actual amount of profits that were coming from what I’d call
banking was less than 10 percent,” said Shearer.
In a sane world the British regulators would hav e stopped the new Icelandic financiers from dev ouring the
ancient British merchant bank. Instead, the regulators ignored a letter Shearer wrote to them. A y ear later,
in January 2005, he received a phone call from the British takeover panel. “They wanted to know,” say s
Shearer, “why our share price had risen so rapidly ov er the past couple of day s. So I laughed and said, ‘I
think y ou’ll find the reason is that Mr. Einarsson, the chairman of Kaupthing, said two day s ago, like an idiot,
that he was going to make a bid for Singer and Friedlander.’” In August 2005, Singer and Friedlander
became Kaupthing Singer and Friedlander, and Shearer quit, he said, out of fear of what might happen to his
reputation if he stay ed. In October 2008, Kaupthing Singer and Friedlander went bust.
In spite of all this, when Tony Shearer was pressed by the House of Commons to characterize the Icelanders
as mere street hustlers, he refused. “They were all highly educated people,” he said in a tone of amazement.
ere is yet another way in which Iceland echoed the American model: all sorts of people, none of them
Icelandic, tried to tell them they had a problem. In early 2006, for instance, an analyst named Lars
Christensen and three of his colleagues at Denmark’s biggest bank, Danske Bank, wrote a report that said
Iceland’s financial sy stem was growing at a mad pace, and was on a collision course with disaster. “We
actually wrote the report because we were worried our clients were getting too interested in Iceland,” he
tells me. “Iceland was the most extreme of ev erything.” Christensen then flew to Iceland and gave a speech
to reinforce his point, only to be greeted with anger. “The Icelandic banks took it personally ,” he say s. “We
were being threatened with lawsuits. I was told, ‘Y ou’re Danish, and y ou are angry with Iceland because
Iceland is doing so well.’ Basically it all had to do with what happened in 1944,” when Iceland declared its
independence from Denmark. “The reaction wasn’t ‘These guys might be right.’ It was ‘No! It’s a conspiracy.
They have bad motiv es.’” The Danish were just jealous!
The Danske Bank report alerted hedge funds in London to an opportunity: shorting Iceland. They
inv estigated and found this incredible web of crony ism: bankers buy ing stuff from one another at inflated
prices, borrowing tens of billions of dollars and re-lending it to the members of their little Icelandic tribe,
who then used it to buy up a messy pile of foreign assets. “Like any new kid on the block,” say s Theo Phanos
of Trafalgar Funds in London, “they were picked off by various people who sold them the lowest-quality
assets—second-tier airlines, sub-scale retailers. They were in all the worst LBOs.”
But from the prime minister on down, Iceland’s leaders attacked the messenger. “The attacks … give off an
unpleasant odor of unscrupulous dealers who hav e decided to make a last stab at breaking down the
Icelandic financial system,” said Central Bank chairman Oddsson in March of last y ear. The chairman of
Kaupthing publicly fingered four hedge funds that he said were deliberately seeking to undermine Iceland’s
financial miracle. “I don’t know where the Icelanders get this notion,” says Paul Ruddock, of Lansdowne
Partners, one of those fingered. “We only once traded in an Icelandic stock and it was a v ery short-term
trade. We started to take legal action against the chairman of Kaupthing after he made public accusations
against us that had no truth, and then he withdrew them.”
One of the hidden causes of the current global financial crisis is that the people who saw it coming had more
to gain from it by taking short positions than they did by try ing to publicize the problem. Plus, most of the
people who could credibly charge Iceland—or, for that matter, Lehman Brothers—with financial crimes
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could be dismissed as crass profiteers, talking their own book. Back in April 2006, howev er, an emeritus
professor of economics at the Univ ersity of Chicago named Bob Aliber took an interest in Iceland. Aliber
found himself at the London Business School, listening to a talk on Iceland, about which he knew nothing.
He recognized instantly the signs. Digging into the data, he found in Iceland the outlines of what was so
clearly a historic act of financial madness that it belonged in a textbook. “The Perfect Bubble,” Aliber calls
Iceland’s financial rise, and he has the textbook in the works: an updated v ersion of Charles Kindleberger’s
197 8 classic, Manias, Panics, and Crashes, a new edition of which he’s currently editing. In it, Iceland, he
decided back in 2006, would now hav e its own little box, along with the South Sea Bubble and the Tulip
Craze—even though Iceland had y et to crash. For him the actual crash was a mere formality .
ord spread in Icelandic economic circles that this distinguished professor at Chicago had taken a
special interest in Iceland. In May 2008, Aliber was invited by the Univ ersity of Iceland’s
economics department to giv e a speech. To an audience of students, bankers, and journalists, he explained
that Iceland, far from having an innate talent for high finance, had all the markings of a giant bubble, but he
spoke the technical language of academic economists. (“Monetary Turbulence and the Icelandic Economy,”
he called his speech.) In the following Q&A session someone asked him to predict the future, and he lapsed
into plain English. As an audience member recalls, Aliber said, “I giv e y ou nine months. Y our banks are
dead. Y our bankers are either stupid or greedy . And I’ll bet they are on planes try ing to sell their assets
right now.”
The Icelandic bankers in the audience sought to prev ent newspapers from reporting the speech. Several
academics suggested that Aliber deliv er his alarming analy sis to Iceland’s Central Bank. Somehow that
nev er happened. “The Central Bank said they were too busy to see him,” says one of the professors who
tried to arrange the meeting, “because they were preparing the Report on Financial Stability.” For his part
Aliber left Iceland thinking that he’d caused such a stir he might not be allowed back into the country. “I got
the feeling,” he told me, “that the only reason they brought me in was that they needed an outsider to say
these things—that an insider wouldn’t say these things, because he’d be afraid of getting into trouble.” And
y et he remains extremely fond of his hosts. “They are a v ery curious people,” he says, laughing. “I guess
that’s the point, isn’t it?”
Icelanders—or at any rate Icelandic men—had their own explanations for why , when they leapt into global
finance, they broke world records: the natural superiority of Icelanders. Because they were small and
isolated it had taken 1,100 y ears for them—and the world—to understand and exploit their natural gifts, but
now that the world was flat and money flowed freely , unfair disadv antages had v anished. Iceland’s
president, Olafur Ragnar Grimsson, gav e speeches abroad in which he explained why Icelanders were
banking prodigies. “Our heritage and training, our culture and home market, have prov ided a v aluable
adv antage,” he said, then went on to list nine of these adv antages, ending with how unthreatening to others
Icelanders are. (“Some people ev en see us as fascinating eccentrics who can do no harm.”) There were
many , many expressions of this same sentiment, most of them in Icelandic. “There were research projects
at the university to explain why the Icelandic business model was superior,” say s Gylfi Zoega, chairman of
the economics department. “It was all about our informal channels of communication and ability to make
quick decisions and so forth.”
“We were alway s told that the Icelandic businessmen were so clev er,” says univ ersity finance professor and
former banker Vilhjalmur Bjarnason. “They were very quick. And when they bought something they did it
v ery quickly. Why was that? That is usually because the seller is v ery satisfied with the price.”
Y ou didn’t need to be Icelandic to join the cult of the Icelandic banker. German banks put $21 billion into
Icelandic banks. The Netherlands gav e them $305 million, and Sweden kicked in $400 million. U.K.
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Geir Haarde: The form er prim e
minister, on January 28, one o f his
last days in o ffice .
inv estors, lured by the eye-popping 14 percent annual returns, forked ov er $30 billion—$28 billion from
companies and individuals and the rest from pension funds, hospitals, univ ersities, and other public
institutions. Oxford Univ ersity alone lost $50 million.
Maybe because there are so few Icelanders in the world, we know next to
nothing about them. We assume they are more or less Scandinavian—a
gentle people who just want ev ery one to hav e the same amount of
ev erything. They are not. They have a feral streak in them, like a horse that’s just pretending to be broken.
fter three day s in Rey kjavík, I receiv e, more or less out of the blue, two phone calls. The first is from a
producer of a leading current-events TV show. All of Iceland watches her show, she say s, then asks if
I’d come on and be interviewed. “About what?” I ask. “We’d like y ou to explain our financial crisis,” she
say s. “I’ve only been here three day s!” I say . It doesn’t matter, she say s, as no one in Iceland understands
what’s happened. They ’d enjoy hearing someone try to explain it, ev en if that person didn’t have any idea
what he was talking about—which goes to show, I suppose, that not ev ery thing in Iceland is different from
other places. As I demur, another call comes, from the prime minister’s office.
Iceland’s then prime minister, Geir Haarde, is also the head of the Independence Party , which has gov erned
the country since 1991. It ruled in loose coalition with the Social Democrats and the Progressive Party .
(Iceland’s fourth major party is the Left-Green Mov ement.) That a nation of 300,000 people, all of whom
are related by blood, needs four major political parties suggests either a talent for disagreement or an
unwillingness to listen to one another. In any case, of the four parties, the Independents express the
greatest faith in free markets. The Independence Party is the party of the fishermen. It is also, as an old
schoolmate of the prime minister’s puts it to me, “all men, men, men. Not a woman in it.”
Walking into the P.M.’s minute headquarters, I expect to be stopped and searched, or at least asked for
photo identification. Instead I find a single policeman sitting behind a reception desk, feet up on the table,
reading a newspaper. He glances up, bored. “I’m here to see the prime minister,” I say for the first time in
my life. He’s unimpressed. Anyone here can see the prime minister. Half a dozen people will tell me that one
of the reasons Icelanders thought they would be taken seriously as global financiers is that all Icelanders
feel important. One reason they all feel important is that they all can go see the prime minister any time they
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What he might say to them about their collapse is an open question. There’s a charming lack of financial
experience in Icelandic financial-policy making circles. The minister for business affairs is a philosopher.
The finance minister is a v eterinarian. The Central Bank gov ernor is a poet. Haarde, though, is a trained
economist—just not a v ery good one. The economics department at the University of Iceland has him
pegged as a B-minus student. As a group, the Independence Party ’s leaders hav e a reputation for not
knowing much about finance and for refusing to av ail themselves of experts who do. An Icelandic professor
at the London School of Economics named Jon Danielsson, who specializes in financial panics, has had his
offer to help spurned; so have sev eral well-known financial economists at the Univ ersity of Iceland. Ev en
the adv ice of really smart central bankers from seriously big countries went ignored. It’s not hard to see
why the Independence Party and its prime minister fail to appeal to Icelandic women: they are the guy
driv ing his family around in search of some familiar landmark and refusing, over his wife’s complaints, to
stop and ask directions.
“Why is Vanity Fair interested in Iceland?” he asks as he strides into the room, with the force and authority
of the leader of a much larger nation. And it’s a good question.
As it turns out, he’s not actually stupid, but political leaders seldom are, no matter how much the people
who elected them insist that it must be so. He does indeed say things that could not possibly be true, but
they are only the sorts of fibs that prime ministers are hired to tell. He claims that the krona is once again an
essentially stable currency , for instance, when the truth is it doesn’t currently trade in international
markets—it is assigned an arbitrary v alue by the gov ernment for select purposes. Icelanders abroad have
already figured out not to use their Visa cards, for fear of being charged the real exchange rate, whatev er
that might be.
The prime minister would like me to believ e that he saw Iceland’s financial crisis taking shape but could do
little about it. (“We could not say publicly our fears about the banks, because you create the very thing y ou
are seeking to av oid: a panic.”) By implication it was not politicians like him but financiers who were to
blame. On some lev el the people agree: the guy who ran the Baugur inv estment group had snowballs
chucked at him as he dashed from the 101 Hotel, which his wife owns, to his limo; the guy who ran
Kaupthing Bank turned up at the National Theater and, as he took his seat, was booed. But, for the most
part, the big shots have fled Iceland for London, or are lying low, leaving the poor prime minister to
shoulder the blame and face the angry demonstrators, led by folksinging activ ist Hordur Torfason, who
assemble every weekend outside Parliament. Haarde has his story , and he’s sticking to it: foreigners
entrusted their capital to Iceland, and Iceland put it to good use, but then, last September 15, Lehman
Brothers failed and foreigners panicked and demanded their capital back. Iceland was ruined not by its own
recklessness but by a global tsunami. The problem with this story is that it fails to explain why the tsunami
struck Iceland, as opposed to, say , Tonga.
But I didn’t come to Iceland to argue. I came to understand. “There’s something I really want to ask y ou,” I
“Y es?”
“Is it true that y ou’ve been telling people that it’s time to stop banking and go fishing?”
A great line, I thought. Succinct, true, and to the point. But I’d heard about it thirdhand, from a New Y ork
hedge-fund manager. The prime minister fixes me with a self-consciously stern gaze. “That’s a gross
exaggeration,” he says.
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Johanna Sigurdardottir: The new
prim e minister, the m ode rn world’s
“I thought it made sense,” I say uneasily.
“I nev er said that!”
Obv iously, I’ve hit some kind of nerv e, but which kind I cannot tell. Is he worried that to hav e said such a
thing would make him seem a fool? Or does he still think that fishing, as a profession, is somehow less
dignified than banking?
t length, I return to the hotel to find, for the first time in four nights, no empty champagne bottles
outside my neighbors’ door. The Icelandic couple whom I had env isioned as being on one last blowout
hav e packed and gone home. For four nights I hav e endured their Orc shrieks from the other side of the
hotel wall; now all is silent. It’s now possible to curl up in bed with “The Economic Theory of a CommonProperty Resource: The Fishery .” One way or another, the wealth in Iceland comes from the fish, and if y ou
want to understand what Icelanders did with their money you had better understand how they came into it
in the first place.
The brilliant paper was written back in 1954 by H. Scott Gordon, a University of Indiana economist. It
describes the plight of the fisherman—and seeks to explain “why fishermen are not wealthy, despite the fact
that fishery resources of the sea are the richest and most indestructible available to man.” The problem is
that, because the fish are ev ery body ’s property , they are nobody’s property. Anyone can catch as many
fish as they like, so they fish right up to the point where fishing becomes unprofitable—for ev ery body.
“There is in the spirit of ev ery fisherman the hope of the ‘lucky catch,’” wrote Gordon. “As those who know
fishermen well have often testified, they are gamblers and incurably optimistic.”
