The fate of the Irish and the Icelandic banks are intertwined in time: as the Irish government decided on a blanket guarantee for the Irish banks, the Icelandic government was trying, in vain, to save the Icelandic banks. In spite of the guarantee six Irish banks failed in the coming months; the government bailed them out. The Icelandic banks failed over a few days. Within two months the Icelandic parliament had decided to set up an independent investigative committee – it took the Irish government almost seven years to set up a political committee, severely restricted in terms of what it could investigate and given a very limited time. The Irish report now published is better than nothing but far from the extensive overview given in Iceland: it lacks the overview of favoured clients and the favours they enjoyed.
A small country with a fast-growing banking sector run by managers dreaming of moving into the international league of big banks. To accelerate balance sheet growth the banks found businessmen with a risk appetite to match the bankers’ and bestowed them with favourable loans. Lethargic regulators watched, politicians cheered, nourishing the ego of a small nation wanting to make its mark on the world. – This was Iceland of the Viking raiders and Ireland at the time of the Celtic tiger, from the late 1990s, until the Vikings lost their helmets and the tiger its claws in autumn 2008.
In December 2008, eleven weeks after the Icelandic banking collapse, the Icelandic parliament, Alþingi, set up an independent investigative committee, The Special Investigative Commission, SIC, to investigate and clarify the banking collapse. Its three members were its chairman Supreme Court justice Páll Hreinsson, Alþingi’s Ombudsman Tryggvi Gunnarsson and lecturer in economics at Yale Sigríður Benediktsdóttir. Overseeing the work of around thirty experts, the SIC published its report on 12 April 2010: on 2400 pages (with more material online; only a small part of the report is in English) the SIC outlined why and how the banks had failed.
In November 2014, over six years after the Irish bank guarantee, the Irish Parliament, Oireachtas, set up The Committee of Inquiry into the Banking Crisis, or the Banking Inquiry, with eleven members from both houses of the Oireachtas; its chairman was Labour Party member Ciarán Lynch. The purpose of the Committee was to inquire into the reasons for the banking crisis. Its report was published 27 January 2016.
Both the Irish and the Icelandic reports make valid recommendations. It does however make a great difference if such recommendations are put forward 1 ½ years after the cataclysmic events – or – more than seven years later.
The Irish legal restraints, the Icelandic free reins and prosecutions
As Ciarán Lynch writes in his foreword to the Irish report: “As the Celtic Tiger fell, our confidence and belief in ourselves as a nation was dealt a blow and our international reputation was damaged.” The same happened in Iceland, confidence was dealt a blow and the country’s international reputation damaged. If anything can restore trust in politicians it is undiscriminating investigations and transparency.
In one aspect, the Irish Banking Inquiry differed fundamentally from the Icelandic one: the Irish was legally restrained from naming names. Consequently, the Irish report contains only general information on lending, exposure etc., not information on the individuals behind the abnormally high exposures.
This is unfortunate because in both countries, the high-risk banking was centred on a small group of individuals. In Ireland these were mostly property developers and some well-known businessmen; in Iceland the favoured clients were the banks’ largest shareholders, a somewhat unique and unflattering aspect that puts Iceland in league with countries like Mexico, Russia, Kazakhstan and Moldova.
The SIC had no such restraints but could access the banks’ information on the largest clients, i.e. the favoured clients. The report maps the loans and businesses of the banks’ largest shareholders and their close business partners, also some foreign clients. Consequently, the SIC report made it a public information that the largest borrower was Robert Tchenguiz, owed €2.2bn, second was Jón Ásgeir Jóhannesson, famous for his extensive UK retail investments, with €1.6bn. Björgólfur Thor Björgólfsson, Landsbanki’s largest shareholder (with his now bankrupt-father) owed €865m. These were loans issued by the banks in Iceland; with loans from the banks’ foreign operations these numbers would be substantially higher.
The SIC report also exposes how the banks had in many cases breached rules on individual exposures and then actively hidden it from the regulators and shareholders.
Apart from reacting quickly to set up an investigative commission, Alþingi passed a Bill in December 2008 to set up an Office of a Special Prosecutor, OSP, which came to investigate and prosecute bankers and businessmen. So far, 21 have been sentenced to prison and a number of cases are still pending. The OSP is now part of a permanent structure to investigate financial crimes. Prosecutions have given a further insight into the banking during the boom years, i.a. exposing fraudulent lending, breach of fiduciary duty and market manipulation.
Those prosecuted by the OSP have not been sentenced for wrong or unwise decisions but for criminal behaviour. Some of these cases, at least on the surface, bear close similarities to things going on in the Irish banks, i.a. in lending which unavoidably would lead to losses since the banks were light on collaterals. Icelandic laws do differ substantially from laws in other Western countries – but in Iceland there was the will and courage to explore these practices.
A very brief overview of Ireland and Iceland in autumn 2008
The year 2008 brought increasing worries of the soundness of an over-extended banking sector both in Ireland and Iceland
In Iceland, the board of Glitnir, the smallest of the three largest Icelandic banks, was the first to ask for a meeting with the Icelandic Central Bank, CBI: on September 25 2008 the governors of the CBI learned that the bank would not be able to meet its obligations in the coming weeks. Over the following weekend, the CBI and the government decided to save the bank by taking over 75% of its shares. This was clear early Monday morning September 29, just as the Irish government was furiously debating and preparing a two year blanket guarantee for six Irish banks.
According to the Irish report the Irish government decided solo on the guarantee; the European Central Bank, ECB had made it clear that each country was responsible for its own banks but no bank should fail. Yet, ECB’s views do not seem to have been foremost in the mind of Irish ministers struggling to find a solution September 29 to 30.
In Ireland, the blanket guarantee issued in the early hours of 30 September, valid from 1am 29 September, had been discussed on and off for some time; it was not an idea that arose on the spur of the moment. But in those last days of September 2008 a decision could no longer be postponed: Anglo and INBS had run out of liquidity. The choice was either a guarantee or nationalising the troubled banks.
The Irish guarantee gave food for thought in Iceland; it was briefly outlined for discussion 2 October 2008 as one possible option but apparently not pursued further.
It only took around 48 hours for the CBI and the government to realise that Glitnir’s affairs were a mess and the bank could not be saved. The following Monday, October 6, it was finally clear that the game was over: since the government could not save Glitnir, the smallest bank, it could evidently not save the two larger banks. An Emergency Bill was passed to have a legal framework in place. By October 9 2008 all three banks had failed.
In the UK, where all the Icelandic banks had operated, the government in panic over the state of the British banking system feared Landsbanki, which by then had around £4.2bn on its Icesave accounts, was moving funds out of the country. On 8 October the UK government slammed a Freezing Order on Landsbanki, using a legislation with the word “terrorism” in its title. A confusion ensued whether the Order referred only to Landsbanki or all things Icelandic. It took weeks and months to entangle this, adding to other woes Iceland faced.
The Icelandic quick blow, the Irish lingering stab
With the banks and the financial system in ruins Iceland sought help with the IMF and by 24 October had negotiated a loan of $2.1bn, now repaid. Iceland more or less followed IMF guidelines and made full use of the Fund’s expertise. Iceland was back to growth by mid 2011, 2 ½ years after the collapse (see here my take on the Icelandic recovery).
The guarantee didn’t save the Irish banks but only extended their lives for some months. Already by January 2009, the government had to step in to save the first bank. In the following weeks and months there were five more bail-outs, i.a. of all the banks mentioned in the guarantee. As the guarantee expired 28 September 2010 the Irish state had over-extended itself in saving six banks and in December a Troika bailout had been negotiated. – Ireland was back to growth in the last quarter of 2014, after two dips from 2008.
The ECB – IMF wrestle that the ECB won
There have been stories of the role of the ECB and possible burden sharing with bondholders, which could have been the solution when the two year guarantee was about to expire. The Irish report spells out what happened: it was the ECB against the IMF and the ECB won, also because the Irish government understood that both the US and the whole of the G7 sided with the ECB.
When discussing the Troika programme in October and November 2010 both the Irish government and the IMF mission were in favour of imposing losses on senior bondholders and the legal issues had been worked out. As Ajai Chopra then deputy director at the IMF informed the Inquiry the IMF staff was of the view that the markets would both have anticipated and been able to absorb ensuing losses “and even if they were not able to absorb it, there were mechanisms to help address that contagion… Recent academic research confirms the view that spillover risks were exaggerated.”
This view ran against the view at the commanding heights of the ECB: in November 2010 ECB governor Jean-Claude Trichet made it clear in a letter that if the government insisted on imposing losses on bondholders there would be no Troika programme. Other powers agreed with the ECB: Ireland’s minister of finance Brian Lenihan knew US Treasury Secretary Timothy Geithner was dead against the burden sharing. Lenihan also told governor of the Central Bank of Ireland Patrick Honohan that the leaders of the G7 countries agreed with Geithner. “I can’t go against the whole of the G7,” Lenihan said to Honohan who was of the view Lenihan saw the burden sharing as “politically, internationally politically inconceivable…”
After a new Irish government came to power 9 March 2011 the possibility of a burden sharing was again explored, especially regarding Anglo and INBS, which were no longer going concerns, but had been placed under the Irish Bank Resolution Corporation, IBRC. Noonan stated his position in a phone call to ECB’s governor Jean-Claude Trichet, who according to Noonan “…sounded irate but maybe he wasn’t irate but that’s the way he sounded and he said if you do that, a bomb will go off and it won’t be here, it’ll be in Dublin.”
