Sigrún Davíðsdóttir's Icelog

At the height of the Icelandic boom, in 2007, the newly rich Icelandic Viking raiders bought loads of trophy assets. None more so than Jon Asgeir Johannesson of Baugur fame. A black Dassault Falcon 2000EX Easy, registered 30 November 2007 as G-OJAJ, named 101 like the Hotel 101 owned by Johannesson’s wife, came his way, owned by BG Aviation Ltd, c/o Baugur UK Ltd. According to news in Iceland in January 2008 the then newly-wed couple flew to Jamaica to test their new yacht, the 101 Heesen yacht. The jet purchase was financed by GE Capital. But GE lent and GE took back, or rather repossessed the jet, on July 20 2009 when the owner could no longer meet the repayments.

BG Aviation also owned a helicopter, G-PLPL, glistening black with the bold Baugur logo. The blackbird was registered with BG Aviation 4 June 2007 – but luckily there was Iceland Food to buy it off BG Aviation when the owner could no longer afford it. So now Iceland Food owns the black Baugur Helicopter, as yet another reminder of the Baugur owner’s previous ties with Iceland Food. Whether Iceland got it at a friend’s price or if it paid a good price for it isn’t known but the Baugur UK administrators probably know.

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Hallgrimur Helgason is one of Iceland’s most popular writers and not only is he a writer but also a painter and a poet. His brush with Iceland’s newly rich was when he donated an unpainted painting to a Unicef-auction. The unpainted painting sold for ISK21m at this auction in 2007 that crystallised the craziness going on – ridiculous prises but they did benefit Unicef Iceland’s work in Africa.

Incidentally, the buyer of Helgasons’ painting was Thorsteinn Jonsson, who still owns and runs the Coca Cola bottling plant in Reykjavik and a close business partner of Jon Asgeir Johannesson. Jonsson is now fighting Glitnir in a court case in New York. A case that has exposed a lot of the wheeling and dealing going on around Johannesson and the major shareholders in Glitnir. What Coca Cola feels about one of their managing directors being brought to court in New York for ‘robbing a bank from the inside’ isn’t known but the Coca Cola conglomerate has so far resisted all attempts in Iceland to changed ownership due to Jonsson’s debt.

Now Helgason has written and performed a poem, in English, on what happened in Iceland and the atmosphere now. You can hear it here. ‘Nothing scares like suit and tie’ Helgason tells us – and there is a brilliant part on Icelanders leaving for Norway, the words spoken in English with the typical Icelandic accent. Crisis doesn’t only spread misery but a bit of esprit as well.

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After blogging on the ‘good borrower’ Patrick McKillen I’ve become aware of the two Irish reports on the banking crisis done at the behest of Irish minister of finance – and have been asked if these two reports are compareable to the Icelandic report by the Althingi Special Investigative Commisson. The short answer is: no, not at all.

Size is an indicator: the printed version of the SIC report is 2600 pages, the longer online version is around 3000 pages. A Preliminary Report on The Sources of Ireland’s Banking Crisis by Klaus Regling and Max Watson is 49 pages. The Irish Banking Crisis; Regulatory and Financial Stability Policy 2003-2008 by the Irish Central Bank Governor Patrick Honohan is 177 pages. Unfortunately, the SIC report hasn’t been translated but the overview and a few chapters are. Have a look here. Another excellent report is Anton Valukas report on Lehman.

The two Irish reports are excellent overviews, not deep-digging analysis but there is more to come. The Irish Government is now having yet another stab at investigating the banks. A commission led by Peter Nyberg, a Finnish government official, will examine governance and risk management in each of the banks covered by the Government’s guarantee from January 2003-January 2009.

The SIC report is based on documents otherwise protected by banking secrecy, interviews with bankers, civil servants, politicians, academics, journalists. It opens doors that have never been opened before, noticeably into the banks but also into official organisations. And most important of all: it lays bare how the banks operated, how much they lent to their major shareholders and how the web of holding companies and companies was used to draw money from the banks, publicly listed companies.