Fishermen, in other words, are a lot like American inv estment bankers. Their overconfidence leads them to
impov erish not just themselv es but also their fishing grounds. Simply limiting the number of fish caught
won’t solve the problem; it will just heighten the competition for the fish and drive down profits. The goal
isn’t to get fishermen to overspend on more nets or bigger boats. The goal is to catch the maximum number
of fish with minimum effort. To attain it, you need gov ernment intervention.
This insight is what led Iceland to go from being one of the poorest
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first openly gay head o f state . countries in Europe circa 1900 to being one of the richest circa 2000.
Iceland’s big change began in the early 197 0s, after a couple of y ears
when the fish catch was terrible. The best fishermen returned for a second y ear in a row without their usual
haul of cod and haddock, so the Icelandic gov ernment took radical action: they privatized the fish. Each
fisherman was assigned a quota, based roughly on his historical catches. If y ou were a big-time Icelandic
fisherman y ou got this piece of paper that entitled you to, say , 1 percent of the total catch allowed to be
pulled from Iceland’s waters that season. Before each season the scientists at the Marine Research Institute
would determine the total number of cod or haddock that could be caught without damaging the long-term
health of the fish population; from y ear to year, the numbers of fish y ou could catch changed. But your
percentage of the annual haul was fixed, and this piece of paper entitled y ou to it in perpetuity .
Even better, if y ou didn’t want to fish you could sell your quota to someone who did. The quotas thus
drifted into the hands of the people to whom they were of the greatest v alue, the best fishermen, who could
extract the fish from the sea with maximum efficiency . Y ou could also take y our quota to the bank and
borrow against it, and the bank had no trouble assigning a dollar v alue to y our share of the cod pulled,
without competition, from the richest cod-fishing grounds on earth. The fish had not only been privatized,
they had been securitized.
t was horribly unfair: a public resource—all the fish in the Icelandic sea—was simply turned ov er to a
handful of lucky Icelanders. Overnight, Iceland had its first billionaires, and they were all fishermen. But
as social policy it was ingenious: in a single stroke the fish became a source of real, sustainable wealth rather
than shaky sustenance. Fewer people were spending less effort catching more or less precisely the right
number of fish to maximize the long-term v alue of Iceland’s fishing grounds. The new wealth transformed
Iceland—and turned it from the backwater it had been for 1,100 y ears to the place that spawned Björk. If
Iceland has become famous for its musicians it’s because Icelanders now hav e time to play music, and
much else. Iceland’s y outh are paid to study abroad, for instance, and encouraged to cultiv ate themselv es
in all sorts of interesting way s. Since its fishing policy transformed Iceland, the place has become, in effect,
a machine for turning cod into Ph.D.’s.
But this, of course, creates a new problem: people with Ph.D.’s don’t want to fish for a liv ing. They need
something else to do.
And that something is probably not working in the industry that exploits Iceland’s other main natural
resource: energy. The waterfalls and boiling lav a generate v ast amounts of cheap power, but, unlike oil, it
cannot be profitably exported. Iceland’s power is trapped in Iceland, and if there is something poetic about
the idea of trapped power, there is also something prosaic in how the Icelanders hav e come to terms with
the problem. They asked themselv es: What can we do that other people will pay money for that requires
huge amounts of power? The answer was: smelt aluminum.
Notice that no one asked, What might Icelanders want to do? Or ev en: What might Icelanders be especially
suited to do? No one thought that Icelanders might hav e some natural gift for smelting aluminum, and, if
anything, the opposite proved true. Alcoa, the biggest aluminum company in the country, encountered two
problems peculiar to Iceland when, in 2004, it set about erecting its giant smelting plant. The first was the
so-called “hidden people”—or, to put it more plainly , elves—in whom some large number of Icelanders,
steeped long and thoroughly in their rich folkloric culture, sincerely believ e. Before Alcoa could build its
smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elv es
were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to
pay hard cash to declare the site elf-free but, as he put it, “we couldn’t as a company be in a position of
acknowledging the existence of hidden people.” The other, more serious problem was the Icelandic male:
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he took more safety risks than aluminum workers in other nations did. “In manufacturing,” say s the
spokesman, “you want people who follow the rules and fall in line. Y ou don’t want them to be heroes. Y ou
don’t want them to try to fix something it’s not their job to fix, because they might blow up the place.” The
Icelandic male had a propensity to try to fix something it wasn’t his job to fix.
Back away from the Icelandic economy and y ou can’t help but notice something really strange about it: the
people hav e cultiv ated themselv es to the point where they are unsuited for the work av ailable to them. All
these exquisitely schooled, sophisticated people, each and ev ery one of whom feels special, are presented
with two mainly horrible way s to earn a liv ing: trawler fishing and aluminum smelting. There are, of course,
a few jobs in Iceland that any refined, educated person might like to do. Certifying the nonexistence of
elv es, for instance. (“This will take at least six months—it can be v ery tricky.”) But not nearly so many as the
place needs, given its talent for turning cod into Ph.D.’s. At the dawn of the 21st century , Icelanders were
still waiting for some task more suited to their filigreed minds to turn up inside their economy so they might
do it.
Enter investment banking.
or the fifth time in as many day s I note a slight tension at any table where Icelandic men and Icelandic
women are both present. The male exhibits the global male tendency not to talk to the females—or,
rather, not to include them in the conv ersation—unless there is some obvious sexual motive. But that’s not
the problem, exactly . Watching Icelandic men and women together is like watching toddlers. They don’t
play together but in parallel; they overlap ev en less organically than men and women in other developed
countries, which is really saying something. It isn’t that the women are oppressed, exactly. On paper, by
historical global standards, they hav e it about as good as women any where: good public health care, high
participation in the workforce, equal rights. What Icelandic women appear to lack—at least to a tourist who
has watched them for all of 10 day s—is a genuine connection to Icelandic men. The Independence Party is
mostly male; the Social Democrats, mostly female. (On February 1, when the reviled Geir Haarde finally
stepped aside, he was replaced by Johanna Sigurdardottir, a Social Democrat, and Iceland got not just a
lady prime minister but the modern world’s first openly gay head of state—she liv es with another woman.)
Every one knows ev ery one else, but when I ask Icelanders for leads, the men always refer me to other men,
and the women to other women. It was a man, for instance, who suggested I speak to Stefan Alfsson.
Lean and hungry -looking, wearing genuine rather than designer stubble, Alfsson still looks more like a
trawler captain than a financier. He went to sea at 16, and, in the off-season, to school to study fishing. He
was made captain of an Icelandic fishing trawler at the shockingly y oung age of 23 and was regarded, I
learned from other men, as something of a fishing prodigy —which is to say he had a gift for catching his
quota of cod and haddock in the least amount of time. And y et, in January 2005, at 30, he up and quit
fishing to join the currency-trading department of Landsbanki. He speculated in the financial markets for
nearly two y ears, until the great bloodbath of October 2008, when he was sacked, along with ev ery other
Icelander who called himself a “trader.” His job, he say s, was to sell people, mainly his fellow fishermen, on
what he took to be a can’t-miss speculation: borrow y en at 3 percent, use them to buy Icelandic kronur, and
then invest those kronur at 16 percent. “I think it is easier to take someone in the fishing industry and teach
him about currency trading,” he says, “than to take someone from the banking industry and teach them
how to fish.”
He then explained why fishing wasn’t as simple as I thought. It’s risky, for a start, especially as practiced by
the Icelandic male. “Y ou don’t want to hav e some sissy boy s on y our crew,” he say s, especially as Icelandic
captains are famously manic in their fishing sty les. “I had a crew of Russians once,” he says, “and it wasn’t
that they were lazy , but the Russians are alway s at the same pace.” When a storm struck, the Russians would
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stop fishing, because it was too dangerous. “The Icelanders would fish in all conditions,” say s Stefan, “fish
until it is impossible to fish. They like to take the risks. If y ou go ov erboard, the probabilities are not in your
fav or. I’m 33, and I already hav e two friends who hav e died at sea.”
It took y ears of training for him to become a captain, and even then it happened only by a stroke of luck.
When he was 23 and a first mate, the captain of his fishing boat up and quit. The boat owner went looking for
a replacement and found an older fellow, retired, who was something of an Icelandic fishing legend, the
wonderfully named Snorri Snorrasson. “I took two trips with this guy,” Stefan say s. “I hav e nev er in my life
slept so little, because I was so eager to learn. I slept two or three hours a night because I was sitting beside
him, talking to him. I gav e him all the respect in the world—it’s difficult to describe all he taught me. The
reach of the trawler. The most efficient angle of the net. How do y ou act on the sea. If y ou have a bad day ,
what do you do? If you’re fishing at this depth, what do you do? If it’s not working, do y ou mov e in depth or
space? In the end it’s just so much feel. In this time I learned infinitely more than I learned in school.
Because how do y ou learn to fish in school?”
This marv elous training was as fresh in his mind as if he’d received it y esterday, and the thought of it makes
his eyes mist.
“Y ou spent seven years learning every little nuance of the fishing trade before you were granted the gift of
learning from this great captain?” I ask.
“Y es.”
“And even then y ou had to sit at the feet of this great master for many months before you felt as if you knew
what y ou were doing?”
“Y es.”
“Then why did y ou think y ou could become a banker and speculate in financial markets, without a day of
“That’s a v ery good question,” he say s. He thinks for a minute. “For the first time this evening I lack a word.”
As I often think I know exactly what I am doing even when I don’t, I find my self oddly sy mpathetic.
“What, exactly , was y our job?” I ask, to let him off the hook, catch and release being the current humane
policy in Iceland.
“I started as a … “—now he begins to laugh—“an adv iser to companies on currency risk hedging. But giv en
my aggressive nature I went more and more into plain speculative trading.” Many of his clients were other
fishermen, and fishing companies, and they , like him, had learned that if y ou don’t take risks you don’t catch
the fish. “The clients were only interested in ‘hedging’ if it meant making money,” he say s.
n retrospect, there are some obv ious questions an Icelander living through the past fiv e y ears might
have asked himself. For example: Why should Iceland suddenly be so seemingly essential to global
finance? Or: Why do giant countries that inv ented modern banking suddenly need Icelandic banks to stand
between their depositors and their borrowers—to decide who gets capital and who does not? And: If
Icelanders hav e this incredible natural gift for finance, how did they keep it so well hidden for 1,100 years?
At the very least, in a place where everyone knows everyone else, or his sister, you might have thought that
the moment Stefan Alfsson walked into Landsbanki 10 people would have said, “Stefan, y ou’re a fisherman!”
But they didn’t. To a shocking degree, they still don’t. “If I went back to banking,” he say s, with an entirely
straight face, “I would be a priv ate-banking guy .”
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ack in 2001, as the Internet boom turned into a bust, M.I.T.’s Quarterly Journal of Economics
published an intriguing paper called “Boys Will Be Boys: Gender, Ov erconfidence, and Common Stock
Inv estment.” The authors, Brad Barber and Terrance Odean, gained access to the trading activity in ov er
35,000 households, and used it to compare the habits of men and women. What they found, in a nutshell, is
that men not only trade more often than women but do so from a false faith in their own financial judgment.
Single men traded less sensibly than married men, and married men traded less sensibly than single women:
the less the female presence, the less rational the approach to trading in the markets.
One of the distinctiv e traits about Iceland’s disaster, and Wall Street’s, is how little women had to do with it.
Women worked in the banks, but not in the risktaking jobs. As far as I can tell, during Iceland’s boom, there
was just one woman in a senior position inside an Icelandic bank. Her name is Kristin Petursdottir, and by
2005 she had risen to become deputy C.E.O. for Kaupthing in London. “The financial culture is very maledominated,” she says. “The culture is quite extreme. It is a pool of sharks. Women just despise the culture.”
Petursdottir still enjoyed finance. She just didn’t like the way Icelandic men did it, and so, in 2006, she quit
her job. “People said I was crazy ,” she say s, but she wanted to create a financial-services business run
entirely by women. To bring, as she puts it, “more feminine v alues to the world of finance.”
Today her firm is, among other things, one of the v ery few profitable financial businesses left in Iceland.
After the stock exchange collapsed, the money flooded in. A few day s before we met, for instance, she heard
banging on the front door early one morning and opened it to discover a little old man. “I’m so fed up with
this whole sy stem,” he said. “I just want some women to take care of my money.”
It was with that in mind that I walked, on my last afternoon in Iceland, into the Saga Museum. Its goal is to
glorify the Sagas, the great 12th- and 13th-century Icelandic prose epics, but the effect of its life-size
dioramas is more like modern reality TV. Not statues carved from silicon but actual ancient Icelanders, or
actors posing as ancient Icelanders, as shrieks and bloodcurdling screams issue from the P.A. system: a
Catholic bishop named Jon Arason having his head chopped off; a heretic named Sister Katrin being burned
at the stake; a battle scene in which a blood-drenched Viking plunges his sword toward the heart of a prone
enemy. The goal was v erisimilitude, and to achiev e it no expense was spared. Passing one tableau of blood
and guts and mov ing on to the next, I caught my self glancing ov er my shoulder to make sure some Viking
wasn’t following me with a battle-ax. The effect was so disorienting that when I reached the end and found a
Japanese woman immobile and reading on a bench, I had to poke her on the shoulder to make sure she was
real. This is the past Icelanders supposedly cherish: a history of conflict and heroism. Of seeing who is
willing to bump into whom with the most force. There are plenty of women, but this is a men’s history .
When y ou borrow a lot of money to create a false prosperity , y ou import the future into the present. It isn’t
the actual future so much as some grotesque silicon v ersion of it. Leverage buy s y ou a glimpse of a
prosperity y ou haven’t really earned. The striking thing about the future the Icelandic male briefly
imported was how much it resembled the past that he celebrates. I’m betting now they ’v e seen their false
future the Icelandic female will have a great deal more to say about the actual one.
Author Michael Lewis is a contributor to The New York Times Magazine


