Sigrún Davíðsdóttir's Icelog

What did the managers and key bankers really think about the operations they were running? ‘Well, they clearly didn’t trust the banks because it was all about getting as much money out of them, via salaries and bonuses, as possible,’ a source close to one of the collapsed banks said to me recently. Bankers’ bonuses has been an international media topic for the last many years – both the numbers and the inbuilt incentives – but in this, as in so many other fields, the Icelandic bankers were well ahead of their foreign colleagues when it came to unreasonable claims and general lack of stringency. Out of the many, Glitnir offers some striking examples: Glitnir’s ex-CEO Bjarni Armannsson got Glitnir to pay him ISK380m when he left the bank in 2007, based on a contract that expired in 2006. A property company registered in his wife’s name owned a house in London and rented it out to Baugur, already then one of Glitnir’s biggest client.

The report of the Althingi Investigative Commission throws a revealing light on i.a. the lending practices, the financing of the banks and their internal and external auditing and is an endless source of illuminating material. But no chapter gives a more profound insight into the thinking of the managers of the banks than the report’s chapter on salaries and incentive schemes: the top bankers were generous in handing out the banks’ money to the small clique of major shareholders – and they weren’t stingy either when it came to their own salaries. Let’s focus here on Glitnir.*

In 2000 a merger of Islandsbanki and FBA, an investment bank, formed Islandsbanki-FBA. The CEO of FBA Bjarni Armannsson, the ‘golden boy’ of Icelandic banking and already famous for his high salary, was named the CEO of the new bank. As the report points out the management’s salary schemes were frequently changed, always for the benefit of the management but against the interest of the bank and its shareholders.

Armannsson brought with him the ‘Economic Value Added’ scheme from FBA but already in 2003 there was a deviation from that scheme in his own salary. In general, the rules weren’t stringent and changes were frequent. A change in 2004 made an end to deferred bonuses – whatever Armannsson got was his, no matter how the bank did. In 2001 Armannsson had made a contract based on options that then expired in 2006 without him making any use of it. When he was planning to leave the bank early 2007 he insisted that is should be honoured. The remuneration committee didn’t even have a copy of the contract and wasn’t too keen on letting Armannsson exercising his rights according to the expired contract. Armannsson’s suggested solution was a cash payment of 370m, the same as the contract would have given him but that wasn’t accepted.

After a bit of to and fro Armansson did indeed walk away with 380m. He also got premium on other shares – and did in the end leave the bank with just over ISK1bn that could be seen as a golden handshake. After the collapse of the bank Glitnir’s resolution committee claimed the final salary payment was illegal. Facing a threat of being brought to court Armannsson decided to repay in total around ISK1bn and make no further claims.

From 2004-2007 Armannsson’s average monthly salary rose from 9m a month to 50m a month, in other words it rose more than fivefold. In 2004 his bonus amounted to 1,8m a month but had reached 9m a month when he left the bank in 2007. But he also had a lucrative business on the side. When Glitnir ventured into the mortgage market Armannsson’s wife, a nurse, set up a property company, Landsyn, with loans from Glitnir. Amongst the properties in Landsyn’s portfolio was a house in a gated community in Richmond where many Icelandic bankers and businessmen lived. The house, valued at more than £1m, was rented out to Baugur already in 2006 – so while Baugur was one of Glitnir’s biggest clients the CEO’s wife was Baugur’s landlady. The Icelandic media has reported that in spite of Landsyn being registered under the name of Armannsson’s wife he himself ran the business.

When Jon Asgeir Johannesson, Palmi Haraldsson and Hannes Smarason – the FL Group cabal – became the major shareholders in Glitnir in spring 2008 they brought about drastic changes in the bank, also regarding remuneration. In 2004 the 10% of staff with the highest salary got around 30% of salaries paid in total by the bank – in 2007 this group got over 45% of all salaries at Glitnir.

Already from early on key employees got loans from the bank on highly favourable terms to buy shares in the bank. As frequently encountered in the Icelandic banks the loans were made out to be ‘risk free’, i.e. the risk was all on the bank not on the borrowers, the covenants were absurdly lenient, the interest rates outrageously low and the only collaterals were the shares themselves. The new board wowed to put an end the loans but that didn’t turn out to be the case at all. Two key employees were even given loans where part of the loans was paid out as dividends as soon as the shares were bought: one employee got a loan of 480m whereof 150 went directly into his pocket – another got a loan of 1bn with additional 150m paid out.

The employee loans escalated over the years – and it now seems clear that this sale of Glitnir’s shares, planned by the bank’s management, was organised market manipulation, comparable to similar but possibly even more extensive ‘parking of shares’ by Kaupthing. In both banks the aim was to make the banks immune to the swinging mood of the market. At the end of 2007 the loans amounted to 17% of the bank’s own capital.

The new owners of Glitnir brought in Larus Welding who had been the head of Landsbanki’s London office. Compared to Welding’s salary Armannsson turned out to have been poorly paid. Welding’s average monthly salary in 2007, including the golden handshake, was 84m out of which 4m was his salary and 80m bonuses. At that time a senior civil servant, i.a. a permanent secretary could expect to get around ISK700.000 – so Welding, at the time 31 years old, got paid the equivalent of 120(!) senior civil servants.

So what was the job that Welding was so well rewarded for? Emails published in the report and charges brought by Glitnir’s resolution committee show that Welding was essentially a private cashier for the new clique. Johannesson and Haraldsson were continuously on-line with harsh demands. At one point, Welding complained he was being treated like a branch manager, not like a CEO.

Although Armansson had been unrestrained when it came to his own salary the running of Glitnir under his management was more conservative than both Landsbanki and Kaupthing. The major shareholders during Armannsson’s time – one of Iceland’s old families famous for political power and unostentatious wealth joined by the much more aggressive Wernerson’s brothers – didn’t have the bank and its CEO in their pockets as did the FL cabal.

No doubt inspired by the fantastic success of the high-interest Internet accounts of Landsbanki and Kaupthing, Glitnir’s new owners aimed at the same lucrative market that Welding was already familiar with from London. But they entered the game too late, the international wholesale funding was dwindling and with the crisis hitting the Icelandic banks early on plans to set up the Internet accounts didn’t materialise. In addition, the new owners were so aggressive that Glitnir was the first of the three banks to run aground – and swept the two other banks along in the fall.

*The salary and incentive schemes for Kaupthing and Landsbanki offer a different insight and will be dealt with in later logs.

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