When asked during a visit to Ireland in spring 2015, Trichet only referred to letters sent by the ECB, nothing more. In a letter in March 2011, Trichet threatened to withdraw Emergency Liquidity Assistance, ELA if the government went ahead with imposing a hair-cut on bondholders.
As in November 2010, the March 2011 attempt by the new Government to impose losses on bondholders, was unsuccessful. “Once again, the intervention of the ECB appears to have been critical.”
The ECB prevailed, with drastic consequences for Ireland: “The ECB position in November 2010 and March 2011 on imposing losses on senior bondholders, contributed to the inappropriate placing of significant banking debts on the Irish citizen.”
It left the Irish with a bailout cost much higher than would have been necessary. Certainly a tragic outcome for Ireland.
The pattern of collective madness
Both the Icelandic and Irish collapse could be summarised as having happened because so many got it wrong, ignored the clear warning signs and made the wrong decisions.
Ciarán Lynch sums up the Irish crisis as “a systemic misjudgement of risk; that those in significant roles in Ireland, whether public or private, in their own way got it wrong; that it was a misjudgement of risk on such a scale that it lead to the greatest financial failure and ultimate crash in the history of the State.” – Further, the banking crisis led to a fiscal crisis. “These were directly caused by four key failures; in banking, regulatory, government and Europe” after which “turning to the Troika became the only solution.”
The Irish banking crisis was caused by the banks pursuing “risky business practices, either to protect their market share or to grow their business and profits. Exposures resulting from poor lending to the property sector not only threatened the viability of individual financial institutions but also the financial system itself.”
Regulators were aware of this, yet did not respond to the systemic risk but adopted “a principles-based “light touch” and non-intrusive approach to regulation. The Central Bank, the leading guardian of the financial stability of the state, underestimated the risks to the Irish financial system.”
In spite of a period of unprecedented growth in tax revenues the government’s fiscal policy was based on long-term expenditure commitments “made on the back of unsustainable cyclical, construction and transaction-based revenue. When the banking crisis hit and the property market crashed, the gulf between sustainable income and expenditure commitments was exposed and the result was a hard landing laying bare a significant structural deficit in the State finances.
The Icelandic crisis also started as a banking crisis, with the banks collapsing. Though bondholders in the large banks were not bailed out (but they were in three smaller banks and an insurance company) significant cost accrued to the state: the net fiscal cost of supporting and restructuring the banks is 19.2% of GDP, according to the IMF. Iceland did indeed suffer at fiscal crisis: it had to be bailed out by an IMF loan.
In summarising its finding the SIC report states that the explanations of the collapse of the three largest banks can “first and foremost to be found in their rapid expansion and their subsequent size when they tumbled in October 2008. Their balance sheets and lending portfolios expanded beyond the capacity of their own infrastructure. Management and supervision did not keep up with the rapid expansion of lending… The banks’ rapid lending growth had the effect that their asset portfolios became fraught with high risk.” The high incentives for growth were found in the banks’ incentive schemes and “the high leverage of the major owners,” in addition to the availability of funds on international markets.
All of this should have been evident to the supervisory authorities, giving cause for concern. “However, it is evident that the Financial Supervisory Authority FME… did not grow in the same proportion as the banks, and its practices did not keep up with the rapid changes in the banks’ practices.”
As in Ireland, Icelandic politicians lowered taxes during an economic expansion, contrary to expert advise “even against the better judgement of policy makers who made the decision. This decision was highly reproachable.” The CBI’s calls for budget restraint were ignored but also the CBI made mistakes, such as failing to raise interest rates in tandem with the state of the economy and in lending to the banks in 2008, resulting in a loss for the CBI of 18% of GDP.
In Ireland, politicians and authorities had, without any test or challenge, adopted a ‘soft landing’ theory, as indeed had many international monitoring agencies. “The failure to take action to slow house price and credit growth must also be attributed to those who supported and advocated this fatally flawed theory.”
Though less clearly formulated, there was a lot of wishful thinking in Iceland. However, as pointed out in the SIC reports, “flawed fiscal and monetary management … exacerbated the imbalance in the economy. They were a factor in forcing an adjustment of the imbalances, which ended with a very hard landing.”
The lethal debts: commercial property in Ireland, holding companies in Iceland
Though banks thrive on debt the wrong type of debt and monoline lending can be lethal when circumstances change and the debt goes from risky to hopeless. The practices of the Irish and the Icelandic banks give some examples of how risky turns lethal.
High exposure to property was claimed to be the main risk on the books of the Irish banks. “Between 2004 and 2008 almost €8 billion worth of commercial investment property was sold in Ireland. 2006 was the peak year for investment volumes, with €3.6 billion traded in 12 months. For context, this compares to the previous record of €1.2 billion in 2005 and an average of €768 million per annum between 2001 and 2004.”
This number is however too low, according to the report, as it only refers to domestic lending to commercial property. The Irish banks funded considerable Irish investments abroad, mostly in the UK and the rest of Europe. Thus, the size of commercial property lending was larger than the domestic market indicates.
Fintan Drury, a former Non-Executive director of Anglo Irish Bank, admitted that Anglo had been “a monoline bank … somewhere between 80% and 90%” of Anglo’s loan book was related to property investment” – or specifically the high exposure to commercial property which turned out to be the most severe risk factor in the Irish banks, later causing the largest losses.
The Irish National Asset Management Agency, NAMA, was set up in 2009 in order to manage and recove bad assets from the banks the government recapitalised. As the Irish report points out the transfer of loans, from the banks saved by the state, exposed the losses. The total par value of loans to commercial property was €74.4bn for which NAMA paid €31.7bn. For the loans remaining on the banks’ balance sheets, the impairment rate of commercial real estate was 56.9%, “over three times that of residential mortgages and over twice the average of all impaired loans.”
Dan McLaughlin former Chief Economist, Bank of Ireland is of the view that lending to commercial property led to the banks needing assistance. In total, commercial property prices dropped by 67% (apparently in 2008-2009 but that is not quite clear from the context) whereas commercial property in the UK fell by 35% and in the US by 40%.
This concentration of a single asset class was seen as a major weakness in September 2008. Merrill Lynch acted as an adviser to the Irish government. During these febrile hours as the guarantee was being prepared the head of European Financial Institutions at Merrill Lynch, Henrietta Baldock wrote in an email that clearly “certain lowly rated monoline banking models around the world, where there is concentration on a single asset class (such as commercial property) are likely to be unviable as wholesale markets stay closed to them.”
In Iceland, the killer lending was to holding companies. At first sight they seemed to be in diverse sectors such as retail, food, pharmaceuticals, banking, mobile telephony and property. However, these apparently diverse companies were highly inter-linked through cross-ownership where every snippet of asset was collateralised.
In addition, both Icelandic bankers and businessmen knew during the boom that foreign banks tended to see various Icelandic enterprises, whether banks or something else, as just one big bundle: a risk to one bank or one enterprise was a risk to them all. Iceland was like one company, with a GDP as a big but not gigantic international company.
Cross-borrowing and high exposures to small groups
Both Irish and Icelandic banks tied their fortunes to a small group of businessmen. Over time, this changed the power balance between the banks and their clients. The clients were not beholden to the banks but the banks to the clients.
The amount of loans to single borrowers came as a surprise to some when the Irish lending was scrutinised. Michael Somers, former Chief Executive, NTMA, said he “was flabbergasted when I saw the size of the loans … which were advanced by the Irish banking system to individuals. I mean, they ran to billions… some individual had loans from the banking system equivalent to 3% of our GNP, which I thought was absolutely staggering.” – It turned out that the “…top ten borrowers had loans of €17.7bn with the six guaranteed banks and that was before any additional borrowings they had in Ulster Bank or Bank of Scotland Ireland.”
The above indicates one of the problems: the largest Irish borrowers most often borrowed not only from one bank for each project but from several banks. Yet, the banks apparently made no attempt to have a holistic overview of their largest clients’ cross borrowing. This created further risk for the Irish banks that directed most of their risky lending to only a small group of clients. – According to Frank Daly chairman of NAMA the impression was that the banks had been “acting “almost in isolation” from one another” showing little interest in clients’ exposure to other banks.
A case in point is INBS, one of the six banks forced to turn to the state for cover. It had “a concentration of loans in the higher risk development sector, a concentration of loans in the higher loan-to-value bands, a concentration in its customer base – the top 30 commercial customers, for example, accounted for 53% of the total commercial loan book – and a concentration in sources of supplemental arrangement fees, representing 48% of profit in 2006. Indeed, 73% of those fees came from just nine customers.” – The board was indeed aware of this but it did not feel it gave cause for concern.
Fintan Drury, former non-executive director of Anglo Irish Bank, was aware that “a relatively small number of clients who had quite a significant percentage of … of the lending, yes. Was I concerned about that? Not particularly.”
The Banking Inquiry “Committee is of the view that the banks had a prudential duty to themselves to inquire, challenge and assess hidden risks arising from multi-bank borrowing by major clients.”
As mentioned earlier, the unique aspect of the Icelandic banking was the fact that the largest shareholders and their business partners were also the largest borrowers. The SIC report drew attention to warnings from Bank of International Settlement, BIS, that banks may evaluate a borrower’s credit value differently if this person is either a key investor or a board member. In countries where supervision and legal protection for small shareholders is lacking abnormal lending to bank owners is often the case, a hugely worrying factor for Iceland.
And here is the unique aspect of the Icelandic banking practices: “The largest owners of all the big banks had abnormally easy access to credit at the banks they owned, apparently in their capacity as owners. The examination conducted by the SIC of the largest exposures at Glitnir, Kaupthing Bank, Landsbanki and Straumur-Burðarás revealed that in all of the banks, their principal owners were among the largest borrowers.” – The SIC concluded that the fact the largest borrowers in all the banks happened to be their owners “indicated a systematic pattern, i.e. that the banks’ owners had an abnormal access to funds in their own banks.”