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Rupert Wingfield-Hayes (2013) : What happened to Japan’s electronic giants? In: BBC News Asia; April 2nd, 2013

What happened to Japan’s electronic giants?

A Sharp sign in an electronics storeElectronics giant Sharp has been losing money fast

Japan’s electronic giants once ruled the world. Sony, Panasonic, Sharp were household names. Now those same companies are in deep trouble, losing billions of dollars a year. How have the mighty Japanese companies fallen so low? The BBC’s Rupert Wingfield-Hayes in Tokyo looks at what went wrong.

If you want to get an idea of what’s gone wrong with Japan’s electronics industry go for a ride on the Tokyo metro.

The Tokyo metro (or a lot of it) now has 3G mobile reception. But you’re not allowed to talk on your mobile phone on public transport in Japan, so everyone in my carriage was busily texting away on their 3G devices.

And what particular device were they using? A quick survey of the carriage I was in found about 80% were holding an Apple iPhone.

That’s admittedly not a scientific result – but the evidence is pretty stark. Where once everyone would have been listening to a Sony Walkman, today it is Apple and Samsung that dominate, even here on Sony’s home ground.

The evidence can also been seen in their financial results. Japan’s electronic giants are bleeding red ink.

Sony may make a small profit this year, its first since 2008. Panasonic (formerly Matsushita) is expected to post a $9bn (£6bn) loss this year. Sharp, which is much smaller, is losing money so fast it will not survive another year without a major infusion of cash.

So what went wrong?

Digital challenge

According to Tokyo-based economist Gerhard Fasol, the Japanese giants were overtaken by the digital revolution.

The Japanese giants, he says, actually built their empires on making complex electrical machines – colour televisions, radios, cassette players, refrigerators, washing machines.

Japan has to become a brain country”

Gerhard FasolEconomist

Yes, they contained electronic components, but they were basically mechanical devices.

But then came the digital revolution, and the world changed.

“The Sony Walkman is a classic example,” Gerhard Fasol says. “It has no software in it. It is purely mechanical. Today you need to have software business models that are completely different.”

The digital revolution not only changed the way electronic devices work, they changed the way they are made.

The whole manufacturing model shifted as companies moved production to low-cost countries. That has put huge downward pressure on profit margins for Japanese manufacturers.

“Look at Apple,” Mr Fasol says. “They make iPods and iPhones.”

“Apple makes at least 50% profit margins on those. People say iPhones are made in China, but maybe only 3% of the value of an iPhone stays in China.”

“So it’s hard to become rich today on the scale of a Panasonic just by manufacturing – you have to do a lot more.”


Hiroaki Nakanishi
Mr Nakanishi decided to drop many of Hitachi’s consumer electronics divisions

Unfortunately neither Panasonic nor Sharp responded to our repeated requests for interviews, so instead I went to see the boss of another Japanese manufacturing giant.

Hiroaki Nakanishi is the 66-year-old English-speaking president of Hitachi Corporation.

When he took over the reins at the 100-year-old engineering giant in 2010 it too was bleeding red ink. Mr Nakanishi immediately decided to do something very un-Japanese. He closed or sold loss-making divisions, most of them in consumer electronics.

“Digital technology changed everything,” he says.

“In the television industry it means that just one chip is now needed to produce a large and high quality TV picture. So now everybody can do it.”

“That means the new players from Korea and China, they now have the advantage.”

Hitachi had built its reputation on having the best technology. But now competition has switched to who has the best sales and marketing strategy, and the biggest advertising budgets. Mr Nakanishi says the Japanese companies just couldn’t keep up.

“The structure of the industry had completely changed,” he says. “We could not adjust to such an environment. So that is why I gave up those segments.”

‘Brain country’

Mr Nakanishi decided to return Hitachi to its core business: heavy engineering. Gas turbines, steam turbines, nuclear power plants, high-speed trains, these are the areas he believes Hitachi can still be a world beater, especially in the developing world.

“In developing countries they don’t have specific planning and construction know-how [for big infrastructure projects], but we have,” he says.

“It is not simply a case of selling machinery, but also the engineering, planning, even sometimes the financing of a project. That total process, that is our most important advantage.”

Mr Nakanishi’s strategy is working. Hitachi is back in profit. Hitachi trains are the front-runner in the competition to replace all of the UK’s fleet of inter-city high-speed trains.

But it will not be as easy for the others.

A Hitachi factory
Hitachi has switched its focus to heavy engineering

Sony is the strongest of the three. But even Sony makes far more money today out of selling life insurance than it does out of making electronics. Panasonic and Sharp have less to fall back on.

Gerhard Fasol says that once again, just as they did back in the 1950s and 60s, the Japanese companies need to learn from America.

“It’s no coincidence that many of the most successful companies today are in Silicon Valley,” Mr Fasol says.

“Companies like Cisco or Oracle are not affected by the Korean competition. Japan has to become a brain country. It’s a country like Switzerland or England.”

“You have very high education and very clever people so you have to use that. Sometimes that value can be captured through manufacturing, but in other cases through software. And software has been neglected in Japan.”

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Jim Tompkins (2013): What is the Amazon Effect?

from his blog Tompkins International

Jim Tompkins, founder and CEO of Tompkins International, is a long-time supply chain guy. And guess what? Jeff Bezos, CEO and founder of Amazon, is a supply chain guy too. He has to be, because business is now at a critical X-Roads in demand-driven supply chain and customer satisfaction.

Amazon has invented – and is continuously refining – new ways to connect customers with solutions. They are your biggest competitor. Watch the video:

“For many businesses, Amazon is simultaneously a sales channel, a potential service provider, and a competitive threat.”– Forrester Research

In this video you will learn about these topics:

  1. What is the Amazon Effect?
  2. Which Amazon? Products and Services
  3. The Magic of Amazon Prime
  4. Amazon Network & Two-Day / Same-Day Delivery
  5. What Can We Expect from the Amazon Brick-and-Mortar Store?

You know that Amazon is exploding in the online retail world. Odds are that you’ve recently ordered something from their website. But did you know that they are also your company’s biggest competitor, regardless of the products you sell or your industry?

Today, we want to help you understand more about your supply chain by understanding more about theAmazon Effect. This huge and mysterious Amazon Effect is about to get even closer to your customer base because the online retailer is planning to open its first brick-and-mortar store.

“Amazon is a black box… It’s difficult to discern any of the company’s essential goals.”– TIME Magazine

What in the world will this new Amazon store look like?

Jim Tompkins has some expert insight into the store’s likely features and how you can compete with Bezos’ expansion plans. Tompkins predicts that between now and holiday season of 2013, both in-store and online retailers have major decisions to make that will result in either success or bankruptcy.

“We are willing to be misunderstood for long periods of time.”– Amazon CEO Jeff Bezos

The traditional thinking around customer satisfaction, distribution networks and operations is obsolete given the X-Roads that we sit at today with the Amazon Effect.  We can talk about multichannel, omnichannel and every other buzz word – but at the end of the day, it’s really about price, selection, convenience and experience.

Learn how to compete with Amazon, and you will survive Business at a X-Roads.

Want to learn more? Read expert opinion and view an illustration on what an Amazon brick-and-mortar store will look like.

The Amazon Store: What Will It Look Like?

It seems like Amazon announces a new product or service every week, and its growth shows no signs of stopping. For example, its dedicated business-to-business website,AmazonSupply, offers price, selection and delivery options that make it a big competitor for industrial distributors.

