Sigrún Davíðsdóttir's Icelog

As if nothing had happened

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Upset that the British government was still too keen on protecting the financial sector, Germany’s Chancellor Angela Merkel said in exasperation that she wanted to remind everyone that something did indeed happen in the financial markets. It made ‘no sense,’ she said, ‘to keep behaving as if nothing had happened.’

Her words describe all too well to the situation in Iceland. The three resurrected banks – New Landsbanki previously Landsbanki, Arion bank previously Kaupthing, Islandsbanki previously Glitnir (but Islandsbanki before that) – have now amassed a sizeable collection of assets and are, in some cases, reselling these assets. In the Icelandic media the banks have been criticised for lack of transparency, especially Landsbanki. There seems good reason to be worried that old habits die hard – but how were the old habits?

A banker working at one of the collapsed Icelandic banks told me recently that it had been quite remarkable to see how the banks’ ‘chosen’ customers – the big customers that in many cases also happened to be the banks’ largest shareholders – were content to pocket the profits but expected the bank to compensate for any losses they might suffer. Documents stemming from the now bankrupt companies Baugur, where Jon Asgeir Johannesson was a major shareholder and Fons, Baugur’s regular co-investor owned by Palmi Haraldsson and Johannes Kristinsson, throw some light on the old habits. Claims lodged against Fons amount to ISK40bn, almost £207m. Claims against Baugur Iceland amount to ISK319bn, £1,65bn.

At the end of 2005 Fons borrowed ISK800m from Glitnir. Three months later 300m were paid off in accordance with the loan agreement. The remaining 500m, supposed to be paid off by the end of 2006, are now part of Glitnir’s claims against Fons. – There are many other examples where the banks’ main borrowers, often their main shareholders as well, apparently did not expect to pay back their loans (even though refinancing was never an issue). The Fons loan from 2005 seems to be a case in point and shows that the banks’ leniency towards their big customers started well before the panic of 2008.

In December 2007 as the credit crunch was seriously starting to hit the leveraged Icelandic companies, Fons borrowed ISK10bn from Glitnir against shares in FL Group, the faltering investment company closely connected to Baugur and Fons. A few days later Glitnir lent Fons another ISK2,5bn. The collateral was a ISK3,7bn loan agreement whereby Fons financed sale of assets to Baugur, i.e. Fons both sold and financed the sale. Nothing was paid off this 2,5bn, most likely because Baugur didn’t pay off its loan from Fons.

Although Fons didn’t pay off any of these loans Glitnir still lent Fons ISK6bn in July 2008 to finance the sale of shares in Aurum Holding, one of Baugur-Fons retail investments, from one Fons-company to another, i.e. like the left hand buying from the right hand. In an illiquid market the evaluation of the shares raises questions. Of the 6bn 1,5bn were set against Fons trading account at Glitnir and 2,5bn were supposedly used to pay off an older loan (though there are conflicting information as to which loan was paid off). Two billion kronur were put into Fons’ account at Glitnir where 1bn was used to pay off 1bn on a loan at Kaupthing, Luxembourg and 1bn was put into Jon Asgeir Johannesson’s private account at Glitnir.

The administrator of Fons has now sued Johannesson to claim back this billion kronur, claiming that the money was paid without the necessary paperwork to underpin the payment. This claim will be settled in court later this year.

This flow of money from Glitnir into and between companies related to the bank’s principal shareholders is a saga of obscure deals and loans that were never repaid. Other similarly questionable deals, related to Baugur and Fons, involve the Danish air company Sterling and the two Icelandic companies Skeljungur, a petrol company, and Securitas, a security company. – The two other Icelandic banks, Landsbanki and Kaupthing, are also big creditors in Fons and Baugur.

Another bankrupt company with an interesting story is ‘Solin skin’, meaning ‘The sun shines’, owned by Baugur, Fons, Glitnir and the UK businessman Kevin Stanford, a frequent co-investor in Baugur’s ventures, a client at Kaupthing and now being investigated by the Serious Fraud Office. The only asset of ‘Solin skin’ was a futures contract on shares in Marks & Spencer. The contract was renewed close to twenty times and incurred spectacular losses. The claims on this tiny company that no one outside of Baugur’s inner circle knew of until its bankruptcy amount to ISK15bn, £77m. – As a comparison the cost of running Althingi, the Icelandic parliament, this year will be ISK2,7bn. The losses of this, in Baugur-Fons’ grand-scheme-of-things, tiny company would be enough to run Althingi for over five years.

The administrator of ‘Solin skin’ has compared the company to a gamble on the house. It seems unlikely that a normal bank would have allowed the company to renew the contract time and again, steadily adding to the losses with no assets to cover them.

In 2007 Jon Asgeir Johannesson bought two flats in New York in one of the most hyped condos in the city, at 50 Gramercy Park. Landsbanki financed the acquisition. The bank’s resolution committee is unwilling to inform what is happening with the flat or if Johannesson has had access to it after he couldn’t fulfil the loan agreement. Attempts to sell the flat, last on the market now in January at $15m, have apparently been unsuccessful. The news of a possible court case against Johannesson for renting out one of the flats with an Ikea kitchen and not a designer kitchen expected in this condo drew some smiles – might it be that after many questionable deals Johannesson would in the end falter on a designer flaw and not a financial deal?

The year 2007 was a year of conspicuous private spending by many of the Icelandic high-flyers, giving rise to a new phrase in Icelandic, ‘it’s so 2007’, meaning ‘outrageously extravagant.’ Banque Havilland, that took over Kaupthing Luxembourg, has already repossessed the yacht bought that year by Johannesson and his wife, and sold it to a Russian buyer. In December 2009 GE Capital repossessed Johannesson’s private jet. Strikingly bold actions compared to Landsbanki’s veil of secrecy hiding the ownership of the New York flat where Johannesson and his wife are still registered as inhabitants.

What causes concern in Iceland is that many of those responsible for lending money ad infinitum to heavily indebted companies and individuals are still working for the three resurrected Icelandic banks (though it doesn’t make the Icelandic banks unique in the international banking sector). – In ‘Liar’s Poker’ Michael Lewis describes banks that were always willing to sacrifice the interest of their clients for their own. Interestingly, the Icelandic banks always set the interest of a few chosen clients/shareholders above their own. So far, no court case has tested the responsibility of the managers and the boards of these banks in deals like those mentioned above.

The report coming out on April 12 will no doubt clarify the operations of the banks. After the report it might be more difficult to continue ‘as if nothing had happened.’

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Written by Sigrún Davídsdóttir

March 30th, 2010 at 12:13 am

Posted in Iceland

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  1. […] that the flat, at 50 Gramercy Park, has been put twice on the market but hasn’t sold so far. Icelog has earlier mentioned the flat and Johannesson’s […]

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