The Regling-Watson report is an excellent overview over just what that title says: the sources of the Irish banking crisis, very much focused on the macroeconomic aspects, concluding that it was a home-made crisis. ‘The report analyses developments in global, European, and Irish financial markets over the past decade. It considers the influence of macroeconomic policies and conditions; deepening financial integration; bank management and governance; banking regulation and supervision; domestic financial stability reporting; and external surveillance of the economy. It seeks to put in perspective the role of both policy and market factors in triggering the crisis.’

As stated in the report it’s ‘not built up from the analysis of large numbers of internal documents’ but taps ‘widely the assessments of both domestic and international experts, conducting interviews with them on an informal and non-attributable basis.’ Most importantly, compared to the Icelandic report, it’s ‘not drawn on documents protected by banking secrecy.’

Honohan’s  mission was to investigate ‘the performance of the respective functions of the Central Bank and Financial Regulator over the period from the establishment of the Financial Regulator to the end of September 2008.’ The aspects it deals with are: ‘crisis prevention, in the years before 2008, and crisis containment after the onset of the global liquidity crisis in August 2007.’ The report seeks to answer two questions: ‘1. Why was the danger from the emerging imbalances in the financial system that led to the crisis not identified more clearly and earlier and headed-off through decisive measures?’ 2. ‘When the crisis began to break, were the best containment measures adopted?’ Both questions are answered with the focus on the actions of the Central Bank and the Financial Regulator.

The prerequisite for choosing members of the SIC was to find people entirely independent of all the organisations SIC had to scrutinize. Its members were a High Court judge, the Althingi Ombudsman and a lecturer in economics at Yale University. All in all 46 experts worked on the report under the auspices of the commission.

Although Honohan only became Governor of the Central Bank in September 2009 it would be asking too much of him to conduct a poking and prodding investigation and analysis of the organistation he is now leading. An independent scrutiniser might have been sharper. There are plenty of somewhat hesitating conclusions such as this one, on the complex structure created by the Act of 2003 for the Central Bank and the Financial Regulator: ‘Though few would now defend the institutional structure invented for the organisation (i.e. the CBFSAI) in 2003, it would be hard to show that its complexity materially contributed to the major failures that occurred.’

Another example of the same mental limpness: ‘First, should policy makers have had a greater sense that Anglo was facing not only a liquidity, but also a potential solvency problem? The answer is probably yes. Second, would nationalisation of Anglo on 30 September – compared with its nationalisation five months later – have made a significant difference to the overall cost of the bank bail out to the taxpayer? Here the answer is – probably not.’ (Italics are mine). Probably, an independent inquirer might have been able to penetrate these issues and come up with a sharper answer. – And it would be extremely interesting to know what the banks were doing during the five months of grace they did indeed get.

When the Irish government issued a guarantee in September 2008 it was done to calm the market. The hope was that this was enough to save the banks. As the Honohan report points out it is ‘conceivable that, had international financial markets remained calm, the two main banks (AIB and Bank of Ireland) might have been able to manage their emerging loan-loss problems without Government assistance … But, given what has now been revealed about the quality of their loan portfolio … it seems clear that at that point Anglo Irish Bank and Irish Nationwide Building Society (INBS) were well on the road towards insolvency.’

Just as in Iceland, the root of the Irish crisis lies within the banks. Yes, regulators failed and politicians were naive but the banks were the instigators and the actors. Reckless lending, insufficient risk management no doubt – but in Iceland we know exactly, from the SIC report, who the clients were who benefited. We also have a clear view of the remuneration systems in the banks, maybe the most important element in understanding why the banks operated as they did. We know who got loans without necessary collaterals and no personal guarantees. In short: we know exactly how the banks operated and how their operations brought the country down.

As the Honohan report points out the Irish crisis wasn’t the fault of anyone except the respective banks. ‘Mortgage brokers and similar intermediaries, incentivised to generate mortgage business, probably played a part at the retail level. It may also be the case that auditors and accountants should have been more alert to weaknesses in the banks‘ lending and financial position. While these aspects have not been independently researched for this Report, they merit further investigation.’

Yes, indeed. The Icelandic report shows auditors and accountants to have failed in giving the clear and honest picture of the banks that they were required to. Liquidity was completely misrepresented. Glitnir’s Wind Up Board has now charged PwC, an auditor to Glitnir, for conspiring with managers and major shareholders to rob the bank of $2bn.

