As the crisis hit in 2007 the Icelandic banks could not make use of margin calls because their largest debtors seriously put the banks’ position at risk – a typical example of what happens when the power in a bank’s client relation is reversed: the bank loses the stronghold on a client that has borrowed far beyond all sensible and justifiable limits. I’ve already pointed out the similarities to corrupt Italian banks. But the banks were also seriously hampered in making margin calls among smaller clients who had pledged the banks’ own shares.
In reality, many of the loans against the banks’ shares, particularly prevalent at Kaupthing (and not only towards the end) were no ordinary loans. It’s more precise to describe these transactions as ‘parking’ – the banks, especially Kaupthing, didn’t want just whoever to own shares so they ‘parked’ the shares with friendly partners. The banks wanted to control the shares, originally perhaps to avoid a hostile take-over, later to keep the share price at a level that the bank itself found satisfactory.
At Kaupthing, many employees borrowed from the bank to buy Kauphting shares with the shares as collateral. These sums were often far beyond what the employees’ salaries could reasonably justify. There are indications that the bank used pressure to induce the staff to make use of this offer that the bank said were ‘risk-free.’ In late 2002, as the share-price started to fall the bank couldn’t make margin calls on these loans thus leaving the employees who mostly didn’t have their shares in a limited liabilities holding company in a limbo. Just before the bank collapsed these employees were released of their responsibility for these loans. The legal wrangle on that decision is still unsolved. On the whole, these loans appear a horribly cynical action by the bank’s management that literally gambled with the employees’ future – a modern version of slavery.
This share ‘parking’ and other means the banks apparently used to keep up their share price is now under investigation in Iceland as market manipulation. It seems these tricks might have started well before the collapse in October 2008. If this proves to be the case investors and bond holders might well see a case for legal action against those responsible. At least one of the banks’ large creditors is preparing a case on these grounds.
It’s also interesting that the Serious Fraud Office is investigating Kaupthing with a team of eleven people. A possible market manipulation is most likely a part of that investigation.
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