Once regarded as a model of economic success, Iceland suffered a complete banking collapse in October 2008.

There is no simple way to explain the Icelandic banking collapse, but a good starting point is the country’s long-standing support of free trade. Iceland’s economy has always been export-driven, and as such, the government there has promoted free international trade for quite some time. Iceland became a member of the European Free Trade Association (EFTA) in 1970 and a member of the European Economic Area (EEA) in 1994. The EEA allows EFTA countries, like Iceland, to participate in the European single market without joining the European Union.

One of Iceland’s obligations in becoming a member of the EEA was to relinquish state ownership of its banks—no small task as the state owned and controlled two-thirds of the banking sector. The timing of this bank privatization, however, was unfortunate. In the wake of 9/11 and the uncertain financial markets that followed, international banks were not about to invest in state-owned banks in little Iceland. Instead of turning to these international banks, as originally planned, the government decided to sell the stakes to Icelandic investors. In late 2002 and early 2003, controlling interests in two major commercial banks were sold to two groups of Icelandic investors.

These transactions would turn out to be a big mistake because the investors had no background in banking and finance. They were simply investors—and speculative ones at that. They soon turned the former state banks, which for some reason still enjoyed strong ratings from the major rating agencies, into their own private financing and co-investing vehicles.

The 9/11 tragedy would continue to impact the Icelandic banking sector even further. The Federal Reserve of the United States and other central banks had responded to the crisis and uncertainties by driving interest rates down to their lowest level in a century and printing money to stave off recession. The Fed was very successful—too successful, many would argue—as the easing policies following 9/11 paved the way for the housing bubble and subsequent liquidity crisis in capital markets that still haunts us.

The Icelandic banks, meanwhile, were rated as if they were still backed by the government, and cheap money was flowing all around. Big banks, like Deutsche Bank, Morgan Stanley and many others, were practically begging the Icelandic banks and their owners to borrow money. In 2002 the size of the Icelandic banking system was less than Iceland’s GDP. By 2008, shortly before the collapse, it had grown to 12 times the country’s GDP.

In the years leading up to 2008, Icelandic banks opened offices and branches abroad. London, Luxembourg, Geneva, New York, Stockholm, Helsinki, Copenhagen—in fact, the whole world—became their playground. The banks acquired banks in other countries and funded acquisitions for Icelandic and international companies, mainly on “High Street” in the United Kingdom (or “Main Street,” as it is known in the United States), but also in Scandinavia and elsewhere. Due to the ready availability of funds there was an equity price bubble in the making on High Street, and Icelandic investors often turned out to be the highest bidders. This scenario was fine as long as the bubble lasted, but once the bubble started leaking air, it turned out to be a curse.

Funding of the Icelandic banks was thin and highly dependent on wholesale. As a result, two of the banks introduced online deposit accounts in major markets (the U.K., the Netherlands, Germany and elsewhere) and were very successful in attracting depositors. Landsbanki operated its Icesave accounts in branches in the U.K. and the Netherlands, while Kaupthing Bank operated its Edge accounts in the U.K. through a subsidiary.

The distinction between branches and subsidiaries became very important in the aftermath of the banking collapse, as subsidiaries are regulated by the host country and thus covered by deposit insurance schemes in the host country. Branches, however, are regulated by the Icelandic Financial Supervisory Authority (FSA) and covered by the Icelandic deposit insurance scheme. The cost of the Icesave deposit insurance alone could end up bankrupting the Icelandic state, as cost per capita could reach $20,000.

Glitnir, the third bank, did not introduce deposit accounts internationally. This meant that Glitnir felt the liquidity squeeze in international capital markets much sooner than the others. Glitnir was facing a refinancing of almost $1 billion in mid-October 2008. After the collapse of Lehman Brothers on Sept. 15, 2008, confidence in financial markets evaporated. Banks stopped doing business with other banks as one could not be certain whether the counterparty would still be around the next day, let alone a month later.

At the end of September, Glitnir went to the Icelandic Central Bank and asked for a loan to cover the refinancing. The Central Bank—against the warning of the whole banking sector, economists and others—refused the loan and recommended instead that the Icelandic government put up the money in exchange for a 75 percent equity stake in Glitnir. The government went with the Central Bank’s recommendation.

There was a problem, however, with this approach. Each share of Glitnir stock, which on Friday, Sept. 26, had been trading at ISK 15.5, was valued at approximately ISK 2, thereby destroying any pricing built into the Icelandic stock market. This move put the pricing of other banks listed on the exchange in jeopardy. Also, to make matters worse, the owners of Glitnir had a billion-dollar loan from Landsbanki secured with their Glitnir stock.
The Glitnir nationalization was announced on Monday, Sept. 29. Immediately the rating agencies downgraded all Icelandic banks and Icelandic sovereign debt as well. In the early hours of Oct. 9, Kaupthing Bank became the last of the large Icelandic commercial banks to fall. The banking system officially had collapsed.

Trying to salvage what they could, the Icelandic government and parliament passed an emergency law, which gave the FSA unprecedented powers to take over and manage Icelandic financial institutions. The British government responded by invoking the anti-terrorism legislation from 2001 to freeze all assets of Landsbanki in the U.K.

