Sigrún Davíðsdóttir's Icelog

Everyone who follows Icelandic affairs will be interested in the activities of the Rowlands, David and Jonathan, who took over Kaupthing Luxembourg, turned it into Banque Havilland and who are now Kaupthing’s administrators through the ‘bad debt’ structure Pillar Securitisation.

A further insight into earlier contacts with Iceland, in this case Straumur Investment bank, have transpired through a court case in London. As Rowena Mason has reported in the Telegraph, Jonathan Rowland is now being sued by Straumur. Three years ago, shares in a company called Xg Technology were transferred to Rowland but the £2m payment never arrived. According to the Rowland camp it turned out that sale of these shares was restricted, Rowland hadn’t been informed and they were consequently worth a lot less than the sum demanded. Straumur now claims that the money is owed by Rowland, no matter what.

There is a whole story out there about Xg – they claimed they had developed a sensational radio technology that has never been realised and their value has plummeted from earlier heights. There is a blog with Xg stories – it makes a riveting read and goes some years back. One of Xg’s directors is an Icelander called Palmi Sigmarsson who was connected to a Swedish company, Spectra, also operating in Iceland but without any apparent success.

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According to the Icelandic daily Frettabladid, earlier owned by Jon Asgeir Johannesson but now by his wife, Johannesson has been questioned this week by the Office of the Special Prosecutor. He met up there with his solicitor Gestur Jonsson who lead his defence team in the so-called Baugur case, 2005-2008. Johannesson denied any information as to the subjects he was questioned on.

Others who have been called in this week, Katrin Petursdottir a former member of the Glitnir board and Oskar Magnusson an ex-CEO of the insurance company TM, have both said they were asked questions about dealings regarding TM involving Johannesson.

As far as is known this was the first time that Johannesson was called in for questioning by the OSP. In Iceland, Johannesson is generally seen as one of the main players in that part of  Icelandic business activities that came crashing down with the banks in October 2008.

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Following the course of events in Ireland – a struggling government, the national sentiment refighting an old war of independence, the international media descending on Ireland – is a déjà vu for an Icelandic observer. Iceland went through it all two years ago. The events then and events and development since provide some interesting points of comparison.

Through 2008, the Icelandic government tried to raise money abroad but to no avail. The Bank of England offered assistance to disentangle the crisis that, according to the bank, was far too large to be solved with the couple of billions of dollars that Iceland was seeking. At the US Fed Tim Geithner told Icelandic officials that a loan of a couple of billions would indeed only make things worse since it would demonstrate to the markets that Iceland didn’t realise the extent of its problems. Nothing less than ten billions would do and the US Fed wasn’t a willing lender.

Towards the end of September 2008, Glitnir, the smallest of the three Icelandic banks, turned to the Icelandic government for help. Glitnir couldn’t meet its repayment. The government’s first step was to attempt saving the bank by taking over 75% of its shares. It didn’t take more than a few days to make it crystal clear that even the smallest Icelandic bank was too big for Iceland to save. And anyway, it wasn’t enough: the two other banks collapsed as well. Later, some smaller banks and building societies have gone the same way.

Because of the enormous size of the Icelandic banking sector, compared to the Lilliputian country, the government couldn’t save the banks. That it would have liked to is clear but Iceland really didn’t have the choice: bankruptcy was the only viable option. It took a heroic effort to make the transition from the old banks to the new ones as smooth as it was. The payment system didn’t go down and deposit holders had access to their money all along.

The three Icelandic banks were split up: the foreign debt was stacked into the bankrupt banks, under the auspices of resolution committees, the domestic debt went into the new banks founded on the ruins of the old ones.

In this way, deposit holders were safe and saved, bond holders felt the pain and the loss. And why not? Bond holders, those who lent money to the Icelandic banks, are mostly other banks and financial institutions. They should have known better than to heap loans on banks in a tiny country. But they probably didn’t even need to worry too much about their losses. In most cases their loans will have been insured. There must be some smarting insurance companies out there.

‘What’s the difference between Ireland and Iceland? One letter and six months.’ This joke circulated when Iceland collapsed two years ago and has now been widely quoted. ‘One letter’ is correct, the time wasn’t exact (Ireland had actually declared some weeks earlier that it would save the banks, gave them all a guarantee in January 2009 but it never was enough) but the major difference is that Ireland saved its banks, Iceland didn’t.