These were i.a. Icelandic businessmen well known in the UK such as the two mentioned earlier – Björgólfur Thor Björgólfsson who owns the investment fund Novator, still operating in the UK and Jón Ásgeir Jóhannesson – in addition to the brothers Ágúst and Lýður Guðmundsson who still control Bakkavör, a major supplier to UK supermarkets.
In addition to the risk stemming from the concentration of loans to the same largest shareholders and clusters of companies connected to them and their business partners within each bank the fact that these clusters were highly leveraged in the other banks exacerbated the risk.
Signs of favour: Irish roll-ups and Icelandic bullet loans
Interestingly, both in the Irish and the Icelandic banks the favoured clients got similar types of favourable loans. In Ireland it is the “roll-ups,” in Iceland “bullet loans.” – This strongly indicates that in addition to high exposure and high concentration, financial supervisors should keep an eye on the types of loans issued.
Rolled-up loans transferred to NAMA amounted to €9bn, out of a total of the €74.4bn transferred. The Irish roll-up “refers to the practice whereby interest on a loan is added on to the outstanding loan balance (“rolled-up”) where it effectively becomes part of the loan capital outstanding and accrues further interest. “Rolling-up” interest would generally allow a borrower not to repay interest as it falls due, but this would be done without placing the loan in default.”
The roll-up offered was either an “interest repayment holiday” agreed in advance as the loan was issued or it was a later offer when the borrower had been unable to meet the agreed interest repayment; a sign of the bank’s lenience or its loss of control over the borrower.
According to NAMA’s evidence the existence of these interest roll-ups did not come as a surprise. The surprise was to discover how extensive they were, especially finding that “new loans were being created to take account of the rolled up interest.”
Added to a narrow group of borrowers, their narrow field of investments and high exposures related to these few individuals with monoline investments, roll-ups are a clear sign of concern. At the Banking Inquiry, Gary McGann, Independent Non-Executive Director at Anglo, was asked if with regards to the roll-up “with such a narrow field of individuals did the bank consider that in terms of risk.” His answer was: “Not specifically.”
The Icelandic bullet loans would normally be paid up in one instalment at maturity with the interest rates paid at regular intervals during the life-time of the loan. There were however many examples, especially as the credit crunch hit the leveraged borrowers, of the loan being “rolled up” and everything paid at maturity, both the loan and interest rates. At this point, paying one bullet-loan with a new one became common.
In theory, issuing bullet loans can make sense. However, by extending bullet loans losses can be hidden and that is just what happened in the Icelandic banks. Bullet loans were also a common feature of the US Savings & Loan crisis in the 1980s.
Lending on “hope value” and lack of expertise
At the Banking Inquiry Brendan McDonagh CEO of NAMA pointed out gave that the “banks were quite clearly lending to individuals and companies that, notwithstanding the massive sums involved, had little or no supporting corporate infrastructure, had poor governance and had inadequate financial controls and this applied to companies of all sizes.” In the case of around 600 NAMA debtors “…very few of them seemed to have any expertise in construction.”
Frank Daly mentioned “…lending on hope value…” where the lending related to “land which wasn’t even zoned, which had hope value more than anything else.”
There are also many Icelandic examples of these two features identified in the Irish report: lending on value that had not materialised or even was not clear would ever materialise – and lending to people who had no expertise of the type of projects on which they were borrowing.
The lack of expertise was not something Landsbanki held against the Icelandic businessman Gísli Reynisson when the bank lend him funds in spring 2007 to buy Copenhagen’s most prestigious hotel, D’Angleterre, as well as a second hotel and two restaurants, all in prime locations. Reynisson, who died in 2009, proudly stated to the stunned Danish media that he had indeed no experience of running hotels and restaurants but the opportunity seemed too good to pass on. While buying these Danish trophy assets he was also busy buying every fishmonger in Reykjavík. His earlier activity had mainly been properties and food production in Eastern Europe and the Baltics.
Another unique aspect of Icelandic lending to the banks’ favoured clients, i.e. the large shareholders and their business partners, was the consistent over-pricing, in the range of 10-20%: the clients would very often buy assets above asking price or above the value of these assets. Consequently, the banks persistently lent above value. The Icelandic businessmen invariably explained this by claiming over-paying was a way to shorten the negotiation time and time being money this made sense in their universe.
Whatever the real reason was, this over-pricing and consequent over-lending seems to be an Icelandic version of “hope value.” But it also meant that when asset prices started to fall both the borrowers and the lenders were far more vulnerable than if the assets had been keenly and more realistically priced.
All risk to the bank, little or none to the borrower
Both in Ireland and in Iceland the banks, with little else in mind than growth at any cost, fought fiercely over the clients with the biggest deals. In both countries this seems to have led to deterioration in both lending criteria and general banking practices. Interestingly, the net effect was the same in both countries: the risk fell on the lender, not the borrower.
The Irish report points out that the effect of this deterioration was that the banks provided the real funding whereas the equity from the borrower “usually existed only on paper.” As Frank Daly explained: “The result is that the borrower was typically not the first to lose. In the event of a crash the banks stood to take 100% of the losses, and that’s what happened.”
The same kind of lending to favoured clients in the Icelandic banks was common. Concentrated lending, both in terms of sectors and clients, constituted a huge risk in the Icelandic banks, effectively absolving the clients of risk. As stated in the SIC report: “…if a bank provides a company with such a high loan that the bank may anticipate substantial losses if the company defaults on payments, it is in effect the company that has established such a grip on the bank that it can have an abnormal impact on the progress of its transactions with the bank.”
In some cases brought by the Icelandic OSP, the charges relate to loans where the collaterals seemed to be weak or non-existent already when the loans were issued. Loans by Kaupthing to a group of under-capitalised or “technically bankrupt” (a description used in court by one of those charged) companies, leading to a loss of €510m for Kaupthing is one such example.
Partially blind auditors, passive regulators
Both in Iceland and Ireland it was evidently the biggest auditors, the international big four – Deloitte, EY, KPMG and PwC – that audited the banks. The two reports point fingers at the auditors: the audited accounts did not reflect the mounting risk. Both in Iceland and Ireland the banks were large clients of the auditors with all the implication it entails. All of this was going on in the realms of passive regulators.
As the Irish banks were concentrating their lending in 2007 and 2008 “to the property and construction industry at record rates, there were few “notes to the accounts” informing the reader of the potential risks involved with this strategy. Therefore, the audited accounts provided little information as to the implications of the risks undertaken.”
The Irish auditors’ riposte is that it was neither their role to advise clients on risk nor to challenge the banks’ business model. – That seems to be beside the point: the serious flaw in the auditors’ work was that leaving aside the auditors’ opinion of the risk and business model, the audits didn’t give the correct information on the banks’ position.
What made the situation worse was the long-standing relationships between the banks and their auditors: “In the 9 years up to the Troika Programme bailout, KPMG, EY and PwC not only dominated the audits of Ireland’s financial institutions, but they audited particular banks for extended, unbroken periods.”
On the regulatory side “there was passivity.”
According to the SIC the auditors did not “perform their duties adequately when auditing the financial statements of” 2007 and 2008. “This is true in particular of their investigation and assessment of the value of loans to the corporations’ biggest clients, the treatment of staff-owned shares, and the facilities the financial corporations provided for the purpose of buying their own shares. With regard to this, it should be pointed out that at the time in question matters had evolved in such a way that there was particular reason to pay attention to these factors.”
As to the Icelandic regulator, FME, it “was lacking in firmness and assertiveness, as regards the resolution of and the follow-up of cases. The Authority did not sufficiently ensure that formal procedures were followed in cases where it had been discovered that regulated entities did not comply with the laws and regulations applicable to their operations… insufficient force was applied to ensure that the financial corporations would comply with the law in a targeted and predictable manner commensurate with the budget of the FME.”
Cosiness and corruption
The Irish know a thing or two about corruption: the Mahon tribunal (1997-2012) and the Moriarty tribunal (1997-2011) did establish that leading politicians, i.a. Bertie Ahern, Charles Haughey og Michael Lowrie, received money from businessmen who profited from governmental favours. Consequently, corruption is a topic in the Irish Banking inquiry.
Nothing similar has ever been established in Iceland. The SIC did investigate loans from the three big banks to politicians. The highest loans are mostly related to spouses and nothing conclusive can be drawn from these loans.
There is however a striking Irish and Icelandic parallel in the cosy relationship between politicians and businessmen. In tiny Iceland these relations often stem from being the same age and having gone to the same schools, through friendships unrelated to business and politics or through family ties of some sort, either direct or indirect, through spouses or close friends.
Elaine Byrne, Consultant to European Commission on corruption and governance and well known in Ireland for her fight against corruption, pointed out the indirect aspect of cosy relations: “often … it is indirect and is a case of doing someone a favour and thereafter, down along the line, that person will return the favour in an indistinct way.” Doing it the old-fashioned way, with money is traceable, relationship is less so. “What the Moriarty tribunal in particular exposed was benefits in kind through different land transactions that may have arisen.” Benefits could later follow decisions. “Corruption is not black and white and is not direct. It is indirect and these relationships are very difficult to examine.”
The journalist Simon Carswell also mentioned what he called the “extremely cosy” relationship, on one hand between individuals in “the property sector, the construction industry, government, certain elected representatives and the banks” and on the other hand “the relationship between the Government, the banks and the financial supervisory authorities.” Carswell underlines a feeling among these parties of being on the same bandwagon leading to group-thinking within these institutions.