Amazon’s future plans, both short-term and long-term, are typically hidden from view. While business leaders, news analysts, and social media channels are all watching Amazon to solve the mystery of how fast its growing or what new markets it is getting into, a topic of major speculation is how an Amazon brick-and-mortar store looks, and how it will perform.

When you think about what an Amazon store looks like, the size of the store is the first thing that comes to mind. With the millions and millions of SKUs Amazon has, wouldn’t an Amazon store have to be about the size of the state of Vermont? But of course, that’s impossible; nor will it be bigger than the world’s largest Wal-Mart.

Instead of focusing on size, consider the Amazon culture and compare it to other popular ones: Starbucks comes to mind. Then think of the Apple stores, where they have the Genius Bar for in-store customer support and service, and the devices right there for you to try.

Put these two concepts together, then think about how Amazon is customer-focused. Amazon CEO Jeff Bezos said so himself: “Do not be competitor-focused. Be customer-focused.” What do customers want? Price, selection, convenience, and experience. When you add all these together, what do you get?

A Tour of the Amazon Brick-and-Mortar Store

“We see customers as invited guests to a party, and we are the hosts. It’s our job every day to make every important aspect of the customer experience a little bit better.”– Amazon CEO Jeff Bezos

The Amazon store is three-stories tall, and it’s open 24/7. On the first floor, in the center, you will see the coffee bar, with lockers in the back where you can pick up the items you ordered online. That is actually the extent of product in the store – items customers have already ordered, waiting to be picked up.

Customer service agents will be positioned on the left side of this first floor, who can tell you how to use all the Amazon products and services. Then on the right side of this floor you can find all the Amazon-related electronics, like the Kindle.

Take a trip up to the second floor. Here you will find all of Amazon’s product offerings from the various other sites they own: For example, Abe Books, which is Amazon’s rare book offerings. There will be local offers, similar to Groupon, on this floor. You can also find all the Amazon Wireless-related cell phone services.

The second floor is going to be fun place to hang out with your friends. Products won’t be there, but there will be displays and employees to tell you how to use the site to order a product and help you get a good deal. This floor is where you find merchants like Zappos for shoes, MyHabit for designer-label fashion… the list goes on and on. Here is a sampling.

  • AmazonPrime
  • Shopbop
  • Audible
  • Book Depository
  • Whs. Deals
  • CreateSpace
  • Woot

The third and final floor will help you navigate all of Amazon’s many service offerings. Experts will be on hand to help you build a website hosted by Amazon, get you set up with display ads posted by Amazon, track your web site’s hits, and services to help you take credit card payments from customers on your site. They can help you with fulfillment of orders, store your data in the cloud, and many other business applications.

Since its early days, Amazon has developed many innovations in online convenience, including one-click check-out and advanced search and recommendation functions, as well as Amazon Prime. When they apply that innovation to a brick-and-mortar store, and add customer experience to their customer-pleasing good prices, convenience, and selection, businesses in any industry need to be prepared to respond.

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The Corporation Video Series

All together.

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John Naughton (2013): Why the Facebook and Apple empires are bound to fall. In: The Guardian 27. January 2013

The Guardian

History should teach us that for today’s technology industry titans, the only way is down. Just ask Microsoft

Mark Zuckerberg launches Graph Search

What goes up must come down: Mark Zuckerberg launches Facebook’s Graph Search. Photograph: Stephen Lam/Getty Images

Nothing lasts forever: if history has any lesson for us, it is this. It’s a thought that comes from rereading Paul Kennedy’s magisterial tome, The Rise and Fall of the Great Powers, in which he shows that none of the great nation-states or empires of history – Rome; imperial Spain in 1600; France in either its Bourbon or Bonapartist manifestations; the Dutch republic in 1700; Britain in its imperial glory – succeeded in maintaining its global ascendancy for long.

What has this got to do with technology? Well, it provides us with a useful way of thinking about two of the tech world’s great powers. The first isApple. The past week saw a veritable torrent of hysterical reaction to its quarterly results, coupled with fevered speculation about its future. The globe has been hypnotised for years by Apple’s metamorphosis from a failing computer manufacturer into a corporate giant that, on some days, is now the most valuable company in the world, with bigger cash reserves than the annual GDP of some countries. But as with all inexorable growth curves, the question on every commentator’s lips is: has Apple peaked?

If you think “hysterical” is a bit harsh, then ponder this. Although Apple did not sell the 50m iPhones that had been forecast for the quarter (it “only” shifted 47.8m) and sales of its Mac computers were down somewhat, nevertheless the quarterly results mean that in 2012 Apple earned more in the year than any other corporation, ever. And even the quarter’s supposedly disappointing earnings of $13.1bn were the fourth largest of all time, according to the same metric. And the reaction of the stock market to this news? The share price dropped 10% in after-hours trading.

Then there’s the social network Facebook with its billion users, which is likewise the focus of much hyperventilating comment. Recently, the Mark Zuckerberg empire launched its latest deadly weapon with the catchy name of Graph Search – as in “social graph”. Facebook’s new tool is just an algorithm that finds information from within one’s network of friends and supplements the results with hits from Microsoft‘s Bing search engine, but to read some of the commentary on it you’d think that Zuckerberg & co had invented either a perpetual motion machine or a through-ticket to hell.

“Facebook’s new search engine attempts to build walls around theinternet and keep its horde within its gates,” wrote the webmaster of arespected online magazine. “It’s a nightmare and it will probably work.”

Actually, it’s Facebook’s latest attempt to become the AOL de nos jours. And, in the end, it will fail for the same reason that AOL’s attempt to corral users within its walled garden failed: the wider internet is just too diverse, innovative and interesting. But because Facebook looms so large in the public consciousness at the moment, it’s difficult to keep it in perspective. Which is why Kennedy’s book makes such salutary reading.

So what we need to remember as we wade through the current overheated commentary on Apple and Facebook is that nothing lasts forever. I have been in this racket long enough to remember a time when Microsoft was at least as dominant and scary as these two companies are now. Spool forward a couple of decades and Microsoft is still around, but actually it’s an ailing giant – profitable but no longer innovative, trying (and so far failing) to get a foothold in the post-PC, mobile, cloud-based world.

Although the eclipsing of Apple and Facebook is inevitable, the timing and causes of their eventual declines will differ. Apple’s current strength is that it actually makes things that people are desperate to buy and on which the company makes huge margins. The inexorable logic of the hardware business is that those margins will decline as the competition increases, so Apple will become less profitable over the longer term. What will determine its future is whether it can come up with new, market-creating products such as the iPod, iPhone and iPad.

Facebook, on the other hand, makes nothing. It just provides an online service that, for the moment, people seem to value. But in order to make money out of those users and satisfy the denizens of Wall Street, it has to become ever more intrusive and manipulative. It’s condemned, in other words, to intrusive overstretch. Which is why, in the end, it will become a footnote in the history of the internet. Just like Microsoft, in fact. Sic transit gloria.

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George Anders (2012) : Inside Amazon’s Idea Machine: How Bezos Decodes The Customer. In: Forbes Magazine, Issue April 23rd, 2012

This story appears in the April 23rd, 2012 issue of FORBES magazine.

A few months ago Amazon reached what its founder and CEO Jeff Bezosdemurely tells me was “an interesting milestone.” The retailing giant, so ubiquitously associated with books, then music and video, now has tens of millions of products in stock—and a majority are nonmedia goods: drills, dress shoes, tennis rackets and almost anything else that a human can ship. Adults may still mentally link Amazon with Barnes & Noble, but to teenage customers, Amazon is now synonymous with store.

Forbes Special Feature: America’s Best And Worst CEOs
Jeff Bezos’ Top Ten Leadership Lessons

That turning point might be Bezos’ greatest accomplishment. In officially transforming Amazon from an online bookstore that sells other stuff to a retailer—and business ser­vices provider—that once sold mostly books, he has taken one of the original Internet bonanzas and created a success story all over again. Its stock is up 397% in the last five

With a net worth of some $19 billion, the 48-year-old is one of the 30 richest men in the world. Yet he still dashes around Amazon with the intensity of a startup boss trying to make his first payroll, as well as the glee of a teenager discovering all the fun you can have at overnight camp. “I’m a legitimately happy person,” Bezos explains on a recent, rainy Friday morning at Amazon’s Seattle headquarters. “My wife says: ‘If Jeff is unhappy, just wait five minutes.’”

What’s not to be happy about? He’s the number one CEO in America. The passing of Steve Jobs has left him, without question, as the corporate chief that others most want to meet, emulate and deify. And his primacy can be proven with numbers: FORBES’ ranking of top CEOs—using a bang-for-the-buck methodology that factors in sustained performance, modest compensation and the ability to pull ahead of one’s peers—has Bezos comfortably in the top spot. Indeed, he’s in the highest 5% in every single metric.

Across numerous e-mail back-and-forths and face-to-face questions with Bezos, I’ve come to understand why. More than a century ago another legendary retailer, Chicago’s Marshall Field, championed the fatalist’s slogan: “The customer is always right.” Bezos, perhaps more than anyone, has taken that mantra into the digital era, incrementally cracking one of the business’s great mysteries: figuring what customers want before the cash register rings and then making those insights pay off. In an era when high-flying tech companies outdo each other with worker perks, no-frills Bezos is proving the potency of another model: coddling his 164 million customers, not his 56,000 employees.

Jeff Bezos’ managers at Amazon find him formidable enough. But the figure that overwhelms their lives goes by the internal nickname “the empty chair.” Bezos periodically leaves one seat open at a conference table and informs all attendees that they should consider that seat occupied by their customer, “the most important person in the room.”

If the empty chair is the ultimate boss at Amazon, then Bezos is its billionaire enforcer, the guardian of what he calls the “culture of metrics” that tries to give that inanimate object a loud, clear voice. Amazon tracks its performance against about 500 measurable goals. Nearly 80% relate to customer objectives. Some Amazonians try to reduce out-of-stock merchandise. Others race to build a bigger library of downloadable movies. Intricate algorithms turn one group of shoppers’ past habits into custom recommendations for new customers. Hourly bestseller lists identify what’s hot. Weekly reviews keep track of who is on course—and where corrective attention is needed.

Amazon is so confident of its ability to personalize the site for each user that the company hardly ever creates classic customer-segment personas, such as “soccer moms” or “gearheads.” Such marketing standbys are too imprecise for Team Bezos.

Feisty debates over what metrics to watch are Amazon’s way of life. “There’s an incredible amount of challenging the other person,” says Manfred Bluemel, a former senior market researcher atAmazon. “You want to have absolute certainty about what you are saying. If you can stand a barrage of questions, then you have picked the right metric. But you had better have your stuff together. The best number wins.”

Bezos is even stricter about what customers don’t want. They hate delays, defects and out-of-stock products, so the metrics patrol at Amazon constantly tracks such numbers, looking to make them as rare as possible. Even the tiniest delay in loading a Web page isn’t trivial. Amazon has metrics showing that a 0.1 second delay in page rendering can translate into a 1% drop in customer activity.

Former executives all have stories about Bezos’ obsessive focus on the customer. Simon Murdoch, the former head of Amazon’s British operations, remembers offering customers in the U.K. next-day delivery if their order was in by 4 p.m.; Bezos personally hammered him to extend that delivery window to 6 p.m., 7 p.m. and later, even if it meant radical changes in warehouse hours. (Today Amazon offers same-day delivery for much of Britain and ten U.S. cities if the order gets in that morning.) Another one-time insider remembers a relentless push for sturdier-than-usual cardboard so customers could reuse its boxes for other shipments or presents, creating goodwill and putting Amazon’s name in front of a second set of potential customers.

Bezos’ zealous protection has paid off. Each year the University of Michigan calculates a customer-satisfaction index for 225 of America’s largest companies. Amazon has led the online retailing category for years and has repeatedly placed in the top 10 among all companies. Currently only Heinz,Clorox, Apple and three car brands topped Amazon.