As a sign of the banks’ sound standing and that no one could have known what was coming the Honohan report points out: ‘… during the first nine months of 2008, Anglo paid out €0.14 billion in dividends, Bank of Ireland €0.39 billion, and AIB €0.72 billion – of which €0.27 billion was paid out as late as 26 September 2008, four days before the guarantee.’ Does that tell us that these banks were in a sound state – or that their accounts were done in a clever way?

One of the many valuable insights in the Icelandic report is the analysis of Icelandic financial policies over the last decade and consequently also of the policies of the Icelandic Central Bank during the decade up to the collapse of the banks. Iceland is a small and often cosy society. The SIC investigated the contacts between the business sphere and politics, i.a. donations to political parties. What about the contacts between politics and business in Ireland and the importance of these relations in creating a property bubble? Any unanswered questions there?

And as to the Irish banks saved by the Irish taxpayer: the reports give little reassurance as to how they were run. The Honohan report points out that ‘Even executive directors of Anglo Irish Bank seem to have had no inkling of the problems to come if we are to judge from the fact that three of them acquired and held sizeable blocks of shares in the Bank close to the peak of its share price in 2007.’

With an insight into the Icelandic banks I wouldn’t draw the same conclusion as the Honohan report unless after an in depth investigation. In Iceland, the shareholding of senior managers in the banks was widespread but far from being a sign of their faith in the banks they ran it has emerged that there were irregularities involved. They got loans from the banks to buy the shares, often with only the shares as collaterals and little or no personal guarantee. Or the managers’ limited liability companies owned the shares and the companies then just sank with the debt when the shares became worthless leaving the owners financially unscathed. Indeed, the banks lent so copiously against their own shares that their own capital eroded – and this also meant they couldn’t do margin calls against these loans. And this share parking is now also being investigated as market manipulation. Is there any investigation showing whether any of this was going on in the Irish banks?

Apart from being surprised by the Nobel prize winner’s somewhat uncritical support to McKillen’s crusade against NAMA my point with the blog on the ‘good borrower’ was that there are similarities between irregular lending by the Irish and the Icelandic banks. I find it very difficult to believe that Anglo Irish’ loan to the ‘golden circle’ of ten businessmen to buy shares from a shareholder who obviously couldn’t find a buyer on the market was a singular event. And that it was entirely proper. Again, with my Icelandic experience I wonder if this really is the only such arrangement – or is this just the only loan that has surfaced?

If a report like the Icelandic report had been done in Iceland the Irish would know who all ten in the ‘golden circle’ were. They would also know if all ten had had their loans written off like Patrick McKillen. They would know who were the biggest debtors, the terms of their loans.

The managers of the banks that the Irish state had to bail out end of January last year will have known it for some time what was coming. Can the Irish be sure that the managers acted in the interest of all shareholders or was there a bias serving the major shareholders and big clients?

According to the Honohan report ‘after the banks have sold their largest property-related exposures to the State‘s asset purchase vehicle, NAMA … and after they have made provision for all of their other prospective loan-losses the State will have taken sizeable equity stakes in most of the banks, and issued some €40 billion or more in Government-guaranteed NAMA bonds …The State will also have had to write-off in the order of €25 billion in unrecoverable capital injections into two institutions – Anglo Irish Bank and INBS – whose prospective loan losses greatly exceed their initial accounting capital … Apart from the experience of Iceland, this has turned out to have been the poorest performance of any banking system during the current global downturn.’ Most people can agree that €65 billion is a lot of money. The Irish must be adamant that this money is used to get the banks up and running to serve society, not to bury their old sins.

Icelanders weren’t happy that a group of investors and bank managers ran the country’s economy to the ground. The SIC report was written to clarify what really happened, what politicians knew and why they didn’t react, what the regulatory authorities did and didn’t do and how the Icelandic National Bank handled its role. But in Iceland, like in Ireland, the banks bear the greatest responsibility. Icelanders now have a pretty clear idea of what happened in the banks. Perhaps the Irish can say the same when the Nyberg report comes out but the reports produced so far are far from telling the whole story of the Irish crisis.

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For an Icelander the demise of the Irish banks has a strong resemblance to what happened in Iceland. The huge difference is that Icelanders know a lot more about banking in Iceland thanks to the fantastic report of the Althingi Investigative Commission. So far, the Irish only have sporadic insights into their banks and their relations to big investors and clients.

