Now, eighteen months after the collapse of the three banks – Kaupthing, Landsbanki and Glitnir – in October 2008 it’s clear that their collapse wasn’t an event but a process that hasn’t yet come to an end. A case in point is the Icelandic system of building societies, ‘sparisjóðir.’ Iceland had a strong system of building societies, similar to the German and Scandinavian ‘Sparkasse.’ Last week, two building societies were taken over by the state. Out of ca twenty societies a decade ago, only two are now left as independent institutions. The rest has either been taken over by the state or merged with one of the banks. Sadly, a financial system, closely linked to communities around the country, has been wiped out. The loss of this backbone of the local economy will, no doubt, make it much more difficult for small businesses all over the country to get financial service tailored to their needs.
The building societies, owned by locals, were run like cooperatives. The members owned what they put into the society and got a dividend of this part only. In 2000 these owners owned 15% of the societies’ equity. In 2002, laws on building societies were changed, enabling the owners to sell their part on the market. From this time the societies were allowed to become listed companies though only one of them eventually did, in 2007 as the tide of easy money was turning.
These changes were made around the time when the banks were privatized. In the following years the banks and their biggest shareholders sought to influence the building societies in their ever-greater need for money, manipulating their managements in the interest of the banks. Many building societies turned into hedge funds gambling with shares in the banks and companies like Exista and FL Group. At a closer look, the profits of the building societies didn’t stem from the banking activities but from shares. The building societies turned into satellites of the three banks, eventually doing a lot of repo loans with the Central Bank as the credit crunch struck.
Together, the building societies owned a bank, Icebank, that threw itself head on into unsustainable investments, i.a. some of the most deranged property projects abroad. One of them was a redevelopment of a hotel in Florida, Longkey, where Icebank eventually lost $8,5m. The key person was an Icelandic investor, Karl Wernersson, who was a principal shareholder in Glitnir before he sold to Jon Asgeir Johannesson. Clearly, fast-talking foreign developers who promised riches and delivered nothing led the Icelandic investors badly astray.
Around Christmas I spoke to a manager from one of the two building societies still standing – one is in the West of Iceland, the other in the North. He complained that competition was now tough since his society was competing against state-funded building societies. As to why his fund was still standing he said that the fund had mostly steered clear of investing in shares. And he and his colleagues had stayed away from making business with people from Reykjavik. ‘At one point,’ he said, ‘we had some clients from Reykjavik but our experience of making business with them wasn’t good.’ – Sometimes, it pays to stay close to one’s roots.
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