But great customer service doesn’t fully explain Amazon’s extraordinary success. Other high-touch online retailers can’t match the $48 billion in sales Amazon did last year. Meanwhile, traditional retailers like Target and Costco play up customer service too—yet their combined market capitalization trails Amazon’s $98 billion.

For Bezos a data-driven customer focus lets him take risks to innovate, secure in the belief that he’s doing the right thing. “We are comfortable planting seeds and waiting for them to grow into trees,” says Bezos. “We don’t focus on the optics of the next quarter; we focus on what is going to be good for customers. I think this aspect of our culture is rare.”


Amazon CEO Jeff Bezos introduces the Kindle Fi...Amazon CEO Jeff Bezos introduces the Kindle Fire tablet in New York, September 28, 2011.

That kind of thinking has transformed Amazon. After wild swings associated with the dot-com boom and crash, Amazon’s performance was essentially flat between mid-2003 and early 2007, in lockstep with the industries it was associated with: books, music and the like. Then Amazon took off afresh, as investors realized that Bezos had been quietly building a multitude of new growth engines inside his company. All were rooted in the same theory: If Amazon lets customers set the specs, it could conquer any number of consumer products and services. Bezos also decided to court business customers (and freak out his own engineers) by turning Amazon’s internal software architecture inside out and selling access to it. The boss’ new diktat upended Amazon’s approach to tasks ranging from quality assurance to interteam communication.

In 2006 he launched Amazon Web Services as a standalone business. It rang up an estimated $1 billion in revenue last year, with $2 billion in its sights, thanks to an even faster growth rate than Amazon’s main storefront. It serves customers ranging from NASA to Netflix with dozens of cheap, on-demand computer services via the “cloud.” During the Cassini space probe’s exploration of Saturn, raw data for 180,000 photos were processed on Amazon’s computers within five hours, at a cost of less than $200, says Tomas Soderstrom of NASA’s Jet Propulsion Lab. Doing the job in-house could have taken 15 days, he says.

Last October’s launch of the Kindle Fire, a computing tablet that can play music and videos, has again hurt short-term profitability. Amazon’s selling price of $199 doesn’t appear to cover costs. Bezos isn’t perturbed. He calls the Fire “the most successful product we’ve ever launched.” To him the bullish case for the Fire is obvious. If it induces owners to buy more from Amazon, the costs of spreading these tablets globally will be well worth it.

This renewed Amazon is basically a personal manifestation of Bezos, who is equal parts quant and dreamer. Growing up in Houston and Miami, Bezos never paused for a traditional retailer’s apprenticeship—i.e., selling things. Rather, he crunched numbers, once proudly telling his grandmother that he had calculated how much her cigarette habit was shortening her life. He went to Princeton to study physics and ended up in computer science, which led to a brief, lucrative career on Wall Street.

The dreamer side of Bezos wants to be at the frontier. His teenage hope was to become an astronaut, and he pushed himself to be high-school valedictorian to improve his chances. He spent summers as a teenager on his grandfather’s 25,000-acre ranch in Texas, fixing machines, working with cattle and learning about self-reliance.


Stumped candidates will find their path into Amazon slipping away. Those who cobble together guerrilla answers—informal polls through free online tools such as SurveyMonkey—tend to thrive at Amazon. They are the same people who might have challenged Bezos in math class and also succeeded on Grandpa’s ranch.

Efficiency—cheapness, in the eyes of Amazon’s detractors—is as much a part of the Amazon culture as the empty chair. In fact, Bezos links the two. In his 2009 letter to shareholders, Bezos declared that Amazon had begun waging war on muda, the Japanese word for waste. The more he could get rid of needless costs, the easier it would be to deliver rock-bottom prices to customers. This crusade, he wrote, was “incredibly energizing.”

During interviews for this story Bezos cited Amazon’s recent success in improving its warehouse usage 23%, “recapturing 6 million square feet of underutilized space.” He also takes pride in Amazon’s work to presort packages for carriers such as FedEx, so shipments aren’t delayed by the carriers’ need to carry out further “sortation.”

The company’s executives feel the pinch. Bezos keeps an eerily tight rein on expenses, eschewing color printers in favor of trusty old black-and-white models. No one flies first class (though Bezos sometimes rents private jets at his own expense). Experiments are hatched and managed by the smallest teams possible; if it takes more than two pizzas to feed a work group, Bezos once observed, then the team is too big. Offices still get cheap desks made of particleboard door blanks, a 1990s holdover that Bezos refuses to change.

Managers may grumble, but they learn to bring sandpaper to work so their merino sweaters don’t get shredded by splinters. None of the company’s five top officers earns more than $175,000 in cash a year. Bezos last year took $81,840 in salary and hasn’t had a raise since 1998. He has raised at least $750 million since 2010 by selling Amazon shares, but that’s how you make your money at his company. Stock and options are the big honeypots; many on the leadership team have $20 million or more in unvested shares.

This mind-set is an outlier in an industry that views talent as a delicate asset in need of constant pampering; in Silicon Valley perks like free on-site massages are as rote as a pot of coffee in the kitchen area. At, where current and former employees rate their companies as a place to work, Amazon generates a middling 3.1 out of 5, putting it somewhere between Delta Airlines (3.2) and Burger King (3.0).

Steve Yegge, a Google employee and former Amazon engineer, chronicled his frustrations last October in a 4,500-word Internet posting that has attracted more than 100,000 readers. He complained about the decor at Amazon, the hiring policies, the pay and the need to do grungy tasks at times. He portrayed his former boss as Dread Pirate Bezos, who issues mandates that cause people to “scramble like ants being pounded with a rubber mallet.”

Yet Yegge also saluted Bezos’ ability to push massive changes through the organization, in particular the initiatives that led to Amazon Web Services. Those small two-pizza-or-less innovation teams are nimble, and because they’re cost-effective, Bezos can deploy dozens. Even Google hasn’t been able to react so quickly with its own Web services, Yegge added. That comparison alarmed him, because Yegge had quit lean-and-mean Amazon years earlier in favor of opulent Google, where free shuttle buses with Wi-Fi whisk employees to their jobs.

Amazon, started in a garage and nurtured in a rundown stretch of Seattle waterfront, is now settling into its fifth headquarters, in Seattle’s elegantly rehabbed South Lake Union district. The company’s new campus consists of nearly a dozen shiny glass and steel buildings, complete with courtyards, cafes, restaurants and a little bit of public artwork on display.

Jeff Bezos should be there a long time. He just turned 48 in January and could easily run Amazon another two decades. That’s good for stability. It could be a challenge in terms of retaining other executives with aspirations of becoming a CEO. Bezos says he knows when to avoid meddling so that his project leaders can find their own paths. Yet it’s congenitally hard for founders to be hands-off for long—an effort to bring in a chief operating officer to work directly under Bezos didn’t work out a decade ago.

How much power can Bezos share when the customer, as channeled by Amazon’s founder, calls all the shots? Rather than kibbitz with a number two, Bezos actually reads over-the-transom e-mail, which most CEOs regard as unbearable clutter. He scanned customer notes avidly when Amazon was tiny, and he hasn’t shaken the habit. Dozens of times a year, unsolicited suggestions turn into feature improvements. Even angry e-mails are “fantastic if you want customers to be honest,” Bezos says.

Then there’s the fan mail. Asked about customer e-mails that have become his favorites, Bezos forwarded to FORBES a note from a woman recounting how Amazon has touched her life over the past 12 years. First she bought books and compact discs when she was in her late 20s. Then she spent $79 a year to qualify for free shipping as part of the Amazon Prime program for heavy users.

Now, she writes, Amazon is “helping me choose a mattress and a crib for my son.” Instead of being overwhelmed by all the shopping associated with pregnancy and the arrival of a child, she feels in control. She concludes by writing: “Thank you so much for making my life simpler and easier. … They say it takes a village, but, in this case, all a mom needs is Amazon, her Amex and an iPhone.”

That last need, ironically, seems to be Amazon’s next target: smartphones. Lab 126, Amazon’s Silicon Valley unit where the Kindle was developed, has been hiring flurries of mobile-technology engineers the past two years. Amazon hasn’t confirmed anything, but it hasn’t made much of an ­effort to swat down speculation. If Amazon does storm the lush smartphone market, it will do so with valuable strengths such as customers’ physical addresses, purchasing histories across a broad array of categories and credit card data. Even Apple can’t claim all of those.

In the short term Bezos will continue to attack muda. Last month Amazon bought Kiva Systems, a maker of small robots that whiz goods to the right spots within a warehouse, for $775 million. Kiva “could speed the cycle time inside our fulfillment centers,” Bezos says. Owning Kiva gives Amazon first crack at its technology, which means “getting products to customers even more quickly.”

In some ways this is the area Bezos least needs to worry about: Last December he was “very proud” that Amazon was able to make good 99.99% of the time on its promises to get packages to customers before Christmas. No small feat (just ask Best Buy). To Bezos, though, this also means they came up short one time in 10,000. “We’re not satisfied until it’s 100%.”

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Evan Osnos (2012): The God of Gamblers – Why Las Vegas is moving to Macao. in: The New Yorker; April 9th, 2012

  • In 2007, Sheldon Adelson opened the Venetian Macao, with the world

In 2007, Sheldon Adelson opened the Venetian Macao, with the world’s largest casino. U.S. authorities are investigating his company’s compliance with the Foreign Corrupt Practices Act. Photograph by Matthew Niederhauser.

In the late summer of 2007, a fifty-year-old former barber named Siu Yun Ping began making regular visits from his village, in Hong Kong, to the city of Macau, the only Chinese territory where it is legal to gamble in a casino. Macau sits on a horn of rocky coastline, where the Pearl River washes into the South China Sea. It’s about a third the size of Manhattan, covering a tropical peninsula and a pair of islands that look, on a map, like crumbs flaking off the mainland. Chairman Mao banned gambling in China long ago, but it endures in Macau because of a wrinkle of history: the city was a Portuguese colony for nearly five hundred years, and when it returned to Chinese control, in 1999, it was entitled to retain some of the flamboyantly libertine traditions that led W. H. Auden to christen it “a weed from Catholic Europe.” The infusion of China’s new riches triggered an unprecedented surge of construction, and by 2006 Macau’s casino revenues had surpassed those of Las Vegas, until then the world’s largest gambling town. Today, the quantity of money passing through Macau exceeds that of Las Vegas five times over.

Siu Yun Ping—or Brother Ping, as friends called him—had known little good fortune. He grew up in the tin-roofed hut of a squatters’ settlement on the mudflats of rural Hong Kong. The year he was born, a fatal flood swept through the neighborhood; subsequent years brought drought, then typhoons. “It was as though the gods wished to destroy us by driving us mad,” a local official recalled in his memoirs. Siu had five siblings, and his education ended in primary school. When he wasn’t cutting hair, he found employment as a tailor and a construction worker. Gambling was technically illegal in Hong Kong, but, as in many Chinese communities, it was a low-key fixture of life, and, by the age of nine, he was pushing his way into the crowd to watch local card games. At thirteen, he was playing for small stakes, and an underground gambling den hired him to hang around and keep an eye on the players’ hands. “I’m good at observing people’s movements,” he told me recently. “Whenever I saw someone cheating, I told the boss.”

As an adult, he continued to play cards, though with little success. He was an unglamorous presence—trim and wiry, with plump cheeks, bushy hair, and the fast, watchful eyes of a man accustomed to looking out for himself. He married at nineteen, had three children, divorced, and married again. Around his home village, Fuk Hing, which means Celebrating Fortune, he was also known by a nickname that he did not much care for: Lang Tou Ping, or Inveterate Gambler Ping.