“These relationships appear to have been too cosy to have allowed any one of these collective groups, be it banks, government, builders or regulators, to shout stop and offer the kind of critical dissent that might have changed the behaviour of all and the direction in which the country was heading… contrarians were ridiculed, silenced or ignored to ensure the credit fuelled boom continued for years as their past warnings did not come true.”
The crisis would have been less costly and less severe, says Carswell, if someone belonging to these groups had had the courage to point out the dangers but these parties had it too good and were making too much money to speak out. The cost of the banking bailout is normally said to be €64bn but Carswell maintains that to this figure should be added losses on loans in all of the Irish banks, “well in excess of €100 billion, including tens of billions of euro covered by the UK Treasury. This is sometimes forgotten.”
The Banking Inquiry points out the cosiness in “the relationship banking, where some developers built strong relationships with particular banks, was a part of the Irish banking system. In some cases, both parties became business partners in a joint venture.”
There were also numerous Icelandic examples of joint ventures between the banks and their large clients. Nothing wrong per se and commonly found but also a potential basis for corrupt practices where joint ventures turn into a way of giving the chosen clients favourable treatment, i.e. with the banks giving these clients loans with no or little guarantee to fund their joint ventures.
It is abundantly clear that there were many signs of danger both in Iceland and Ireland prior to the banking collapse in these two countries. The pertinent question is if the proper lessons have been learned so as to prevent another similar future crisis. If read instead of buried the two reports do indeed provide a healthy antidote.
It was however not only the bad – and in proven cases in Iceland, criminal – practices that felled the Irish and the Icelandic banks. It was also the inherent risk of fast growth with regulators not keeping up and not realising the risk. In Iceland, the size of the banking system relative to the GDP topped at 10 times the GDP in early 2008, from around one GDP in 2002, around 150% of GDP in June 2015. In Ireland the banking system reached around eight times the GDP in 2008, is now just under five times. – The risk of the banking sector’s size might still be lingering in Ireland (and elsewhere!); this risk of a sector being so big that parliament and government tend to lack courage to set sensible limits to the financial system.
The Icelandic SIC allowed mining the banks’ accounts, also exposures to specific individuals, i.e. the banks’ largest shareholders and their business partners. This has given a keen understanding of how the banks really operated: by serving their largest shareholders way beyond reasonable risk and way beyond what other clients could expect. This was banking on and with a chosen circle that the banks helped to enrich.
One reason why it is important to make this information public is that it also explains why these individuals have done well after the banking collapse. Yes, they went through difficult times as many of their entities did fail but cleverly constructed company clusters, all with offshore angles, did make it possible for them to keep at least some of their assets showered on them as favours in an unhealthy banking system. It is no coincidence that many of the favoured clients are still operating, both in Iceland and Ireland.
*As can be seen on my blog I have often blogged on Ireland. Here are my blogs on the earlier reports on the Irish collapse: mentioning Regling and Watson but mainly on the Honohan report, as well as the report by Peter Nyberg in 2011. – Here is an excellent overview on the Banking Inquiry conclusions and recommendations, by Daniel McConnell.
Follow me on Twitter for running updates.
Yet another case from the Office of Special Prosecutor v Kaupthing’s three top managers is up in Reykjavík District Court these days. As in several other cases, the charges centre on breach of fiduciary duty, ultimately causing the bank a loss of €510m. The loans went to two companies owned by Kaupthing clients that used the funds to buy credit linked notes and enter into credit default swaps related to Kaupthing in order to lower the bank’s collateral debt swap spread. Does this sound like market manipulation? Deutsche Bank seems to think it might, strongly denying any involvement in the scheme except as the issuer of the notes though Icelandic sources tell a different story.* – But who made a killing on the other side of the CDS bet? Partly Deutsche Bank, according to the OSP but this part of the CLN saga is still not entirely clear, which is one of the reasons why the court hearings might be interesting.
Soon after the collapse of the three largest Icelandic banks in early October 2008 there were plenty of allegations, also in the Icelandic media, of possible wrongdoing in the banks. One of the stories told centred on Kaupthing funding transactions connected to the bank’s CDS.
At the end of January 2009 former chairman of the Kaupthing board Sigurður Einarsson wrote a letter to friends and relatives explaining his side of the media reports. The first matter he dealt with was the CDS story: it was true that Kaupthing had funded transactions by what he called “trusted clients” of the bank to influence the bank’s CDS spread, following a proposal from Deutsche Bank, DB.
This story was told in greater detail in the 2010 report by the Icelandic Special Investigations Committee, SIC: also here, the idea is said to have originated with DB.
Further information came up in a London Court in 2012: the two BVI companies set up for the transactions, Partridge and Chesterfield, went bankrupt soon after Kaupthing failed. Their administrators, Stephen Akers from Grant Thornton London and a colleague, quickly turned to DB to get answers to some impertinent questions regarding the two companies.
Now, the CDS saga is summed up in the OSP charges (in Icelandic) against Einarsson, Kaupthing’s CEO Hreiðar Már Sigurðsson and head of the bank’s Luxembourg operations Magnús Guðmundsson in a case of breach of fiduciary duty and causing a loss of €510m to Kaupthing, some of it paid out on Kaupthing’s last day of trading.
In orchestrating the loans the three managers took great care that DB would get paid, i.e. the deal would not fall through due to lack of funds at a time when Kaupthing had practically no foreign currency left and was running out of liquidity.
According to the charges DB not only organised the transactions but also took part of the opposite bet. What is still lacking in this saga is who, together with DB, was on the other side of the bet the two companies lost?
Einarsson’s letter 2009 and transactions with “trusted clients”
In his letter to friends and family 26 January 2009 Einarsson pointed out that although the UK Financial Services Authority, FSA, had in the third week of August 2008, ascertained that Kaupthing’s UK operation, Kaupthing Singer & Friedlander, KSF, was well funded the CDS spread on Kaupthing stayed high. Unreasonably so according to Einarsson who claimed having heard from foreign journalist that false rumours on Kaupthing were being spread, even by PR firms. There were also rumours, wrote Einarsson, that the CDS market was being manipulated, not only in relation to Iceland. (The letter was later leaked to the Icelandic media, see here, in Icelandic; excerpts below, my translation).
“Following a proposal from Deutsche Bank it was decided to test what would happen if the bank itself (i.e. Kaupthing) would buy such insurance. This was however not a trivial matter since the bank could not issue insurance on itself. The solution was to get our clients we trusted well and with whom we had had a long relationship, built on trust and loyalty, to make these transactions on behalf of the bank. Of course we would never have entered into these transactions except for the particular circumstances. These transactions were made with the interest of the bank at heart and in full accordance to law and regulations.”
Following Lehman’s collapse September 15 2008 the CDS spread on Kaupthing increased; not only Kaupthing but the international banking system felt under siege, wrote Einarsson.
“As the bonds (i.e. credit linked notes), that we at Kaupthing and our business partners had purchased, were leveraged and had now gone down in price there were only two options. To hand over further funds or give up, have the bonds sold and lose a part of or all the original investment. The latter option was to my mind simply preposterous. Kaupthing enjoyed good liquidity and nothing indicated the bank would not withstand the pressure, just as it had done in 2006 and in spring 2008. If on the other hand the bonds had been sold the bank would have suffered a loss and the risk was that the increased offer of bonds would have undermined the bank and diminished its access to credit lines.”
This had been the rational behind these transactions, wrote Einarsson, made to maintain Kaupthing as a going concern contrary to media reports that funds had been taken out of the bank before it collapsed.
The SIC report April 2010
One of the many interesting stories in the SIC report was the story of the Kaupthing transactions regarding the CLNs. Two BVI companies, Chesterfield and Partridge, were set up by Kaupthing. The former was owned by three companies under the ownership of Antonios Yerolemou, Skúli Þorvaldsson and Karen Millen and Kevin Stanford, respectively owning 32 %, 36% and 32%. Ólafur Ólafsson owned the latter, through another company.
All of the owners were, as Einarsson said in his letter, longstanding clients of Kaupthing. Yerolemou, a Cypriot businessman prominent in the UK Cypriot community and a Conservative donor, had sold his business, Katsouris, to Exista, Kaupthing’s largest shareholder, in 2001 and stayed in touch, i.a. as a board member of Kaupthing in 2007. Stanford had a long-standing relationship with Kaupthing as with the other Icelandic banks and Ólafsson was the bank’s second largest shareholder.
The SIC report traced the origin of the transactions to DB but earlier in 2008 than Einarsson said in his letter. The SIC report states:
“At the beginning of 2008, Kaupthing sought advice from Deutsche Bank as to how it could influence its CDS spreads. In a presentation in early February, Deutsche Bank advised Kaupthing, for instance, to spend all liquid funds it received to buy back its own short-term bonds in an attempt to normalise the CDS curve. In the summer the idea of a credit-linked note transaction appeared in an email communication from an employee of Deutsche Bank. It states that this would mean a direct impact on the CDS spreads rather than an indirect one, as in the case of buy backs of own notes. It also states that this transaction will be financed. The message concludes by stating that the issue has to be timed right to get the ‘most “bang” for the buck’. In e-mail messages exchanged by Sigurdur Einarsson and Hreidar Mar Sigurdsson following this, the two agree that they do not need to involve pension funds, but that there is ‘no question’ that they should do this.
Sigurdur Einarsson said that the initiative for the transaction had come from Deutsche Bank. ‘It involved getting parties to write CDSs against those who wanted to buy them. This was to create a supply of CDSs, of which there were none. Because what we saw was happening on the market, or what we thought we saw, was that the screen price was always rising and there were certain parties, certain funds that put in a specific bid, no transaction, raised the bid, no transaction, raised it, raised it, raised it, raised and raised.‘” (As translated in Akers and Anor v Deutsche Bank AG 2012.)