The U.K. authorities also used their powers to bring down Singer & Friedlander, Kaupthing Bank’s subsidiary in the U.K., with brute force. This move guaranteed the fall of Kaupthing and was, in the eyes of many, a low blow by the British. On that very same day the British government announced a rescue package for U.K. banks—that is, all banks other than the one owned by an Icelandic bank.

The Icelandic Central Bank failed miserably in maintaining a responsible and stabilizing monetary policy. It brought interest rates up to 15.5 percent in a fight against imaginary inflation. This policy drove up the value of Iceland’s króna, the world’s smallest floating currency, and created an opportunity for carry trade, wherein investors borrowed in low interest rate currencies and invested in króna. This further drove up the value of the króna, resulting in a huge trade imbalance, which in the end caused the króna to collapse even before the banks.

When the monetary policy of the Central Bank is viewed in context, it is difficult not to put the brunt of the blame for the meltdown squarely in the lap of its directors. In fact, chances are anyone could have done better than they did. But, of course, the Central Bank was working under adverse conditions at the time, and it would be unfair to say that one group was more at fault than any other. In reality there was no single, simple reason for the collapse. It was the result of a confluence of unfortunate decisions and circumstances—ones that Icelanders hope will never be duplicated again.

Having seen this process over the years, Professors Neta Moye, Meredith Ferguson and I began to wonder: Does it matter if companies create negative feelings on the part of job candidates during negotiations? Obviously the goal of an exploding offer is to get a candidate to agree to the company’s terms, and many candidates do sign on as a result of this tactic. In the end the company achieves its goal, regardless of potential negative feelings. While disrespectful behavior may make them less likely to join a company, candidates still sign on because it is a good job in terms of pay or responsibilities, or because there may not be any other good alternatives. If that is true, then why should it even matter how job candidates feel? 

How a company treats an employee during the negotiation process has an impact months or even years later. That first impression is a very strong and enduring one.

Our answer to that question is that the relationship between employees and companies requires long-term commitments. An employee’s feelings toward a company build over time. Those feelings affect whether an employee is likely to keep an eye on other jobs or really commit to the company. The costs associated with turnover are high. They include direct recruiting costs, as well as the time and money it takes to get an employee fully up to speed. Indeed, it may not be until a new MBA’s second or third year that he or she is really productive for a company. A premature exit by a highly skilled employee can be costly. 

Looking at the literature on “justice” in organizations, we know that people care not just about the financial results of personnel decisions, like pay and job assignments, but also about how those decisions are made. People want to be treated with respect, have procedures explained and feel that others recognize their individual needs. It is not just that people like proper treatment; it is also about whether the organization sees them as valued members of the community. An employee builds his or her first impressions about a company during the job negotiation. As a result, we predicted that the treatment of employees during job negotiations would affect their sense of negotiation “interactional justice,” which in turn would affect their interest in looking for jobs at other companies—even long after the initial hiring process was over. 

To test our predictions, we conducted two studies. In one we surveyed 68 MBA graduates about the hiring processes for their current jobs, which had happened on average a year or two earlier. We asked if they thought their companies used high-pressure negotiation tactics, if they felt unjustly treated, and if they were currently looking around for other jobs. When we did the analysis, we statistically controlled for the quality of the actual outcome (that is, how satisfied they were with the actual deal they got) and for their impressions of the overall HR practices at their companies. This was done to be really clear about the effects of the job negotiation process. Our results showed that those MBAs who felt that their initial job negotiations were unjust reported a higher desire to leave their companies. And, we know from prior research that this desire to leave a company (called “turnover intention”) does predict actual job exit. 

In our second study we surveyed 52 MBAs just as they were leaving their MBA programs and right after they completed their job negotiations. We asked about pressure tactics during those job negotiations and how they felt they were treated. We then did a follow-up survey asking about turnover intentions six months later, with 31 of those MBAs responding. This study showed that high-pressure tactics did enhance feelings that the negotiation process was unjust, and it also confirmed what we found in our first study: that perceived unjust treatment experienced during job negotiations enhanced turnover intentions six months later. Thus, using two different research methods, we were able to show that how a company treats an employee during the negotiation process has an impact on turnover intentions months or even years later. That first impression is a very strong and enduring one. 

What are the implications for companies? Most importantly, companies should pay attention not only to what they offer new recruits but also to how those offers are made. Note that these effects occurred controlling for actual outcomes (that is, the actual terms being offered to new hires). So, we are not suggesting that companies need to pay more or give higher benefits. Totally separate from what is actually offered, it is important to make the offer and manage the conversations and interactions with job candidates in a way that is respectful and considerate. This can be done at no cost to the company, and can potentially save lots of money down the road.

Does this matter even during hard economic times? Actually it may matter even more. Hard times are when people may take job offers simply because they have no other choice. They may be even more willing than usual to overlook bad behavior by a hiring company just to get that job. So while it may be easier to get the recruit, the feedback received from that person will be less clear. During hard times companies are more at risk of being overconfident, being sloppy in the negotiation process, and undermining the foundation of the relationship with that employee in the years to come.