As a consequence, the cost of the Icelandic bank collapse is mostly born by foreign banks that were ignorant or reckless enough to lend far too much to the Icelandic banks (and the insurance companies that insured the loans). The cost of the Irish bank salvation is born by the Irish taxpayer. And what a burden it will be!

The most serious cost for the Icelanders is that as the banks collapsed their krona collapsed though its decline had already started much earlier in 2008. Part of the ingenuity of the Icelandic banks had been to convince ordinary people, with all their income in the local currency, to take out mortgages and loans in foreign currencies. Consequently, many Icelanders are struggling to meet repayments of forex loans that have shot up (and this problem has taken up most of the attention in Iceland).

The krona has been gaining strength but this, as well as rising unemployment (now just under 5%, staggering on an Icelandic scale, enviable for most other countries), have been the gravest cost to Icelanders. With a domestic currency that was to some extent squeezed at home by foreign currencies Icelanders were hit by a currency crisis.

What Icelanders didn’t know in October 2008 was the extent of bad loans and dubious corporate governance in the banks – the loans to the major shareholders and to bankers, often without any guarantee and on terms very favourable to the borrower but unsustainable for the banks. My feeling is that the Irish don’t quite know the extent of bad loans in their banks. The Irish state stepped in and bailed out banks without the cost being at all clear.

I’ve earlier pointed out that the same unsavoury tricks used by the Icelandic banks to help their largest shareholders and bankers have been used by at least one Irish bank. I find it profoundly improbable that this would be just a singular incidence. The Irish bankers drove the reckless lending into the property market as if houses peopled and sold themselves. The Irish bankers who didn’t see that they were playing with the financial safety of their fellow countrymen are, to a large extent running the banks. In Iceland, there have been major changes at the level of top management but many Icelanders will still feel that the changes haven’t been wide-reaching enough.

A major difference between Iceland and Ireland – and for that matter the rest of the world – is that Icelanders now have a hugely clear insight into i.a. the Icelandic banking system, the economic policy and the events that led to the demise in October 2008. There is the Althingi Special Investigative Commission’s report (unfortunately not yet translated into English except for a few chapters). No other country has, so far, probed and investigated these matters like Iceland has. Two reports have been done in Ireland but as I’ve already demonstrated these reports leave plenty to be desired and are nowhere near as thorough as the Icelandic report. It will be interesting to see that the coming Peter Nyberg report will be like.

In the wake of the Icelandic collapse some Irish politicians mentioned with horror that certainly they wouldn’t let Ireland go down the same route as Iceland. In reality, it wasn’t such a bad route and Iceland will most likely wind itself out of its bend more quickly and less painful than Ireland. Icelandic tax payers won’t have to work their socks off for foreign bondholders.

Being an Icelander, I can shrug my shoulders and say that at least Icelandic and foreign banks and bankers were taught a lesson in October 2008. It surely wasn’t a lesson that the Icelandic government wanted to teach them. It would have liked to save the banks but couldn’t – that opportunity had passed sometime in 2005. If I were Irish I would be furious that the recklessness of the Irish and the international banking world has now been rewarded by a bail-out that Irish tax payers have to fund.

But being a citizen of the world I am furious that there isn’t an outcry for splitting banks apart to make it a harmless event if a bank can’t close its books. Everything has been tried – the banks have been pleaded with, asked and begged to save the rest of the world from their dangerous activities. Instead, they raise their bonuses and keep on as if nothing had happened. And it hasn’t. The bail-outs take the risk out of the system, the recklessness can go on – and taxpayers can rest assured that they will keep on toiling away a certain amount of hours every week to keep bankers happily at what they have shown themselves to be brilliant at: playing with fire and setting the world ablaze.

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It was a misunderstanding that the Office of the Special Prosecutor had ended the questioning of high-profile individuals connected to Glitnir. Saturday, the questioning was still going on. However, it seems that the OSP has now finished questioning Glitnir’s ex-CEO Larus Welding. He was questioned over two days, the first day for eleven hours. Dozens of Glitnir’s employees have been questioned.

The board of Saga Investment Bank still has full confidence in its CEO Thorvaldur Ludvik Sigurjonsson although he seems to be suspected of participating in the allegedly illegal deals at the centre of the investigation. Many are now wondering about the soundness of keeping him since it reflects badly on the bank and its trustworthiness to have a CEO who is being investigated for financial irregularities.

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According to the Office of the Special Prosecutor in Iceland the questioning that’s been going on for the last few days, beginning with house searches on Tuesday has now come to an end. Glitnir’s ex-CEO Larus Welding was questioned today since he arrived in Iceland a day earlier than had been expected. Welding now lives in London.