According to the SIC report the CLN transactions “can be assumed to have actually made an impact on the CDS spreads on Kaupthing.”
Akers v Deutsche Bank
Stephen John Akers works at Grant Thornton in London and has a fearsome reputation as a diligent administrator. On being appointed a liquidator in 2010 of the two BVI companies, Chesterfield and Partridge, together with his colleague Mark McDonald, the two quickly set about to understand the nature of the transactions in the two companies.
They turned to DB with two impertinent key questions: 1) How did the transactions make commercial sense for the two companies? 2) How were the two companies expected to repay the loans from Kaupthing in case the markets moved against them, as indeed did happen?
When answers were not forthcoming from DB Akers sued the bank to get access to documents related to the transactions. In February 2012 a judge ruled DB should hand over the information asked for.
As to the purpose of the companies Akers states in his affidavit that “it seems possible that the Companies were involved in a wider package or scheme, although it is too early to comment definitively on the purpose of such scheme, contemporaneous reports and documents suggest that the purpose might have been to manipulate the credit market for Kaupthing” (Emphasis mine).
In court, DB strongly denied suggestions “it entered into the CLN transactions in order to manipulate the market” and took “issue with the picture painted in the Icelandic report. Among other things, it says that the CLNs were not in any way unusual or commercially unreasonable transactions; that it was not aware that Kaupthing was itself financing the purchase of the CLNs, if that is what happened; and that it did not act as adviser to Chesterfield, Partridge or Kaupthing.”
Further, in a witness statement, Venkatesh (nick-named Venky) Vishwanathan, the DB employee who wrote the email the SIC report quotes, supported the DB position. His interpretation of the “bang for the buck” is: “I say the way to proceed would involve ‘hitting the right moment in the market to get the most bang for the buck’ because an investor investing in a CLN product would want the best return and the coupon available over the term of the CLN, should it run to maturity, is set when the CLN is issued. That was why market timing was important. I was not suggesting, as Mr Akers says, that Kaupthing would get ”bang for its buck” by Deutsche selling CDS protection.”
Thus, Vishwanathan claims the email was not referring to Kaupthing getting the timing right for the most bang but the two companies investing in the CLN.
The OSP charges
According to the charges the first round of loans was made end of August 2008 to the three companies funding Chesterfield, in total €130m. However, these late August loans were issued so the companies could repay an earlier money market loan from Kaupthing Luxembourg, which already in early August had been used to instigate the transaction organised by DB in return for CLN as the company entered into a CDS with DB on Kaupthing; €125m were used on the CLN transaction but DB got €5m in fees. In September 2008 Kaupthing issued further loans of €125m to Chesterfield to meet margin calls from DB.
The Partride loans were issued in September, first €130m, of which €125m were used on the same kind of CLN transactions as Chesterfield though with the difference that DB only got a fee of €3.625.000 with apparently the rest, €1.375.000 left behind in Ólafsson’s company (the charges do not clarify why or for what purpose these funds were left in Ólafsson’s company or why DB settled for a lower fee than on the other transaction for the same amount). Also here there were margin calls from DB, for which Partridge got a further loan of €125m.
In total, Kaupthing lost €510m on these transactions. As Akers pointed out this loss was entirely predictable if the market turned and Kaupthing went out of business – after all, the two companies were unhedged. In other words, the two companies had little or no assets beyond the CLNs meaning that it was, according to the OSP, clear from the beginning that the companies should never have received the loans they got.
Urgency and faulty documentation
The charged Kaupthing managers steered the operations of the two companies and followed closely that the loans were paid to DB. According to emails between Sigurðsson and Einarsson as the scheme was being planned, quoted in the SIC report, the two seemed to have at first planned to ask some pension funds to participate but instead opted for the trusted clients.
The two were adamant that payments should go through to DB no matter what. In one instance, payment was due on 2 October 2008 but the managers made sure it was paid already on 22 September.
The most remarkable part of these loans is that they were being paid to DB literally up to the last hours of Kaupthing. Almost the only un-told saga (my account of this is here) from these last days relates to a rather incomprehensible loan of €500m given to Kaupthing by the CBI at noon on October 6 2008, hours before prime minister Haarde addressed the stunned nation to spell out the catastrophe in view: the banks could all fail, necessitating Emergency Law.
The CBI loan was given, as far as is known, to meet demands by the FSA for funds to strengthen KSF: the funds were ear-marked to prevent the failure of KSF in order to prevent cross-defaults, which would bring down the mother-bank in Iceland. However, nothing indicates the funds were used for that purpose and the CBI does not seem to have made any safeguards as to how the loan would be used.
Sigurðsson has later said that the Kaupthing management was unaware of the imminent Emergency Law as the loan was issued; as soon as he was aware of the Law, later in the afternoon, he knew the banks would not survive.
Yet, next day October 7, €50m were paid to DB in connection with the CLNs transactions, which were based on the premises that Kaupthing would be a going concern in five years time. The OSP charges state that the CBI loan enabled this last payment to DB. – On October 8 the Kaupthing board resigned; the day after Kaupthing in Iceland was taken over by administrators.
Further, the OSP charges show the loan documentation was lacking and the foreign owners were not entirely informed by Kaupthing of the transactions. Ólafsson says Sigurðsson asked him to participate; Sigurðsson claims Ólafsson or his representative asked for Ólafsson to be included.
According to the charges, documents related to these loans were changed twice after Kaupthing went into administration, first a few days after the collapse and again in December 2008.
Apart from this, the choice of clients to lend to was quite remarkably a direct challenge to complaints from the Luxembourg financial services authority, Commission de Surveillance du Secteur Financier, CSSF. In August 2008 the CSSF warned Kaupthing Luxembourg of the precarious position of some of its large debtors and shareholders. Choosing these clients for further loans was a direct challenge to the CSSF warnings, again a sign that the Kaupthing managers were willing to go to a great length to execute this plan.
The bang for the buck-writer – on leave since early 2015
The writer of the “bang for the buck” email, Venky Vishwanatha, later became DB’s head of corporate finance in Asia. Earlier this year he was put on leave, according to Bloomberg, as DB “faces civil court cases over alleged mis-selling of derivatives by a group he helped oversee, the people said, asking not to be named because the information is confidential. … The court cases relate to allegations that Deutsche Bank manipulated the market when it sold 450 million pounds ($700 million) of credit-linked notes in 2008 to two U.K. companies associated with the failed Icelandic lender Kaupthing Bank Hf, said the people. Vishwanathan was involved in the sale of the notes when he worked for Deutsche Bank in London and co-ran the bank’s western European financial institutions group at the time, one person said.”
Bloomberg quotes an e-mailed statement from DB saying the bank entered into credit linked transactions in 2008 with two counterparties, referencing Kaupthing. “Following Kaupthing’s bankruptcy, claims to recover funds have been brought against the bank. We will continue to defend ourselves vigorously against these claims.”
Did it make sense to try to influence the CDS via the CLN transactions?
The Kaupthing managers claim lending to influence the CDS spread was an understandable attempt, given the situation at the time. As mentioned above the BVI administrators could not quite see the sense.
Further, CDS spread is a measure of trust, the high spread indicated low trust. As it were, the transactions seemed to influence the spread for a few days. Considering the cost to Kaupthing and the risk, this was a high-wire act that resulted in losses and made absolutely no material difference to Kaupthing’s situation, except increasing the losses.
Also, these transactions were invisible to the market – of course Kaupthing did not advertise it was itself going into the market to finance the CDS linked transactions. If found out, this would definitely not have looked good, having a negative influence on the trust-factor the bank was trying to influence.
The large sums of money needed, the very little impact and the great risk might show the despair among the bank’s management. A sober scrutiny, also from the technical point of view, does not indicate this ever was a good idea. And then there is the market-manipulation angle DB contests.
The result was that the bank lost €510m by setting up a trade with remarkable little influence on the bank’s CDS spread, which at the same time created a hell of a good deal for those on the other side of the bet.
Who was on the other side of the bet?
As referenced above DB denies all involvement in the CLNs transactions apart from issuing the CLNs. Yet, according to the charges DB was much more heavily involved.
The Kaupthing managers assumed, according to the charges that DB would go into the market to find those willing to take the opposite position but, according to the charges, the managers did not do anything to inquire into the matter.
As it turns out, according to the OSP charges, DB did indeed take part of the position for itself. It is however unclear if DB was the end beneficiary here or if it was possibly acting on behalf of clients. In the end, DB turned out to be one of the largest creditors in all the failed Icelandic banks.
The interesting side saga looming in the coming court case is what role DB did play – and who made the handsome profit from the trades that caused Kaupthing such losses.
*Obs: neither Deutsche Bank itself nor any DB employees are charged in the Icelandic case but the outcome in Iceland might have ramification for civil cased related to the scheme.
The above is not based on accounts at the court case, but as stated above, mainly on Einarsson’s 2009 letter, the 2010 SIC report, the 2012 Aker ruling and lastly the OSP charges in the present case. I will be blogging in the coming days on what has transpired at the court case. – The CDS saga was one of the first cases related to the banking collapse that caught my attention so I’ve been following it for over six years.
Follow me on Twitter for running updates.
Thirteen people, mostly ex-bankers, have now been sent to prison in cases connected to the banking collapse brought by the Office of Special Prosecutor. Four of these prisoners keep giving rise to media coverage in Iceland: earlier in November it turned out that they had applied for a riding course, organised by the Agricultural University of Iceland. In the end, the director of the Prison Service refused to accept that this expensive course fulfilled the set criteria for prisoners’ rehabilitation. It also ensued that these prisoners have allegedly made use of PR firms.