At the 2007 Yearly Kos convention in Chicago, Clinton said, “A lot of those lobbyists, whether you like it or not, represent real Americans. They actually do. They represent nurses. They represent social workers. They represent—yes, they represent corporations that employ a lot of people.”

Firms lobby not only to defend themselves from harmful policies but also to profit from tax advantages, regulation loopholes and government budget appropriations.

Obama, however, offered a different argument. “I disagree with the notion that lobbyists don’t have disproportionate influence,” he said. “Look, the insurance and the drug companies spent $1 billion in lobbying over the last 10 years. … They are not spending that just because they are contributing to the public interest. They have an agenda.”

Interestingly their views seem to correspond to the two academic theories of lobbying. On the one hand Gene Grossman, an Economist at Princeton University, and Elhanan Helpman, an Economist at Harvard University, emphasize the “information” role of lobbying. In their well-cited book Special Interest Politics, they consider lobbying as primarily a mechanism to transfer information and knowledge from certain interest groups to policymakers. Grossman and Helpman argue that this improves the efficiency of society, in a sense. 

Nobel Laureate and University of Chicago Economist George Stigler, however, suggests industries are often able to acquire regulations that protect them rather than harm them. Their need for such regulations and the regulators’ willingness to provide them create the demand and supply of a “market for politics.” Firms contact politicians and government agencies through various channels and try to convince them of the necessity to pass “friendly” policies or deter “hostile” ones. In return for the favor granted by the regulators, firms compensate them with votes and resources such as political contributions. 

The popular press seems to give more support to the latter view. The Washington Post recently quoted one top lobbyist as saying: “People in industry better have good lobbyists or they’re going to get rolled over.” Even companies that try to resist political involvement for various reasons usually end up joining the game. For example, Google was reluctant to lobby until it was under severe pressure for issues related to user privacy and operations in China. It then decided to hire high-profile Washington lobbyists and invest heavily in lobbying, as reported in The New York Times. Google’s story was hardly new; Microsoft went through the same process in 1996 when it was entangled in antitrust problems.  

Firms lobby not only reactively to defend themselves from potentially harmful policies but also actively to profit from tax advantages, regulation loopholes and government budget appropriations. The benefits of lobbying are seemingly huge: The Washington Post reported a $100 return on $1 of investment in lobbying for corporations. Similarly BusinessWeek conservatively estimated that firms received an average of $28 in awarded federal earmark spending per dollar spent on lobbying. The benefits of these efforts can come through various channels. The defense industry lobbies for more government contracts; the hi-tech industry lobbies for issues related to patent; and of course, everybody lobbies for lower taxes.

To check whether these claims withstand statistical scrutiny, we compiled a database of corporate lobbying activities made possible by the Lobbying Disclosure Act of 1995. Prior to the Act there was no public data available on how much firms spent on federal lobbying, as lobbying organizations and professional lobbyists were not required to register or disclose their lobbying activities. 

In brief, we found that spending on lobbying pays off handsomely. We looked at financial performance as reported in firms’ financial statements, as well as stock market returns. To gauge stock market performance, we constructed portfolios of companies based on their lobbying intensities (that is, by how much they lobby relative to their size). Based on these rankings, we discovered that firms in the top portfolio generated annual returns 8 percent higher than similar firms that do not lobby. Moreover, it was only these firms with the highest lobbying intensities that systematically outperformed their benchmarks. Thus, contrary to the impression gleaned from the financial press, not all lobbying yields huge rewards.

That said, the chance to tilt the odds in their favor probably explains why American corporations spend so much on lobbying. For example, in the 1997-1998 election cycle, corporations, their trade associations, and other business-related interest groups accounted for roughly 90 percent of the total lobbying spending, dominating that of any ideological or single-issue organizations. (See Figure 1 for the list of top lobbying spenders from 1998 to 2008, as reported by the Center for Responsive Politics.)

So was Hillary Clinton wrong in saying that lobbying represents the interests of everyday Americans? Not necessarily. Corporations lobby to inform policymakers of the impact of regulation and legislation; individuals are impacted in their roles as consumers, as employees and as shareholders. The presence of corporations in the list of top spenders on lobbying is just an example of a collective action problem. Only those groups or firms with the most to gain or lose have an incentive to participate. 

One solution to this problem is to ensure a clean and transparent process. The Lobbying Disclosure Act of 1995 intends to at least partially serve that purpose. All lobbyists and organizations that lobby must register and file with the government, and report semi-annually how much they spend on lobbying, for what purpose, etc. At the end of the day, the need for petitioning government and influencing public policy will never go away, and eliminating official channels of lobbying will only result in a secretive and corrupt system. The principle of transparency is arguably one of the key advantages of the American political system and must be viewed as an important contributor to its current and future economic health. What is needed is more disclosure, not less lobbying.

Hui Chen is an Assistant Professor at the University of Colorado’s Leeds School of Business. David Parsley is a Professor of Management at the Owen School. Their paper “Corporate Lobbying and Financial Performance” was co-written with Ya-Wen Yang of the University of Miami.