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A modern amorality tale – or how to wipe out a ISK6bn debt

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How can a bank break all rules to lend ISK6bn, £30m, to a shelf company without any assets – and buy back this company, debt and all, for 1 krona? This might seem to run counter to both business sense and common sense – but welcome to the Icelandic way of banking.

This tale, not a fairy tale but a bank tale, rotates around Fons, a now bankrupt company owned by Palmi Haraldsson and closely connected to Baugur, the now bankrupt company of Jon Asgeir Johannesson. In early 2008 Fons’ debt to Glitnir was so ominous that Glitnir could hardly avoid making margin calls. Johannesson and Haraldsson then rather insistently presented a plan to Glitnir: the bank agrees to finance a deal between two Fons’ subsidiaries that triggers a loan of ISK6bn whereby Fons’ debt of ISK4bn is paid and ISK2bn in cash is released to Fons out of which ISK1bn goes into Johanesson’s private current account.

This is the apparent structure behind charges brought recently by Glitnir’s resolution committee against Jon Asgeir Johannesson who built up the Baugur empire in Iceland, the UK, Denmark and elsewhere, Palmi Haraldsson the present owner of Iceland Express as well as a string of failed companies and a frequent business partner of Johannesson, Larus Welding former CEO of Glitnir, brought in when Johannesson and Haraldsson became the bank’s major shareholders in 2007 and three employees of the bank who, after Glitnir’s collapse, have continued to work at Islandsbanki, the new Glitnir. All six claim innocence. The case will open in late April. The charges clarify news that has been brewing in the Icelandic media over the last few weeks, complete with excerpts from emails of the personae dramatis.

The loan was structured around the sale of a Fons subsidiary to another subsidiary of Fons’ share in Aurum, the holding company of Goldsmiths, a UK jewelry chain, where Baugur and Fons were major shareholders. Glitnir valued the shares at no more than ISK1,5bn but in emails Johannesson and Haraldsson insist on a loan of ISK6bn against the shares. In an email to the bank Johannesson ‘expects’ his plan to be carried out. Welding ordered his employees to ‘prepare a loan agreement’ according to the plan outlined by the two businessmen.

Out of the 6bn 4bn were used to pay up older loans – and 2bn in cash put into Fons’ account. Fons sends 1bn to Kaupthing Luxembourg, allegedly to settle a loan there. Johannesson claims a billion for himself. In an email Johannesson explains that he absolutely doesn’t want to be overdrawn since that doesn’t look good – accordingly, the bank settles the overdraft and puts 750m in ready money into Johannesson’s account. Fixing the overdraft and providing cash of the bank’s major shareholder seems to be enough for the bank to give a helping hand.

According to the charges the only motive for the loan is to the help an already insolvent Fons from Glitnir’s inescapable claims, to dump Baugur’s and Fons’ obligations into an empty shelf company and to provide the two businessmen with cash without any collaterals or obligations. According to the charges all three motives were perfectly clear to the bank.

In an email written as the loan was in the making, a Glitnir employee points out to Welding that he can’t understand why Glitnir needs to go to this length of setting up the Aurum sale – it would have been a lot simpler just to send 2bn directly into Fons’ account in the Cayman Islands.

The emails quoted in the charges give an interesting insight into the minds of the two businessmen and the bankers ordered to prepare the loan. In an email at the end of May Johannesson explains how the loan should be structured, adding that if these requirements won’t be met ‘I should perhaps consider becoming an executive chairman of Glitnir.’ – This has been widely understood as a threat. After the charges became public Johannesson claimed that by deleting a smiley after this sentence the resolution committee had changed its meaning. Apparently, a smiley is no laughing matter to the businessman.

Smiley or not: only three weeks later, this was a threat without any claws. June 5 2008 the Icelandic High Court confirmed an earlier verdict over Johannesson by the Reykjavik County Court Johannesson of three months conditional prison sentence – thereby excluding Johannesson from sitting on any company boards for the next many years.

But there is a further twist to this tale. As the loan agreement was finally in place in July 2008 and FS38, the shelf company, saddled with the loan Fons did a call option with Glitnir obliging the bank to buy FS38 for 1 krona in December 2008 if FS38 so wished. In December, Fons made use of its option and Glitnir, by then taken over by the resolution committee, was forced to buy back its own glorious 6bn debt structure for the agreed 1 krona. In April 2009 Fons went bankrupt. One of Glitnir’s credit claims in Fons is the 6bn loan that then gave rise to the present charges.

According to the charges, Johannesson and Haraldsson were the instigators who commanded the four bankers to fix the loan that was only a make-believe deal, made to provide the two businessmen with 2bn in cash. The businessmen are charged with violations of company law. The bankers are charged with breaking the bank’s internal rules and violating company law.

Bankrupt companies related to Baugur and Fons now come by the dozen and their combined debt amounts to hundreds of billions of kronas that will never be paid. Each of the three Icelandic banks lent tens of billions, in some cases hundreds of billions, to these companies. Around 2000, Kaupthing was instrumental in the making of Baugur as the company started expanding abroad. Landsbanki later lent Baugur astronomical amounts, even when Kaupthing appears to have become more reticent. Baugur and Fons had already done pretty well for themselves when these two became the principal shareholders in Glitnir in summer 2007.

As the credit crunch was slowly crushing the Icelandic banks in the summer of 2008, Glitnir decided on the loan and the call option of 1 krona with the foreseeable final loss shouldered by the bank. The loan of 6bn is not only an offense to all business ethics and to common sense but also runs contrary to good business practice.

It’s an intriguing question why all the three major Icelandic banks went down the same path of lending only a handful of people exorbitant amounts of money on such shaky premises – in deals that time and again run against the interests of the banks, all listed companies.

The Italians have a great expertise when it comes to organised crime – and one of their lessons is that crime propagates in a vacuum beyond the state. The charges against the six haven’t yet been resolved in court – and as long as it hasn’t happened the six are innocent – but these charges and other cases seem to indicate that there was a lawless vacuum in the banks. Hopefully, the report of the Investigative Commission, coming out tomorrow will clarify these issues.

It’s deals like these that have left the Icelanders somewhat perplexed as to what kind of bank system was actually run in Iceland. At the root of this modern amorality tale are bankers prepared to break every rule in the book and major shareholders pulling the strings.

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Written by Sigrún Davídsdóttir

April 11th, 2010 at 4:31 pm

Posted in Iceland

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  1. […] ‘A modern amorality tale…’ by Sigrún Davíðsdóttir… How can a bank break all rules to lend ISK6bn, £30m, to a shelf company without any assets – and buy back this company, debt and all, for 1 krona? This might seem to run counter to both business sense and common sense – but welcome to the Icelandic way of banking. […]

  2. […] Loans to FS-38, to buy shares in Aurum Holding Ltd (the UK Goldsmith jewellery chain), already a famous case in Iceland where a loan of ISK6bn was in the end offloaded for 1 […]

  3. […] Glitnir in spring of 2007 and three employees of Glitnir. The Glitnir case regards the sale of Aurum shares from one Haraldsson company to another Haraldsson company, a case Icelog has reported on […]

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