For the time being, three former top managers of Kaupthing – Hreiðar Már Sigurðsson, Magnús Guðmundsson and Sigurður Einarsson – and the bank’s second largest shareholder Ólafur Ólafsson are in prison, serving sentences from four to six years. The prison that houses them, Kvíabryggja, is on the Northern side of Snæfellsnes, close to the tip of the peninsula that can be seen from Reykjavík on a clear day.
These four prisoners, sentenced in the so-called al Thani case, are not the first sentenced in relation to the banking collapse but they are the first to continuously making media headlines. In 2003 a member of Alþingi was sentenced to prison for embezzlement from public funds. Also staying at Kvíabryggja he procured new mattresses for the prison.
Shortly after the four were imprisoned there were news that also they wanted to pay for some improvements at Kvíabryggja but this is no longer legal: prisoners can’t use their funds things at Kvíabryggja at their own will.
An exclusive course for wealthy prisoners
In early November the Icelandic media covered a story regarding a riding course these four prisoners allegedly wanted to take part in. The Agricultural University offers riding courses, intended for A level students and was willing to offer it to the four prisoners at Kvíabryggja. The course was to run on weekends this winter, starting early November, in a riding hall at a farm next to but not belonging to the prison.
The cost was €3.800 per participant. The course only included the teaching, which meant the prisoners had to provide a horse, saddle and other things needed, apparently not a problem. Ólafsson who for years has owned a grand summerhouse close by the prison is known in Icelandic equestrian circles as the owner of some of the most expensive and outstanding horses in Iceland.
It seems that when the director of the Prison Service Páll Winkler heard about this he inquired if the course was offered to all prisoners. Apparently that was not the case. Though being part of the curriculum offered by the Agricultural University in this case it was allegedly tailor-made for these four prisoners, at a price only very few prisoners will be able to afford. Consequently, Winkler interfered and the course was called off.
Prisoners, a riding course and human rights
Following Winkler’s comments to the media that the riding course did not fit rules on courses acceptable for prisoners the wife of Ólafsson, Ingibjörg Kristjánsdóttir, wrote an article in one of the Icelandic papers, Fréttablaðið, accusing Winkler of inappropriate comments and breaching the prisoners’ human rights. Interestingly, the paper is owned by Ingibjörg Pálmadóttir, the wife of Jón Ásgeir Jóhannesson; Jóhannesson is charged by the OSP in a pending case.
Kristjánsdóttir claims that Winkler’s comment breached the prisoners’ human rights, made at the cost of people he should be protecting, “prisoners who have few to speak for them in a society of hate and revengefulness, prisoners that Páll knows are not allowed to speak to the media. Thus the prisoners are defenceless against the attack by the director of the Prison Service.”
Winkler answered, claiming that talking about “breach of human rights” showed Kristjánsdóttir’s “lack of understanding and utter lack of respect for people who have really suffered breach of human rights from public institutions, either in this country or abroad.” Rules had been followed and he had no further comments to this case.
Prisoners with PR people
In relation to the riding course Winkler said to Rúv that a very small group of prisoners has access to millions of króna and even makes use of public relation firms to contact him and the prison service. “PR firms have contacted me, asking me to say a, b or c or not to say a, b or c. I found this utterly preposterous and was left speechless.”
Winkler also says that wealthy prisoners have tried to buy services that are not offered to prisoners in general. “This is a delicate balance because if this is something offered to all prisoners I am of course only glad when the situation can be improved.” However, services for only a select group of prisoners is unacceptable.
As an example Winkler mentions a new association, “Friends of Kvíabryggja” set up to improve life at Kvíabryggja, offering funds for improvements but this is, according to Winkler, unacceptable. He has i.a. refused requests for a yoga course and more tv channels. “If you are powerful and want to improve the situation for prisoners you turn to Alþingi and do it through the Budget.”
Follow me on Twitter for running updates.
In the case of Glitnir there was a retrade – the numbers have been renegotiated since the June plan. The government has talked effusively about clarity and transparency in liberalising capital controls but the process of introducing such a plan has been characterised by obfuscation and opacity. The plan seems sensible but earlier promises by the prime minister’s party, the Progressives, of gigantic windfall seem to have pushed the government to play a game of make-believe, smoke and mirrors. Selling the banks will prepare for the coming years: drumming up the fear of foreign investors masks the fact that the greatest danger is the mind-set of the boom years.
The press conference October 28, to introduce the assessment made by the Central Bank of Iceland, CBI of the draft proposals from Glitnir, Kaupthing and LBI, was a very low-key event held at Hannesarholt, a small culture house in the centre of 101 Reykjavík – nothing like the hugely publicised and carefully staged June event at Harpan, the glass palace by the harbour.
In June, when the plan to lift capital controls was formally introduced, the emphasis was on the large funds, altogether ISK850bn or 42.5% of Icelandic GDP, which could be recovered by the planned stability tax. There was albeit to be some deduction, the number was closer to ISK660bn but yet, the tax was the thing and the numbers astronomical.
Already then, it was heard from all directions that in spite of the tax rhetoric, minister of finance Bjarni Benediktsson was not keen on the stability tax. He preferred a negotiated stability contribution, seeing it as best compatible with his goal of the least legal risk and taking the shortest time, as the International Monetary Fund, IMF, also recommended.
Lo and behold, the CBI now recommends stability contribution, as governor Már Guðmundsson presented last week (full version in Icelandic; a short one in English) firmly supported by Benediktsson at last week’s press conference. The stability contribution mentioned is ISK379bn but plenty of numerical froth was whirled up, as so-called counter-active measures, pumped up to a sum of ISK856bn, no doubt meant to trump the tax of ISK850.
With the booming Icelandic economy luckily there are strong indications that the economy can well cope with the measures planned; getting rid of the controls will be a big leap forward for Iceland. What leaves a lingering irritation is the illusion and mis-information used, no doubt to make the Progressive party’s election campaign promises look less outrageous now that the plan goes in an entirely different direction compared to its earlier promises.
A bank or two
Due to the toxic legacy of Icesave, the Left government (2009-2013) was forced to take over the new Landsbankinn. What now came as a surprise was to see the government accepting to take over Íslandsbanki as part of the Glitnir solution.
Clearly, Glitnir with its large share of ISK assets was always going to be a tricky situation to solve but well, this turn of event was a surprise.
Until the announcement, Glitnir’s winding-up board, WuB, had bravely tried to convert its largest Icelandic asset, Íslandsbanki, into foreign currency by selling it to foreigners paying in foreign currency. Time and again there was news about an imminent sale, to outlandish elements – Arabic and Chinese investors were mentioned.
Cough cough, getting such investors accepted as fit and proper by Icelandic authorities was never going to be trivial though getting the Icelandic political class agreeing to foreign owners was a no less daunting task. After all, Iceland is the only European Economic Area, EEA, country where the banks are entirely under domestic ownership.
It is still unclear what the price tag on Íslandsbanki is. At first I understood that the bank would be acquired for a fraction of its book price of ISK185bn, of which Glitnir owns 95%, ie. ISK176bn. Now I’m less sure; apparently the price might be as much as ISK164bn.
Glitnir number crunching
According to previously published information, the stability contribution amounted in total to ISK334bn. The recent changes to the Glitnir contribution are not entirely easy to decipher.
As I pointed out earlier the new Glitnir agreement was indeed a retrade since Íslandsbanki was unable to honour previous plans. With the new plan Glitnir gives up 40% of the planned FX sale of Íslandsbanki, valued in ISK at ISK47bn as well as Íslandsbanki dividend of ISK16bn, meant to be paid in FX, in total ISK63bn. In return creditors are allowed to exchange more ISK into FX than earlier planned.
This seems to rhyme with the Ministry of finance press release: “According to the above-described proposal, the transfer of liquid assets, cash, and cash equivalents will be reduced by 16 b.kr. because of the proposed foreign-denominated dividend to Glitnir, which will not be paid, and 36 b.kr. due to other changes provided for in the amended proposal from the Glitnir creditors.”
(From the Oct. 28 Icelandic CBI report; counter-active measures related to the estates of the three big banks, at end of 2015; 1. line Cash; 2. Other ISK assets; 3. Other assets in FX; 4. Cash-sweep assets)
The interesting thing is that the CBI report seems to indicate that this has negative impact on the CBI currency reserve, by ISK51bn
(From the Oct. 28 Icelandic CBI report; counter-active measures related to the estates of the three big banks, at end of 2015; 1. ISK converted into FX; 2. FX recovery by ESÍ, Assets held by CBI, from the estates, in FX until 2019)
Smoke and mirrors
It has been my firm opinion that since the estates, because of capital controls, can’t be resolved as a private company normally would, i.e. without a state interference, the outcome should be negotiated. This has now happened, a welcome and wise approach.
The smoke-and-mirrors events that the government has chosen in introducing the latest step towards lifting the controls is however neither wise nor welcome. Considering the emphasis in June on the stability tax the step taken now towards stability contribution can’t be said to be a logical step on from the June plan though an entirely sensible plan. Indeed, the June emphasis on the tax was a deviation from what Benediktsson seems to have intended for quite some while, i.e. a negotiated contribution and not a one-sided tax.
Value of Íslandsbanki v Arion
With news that investors are seeking to buy Arion it seems that the p/b in question is 0.6-0.8, where the lower estimate may turn out to be the more realistic one.