The unexpected link in this last chain of events is that Thorvaldur Ludvik Sigurjonsson CEO of Saga Investment Bank seems much more involved in the issues that the OSP investigation rotates around, i.e. issues related to certain sales of shares in Glitnir and FL Group, than earlier thought. In a TV interview earlier this week Sigurjonsson claimed that Saga had only been an intermediary in these transaction. That doesn’t quite fit with the fact that Saga actually owned 25% in Stim, the Special Purpose Vehicle set up to buy shares that were rapidly loosing value.

However, the OSP hasn’t really clarified the details but only the main issues that are being investigated.

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The Office of the Special Prosecutor in Iceland has continued questioning people related to Glitnir. According to Icelandic media, there has been focus on Saga Capital’s role in the Glitnir deals connected to Stim. Saga’s CEO Thorvaldur Ludvik Sigurjonsson appears to be not only a witness to but an actor in these deals.

Sigurjonsson held a Stim bond of ISK1bn that by the summer of 2008 would have been worthless since the underlying shares in FL Group had lost value. Sigurjonsson then asked Glitnir if the bank could sell the bond. It’s unlikely there were any buyers but Glitnir bought the bond for ISK1,2bn. At the time, the bond is alleged to have amounted to 40% of Saga’s assets, making it clear that a loss of this magnitude would have been the end of Saga.

Since Saga had been a party to Stim, owning 25% of the company, the question that floats in the air is if its participation in Stim was yet another example of the speciality of the Icelandic banks: offering those close to the banks to participate in deals they would never lose money on as the banks took all the risk. It’s been alleged in the media that when Saga bought this Stim bond part of the deal would have been that Glitnir bought the bond back when Saga wanted to sell.

Behind all this are the major shareholders of Glitnir, i.a. Jon Asgeir Johannesson and Palmi Haraldsson. Johannesson has said that he knows absolutely nothing about Stim. He said today that he called special prosecutor Olafur Hauksson on Tuesday, asking if he wanted to question him but that Hauksson refused. No doubt, Hauksson sticks to his own path, unperturbed by callers who want to get things over and done with. It now seems that Larus Welding, who became the CEO of Glitnir as Johannesson and Haraldsson became major shareholders in spring 2007, will be questioned on Friday. Others will have to wait their turn.

Asked how things were going Hauksson said that the fact that each questioning takes a while was an indication that people have indeed had information to give. So far, no one has been remanded to custody as was the case when Kaupthing’s ex-managers were questioned in spring. Hauksson is adamant that each investigation follows its own pace and what was done earlier re Kaupthing wouldn’t necessarily be appropriate for the Glitnir investigation.

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Yesterday, a team of 70 people, at the request of the Office of the Special Prosecutor, searched 16 properties in Iceland related to shareholders, clients and directors of Glitnir Bank. The action continues today where some people have been brought in for questioning.

The names figuring in Icelandic media are Jon Asgeir Johannesson, Palmi Haraldsson, Larus Welding. Welding who lives in London is said to be on his way to Iceland and already seems to have an appointment with the OSP. Johannesson has said in an interview with the paper owned by his wife that he has not been called in for an interrogation by the OSP.

According to Olafur Hauksson at the OSP the searches are connected to five cases, all familiar to those who follow the new Icelandic sagas of the collapsed banks:

1 Loans to a company called Stim, almost the name for the alleged market manipulation inherent in so many deals in the Icelandic banks. Stim was related to FL Group where Jon Asgeir Johannesson, Hannes Smarason and Palmi Haraldsson were among well-known names connected to Stim. Stim got a loan from Glitnir of ISK20bn to buy shares in FL and Glitnir itself. A major owner in Stim when it surfaced in November 2007 was a fishing company, Samherji, one of the largest Icelandic fishing companies.

2 Loans to FS-38, to buy shares in Aurum Holding Ltd (the UK Goldsmith jewellery chain), already a famous case in Iceland where a loan of ISK6bn was in the end offloaded for 1 krona.

3 Loans to Stodir (Landic Properties, a Baugur real estate company), Baugur and 101 Capital (owned by Ingibjorg Palmadottir, Johannesson’s wife).

4 A deal where GLB FX, a fund with Glitnir, bought a Stim bond from Saga Capital (now Saga Investment Bank). Saga Capital, based in Akureyri, was one of the owners of Stim.

