Iceland: The country that became a hedge fund

    Oddsson didn't seem particularly sympathetic to Glitnir's plight, nor did he seem alarmed that a global bank was turning bearish on Iceland. He initially declined the request for funds - he later trashed the collateral Glitnir offered for a loan as "love letters" - and bank executives say he simply didn't return their increasingly frantic calls after the meeting.

    The principal shareholders of Landsbanki and Kaupthing, nervous about the fate of their peer, made their own proposals to the central bank. Among other ideas, they suggested merging Glitnir with Landsbanki. They, too, got no reply.

    Instead, on Sunday, the central bank announced that the government was taking a 75% stake in Glitnir in return for a cash injection of $750 million, valuing the bank at less than half the market price of the previous Friday. That quickly backfired: Standard & Poor's and other rating agencies immediately downgraded Iceland's sovereign rating.

    The domino effect was immediate: Landsbanki had been using Iceland paper as collateral for refinancing transactions with the European Central Bank, so it had to put up more funds, making its situation even more precarious. It was nationalized promptly the following weekend. Officials involved in the rescue say the main goal at this stage was to save the strongest bank, Kaupthing, which received a $625 million infusion.

    But Oddsson's erratic behavior doomed even that bank and compounded Iceland's financial and diplomatic problems. In an interview he gave to Iceland's state-owned TV in early October he slammed the banks for being "reckless" and said Iceland's mistake was not to have "cut the banking system down" beforehand, but rather to have acquiesced to its "daredevil expansion abroad."

    He also insisted, "We do not intend to pay the debts of the banks that have been a little heedless." The following day Britain's Chancellor of the Exchequer, Alistair Darling, called his Icelandic counterpart and then announced that Iceland was refusing to honor its obligations to British depositors.

    Britons had deposited more than $5 billion in Icelandic banks, mainly in the Internet banks set up two years earlier, and had invested additional billions in the nation. Invoking a new antiterrorism law, the British government froze the assets of Icelandic companies in the U.K. By taking control of the British subsidiary of Kaupthing, the last survivor of the three banks, it automatically triggered the default of its parent company back in Iceland.

    Iceland started quarreling with British officials over how much compensation it would pay to about 150,000 Britons who had put their money in its banks, although it backed off in November after Britain and the Netherlands put up obstacles to its IMF bailout. And Oddsson continued to flip-flop. First the central bank announced it was fixing the krona exchange rate to prevent it from falling further; the next day it issued a clarification: The exchange rate hadn't been fixed at all. Then came the Russian "loan."