However, this is in stark contrast to the p/b that the state seems to be paying for Íslandsbanki, i.e. 0.93. Considering the banking sector in Iceland – probably still too big and still miraculously gaining from one-off legacy windfall – this price for Íslandsbanki would be nothing less than staggering and could well be seen as a total failure on part of those negotiating for the government.
Arctica Finance and Virðing – ties to politics and the past
It comes as no surprise that the pension funds are buyers in spe of the Icelandic banks. According to news in Iceland, it seems there are two finance firms – Virðing and Arctica Finance – vying for buying Arion. As could be expected, both have ties to politics and the past.
Virðing is run by ex-Kaupthing bankers i.a. Kaupthing Singer & Friedlander manager Ármann Þorvaldsson, owned by investors with various ties to the boom times and very active during the last few years. Arctica Finance was set up by bankers mostly from old Landsbanki, i.a. Bjarni Þórður Bjarnason, seen to be strongly connected to the Independence Party, Benediktson’s party. Unsurprisingly, both firma are courting the pension funds, the source of the greatest financial power in Iceland.
The really worrying aspect here is that the pension funds have all clung religiously to their mantra of being non-interfering non-active owners. During the boom years the pension funds were closely aligned with the banks and in the end lost heavily because of these ties and their unquestioning and uncritical attitude to the banks. There were clear indications of clustering: certain pension funds seemed particularly close to certain banks and certain large shareholders.
The billionaire-makers of Iceland: the pension funds
In most countries such ties exist to a certain degree but in Lilliputian Iceland these ties of friendship, kinship and political ties, border on the incestuous.
If we are now seeing these old ties revived among owners of one or more banks Iceland is set for round two of running the banks as during the boom years: with a chosen group of what I have called “preferred clients” and their fellow-travellers, i.e. clients who got collateral-light or no-collateral loans, who got bullet loans that were continuously rolled on, never classified as non-performing – and then all other clients who just got the professional scrutiny any normal person can expect from a bank.
Indeed, the pension funds are not only king-makers in the new Iceland but billionaire-makers. This has to a certain degree started, though on a minor scale so far: the pension funds are already investing with groups of investors who are doing very well from these ties. Clearly, investors chosen as the funds’ co-investors are pre-destined to do exceedingly well.
Indeed, the pension funds are not only king-makers but billionaire-makers.
The fight against foreign ownership – to control Iceland
This possible danger of the pension funds repeating past mistakes is compounded in an Icelandic-owned banking system with no foreign competition and no foreign ownership, a wholly exceptional situation in Europe.
Seen from this point of view it is utterly fascinating to notice that many in power in Iceland, both in politics and business, have for decades fought with all their might against foreign ownership of banks or any sort of important businesses in Iceland – and still do.
From the point of view of these old bastions of power Iceland needs to be connected to the outer world but only to the degree that Icelandic entities can make use of connections abroad, not the other way around, i.e. no foreign ownership in Iceland. Needless to say, these powers fiercely oppose closer connection to the European Union – nothing more than the EEA, thanks!
The fight to link with the pension funds and to buy banks is the latest apparition of interest politics in Iceland: it is a battle of the soul of Iceland and the weapons are fear of foreigners and foreign ownership though the real danger is entirely domestic: the danger of the same mind-set that ruled the banks during the boom years and eventually pushed them off a cliff in October 2008.
Follow me on Twitter for running updates.
Owning one bank, Landsbanki and, as seems, soon becoming the owner of the second one, Íslandsbanki, the Icelandic government needs to decide on if to privatise the banks again and then how it should be done. Bjarni Benediktsson leader of the Independence Party has aired his idea that five percent should be given to the nation. The most famous example of a privatisation based on giving away shares was the rather notorious privatisation in Russia in the 1990s. Considering that this created an easy way for some oligarchs to acquire public good for little this hardly seems like the brightest idea. In general, the state should not be in the business of handing out presents but maximise returns on behalf of the nation.
At the weekend’s party conference, Bjarni Benediktsson minister of finance and Independence Party’s leader aired his idea that the state could create the largest possible shareholder base in the three new banks by giving every Icelander shares in the new banks. His suggestion was 5%. At present, the state owns 13% of Arionbanki, 97.9% of Landsbanki and might soon own the whole of Íslandsbanki, where it currently owns 5%.
The party conference, a biannual event, was held as the party’s standing in the polls is record-low, at 21%, compared to 25% in the elections 2013, far from the 35% to even above 40% in earlier decades.
It is no doubt a well-intended idea but the fact that the party leader throws this out as just an idea is intriguing, perhaps also rather worrying, considering that this regards a state asset. So far, Benediktsson has been more associated with planned policy-making rather than the top-of-my-head policy prime minister Sigmundur Davíð Gunnlaugsson has become known for.
It was also interesting that Benediktsson mentioned Icelanders were 300.000 when they are actually 330.000 – after all, Icelanders take great pride in the fairly rapidly growing nation. And most of all: Benediktsson does not seem to remember that privatisation via gifts has indeed been tried before – in Russia.
When this dawns on Benediktsson and his advisers they will learn the whole story of the origin of the wealth of some of the largest oligarchs of the 1990s, who organised a buy-out for a pittance of large chunk of these shares to the popolo. Not a very edifying story. After all, a hand-out of this kind seems unthinkable in the kind of well-governed countries Iceland likes to compare itself to.
Follow me on Twitter for running updates.
“Is this a retrade?” creditors will be asking themselves as they scrutinise the agreement reached between the Icelandic Task Force, the government’s advisers, and representatives of the three estates. As regards LBI and Kaupthing, probably not – relevant decisions will be made according to the June 8 agreement. However, Glitnir is a different case: yes, it is a retrade but the June agreement was probably never going to work for Glitnir. the main thing is that the present agreement with Glitnir and earlier with LBI (and Kaupthing probably by the end of this week), which means that the yoke of the capital controls will be off Icelandic shoulders.
Without much ado LBI announced last week that it was ready for a composition following the June 8 guide-lines. The LBI situation is very different from Glitnir and Kaupthing – LBI has hardly any ISK assets to speak of, it doesn’t own Landsbankinn, the Icelandic state does. The relative ease can be seen from the fact that the LBI stability contribution is only ISK14bn. The lion share of the LBI funds goes to priority creditors, i.e. the UK Treasury and those who bought the claims of the Dutch Central Bank earlier this year but the stability contribution will be paid by those holding general claims.
Kaupthing is due to pay ISK120bn in stability contribution according to the June 8 guidelines and will most likely do so. Will its main Icelandic asset, Arion bank, also end up in public ownership? That is unlikely, the constellation in Kaupthing is entirely different compared to Glitnir. Kaupthing’s only ISK asset is Arion bank, whereas Glitnir had around ISK150bn in ISK cash and assets, in addition to Íslandsbanki, i.e. the problem of foreign-owned ISK assets is much greater in Glitnir than Kaupthing.
Consequently, Glitnir was a much harder nut to crack. The task force accepted Glitnir’s solution in the letter Glitnir sent in, as did the other banks, in connection to the June 8 plan; i.e. the task force accepted that the solution Glitnir suggested fulfilled the stability criteria. However, at a closer scrutiny – most likely done by the CBI (which should have been kept closer to the negotiations because they have the necessary insight but weren’t) – it became clear that no, it actually did not. Therefor a retrade, i.e. a new agreement for Glitnir.
Discussing the Glitnir agreement on Rúv October 20 minister of finance Bjarni Benediktsson stated that “we (i.e the government) intervened in the process at the right time.” Another way to look at it is that it took the government two and a half years of wrestling to agree to sing from the same hymn sheet and accept that should the process be consensual the only sensible way was to negotiate the outcome with creditors.
After deducting priority claims the stability contribution amounts to 80% of the ISK assets in the tree estates or 20% of their total assets – interestingly, numbers that have been swirling in the air from 2012. Something in this direction has always been the obvious solution. The delay in acting on it was the political price.
The contribution, which in June amounted to ISK334bn – ISK14bn from LBI, ISK120bn from Kaupthing (given that the finalising brings no further changes) and ISK200bn from Glitnir – will now most likely amount to almost ISK380bn, with the increase coming from the new Glitnir agreement.
The June plan versus the new plan
Benediktsson mentioned that the government had intervened, a word which could for years not be uttered aloud. In the October 20 statement it is for the first time mentioned that there were indeed negotiations. This was necessary because contrary to what the task force stated in June the Glitnir June proposals did indeed not fulfil the CBI stability criteria.
So what is the difference between the June and the new proposals (see the details here)?
The key item is Íslandsbanki. At the end of last year the bank’s capital was ISK184bn of which ISK175bn or 95% belongs to Glitnir, 5% to the Icelandic state (which owns 5% shares in the bank).
The June plan was to lower the capital by a dividend of ISK37bn, i.e. dividend paid out in ISK, in addition to dividend paid out in foreign currency, amounting to ISK16bn, roughly reducing the bank’s capital down to ISK120bn. The dividend paid out in ISK was to go towards the stability contribution, i.e. to the Icelandic state; the foreign currency dividend to creditors.
The plan was all along to sell the bank for foreign currency, i.e. convert this ISK asset into foreign currency asset so the creditors could easily be paid out without upsetting the holy grail in all of this – Iceland’s balance of payment.
Further, the June agreement stipulated that 60% from the expected sale in foreign currency would go towards the stability contribution, i.e. paid in foreign currency whereas the Glitnir’s creditors would get 40%.
The June snag
So far, so sensible. Except this apparently so perfect plan had one snag: Íslandsbanki did not have the financial strength to pay all this dividend in addition to the deposits of the failed banks, which creditors could take over at composition (the three estates have deposits in the three banks – Landsbankinn, Arionbank and Íslandsbanki – amounting to ISK109bn in ISK and ISK138bn in foreign currency at end of 2014; table vii-2).