5 Glitnir’s buying of shares in Tryggingamidstodin, TM, an Icelandic insurance company. This deal figures in the Glitnir charges against Johannesson, Haraldsson e.al. in New York.

All of these cases are well known in Iceland and these companies all figure in the report of the Althingi Investigative Commission. There is absolutely nothing unexpected here and now it seems that premises of Johannesson, Haraldsson, Larus Welding ex-CEO of Glitnir and others have been searched. According to Visir, the media owned by Johannesson, Thorvaldur Ludvik Sigurjonsson the CEO of Saga Investment Bank has been imprisoned earlier this morning, to be interrogated by the OSP. Sigurjonsson was on TV yesterday, claiming that neither he nor Saga was a part in the Stim case but that they had only dealt with a Stim bond. However, it was more than that since Saga, in November 2007, owned 25% of Stim.

When and if these people will be interrogated by the OSP remains unclear but it’s an ongoing investigation. Icelanders have long expected that the OSP would move in on the group around Glitnir. People connected to Kaupthing were interrogated and taken into custody in spring, now Glitnir. Now it’s only Landsbanki people who haven’t, at least not yet, been in the same situation as those of Glitnir and Kaupthing.

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Last Thursday, the fabulous BBC radio 4 programme ‘In our time’ discussed the Volga Vikings who didn’t plunder the British isles and France but left Scandinavia and headed east. Crossing the Baltic they settled in present-day Russia and Ukraine. An Arab scholar who travelled among the Volga Vikings wrote that they were physically perfect but otherwise ‘the filthiest of God’s creatures’. Interestingly, the Arab scholar observed that they bonded by sharing their female slaves and that their women were strong.

Quite appropriately, this was the week that brought out reminders of strong women and stories about the present-day ‘Viking raiders’ and their shared fondness of escort women if not exactly sharing the same women. As dedicated readers of Icelog know it’s mostly about economics and politics but this time the subject is more saucy in order to illuminate non-Icelandic speakers on a new Icelandic book that deals with stories that have long been in the rumour mill. Now it’s stuff that a book has been written about.

Jonina Benediktsdottir is an illustrious business lady who has run fitness centres in Iceland and Sweden and now runs a detox centre in Iceland and Poland. About a decade ago, when Baugur was coming into being, she was on intimate terms with Johannes Jonsson, the father of Jon Asgeir Johannesson. The love relationship went sour, later Benediktsdottir kept Iceland enthralled with leaked emails, allegation about fraud and deception at Baugur and with yet another amorous relationship, this time with a married man, Styrmir Gunnarsson. Gunnarsson was at the time hugely influential as the long-sitting editor of Morgunbladid, for decades the most influential newspaper and closely connected to the (conservative) Independence Party.

Now, Benediktsdottir has published her memoirs – and as could be expected, she writes on Baugur, the banks, on Jonsson and Gunnarsson. After the break-up with Jonsson she has spread her inside-information on Baugur, painting in vivid colours what she claims to be a story of fraud and greed. She has often appeared on TV over the years but this time it’s her whole story, not juts bits and pieces.

The Baugur case started in August 2002, when the offices of Baugur in Iceland were raided. In 2005, Johannesson, his father, his sister, and three others accountant were charged. The issues related to Johannesson ranged from abuse of Baugur’s credit card and embezzlement. At the time, Baugur was a public company.

The case sprung from a dispute between Baugur and Jon Gerald Sullenberger, a businessman in the US and a Baugur fixer there, now owning a supermarket in Iceland. In 2001, Baugur had invited bankers and businessmen, allegedly also men (only men were on this trip) from some pension funds to Miami to celebrate a business deal. Sullenberger took care of a yacht that Baugur had use of, with the rather odd name ‘Thee Viking’. Sullenberger wasn’t in Florida when the Baugur expedition turned up but when he returned the boat had been wrecked. It took Sullenberger and his staff quite some effort to clean it and repair the damages. A bill of $19.000 for escort service was dropped on Sullenberger when Kaupthing Luxembourg stopped Johannesson’s payment to the escort service, allegedly at Johannesson’s request.

Later, it was decided that Baugur would refund Sullenberger by him making out an invoice on Baugur for the amount he had paid on behalf of Baugur. Sullenberger later claimed that the bank did in the end facilitated Johannesson’s payment directly to the escort service so he toar up the invoice. However, by the invoice had been faxed, Sullenberger became embroiled in the case he helped to instigate and was in the end convicted for making a false invoice. Though the court in Iceland dropped most of the charges in the Baugur case against Johannesson he was finally found guilty on a few charges and sentenced to a suspended three months prison in the summer of 2008, five years after the case started. Consequently, he had to resign from many board posts both in Iceland and the UK. The suspended sentence has now lapsed but because he was found guilty Johannesson is called ‘a convicted white-collar criminal’ in the Glitnir charges in New York.