While working as a barber, he befriended a skinny local teen-ager named Wong Kam-ming. Wong had grown up in the same district, one of the poorest in Hong Kong, and had also dropped out of school to find work. They occasionally met for supper at a café where Wong worked for his mother. Siu was trying to become a small-town developer, building and selling houses among the paddy fields near his village, and Wong opened his own restaurant. They didn’t see each other often, but Siu said that they were “like brothers.” They became especially close in recent years, when Wong began working on the side in Macau, as a “junket agent,” recruiting gamblers, giving them lines of credit, and earning commissions on how much they bet. One of the people he recruited was Siu.

Once or twice a week, Siu boarded the public ferry for an hour-long trip across the rolling gray waters of the Pearl River estuary. Seventy thousand people turned up each day to try their luck, more than half of them from mainland China. He had no illusions about whether his habit was in his favor. “Out of every ten people who gamble, maybe three will win,” Siu said. “And when those three keep on gambling only one will win.” He played baccarat, the Chinese gamblers’ favorite. (It offers slightly better odds than the alternatives, and is easy to master.) The punto bancostyle, favored in Macau, involves no skill; the result is determined as soon as the cards are dealt.

In August of 2007, within weeks of beginning his regular trips, Siu hit a hot streak. Some days, he won thousands of dollars. Others, he took home hundreds of thousands. With Wong’s recommendation, he was invited into opulent V.I.P. rooms, which are open only to the biggest bettors, and he became a regular on the high rollers’ helicopter trips across the water. The more he played, the more Wong earned in commissions and tips. As winter approached, Siu’s success set in motion a chain of events that eventually reached Las Vegas and showed why Macau is a place where it’s easy to get in over your head, whether you’re a former barber in Hong Kong or one of the richest men in America.

Gambling towns are shrines to self-invention. In the eighteen-sixties, Monaco was a tiny backwater in financial distress after losing most of its land to France; then it built a casino, and became one of the world’s wealthiest places. Las Vegas was a desert outpost battered by sandstorms and flash floods—a land that the “Lord had forgotten,” in the view of nineteenth-century Mormon missionaries, who abandoned it—before it grew into the city that now attracts more people each year than Mecca. Hal Rothman, the late historian of the American West, wrote that Las Vegas posed the same question to every visitor: “What do you want to be, and what will you pay to be it?

The ferry to Macau is greeted by a crowd of touts. When I arrived not long ago, I encountered a figure in a rotund cartoon-dog suit, waving strenuously in the heat. He was a mascot from Macau’s Venetian resort—a cousin of the Las Vegas resort of the same name—and the dog suit was adorned with the striped shirt and straw hat of a gondolier. Beyond, the city rose in layers of steep hillsides jammed with high-rise apartment blocks, the remnants of a Portuguese fort, and lush groves of Chinese banyan trees. In the crowd, a young woman handed out a Chinese advertisement for “USA Direct,” which offers a toll-free number for Mandarin speakers to buy American real estate at cut-rate prices.

Macau, whose population is half a million, feels like China amplified and miniaturized. It is animated by the same formula of ambition and speed and risk, but the sheer volume of money and people passing through has distilled the mixture into an extract so potent that it can seem to be either the city’s greatest strength or its greatest liability. A generation ago, Macau made fireworks, toys, and plastic flowers. Today, the factories are gone, the average citizen earns more than the average European, and the gap between the rich and the poor is vast and widening. Construction is ceaseless, and at night welders’ torches flare from scaffolding overhead. Underfoot, the sidewalks are littered with faces on discarded handbills that promise the companionship of “girls from every continent.”

American casino companies have raced to move in. In 2006, Steve Wynn, who led a revival of Las Vegas in the nineteen-nineties, opened a casino in Macau; he makes more than two-thirds of his global profits there. He is learning to speak Chinese, and he talks about moving his corporate headquarters to Macau. “We’re really a Chinese company now, not an American company,” he has said. Macau has become especially attractive to American corporations in the last few years. In Nevada, after tourism sank in 2008, gaming revenue plunged by nearly twenty per cent in two years, the largest decline in the state’s history. It later improved, but Nevada still has the highest unemployment and foreclosure rates in the country. Gary Loveman, the chairman of Caesars Entertainment, was one of the few casino bosses who passed up a chance to build in Macau. “Big mistake,” he said later. “I was wrong, I was really wrong.” Even by China’s standards, the speed of Macau’s growth is breathtaking; for a decade, the economy has ballooned, on average, nineteen per cent a year—nearly twice as fast as mainland China’s. In 2010, high rollers in Macau wagered about six hundred billion dollars, roughly the amount of cash withdrawn from all the A.T.M.s in America in a year.

The United States government has come to believe that the cash changing hands on the tables in Macau is only a small part of the picture. “The growth of gambling in Macau, fuelled by money from mainland Chinese gamblers and the growth of U.S.-owned casinos, has been accompanied by widespread corruption, organized crime, and money laundering,” according to the 2011 annual report by the U.S. Congressional-Executive Commission on China. The place has emerged as the “Macau Laundry Service,” as U.S. diplomats put it in an internal cable in 2009. Juan Zarate was a senior counterterrorism official in the Bush Administration who worked on sanctioning a private bank in Macau that allegedly facilitated, among other things, the financing of nuclear proliferation by North Korea. “Anyone who knows anything about anti-money laundering understands both the inherent and the real risks in Macau,” Zarate said. “You have an admixture of commercial-financial activity, a way station for people and goods, a casino sector, all in a potentially volatile regional environment.” David Asher, who was a State Department senior adviser for East Asian and Pacific Affairs in the Bush Administration, calls Macau “a cesspool” of financial crimes. “It’s gone from being out of a James Bond movie to being out of ‘The Bourne Identity,’ ” he said.

Intrigue, of one kind or another, has clung to Macau’s history since the city’s founding myths, which described an act of elegant deception: In 1564, local Chinese fishermen sought the help of a visiting Portuguese fleet for a battle against pirates; the Portuguese disguised their cannon inside Chinese boats and waylaid the bandits at sea. In gratitude, the Chinese granted permission to the Portuguese to stay on the peninsula. Macau became a vital stop between India and Japan, but, eventually, nearby Hong Kong built a better port and Macau found alternative specialties: opium, prostitution, and gambling. When the Dutch-born writer Hendrik de Leeuw visited, in the nineteen-thirties, for his book “Cities of Sin,” he included it as home to “all the riffraff of the world, the drunken shipmasters; the flotsam of the sea, the derelicts, and more shameless, beautiful, savage women than any port in the world. It is a hell.”

Until recently, Macau looked as much Mediterranean as Chinese, with baroque Catholic churches and rows of cafés shaded by drooping palms, where old émigrés sipped café da manhã over the Jornal Tribuna. These days, the city also evokes a touch of the Persian Gulf. Government tax revenue is often more than double the budget, and, like Kuwait, Macau distributes occasional checks to its residents under a program named the Wealth Partaking Scheme. (Last year: eight hundred and seventy-five dollars per person.) Unemployment is below three per cent. “What Las Vegas did in seventy-five years, we are doing in fifteen,” Paulo Azevedo, the publisher of Macau Business and other local magazines, told me. The rush has left the city short of many things—taxis, roads, housing, medical services. “For dental, I have to go to Thailand,” Azevedo said. One month, Macau came close to running out of coins. The casinos have reordered the rhythms of life and work, in ways that are not universally celebrated. Au Kam San, a member of Macau’s Legislative Assembly, who works as a high-school teacher, told me, “My students have said, ‘I can go get a job in a casino right now and earn more than my teacher.’”

A short drive from the ferry, Steve Wynn has a complex with two hotels, where the Louis Vuitton outlet is said to generate more sales per square foot than any other Louis Vuitton outlet worldwide. Walking past a tank of luminescent jellyfish, which require a specially designed curtain to sleep at night, the casino official who was showing me the place told me that Chinese clientele demand a heightened level of luxury, because “everyone is a president or a chairman.” We stopped into the complex’s newest Michelin-starred restaurant, which has an in-house poet who writes a personal verse for every V.I.P. I asked about a tiny white leather stool beside each table, and a staff member explained, “That’s for your handbag.”

In catering to his clients, Wynn has embraced Chinese notions of luck and fortune with the passion of a convert. When the hotel discovered that the number of private rooms in its spa was four—an unfortunate number, because it sounds, in Chinese, like “death”—designers added a line of fake doors across the hall, to suggest a total of eight, which is closer to “get rich.” In Las Vegas, Wynn made his name pushing luxury over camp—Picasso, say, over Wayne Newton—but his hotel in Macau still has a place for what casino designers call the “wow feature.” Once an hour, tourists gather in the lobby to watch a hole open in the floor. A giant animatronic dragon climbs out, coiling into the air, red eyes blazing, smoke pouring from its nostrils.

Games of chance have been a part of Chinese history since the Xia dynasty (2000-1500 B.C.). “The government often imposed rules against them, and yet officials themselves were the ones who gambled the most,” Desmond Lam, a marketing professor at the University of Macau, told me. “They would get stripped of their titles, caned, jailed, exiled, but we still see the trend across the dynasties.” Parsing Chinese appetites for risk is a modest academic niche, with applications beyond the world of casinos. “When I was growing up,” Lam said, “my family always gambled—at holidays, funerals, that’s just what we did—so I wanted to know: Why do Chinese communities gamble?” Lam and I were taking a walking tour of the City of Dreams, a casino complex that uses the promotional tagline “Sign Up, Play, Change Your Life.” After six years of studies and surveys, Lam views each gambling table as a “microscopic battle,” a standoff between science and faith. On one side is the casino, which can reliably calculate its advantage to two decimal points. On the other is a collection of Chinese beliefs about fate and superstition, which, Lam says, “people know are irrational but are part of the culture.” He ticked off some received wisdom: To improve the odds, wear red underwear and switch on all the lights before leaving home. To prevent a losing streak, avoid the sight of nuns and monks when travelling to the casino. Never use the main entrance. Always find a side door.

The City of Dreams smells of perfume, cigarettes, and rug shampoo. Chinese gamblers rarely drink when money is on the line, and the low, festive hum is broken now and then by the sound of someone pounding the table in delight or anguish, or exhorting the cards to obey. One night, I settled into the scrum around a baccarat game in which a slim man with heavy eyebrows and a red face shining with sweat was performing “the squeeze”—slowly peeling up the edge of his card, while the man beside him shouted “Blow! Blow!” to wish away a high number. When the slim man had peeled enough to see the digit, his face twisted in disgust and he tossed the card across the table.

“Americans tend to see themselves in control of their fate, while Chinese see fate as something external,” Lam said. “To alter fate, the Chinese feel they need to do things to acquire more luck.” In surveys, Chinese casino gamblers tend to view bets as investments and investments as bets. The stock market and real estate, in the Chinese view, are scarcely different from a casino. The behavioral scientists Elke Weber and Christopher Hsee have compared Chinese and American approaches to financial risk. In a series of experiments, they found that Chinese investors overwhelmingly described themselves as more cautious than Americans. But when they were tested the stereotype proved to be a fallacy, and the Chinese took consistently larger risks than Westerners of comparable wealth. (The gap applies only to investing; asked about decisions in health care and education, the groups were indistinguishable.)

Living in China, I’ve come to expect that Chinese friends make financial decisions that I find uncomfortably risky: launching businesses with their savings, moving across the country without the assurance of a job. One explanation, which Weber and Hsee call “the cushion hypothesis,” is that traditionally large Chinese family networks afford people confidence that they can turn to others for help if a risk does not succeed. Another theory is more specific to the boom years. “The economic reforms undertaken by Deng Xiaoping were a gamble in themselves,” Ricardo Siu, a business professor at the University of Macau, told me. “So people got the idea that taking a risk is not just O.K., it has utility.” For those who have come from poverty to the middle class, he added, “the thinking may be, If I lose half my money, well, I’ve lived through that. I won’t be poor again. And in several years I can earn it back. But if I win? I’m a millionaire!”