This problem became clear in July when Glitnir and Íslandsbanki came to an agreement regarding the recapitalisation of Íslandsbanki which involved extending the maturity of Glitnir’s deposits in Íslandsbanki. The stability contribution clearly had to be paid out in cash, not by a bond.
So what are the changes made in the new plan?
The creditors pass on the ISK16bn dividend (that should have been paid out in foreign currency) and they also pass on the 40% in the hoped-for foreign currency sale of Íslandsbanki (which frankly did not seem about to happen, also because the foreign owners might not suit the political commanding heights in Iceland) – in total, they pass on ISK63bn.
What do they get in return for this sum? They don’t need to refinance a subordinate foreign currency loan, which the Icelandic state placed in Íslandsbanki, set up to entail Glitnir’s domestic operations. In Glitnir’s accounts end of June 2015 this is put at ISK20bn.*
Thus, what the creditors are in reality giving up is ISK16bn + (0.4 x 120bn) – 20bn = ISK44bn or 25% of their share of Íslandsbanki capital of ISK175bn. The task force is offering them to buy the bank at price to book 0.75.
Given that Landsbanki and Kaupthing will pay respectively ISK14bn and ISK120bn in stability contribution and Glitnir will now pay additional ISK244bn, the total is ISK378bn.
The most important outcome is that is the one Benediktsson has long been advocating, as has i.a. the IMF and the CBI: a consensual agreement, meaning that creditors take this as a final solution and will not sue the Icelandic state neither for this nor earlier actions, i.a. tax on the estates in 2014. No legal wrangling, no litigation all over the world that could delay the lifting of the capital controls for unforeseeable future. The stability tax is out, the stability contribution in.
Through the prism of Icelandic politics
Nothing can be understood in this lengthy process since Kaupthing and Glitnir presented their composition plans in 2012 and 2013 except through the prism of Icelandic politics.
Panic politics is now a passé possibility for the Progressive party. At ca. 10% in polls, compared to 24% in the elections in spring 2013, prime minister Sigmundur Davíð Gunnlaugsson could in theory have attempted to raise hell and claim that the difference between the tax and the contribution was unacceptable and he was the man fighting Iceland’s case to wring more out of creditors than the paltry ca. ISK400bn compared to ISK850bn from the tax. However, with the standing of the Pirate party in the polls – ca. 35% over the last few months – any discontent is more likely to fatten the Pirates rather than the progressives.
The June plan was to a certain degree presented on false premises by putting so much emphasis on the tax and how much it would bring. The risk linked to the non-consensual stability tax was humongous, compared to low risk of a negotiated and consensual stability contribution. These numbers have lingered on in the debate, thus kept on skewing it.
It took less than six years to bankrupt the privatised banks (they were fully privatised by end of 2002), many Icelanders will now feel uneasy that the state now owns not only one but two banks. However, that is a challenge for Icelanders to solve and will test how much, if anything was learnt following the 2008 collapse.
A good deal for Iceland?
Is this a good deal for Iceland? And is this a good deal for creditors? Yes. Both parties have a great interest in bringing the matter to a close. Iceland needs to move out of the shadow of the capital controls and now that the economy is booming again (perhaps dangerously so but that’s another saga) it’s paramount to make full use of the good times. The creditors will want to run for the exit, with whatever they get in order to invest elsewhere and get out of the sphere of Icelandic politics.
Both parties will be asking themselves what is the price of risk. Reducing uncertainty will be a profit for both parties and not the least for Icelanders themselves. In addition, Iceland should be worried about the reputational risk. As I have pointed out earlier the path towards a deal has, from the point of view of foreigners “been tortuous, with new deadlines, conflicting messages from Icelandic politicians and deals that are a deal until the authorities think of something else. Some may think this is maverick and cool, little Iceland fooling the financial markets. Others will beg to differ.”
I have earlier written extensively on all aspects of the estates and capital controls so please browse and search if you are looking for specific issues.
*Update: as stated, creditors don’t need to refinance the loan – not easy to measure the time value of money involved. They do however get what remains of the loan as a payment for Íslandsbanki, which means that their gain is a bit more than ISK20bn, to be precise.
Follow me on Twitter for running updates.
Now that a deal with creditors of the three largest banks – Kaupthing, Glitnir and Landsbanki – has been drawn up and is being finalised (by the end of the week?), there are issues for Icelandic authorities to consider.
From the point of view of foreigners, the path towards a deal has been tortuous, with new deadlines, conflicting messages from Icelandic politicians and deals that are a deal until the authorities think of something else. Some may think this is maverick and cool, little Iceland fooling the financial markets. Others will beg to differ.
Iceland, as any other country, needs investment, i.a. in infrastructure and that will partly have to be financed by foreign loans. Yes, financial markets have short-term memory and there will always be young gung-ho traders rearing to do a deal. But large institutional investors, such as pension funds and other long-term investors, who are often somewhere behind the large infrastructure investments, may think differently after struggling or seeing others struggle to get their share of the assets in the failed banks.
So who is then left to finance it? The Chinese, as the British government is so enthusiastic about. Icelanders have a huge problem in general with foreign ownership, wonder if it’s any easier if it’s a foreign dictator and not just a foreign greedy hedge fund, as creditors are normally called in the Icelandic parlance.
Another worrying aspect, in terms of Icelandic financial stability, is carry trade. Eh, for real? Yes, for real. Carry trade – trading on interest rates differential – brought Iceland under capital controls in November 2008, following the banking collapse. It is stirring again.
In summer, soon after the June 8 plan on lifting capital controls was announced, foreign currency from carry trade deals started to appear in Icelandic stats. There were some inflows in July, more in August. It might now amount to 2% of GDP I’m told, far from the 44% it was in November 2008 but still… suddenly growing fast.
I thought that part of the explanation might be creditors in the three estates hedging but I’m told that is very unlikely (possibly in LBI but probably not and would not explain it all). The truth is that Icelandic bankers are again – and before their last mess is mopped up – selling this fantastic product: carry trade on the Icelandic krona in high-yield Iceland. Look around, there might even be some right now close to you in New York. And London is always close to Iceland.
The Icelandic Central Bank, CBI, has earlier put in place prudence rules, in order to counteract the carry trade situation in autumn 2008. But I wonder why Icelandic bankers still think it’s a good idea to tour the financial megapoles to sell this product that proved so toxic in 2008. Lessons learnt? I hope the CBI is paying good attention, tooth and claw.
Follow me on Twitter for running updates.
The Icelandic state will take over Íslandsbanki from creditors of Glitnir, according to a press release from Ministry of finance. This means that the June 8 agreement with Glitnir creditors has been changed. However, the trade off is certainty for a possible future upside. Given the Icelandic political climate, that is probably not a bad deal.
LBI, old Landsbanki, has already announced its intention to do a composition and is on track with it, meaning that it must already have the blessing of the government.
Kaupthing will most likely finalise its composition this week. That means that all the three banks are on track towards a composition and a stability contribution.
And the delayed Financial Stability report from the Central Bank of Iceland is now out, published on Friday to no fanfare. Intriguingly, in the introduction there is no mention of the stability tax, only the consensual contribution, levied on the estates, exactly as is now being done.
Updated to include the para on the FS report.
Follow me on Twitter for running updates.
As far as I understand, Icelandic officials are in London to finalise agreements regarding the estates of the three failed banks – Landsbanki (LBI), Glitnir og Kaupthing. The agreements are a necessary step in the plan to lift capital controls, long in the making.
The agreements agreed to in June were only lose outlines. The recent work aims at spelling out the precise meaning, terms and conditions.
Creditors in Glitnir and Kaupthing own respectively the new banks, Íslandsbanki and Arionbank. These two entities are also the largest part of the estates’ Icelandic assets, which cause the problem: these assets can’t be paid out in foreign currency, as the creditors, mostly foreigners, would prefer.
Glitnir has been trying to sell Íslandsbanki to foreigners but it so far without success.
Follow me on Twitter for running updates.
The Icelandic Supreme Court has sentenced (in Icelandic) three ex-managers of Landsbanki to jail sentences. Two of them – the bank’s CEO Sigurjón Árnason and director of corporate lending Elín Sigfússdóttir – had earlier been acquitted by Reykjavík District Court. The Supreme Court sentenced the two to respectively 3 1/2 years prison and 18 months prison. The third manager, Steinþór Gunnarsson director of proprietary trading had been been given a nine months suspended jail sentence, which the Supreme Court turned into nine months in prison.
The case was yet another example of bankers being convicted for breach of fiduciary duty, i.e. causing losses by fraudulent lending where laws and the banks own rules were broken, in addition to market manipulation. In this particular case over ISK5bn were lent to Ímon, a company with no assets except the Landsbanki shares bought for the fraudulent loans from Landsbanki on September 30 and October 3 2008, only days before the bank collapsed.
This case, called the Ímon case, was one of the first cases of suspicious lending to surface after the banks collapsed in early October 2008. The case became symptomatic for the three banks’ lending patterns where the banks lent money to asset-less companies to buy the banks’ own shares, with only the shares as collateral in the days, weeks and months before the banks failed, as share prices were collapsing. As so many of these loans the Ímon lending was later described in detail in the Special Investigation Committee report, published in April 2010.
With this sentence, top managers from both Landsbanki and Glitnir have been sentenced to prison. There are still on-going cases against Glitnir managers.
Updated 9 Oct., clarifying the loan and lending date.
Follow me on Twitter for running updates.