Last year, it transpired that in the summer of 2008 Seán Quinn, owner of 25% of Anglo Irish wanted to sell 10% of his shareholding. The snag was that there wasn’t a buyer in sight. Consequently, the inventive Anglo management contacted ten trusted clients, most of them already mired in loans, and made them an irresistible offer: each of them would take a loan of €45m, guarantee only 25% and the Anglo shares would cover the rest. If the bank hadn’t folded these ten would have made a handsome return. As it stands now the taxpayer has lost about €340.000 on each of the ten loans.

Anglo hasn’t yet made public the names of this ‘golden circle’ of ten but five names have been confirmed. The shares are now worthless, Anglo wrote off €308m for these loans last year but the borrowers hang on their guarantee. One of the ten is a high-flying property developer, Patrick McKillen. He seems to have been luckier than the rest: the bank wiped out his guarantee – no guarantee, no loan and nothing to pay. Except that just like the Icelandic banks did for the favoured clients Anglo shouldered the risk all by itself. And of course the taxpayers.

Lending against own shares is an insane policy since it weakens the bank’s own capital. The Icelandic banks practiced this on a grand scale. Kaupthing tried to get all its big clients to invest in Kaupthing’s shares with a loan magnanimously offered by the bank. It also pushed loans on Kaupthing employees and they only needed to pledge the shares and give a 10% personal guarantee. Landsbanki did it through off shore companies that never owned more than 5% so they wouldn’t need to notify the Icelandic Stock Exchange. Glitnir offered staff shares against loans.

There is one example of this in Ireland, plenty in Iceland. I wonder if the Anglo loans to the ‘golden circle’ really are the only loans of its kind. I find it very difficult to believe this was only done once. But the Irish bank system has only been saved – not investigated. Not yet. In Iceland, loans like the loans to the ‘golden circle’ are being investigated as market manipulation. In Ireland the police says there’s nothing wrong with them.

Patrick McKillen is suing National Asset Management Agency, NAMA, claiming that NAMA has unjustly and without a reason gobbled up his loans. Loans that amount to €2.1bn against collaterals of mere €135m. Also this sounds very Icelandic: loans to favourite clients left mostly uncovered. NAMA begs to differ, claiming that McKillen’s loans are indeed non-performing loans.

McKillen spares nothing in his law suite against NAMA. I.a., he has called on Noble prize winner Joseph Stiglitz to file an affidavit in his favour with the Irish High Court. In his affidavit Stiglitz criticises the government’s decision to set up NAMA because ‘such value-destroying loan transfers hurt the banks, the economy and, most relevant to this case, good borrowers such as McKillen.’

In Iceland ‘good borrowers’ like McKillen came by the dozen, borrowers who borrowed way beyond all collaterals and guarantees. Borrowers who were allotted loans by a bank to buy that same bank’s shares when no one else wanted to buy them. Borrowers for whom the banks took all the risk and left the clients with all the profit.

So far, the bill to the Irish taxpayers for saving the banking system is around €30bn, roughly a third of the Irish GDP last year. The gains of the bubble years have been lost during the two years of crisis. The main reason was the banks’ willingness to cater to every whim of property developers like McKillen. Was Mr Stiglitz perhaps slightly too quick at accepting the affidavit that McKillen put under his pen? The feeling in Iceland is that Iceland doesn’t need ‘good borrowers’ like these. Does Ireland really need them?

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‘They Blew It – The CEOs and entrepreneurs behind some of the world’s most catastrophic business failures’ is a book about businessmen who were served great opportunities on a silver tray and yet managed to blow it all. The book, by Jamie Oliver and Tony Goodwin, tells the story of fallen business gurus like Bernie Ebbers, of WorldCom fame now in prison, Lehman’s Dick Fuld and Enron’s Ken Lay who died while awaiting sentence – and also the story of two businessmen who very much embodied the rise of Iceland as a finance centre and its collapse: Jon Asgeir Johannesson or the ‘rock star’ as Oliver and Goodwin call him and the UK businessman Robert Tchenguiz who got ‘credit crunched’ according to Oliver and Goodwin.