In the case of Inveterate Gambler Ping, success drew attention. About four months into Siu’s streak, a gossip column in the Apple Daily, a popular Hong Kong paper, took note of a “mysterious” figure making the rounds in Macau, said to be amassing a fortune as large as a hundred and fifty million dollars. “Is he extremely lucky or does he have the real magic touch?” the paper asked in January, 2008. The next day, a member of Hong Kong’s legislature, Chim Pui Chung—a devoted gambler himself—told the paper that he had heard people hailing the new high roller as the “God of Gamblers,” borrowed from the title of a Hong Kong movie starring Chow Yun-fat.

A streak of that scale was also likely to attract suspicion. Macau garners its share of creative casino cheats; last summer, local police arrested members of a gang accused of embedding miniature cameras into card-shuffling machines. Too much success can be cause for distrust. A casino’s advantage in baccarat—about 1.15 per cent—ordains that the chances of winning all but evaporate for a gambler after thirty thousand hands. A dedicated player can draw a thousand hands in a weekend and come out ahead, but after seven months almost nobody should go home a winner.

Not long after the article appeared dubbing Siu the God of Gamblers, his twenty-year-old son received a series of anonymous threatening phone calls. Then one night someone slipped into Celebrating Fortune village and tried to set the family house on fire. Finally, Siu’s friend Wong Kam-ming, who had introduced him to several V.I.P. rooms, received an angry call. The man on the other end demanded a meeting to discuss the question of Inveterate Gambler Ping’s having cheated.

Nobody embodies Macau’s reputation for self-invention more thoroughly than Stanley Ho, a tall, elegant ninety-year-old tycoon who once dated starlets and dancers, excelled at the tango, and was chauffeured around Hong Kong in a Rolls-Royce with the license plate “HK-1.” After his father lost the family fortune in the stock market, Ho got his start during the Second World War with a trading company in Macau. “By the end of the war, I’d earned over a million dollars—having started with just ten,” he said later. He expanded into airlines, real estate, and shipping, and in 1962 he and associates took over Macau’s casinos, gaining a monopoly that lasted forty years and made him one of Asia’s richest men. In his choice of business partners, he was non-judgmental; he ran horse racing under the Shah of Iran, a gaming boat under Ferdinand Marcos, and an island casino under Kim Jong Il. Intelligence agents were desperate to cultivate Ho for his connections, but the late Dan Grove, a retired F.B.I. agent who served in Hong Kong, told me, “Nobody ever got past first base.”

For years, foreign governments have suspected Ho of being too cozy with Chinese organized crime. Regulators have thwarted his family’s efforts to run casinos in the U.S. and Australia. In 2009, New Jersey regulators decided that a joint venture between MGM Resorts International and Ho’s daughter Pansy failed the state’s requirement that casinos avoid business with “notorious or unsavory persons.” Far more surprising is what happened afterward, when New Jersey gave MGM an ultimatum: cut ties with the Ho family or lose a stake in Atlantic City’s highest-grossing casino. MGM chose Macau, and it is now selling its stake in Atlantic City.

Stanley Ho’s monopoly expired in 2002, three years after China took control, and foreign competitors surged in to obtain licenses. The first new casino to open was the Sands Macao, backed by Sheldon Adelson, of Las Vegas, whom Forbes ranks as the seventh-richest person in the United States. Adelson is Stanley Ho’s physical opposite—small and heavy, with pale-red hair. Where Ho avoided overt declarations of power, Adelson has described himself as the “largest investor of any kind in the history of China.” The son of a cabdriver from Lithuania, Adelson grew up in the Boston suburb of Dorchester, and ran a spate of businesses with erratic success—packaging toiletries for hotels, selling a chemical spray to clear ice from windshields—before his break, in 1979, when he launched Comdex, a computer trade show. He later bought the old Sands Hotel in Las Vegas, created America’s largest privately owned convention center, and enriched himself with a signature strategy of pairing casinos with exhibition centers.

More than a decade ago, he coveted Macau as a gateway to 1.3 billion Chinese nationals, and he successfully courted Chinese leaders in Beijing by emphasizing his influence in Republican politics. (He is a frequent donor to right-wing causes in the United States and Israel. He and his relatives drew attention in the Republican Presidential contest this year by giving $16.5 million to a Super PAC that supported Newt Gingrich, representing all but five per cent of the money that the group raised.) He told people that Macau would someday help him overtake Bill Gates and Warren Buffett in wealth. A crowd of thousands turned up on the Sands opening day, in May, 2004, lured in part by false newspaper reports of free gambling chips for the first bettors. Tom Smock, the casino’s general counsel at the time, watched as the building’s tall metal front doors began to give way from the pressure of the crowd. “Every time a hinge broke, the crowd roared with approval,” Smock said. “They ripped every door off the hinges at that front entrance. That’s how the casino opened, and they poured in.”

Within a year, the Sands Macao had recouped its construction costs, of two hundred and sixty-five million dollars, and Adelson embarked on an idea that he described as coming to him in a dream: to replicate the Las Vegas Strip on a stretch of open sea between two islands in Macau. His company constructed a landfill out of three million cubic metres of sand—he named it the Cotai Strip, for Coloane and Taipa, the islands that it fused together—and he opened the $2.4-billion Venetian Macao, a supersized replica of the Las Vegas Venetian, with the largest casino floor in the world.

Unlike Las Vegas, where most of the profits come from coins fed into slot machines, three-quarters of the revenue in Macau is derived from the enormous bets made in the V.I.P. rooms, where high rollers play around the clock. Casinos rely on outside companies, known as “junkets,” to solve some of the practical problems inherent in running a casino in Macau. It is illegal to advertise gambling in mainland China, and Chinese citizens are barred from carrying more than the equivalent of about three thousand dollars on any single trip to Macau. Most troubling, from the casinos’ perspective, is that it’s illegal to try to collect a gambling debt in the People’s Republic. Working through junket operators is a legal bypass around those problems, because the operators will recruit rich customers from across China, issue them credit, and then handle the complicated business of collection. The system is an attractive arrangement for customers who need to secrete large quantities of cash out of China. If a corrupt official or executive wants to hide the proceeds, a junket is a way to hand over cash on one side of the border and recover it on the other, in chips that can then be played and cashed out in clean foreign currency. (Another option is to smuggle it by hand across Macau’s relaxed borders, a practice known in laundering circles as “smurfing,” for the army of small-time couriers involved.)

While the junket industry has many law-abiding members, it has, for decades, been susceptible to the involvement of organized crime. Triads, which grew out of nineteenth-century Chinese political societies, had always been involved in loan-sharking and prostitution, and had made their presence felt on the edges of Macau’s casinos, but in recent years triads had become more business-oriented. Triad violence in Macau and Hong Kong has declined over the past decade, because triads have increasingly set aside squabbles over drugs and petty crime in order to pursue the range of new criminal opportunities associated with a more prosperous China, including money laundering, financial fraud, and gambling. Gangsters are becoming “gray entrepreneurs,” as criminologists put it, and it was more difficult to distinguish between triads that had gone into business and businesses that were acting like triads. Some mob bosses still adhere to the old ranks of gangsterdom—“dragon heads,” at the top; “red poles,” overseeing operations—but many follow the ancient rituals only perfunctorily: the thirty-six oaths, the cocktail of blood and rice liquor. Some younger gang members resort to cribbing from the rituals in gangster movies.

Steve Vickers is a former commander of the Royal Hong Kong police’s Criminal Intelligence Bureau. “I know of no Chinese junket operator that doesn’t have some association with triads,” he told me. A thirty-nine-year-old junket agent said that when he entered the business, in his mid-twenties, triad membership was effectively a job requirement, but in the past decade it has broadened to include anyone who “can bring in money and customers.” To find clients in a country that is minting more millionaires each year than any other, some of his peers scour the business press looking for new tycoons. “Nowadays, in Macau, if a person doesn’t gamble at least a few hundred thousand dollars, then he isn’t even a real customer,” he said. What happens if a customer doesn’t pay up? “We go to the city where he is and call him up. Then, if necessary, we wait there for a couple of days. Just to put some pressure on him.”

In recent years, U.S. federal agencies, including the F.B.I., the Secret Service, and the Internal Revenue Service, have become increasingly familiar with Macau. In an elaborate smuggling investigation that ended in 2005, undercover F.B.I. agents infiltrated a ring that included a Macau citizen named Jyimin Horng, who was accused of importing into the U.S. millions of dollars’ worth of counterfeit cigarettes, methamphetamines, and high-quality fake currency known as “supernotes,” believed to originate in North Korea. Undercover agents wired Horng payments in Macau in exchange for fake bills at a rate of thirty cents for each phony dollar, smuggled in large bolts of fabric and boxes of toys.

When an F.B.I. agent named Jack Garcia posed as a representative of Colombian FARC guerrillas and asked for weapons, Horng sent him a catalogue, and Garcia ordered anti-tank missiles, grenade launchers, submachine guns, and AK-47s. To lure Horng and others to the United States for arrest, the agency staged a mock wedding for a male and a female agent involved in the sting. Horng and other guests received elegant invitations to a celebration aboard a yacht moored off Cape May, New Jersey.

“I was the best man,” Garcia, who is now retired, told me. “We picked them up for the bachelor party and drove them straight to the F.B.I. office.” Fifty-nine people were arrested. (Horng pleaded guilty and is serving three and a half to four years.) Based on that case and on other information, the Treasury Department blacklisted Banco Delta Asia, in Macau, for participating in money laundering. The bank denied the claim, but it has been barred from access to the U.S. financial system.

Eight years ago, when American-run casinos arrived in Macau, observers predicted that the scrutiny of Wall Street and state regulators would drive organized crime out of Macau’s gambling industry. But the junket industry has not shed its links to triads, and junkets operate in every U.S.-owned casino in Macau, largely because they are able to collect debts in China. American casinos insist that they strictly adhere to laws in Macau and the United States to prevent money laundering and the involvement of organized crime. But even those standards have left the casinos at risk. Macau law, for instance, requires identification for any casino transaction above the equivalent of sixty-one thousand dollars—a threshold that is six times higher than that for casinos in the United States.

Grove, the former F.B.I. agent, headed security for the Sands Macao in its early years. He said that American casinos instituted background checks, international accounting standards, and other good-faith efforts to prevent the encroachment of organized crime, but triads found inventive solutions. “They’d even try and get in through the meat contracts at the steak house,” he said. With Las Vegas ailing, casinos can’t afford to sever contracts with the most profitable junkets and lose access to the clients they deliver. As a result, Steve Vickers told me, unless a company has the will and the strategy to get rid of the triads, “you’re constantly on the back foot, constantly worried what these guys are going to do next.”

A few weeks after Siu Yun Ping’s house was set on fire, a group of men were summoned to a meeting in a parking lot on the outskirts of Hong Kong. The meeting had been called by See Wah-lun, a thickset, thirty-year-old mid-level member of one of China’s most famous triads, the Wo Hop To.

See Wah-lun told his men about a plan to extort Siu. As one of them later described it in court, “A boss wanted a man to return some money.” The boss was Cheung Chi-tai, a gang leader who was well known to Hong Kong police and U.S. authorities. In the words of a Hong Kong judge, Verina Bokhary, Cheung could “have a say in things” in a V.I.P. room at the Sands Macao, one of the places where Siu had made his baccarat fortune.

See Wah-lun unveiled a straightforward plot: they would send Siu a message by ambushing his friend Wong, pinning his car between two others and then hustling him over to a nearby village, where a secluded, run-down building would be prepared with gloves, hoods, knives, and extendable police batons. The plan was to break Wong’s legs and hands, but then See called his guys back and told them that it was being upgraded to murder, so Siu would know they were serious and hand over his winnings.

The gang balked. One of the recruits asked, “Do we have to be that serious?”

