Sigrún Davíðsdóttir's Icelog

A ‘good borrower’ in the Stiglitz sense

with 8 comments

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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Written by Sigrún Davídsdóttir

October 11th, 2010 at 7:26 pm

Posted in Iceland

8 Responses to 'A ‘good borrower’ in the Stiglitz sense'

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  1. Rather like lengthening a rope by cutting off one end and tying it to the other.

    Knute Rife

    11 Oct 10 at 9:20 pm

  2. […] Read it in full. […]

  3. It is so refreshing to read your article. Haven’t the laws in Iceland been changed to ensure that the type of corruption that took place there can be properly and quickly exposed in the press in future? Ireland must learn from this.

    Rosemary Hannan

    13 Oct 10 at 9:00 am

  4. More than 2 years on we still are being told that there will not be a conclusion to the official investigation for years.

    How did Iceland manage such a quick investigation, and was any illegality uncovered ?

    Our discussion thread is here at

    C. Flower

    13 Oct 10 at 9:31 am

  5. and-unlike Iceland- the people who presided over the Great Irish Apocalypse are still governing the country!!

    John McDermott

    14 Oct 10 at 8:39 pm

  6. Centuries ago Norwegian settlers got a bit of your Irish genes as they headed to this island now called Iceland – and now we return with a little bit of wisdom:)

    Rosemary, the press is doing a bit better now – but still, the media is too much in the hands of tycoons or others who have things to hide.

    C. Flower, the investigation took 1 1/2 year. Pointing out illegalities was not its remit but it pointed at questionably things and did actually give a lot of evidence to a special prosecutor whose team of now ca. 80 people works on cases related to the collapse of the banks.

  7. […] economist Josephs Stiglitz was an expert witness, that first drew my attention to Icelandic Irish parallels. I then realised that there are two Irish reports on the Irish situation so I read them and blogged […]

  8. […] have earlier written on the “golden circle” (ia here) – I find it astonishing that if this “trick” was known it would be the only […]

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