I haven’t read the book yet, only glanced at it on Amazon but Asgeirsson is quoted as saying that he clearly had too much on his plate. Baugur’s ex-CEO Gunnar Sigurdsson blames Baugur’s failure on the biggest recession for 100 years adding that they had a great team and did good things.

‘Really?’ ask the authors. ‘While the global recession may have speeded up the collapse, it is stretching credibility to place all the blame at the door of the global economy. The business plan was ill-conceived. They got it wrong. They paid the price.’

The authors find it difficult to believe that Johannesson will succeed in staging any come back after such ‘a spectacular fall from grace’ and ‘being reviled’ in his homeland. Some blame the demise of Iceland’s economy on a small population the authors stress others on regulatory failure, Icelanders’ inability to head advice and even on machismo.

“Ultimately, in the case of Johannesson, it is about an entrepreneur having a little too much self-believe – and far too much debt.”

The same could be said of Robert Tchenguiz who is the largest debtor to the Icelandic banks, almost solely through loans with Kaupthing. Tchenguiz wasn’t only close to his accounts but very close to Kaupthing’s management for whom he was an important contact to other businessmen. He is thought to have brought quite a bit of business to the bank. No doubt a bit of a quid pro quo there: he brought in business opportunities, the bank was overly positive to lend Tchenguiz money.

That Baugur’s business plan was ill-conceived is an interesting observation. As Baugur was buying up assets at a frenetic pace – in Iceland, the UK and elsewhere – it was indeed difficult to gauge what the grand scheme was. Here in the UK Baugur presented itself as a retailer, a business conglomerate with roots in retail and retail was what they did best, they said. But then the expansion stretched to media as well, not forgetting buying up an absolutely staggering property portfolio in Scandinavia. At times Baugur looked like private equity except it never sold anything unless as a part of an asset merry-go-round with business partners such as Fons.

During 2008 Tchenguiz’ debt with Kaupthing went up by 80%, reaching the staggering number of €2,2bn. In a TV interview with Johannesson just after the collapse in October 2008 the journalist mentioned with some disbelief that Johannesson’s debt might be as high as €260m. Johannesson didn’t comment on this incredible number at the time. It now seems clear that Johannesson’s debt with the Icelandic banks was around €1.5bn. The total amount is even higher since this number only includes debt with the Icelandic banks in Iceland, not in Luxembourg.

Now two years later we know a lot about Johannesson’s and Tchenguiz’ operations thanks to the spectacular work of the Althingi Investigative Commission. But we still don’t know why all the banks were so incredibly willing to lend insane amounts of money to so few people, why the banks so easily put aside their own rules to service these chosen customers like Johannesson and Tchenguiz and how come that with exorbitant debts and shrunken assets these and other favoured clients of the Icelandic banks aren’t bankrupt.

With investigations going on in Iceland and the UK there will be those who ask if these two will share the fate of people like Bernie Ebbers.

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These days the Icelandic government is struggling to close a budget hole of ISK40bn, €258m. Budget cuts are imminent, estimated to reach ISK30-33bn. The cuts will be felt all over the country, be it in hospitals, schools or elsewhere in the public sector.

It is interesting to compare this sum, ISK30bn, to a loan that Landsbanki granted in summer 2008 to an obscure company called Stytta. Stytta means ‘statue’ but also figures in an idiom, ‘stod og stytta’, i.e. ‘support’. And Stytta certainly was an important support to Fons, a company owned by Palmi Haraldsson. In Iceland Haraldsson has commonly been seen as a business Siamese twin to the arch Viking raider Jon Asgeir Johannesson. A link that Haraldsson now contests in a court case in New York where the Glitnir Wind Up Board is suing Johannesson, Haraldsson and other main shareholders and directors of Glitnir.

In the summer of 2008 Fons situation was precarious due to falling asset prices against astronomical leverage as the Icelandic banks granted their chosen clients (certainly not an Icelandic invention but practiced there in an usually reckless way). At this point the banks in general couldn’t lend more to those they had already lent too much. Instead they started buying assets on dubious valuation and terms, often with a highly favourable buy-back scheme.