See was taken aback. “The boss tells you to do it, are you not going to do it?” he said.

Another of the chosen assassins complained that he was supposed to be a guest at a wedding that evening. A third, Lau Ming-yee, had a pregnant girlfriend and financial troubles, and yet he was being asked to do the job gratis. “If you are not going to pay someone, then how would that someone help you?” he said later.

It didn’t help that Lau happened to know the intended victim from years before, when he worked as a delivery boy and dropped off food at Wong’s village. “Everyone was shocked by the idea of killing anybody, never mind somebody some of us knew,” Lau said.

When See asked him to take part in the murder, Lau hesitated. The boss was incensed. “What the fuck you have to think about?” he said.

Lau seemed to relent, and agreed to help with the murder. In reality, he had become an informer for the police. In the predawn hours before the attack, he called his police handler, met him near the Temple Under a Big Tree, and told him about the murder plot and about Siu. In his statement to the police, Lau said, “I am the father of a child and I want to be a responsible man.”

The police arrested five gangsters, and in a trial that fall Lau, who had been placed in protective custody, testified against them. They maintained their innocence, but all were convicted of conspiracy to commit grievous bodily harm and acting as members of a triad. See, the ringleader, was sentenced on additional charges of conspiring to commit murder and recruiting others to carry it out. The five men are now serving between eight and a half and fourteen years. At one point, Siu himself was arrested, on suspicion of involvement in the plot to kill his friend Wong. But he was “released unconditionally,” the judge said, after police concluded that “he was not involved in any such plot.” During the investigation, police also detained Cheung Chi-tai, the triad leader, but he did not spend long in custody. According to John Haynes, See’s defense attorney, Cheung “called his lawyer and refused to answer any questions, and as a result he escaped being charged with anything.” At sentencing, Haynes lamented that the “small potatoes” were going to jail while the “big boss . . . now sits comfortably, free from any charges, in Macau.”

Siu and Wong testified at the trial, and they were asked to estimate how much Siu had amassed during his five-month winning streak. It was a complicated question, because high rollers in Macau often make side bets that are many times larger than the chips on the table. (In a side bet, a player and a junket agent secretly agree that every hundred-dollar chip, say, is worth a thousand or ten thousand, and then they settle wins and losses in private.) In total, he estimated that he had won the equivalent of thirteen million U.S. dollars. Wong put the figure at seventy-seven million.

The notion that a former barber had won as much as seventy-seven million dollars—and outlasted the mobsters charged with getting it back—attracted the attention of members of the Hong Kong press, and they pursued the God of Gamblers as a minor curiosity, though he declined interviews. A year after the trial, the Hong Kong magazine Next published an article alleging that Siu had cheated, by finding a way to manipulate the side-betting system. The article claimed that he had paid off an underling who recorded players’ ups and downs, in order to boost his wins and minimize his losses. The casino hadn’t detected the fraud, the magazine surmised, because side bets were off the books, and the junkets hadn’t anticipated that a gambler might risk trying to buy off a staff member. Siu never responded to the article. In any case, local reporters discovered, he had disappeared.

The God of Gamblers case had all but vanished from the Hong Kong crime pages when, in March, 2010, a Reuters investigation, published in collaboration with Matt Isaacs, of the Investigative Reporting Program at the University of California, Berkeley, reëxamined the trial and seized on a crucial detail: If the triad boss Cheung Chi-tai had “a say in things” in a V.I.P. room at the Sands Macao, as Judge Bokhary had put it, and potentially other links to the industry, then the relationship appeared to be “one of the first documented examples” of mob involvement in a U.S.-backed casino in Macau, Reuters wrote. That link could put Sands at risk of violating Nevada laws barring casino companies from associating with figures who “discredit” the industry, not only on Nevada soil but anywhere.

The Las Vegas Sands was quick to issue a statement that Cheung was “not listed as a director or shareholder” in any of its V.I.P. rooms, but, after it conducted an internal investigation, its lawyers stated that Cheung had indeed been found to be operating as a “guarantor” of V.I.P. rooms at one of the company’s casinos. (A guarantor—who puts up money to lend to players—was not routinely subject to the background checks applied to directors and shareholders, according to a former Sands executive.)

Sands’s trouble with Macau got more complicated that fall, when a former executive, Steve Jacobs, filed a wrongful-termination lawsuit that made a range of accusations against Sheldon Adelson. Jacobs said that he and Adelson had discussed the God of Gamblers case, and the allegation that triads were involved with Sands’s casinos; over Jacobs’s objections, he said, Adelson sought to “aggressively grow the junket business” anyway. Jacobs’s suit also accused Sands of hiring a Macau legislator in a way that could put it at risk of violating the Foreign Corrupt Practices Act. In its responses, Sands denied all the accusations and said that Jacobs was the one who had failed to distance the company from Cheung, the triad boss.

In March, 2011, Sands disclosed that it was being investigated by the Department of Justice and the Securities and Exchange Commission for potential violations of the Foreign Corrupt Practices Act. Adelson vehemently denied any wrongdoing. “When the smoke clears, I am absolutely—not one hundred per cent but one thousand per cent—positive that there won’t be any fire below it,” he said. “They want to get all my e-mails. I don’t have a computer. And I don’t use e-mails. I’m not an e-mail type of person.” (He declined to comment for this account.)

For Adelson and his peers, doing business in Macau is turning out to be opaque and intricate in ways outside their control. They expected to take the strategies that had brought them success in the United States and apply them to Macau. Instead, their corporate fortunes now hinge in part on the decisions of the Communist Party and corrupt officials and Chinese triads. But U.S. casino operators are not about to quit Macau. “The bottom line is this,” Vickers, who is now the head of Steve Vickers & Associates, a risk-consultancy firm, said. “Is the conduct of a United States-listed company compatible with doing business with junket operators in Macau? And the answer might simply be not to list in America.”

Even if Macau can pass muster with Wall Street and U.S. regulators, the bigger question may be what it portends for China—whether its roguish success rides on the kinds of epic corruption that the Party recognizes as one of its most urgent threats.

China could bring Macau’s boom to an end by fiat; citizens need a special permit to go to Macau, and China opens and closes the flow of visitors at will. When, in 2008, it reduced the number of visas, revenue dropped sharply during the financial crisis; Sands stock lost ninety-nine per cent of its value, wiping out more than twenty billion dollars of Adelson’s family fortune. (The value later recovered.)

But cracking down on Macau poses political problems. Some officials in Beijing are keen to maintain the enclave’s economic success, because it shows the breakaway island of Taiwan the potential benefits of a return to the motherland. Moreover, Macau is a place where China’s new millionaires can indulge in the gains of their prosperity, which is one of the rewards guaranteed by the unwritten bargain between Chinese leaders and their people for a generation: Don’t concern yourself with the state’s inner workings, and the state will not overly concern itself with yours. On a return flight from Macau to Beijing, I sat beside a former military officer, who now owns real estate and a string of factories. He visits Macau once a month (“to let off steam”), and he spent much of the flight scrutinizing his latest acquisition: a twelve-thousand-dollar cell phone, encased in alligator skin and equipped with a button that connects him to a full-time concierge, to make dinner and handle travel arrangements.

Macau is poised for another dramatic expansion. A high-speed train line is under construction that will link it with cities as far north as Beijing, and the world’s longest sea bridge, connecting Macau to Hong Kong, is set to open in three or four years, reducing the ferry crossing to a half-hour drive by car. Even as the federal investigations continue, few people in Macau have both the interest and the capacity to impose greater control over the system. Manuel Joaquim das Neves, Macau’s top casino regulator, told me that foreign criticism will not alter the way of doing things in Macau. “Macau is not Las Vegas, Singapore, or, indeed, any other jurisdiction,” he said, adding, “Macau has attracted more than twenty billion dollars in foreign investment in the casino industry alone. In short, the public interest has been well served.” José Maria Pereira Coutinho, a liberal member of the Legislative Assembly, is less impressed with the industry. “The government is incompetent,” he said. More than eight out of every ten dollars of government revenue comes from casinos, and Coutinho says that the annual payments to citizens are a “drug,” to “keep their mouths shut.” I asked whether lawmakers will push for more urgent changes. He laughed, and said, “In the Legislative Assembly, a nuclear bomb could pass through and everything would go slowly and calmly.”

The files of the God of Gamblers case can be read as a string of accidents, good and bad: Siu’s run at the baccarat table; Wong’s luck to be assigned an assassin with a conscience; Adelson’s misfortune that reporters noticed an obscure murder plot involving his casino. But the tale, viewed another way, depends as little on luck as a casino does. It is, rather, about the fierce collision of self-interests. If Las Vegas is a burlesque of America—the “ethos of our time run amok,” as Hal Rothman, the historian, put it—then Macau is a caricature of China’s boom, its opportunities and rackets, its erratic sorting of winners and losers.

Four years after Siu hit his hot streak, I got word through a friend in Hong Kong that he might be back in his old neighborhood, not far from the dismantled squatters’ camps where he grew up. He was said to have worked out a deal for protection from another triad, the Wo Shing Wo. I took the train to see him. His neighborhood lies in a lush river delta framed by green hills on the horizon. The summer heat had broken and construction seemed to be under way everywhere, as old villages were being converted into enclaves of villas and cul-de-sacs with names like the Prestige and Sky Blue and Full Silver Garden.

I met Siu at a construction site near a scrap-metal yard, surrounded by marshy fields of water chestnuts and lilies, crosshatched by footpaths. He was building fourteen houses whose modern design, heavy on stainless steel and black granite, would have looked at home in Sacramento or Atlanta. The complex will be called the Pinnacle. Siu was wearing a droopy yellow golf shirt, jeans, and muddy sneakers. He seemed subdued, and his voice was raspy. He was barely distinguishable from his crew—tanned, bony, middle-aged men from across the Chinese countryside. When I arrived, it was quitting time, and one of them was naked, giving himself a bird bath from a bucket of soapy water. Siu and I sat on folding chairs beside a line of drying laundry and gazed out over the unfinished houses.

I asked where he had gone into hiding, and he smiled. “All over China,” he said. “I drove everywhere by myself. Sometimes I stayed in five-star hotels, sometimes in tiny places. I liked Inner Mongolia the best. Eventually, I went up to the mountains of Jiangxi for eight months. When it began to snow, I nearly froze. I went down from the mountains and came home.”

I asked if he had cheated at baccarat. “The reporters just listened to rumors from people who wanted their money back,” he said. “Everybody says I was playing tricks at the table. It’s not true. I wasn’t. When I gambled, there must have been ten people with their eyes on me at any time. How am I supposed to play tricks?”

His denial left open a range of possibilities for manipulating the game, and theories abound. A lawyer for one of the defendants surmises that Siu may have been a minor player in a larger con, pitting one triad against another. But he said that, ultimately, “there is so much cheating going on. How can you know the truth?”

Siu seemed unconcerned about his safety. “I’m in my mid-fifties, and I’ll live to be, what, seventy?” he said. “So I’ve got only another decade or so. What do I have to lose? I’m not afraid.” He fell silent for a moment. “If they come for me, I can go for them, too,” he added.

He’d stopped going to Macau. The decision was for his kids, he said. “I don’t want them to gamble. Two of them have bachelor’s degrees, one has a master’s. They don’t swear. They’re good kids.” He went on, “You have to be highly sensitive to be a good gambler. I don’t recommend it to everybody. Everyone called me Inveterate Gambler Ping. But I never liked that, because I was never addicted. I gambled because I knew I could win.”

Night was falling, and Siu offered me a lift back to the station in his black Lexus S.U.V., parked in the dirt beside us. “There used to be a helicopter taking me to the Venetian anytime I wanted to go,” he said. “Now I’m getting my feet dirty. Real estate is even more lucrative. It’s better than gambling or drugs or anything.” He pointed out the new houses in progress. “It costs a few million to build one of these, and then I can sell it for ten million.”

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