The pre-fall banking system in Iceland had some intriguing characteristics. One of the more astounding one is how willingly all the three major banks lent a small group of businessmen, tied to the banks through ownership and inter-dealings, beyond all rhyme and reason. This completely reversed the power balance between the banks and their main clients – the clients, not the banks, set the rules of the game. In their game the clients were favoured at the expense and to a great risk for the banks.
Last summer I read a fascinating and scary book, ‘Mafia Pulita’, ‘The Clean Mafia’, by Antonio Laudati (now a prosecutor in Bari where the Mafia is particularly ingrained and vicious) and Elio Veltri, both well known for their fight against organised crime. Through stories of a few Mafiosi they explain how the Mafia infiltrates the ‘clean’ economy (as opposed to the ‘dirty’ or ‘black’ economy of organised crime) – this is the Mafia that buys what it can and only kills when it has to. I interviewed Laudati on a hot August Sunday morning in Naples where we shared the Napolitan pastry ‘sfogliata’ as he told me about corrupt Italian banks that seemed uncannily similar to the Icelandic banks.
In former times, the Mafia would find a bank clerk, often a low level one, to help channel its ill begotten money into the licit economy. Now instead, there have been cases, mostly in small banks in the North of Italy, where the criminals collude with the managers. The criminals get loans that systematically are far above the exposure anyone else gets, putting the bank itself at great risk. These banks also assist the criminals to borrow money from other banks by guaranteeing their loans though the collaterals, mostly shares and property, often financed by loans from the ‘helping’ banks. This effective loan machine generates money for the criminals, their loans are never paid back but serviced with more loans.
I’m not suggesting a Mafia connection or anything Mafia-related regarding the Icelandic banks; not at all. I just find it intriguing that the only banks with business patterns similar to the Icelandic ones turn out to be corrupt Italian banks that have been closed down by the authorities. As in the Italian banks the Icelandic banks loaned money to few chosen individuals beyond all sensible limits. These clients weren’t much bothered with margin calls nor the collaterals sold when loan covenants were breeched; old loans were serviced with new ones and it does indeed seem likely that in some cases the banks did not expect the loans to be repaid.
Icelanders are now following with anger and resentment how the new banks –Islandsbanki and Arion Bank owned by credit holders respectively in Kaupthing and Glitnir respectively, Landsbanki by the Icelandic state – are refinancing companies owned by some of the major before-the-fall players. Here are the latest examples:
There isn’t much left of Baugur, Jon Asgeir Johannesson’s retail empire spanning UK high streets and other places. Both Baugur Iceland and Baugur UK collapsed under its debt. Administrators have contested various last-minute dealings. Landsbanki was evidently the biggest lender but the two other banks were fairly generous too. The most valuable Icelandic assets are now in Hagar, a holding company that runs a myriad of shops in Iceland, most importantly two supermarket chains, Bonus and Hagkaup (interestingly, Hagkaup was founded by the father of Jon Asgeir’s wife – first Jon Asgeir bought Hagkaup, later he married into the Hagkaup family, though long after its founder’s day). Arion Bank had taken over Hagar, apparently against a debt of ISK70bn (£350m).
After continuous headlines of Hagar’s fate – last summer Johannesson i.a. wowed to bring in foreign investors in 2-3 years time – Arion Bank has now decided to float Hagar later this year. Johannes, Jon Asgeir’s father (who in 1989 founded Bonus with his son, the first step towards the Baugur empire), is the chairman of Hagar. Arion will grant him the right to buy 10% of the company, in addition to the management getting 5% – in Iceland, the takeover trigger is 30%. Before the fall the bank would no doubt have lent preferred buyers against Hagar shares but Arion claims that’s not on offer now. Many Icelanders would have liked to see Hagar broken up so as to correct the ca 60% market share that Hagar has in the food market. Arion maintain that it’s obliged to focus on its profit not correcting competition.
Olafur Olafsson’s foreign profile has been much lower than Jon Asgeir’s though he has been living abroad for years, recently swapping Knightsbridge for Lausanne. Olafsson, who spans the gamut of the pre- and post-privatisation period, rose on the tail of the Progressive Party and the co-operative movement and built his empire on the shipping company Samskip. He later became one of the biggest shareholders in Kaupthing and was the main shareholder of Alfesca that sprung from one of the two main fishing companies, operating since after the war. It seems to have been through Olafsson’s networking that the Quatari businessman al-Thani invested in both Kaupthing (Sept. 2008) and Alfesca (summer 2008). The Alfesca investment never materialised; the Kaupthing one is being investigated as an alleged market manipulation. Olafsson and Samskip’s management have now negotiated a financial reorganisation with Arion and Fortis Bank – it is understood that the owners will bring in new capital.
Icelandic Group is the other major Icelandic fishing company that in 2005 was bought by Magnus Thorsteinsson and Björgolfur Gudmundsson. These two, together with Gudmundsson’s son Bjorgolfur Thor Bjorgolfsson, bought 40% as Landsbanki was privatised in 2002. At the time it was understood that the money came from the sale of the Bravo Brewery in St Petersburg to Heineken for $400m (their St Petersburg enterprise gave rise to myriads of stories about Iceland’s ‘Russian connections’ and ‘Russian money’ culminating when Russian authorities seemed to contemplate bailing Iceland out in Oct. 2008 – one of the many untold stories of the fall). It’s now clear that if there was any profit from the Bravo sale it only partly, if at all, financed the Landsbanki deal – the three simply got a loan from Bunadarbanki just like those who bought Bunadarbanki (later merging with Kaupthing), Olafsson being one of them, got a loan from Landsbanki.
Thorsteinsson and Gudmundsson are both bankrupt in Iceland. As most companies touched by the two (and all the other ‘viking’ investors) Icelandic sank under its debt in October 2008 when Landsbanki’s new CEO, put in place just after the bank’s demise, revived it. Icelandic’s present management has been running the company since 2007. In spite of losses since 2005, Landsbanki, now on its second CEO since the fall, still keeps the company afloat, claiming that the company will be able to clear out its debt in due course. Since Icelandic hasn’t published an annual report since 2007 it’s difficult to judge its position.
The latest stories of Hagar, Samskip and Icelandic – all important companies within the major Icelandic business conglomerates during the boom – show that certain relations seem to reach if not beyond the grave then at least beyond bankruptcies. Those who had the greatest hold on the old banks are still flying but some of these financial cliffhangers might still crash as the administrators edge in. In Iceland, the feeling is that it’s happening only very slowly – people find it difficult to understand that billions in debt in companies fallen by the road side do not affect the general standing of those whose financial acrobatics brought down the banks and the krona. Returning to former times when the political parties meted out favours through the banks is not an option – and yet there is a great pressure on the Government to do whatever it takes to prevent what is seen as cementing the unfairness in the unhealthy banking system before the fall.
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