In summer of 2008 there was news that Fons had broken all Icelandic earning records when it sold its share in the UK supermarket chain Iceland Food for ISK75-80bn, ca €516m but the buyer wasn’t mentioned. However, the story told in the Althingi Investigative Report is rather less glorious. Stytta was a company set up in summer of 2008 to buy Fons’ share in Iceland Food. Three months later Stytta’s debt amounted to ISK60bn, €387m – enough money to run Althingi, the Icelandic parliament for about 25 years and more than enough to cover the present budget black hole.

With Stytta in place a series of transactions was set in movement between Stytta, FL Group (then with a new name, Stodir, making the Stytta name a great pun) and Fons. Stytta borrows ISK50bn, €322m, from Landsbanki. The bank’s loan committee granted the loan in between meetings, a regular way of granting dodgy loans as the AI report shows. Glitnir grants Stytta a loan of ISK6bn, €38m, on September 17 2008 when it must have been crystal clear to the Glitnir management that Glitnir’s bankruptcy was imminent. My source close to Glitnir says that at that time there was no sensible ground for the Stytta loan.

But why did Landsbanki grant Stytta the exorbitant sum of ISK50bn? This was done to improve Fons’ standing with Landsbanki. Landsbanki lent Stytta the ISK50bn to buy the Iceland Food shares from Fons – and 50bn goes on Fons’ account with Landsbanki. Fons was then expected to lower its debt by 50bn. On Landsbanki’s books it appears that one company gets a loan of 50bn and then another company pays down its debt in an unrelated transaction.

Or rather, this was what the management at Landsbanki envisaged. In reality, Fons didn’t quite follow the instructions: Fons didn’t pay back ISK50bn out of the ISK50bn they got but only 48bn. Fons kept ISK2bn, €13m, for itself. Sigurjon Arnason CEO of Landbanki said to the AIC that this had been ‘bad’ – an understatement if there ever was one. Since this was Arnason view it’s all the more surprising that Landsbanki did nothing to chase and reclaim the ISK2bn. So what did Fons do with the ISK2bn that summer when no money was to be had at all? Fons used that money to secure its control over Iceland Express. Later the air company was moved over to Fengur, another Haraldsson company. Fons then went bankrupt and Haraldsson still owns Iceland Express.

Stytta is still going strong, at least on paper, in the sense that it isn’t yet bankrupt. However, I’m told that the Landsbanki ResCom might be about to take the company over and that there might possibly some news on this later.

But who owns Stytta? FL Group owned 36%  – but the main shareholder is an Isle of Man company called Blackstar, set up in the obscure off shore way allowed there. The beneficial owner of *Blackstar is Iceland Food’s CEO Malcolm Walker and two other Iceland Food managers. Walker, who has never answered when I’ve contacted him, founded Iceland, then left the company and was brought in by Johannesson, Haraldsson and the consortium that bought Iceland in 2004.

Stytta hasn’t sent in annual returns for 2009 but according to the 2008 accounts the results that year were, unsurprisingly, a huge loss. This year, Stytta is due to repay 63bn. On the board is Bernhard Bogason, an Icelandic lawyer living in London and closely connected to Johannesson e.a., and a manager from Iceland Food.

Landsbanki and Glitnir now own ca 70% of Iceland, Glitnir’s stake is small, probably only around 10%. It’s been confirmed that Malcolm Walker and other managers now want to buy back the supermarket chain. Given the intimacy Walker has had with the previous Icelandic owners and his part in Stytta this sale is being followed with a great interest in Iceland.

The story of Stytta is in a nutshell what was going on in the banks in the summer of 2008 around Johannesson, Haraldsson and others in the ‘cabal’ mentioned in Glitnir’s New York court case. Walker’s connection to Stytta is also of interest and shows his close ties with the Icelandic Iceland Food owners. It is also highly remarkable that Landsbanki’s ResCom has been so slow in taking over Stytta with its astronomical leverage.

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* Interestingly, Blackstar got a loan from Kaupthing in April 2006. A loan of €12m, given in two 6m installments with, as far as I can see, insufficient and obscure collaterals. A name listed as the recipient of the loan is a certain Jan Geertman living in Spain. Sources from within Kaupthing’s old management tell me that they can’t remember having lent money to a Jan Geertman so there is a question mark as to who was involved here, why Kaupthing granted this loan and what interests were at stake. Further information would be appreciated ([email protected]).

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