Benediktsdottir knew everything about the Florida trip. After her own business failures she was on the verge of bankruptcy when she couldn’t meet payments with Kaupthing. When the bank was about to repossess her flat she had a woman-to-man talk to Kaupthing’s CEO Hreidar Mar Sigurdsson.

“I immediately asked Hreidar what he was thinking,” she writes in her new book, “if he wanted to continue living like a slave of Jon Asgeir. By then, I had nothing to lose and was seriously aggressive. At this meeting, I did indeed go very far and reminded him of the charges in the US related to the Miami Beach Escort Service (Baugur had countersued Sullenberger in the US and that’s how the story of the escort service surfaced) and asked him if his wife knew of the charges and if he would be happy to see his wife behave as he himself did.”

Benediktsdottir told Sigurdsson “I’ve done everything to hinder that Jon Gerald charged you as well. And that’s how you repay me. Does your wife know what you do when you travel abroad, the Delano Hotel in Miami and the yacht in Florida.” She claims that Sigurdsson begged her not to go further with this information after which she stormed out, calling him “a loser”. She then told both Sigurdsson and Kaupthing’s executive chairman Sigurdur Einarsson that she was ready to feed these stories to the Icelandic media. It didn’t take long before the bank sent her a letter, confirming that all her debt would be written off. In a TV interview last week Benediktsdottir said she was by no means proud of her behaviour at the time but that there had been nothing left for her but talked to the bankers in a language they understood.

The stories of Thee Viking, the escort girls and Baugur’s guests have long been circulating in Iceland as they came out in the Miami charges that Baugur brought against Sullenberger. Some will muse if the use of escort girls was a one-off treat in 2001 or if the contemporary Vikings in general stuck to their ancestors’ bonding method and shared their women. Escort girls are notoriously silent about their clients and so far no first-hand stories have emerged but all along the rumour mill has been moving at high speed on the life style of some of the Viking raiders and their bankers.

Apart from the saucy details, Benediktsdottir raises a serious issue, indicating that Johannesson possessed compromising material on those who had been on the yacht in 2001. Johannesson did very well in some of his business ventures such as his shops in Iceland and his media ventures, now owned by his wife. Abroad, there were plenty of failures and flops, from the Dollar Stores in the US, to Wyndeham in the UK and the hubristic Nyhedsavisen in Denmark. But the earlier failures didn’t dent the banks’ faith in him. And though his companies have been failing left, right and centre these bankruptcies haven’t dragged him into personal bankruptcy, something that puzzles many Icelanders considering the enormous sums lent personally to Johannesson and his companies. In October 2008, he and his companies owed the Icelandic banks close to Iceland’s GDP, conjuring up images of Viking-like plundering of the banks.

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Today, the EFTA Surveillance Authority, ESA, declared that it’s opening a formal investigation into the regional aid to Verne Holdings granted earlier by the Icelandic government. Verne is building a data storage centre at the Keflavik Base, previously a home to the US army force stationed in Iceland.

Verne Holdings is a company owned by the US venture fund General Catalyst, Novator, i.e. Bjorgolfur Thor Bjorgolfsson (major shareholder in Landsbanki, of Icesave fame, and the investmentbank Straumur, now in moratorium) and the UK Wellcome Trust.

The project is controversial in Iceland as many Icelanders feel that investments involving Bjorgolfsson shouldn’t receive any government aid. He is widely seen as one of those who caused the economic demise of the Icelandic banks and Iceland. Companies related to him borrowed heavily from the Icelandic banks, all of them public companies, most noticeably from the two banks where he himself was a major shareholder. His business dealings were scrutinised by the Althing Investigative Commission, giving an intriguing insight into his affairs and his Icelandic contacts.

The regional aid to Verne isn’t the only help that Verne has received from the Icelandic government, a coalition with the Left Green led by the social democrats. Earlier this year, Althingi passed a bill on tax etc for Verne. The given reason was that this had been done earlier regarding major foreign investment in Iceland. However, the Verne investment is nowhere near the scale of projects previously given such treatment. A few weeks later, Althingi passed new law setting out the general framework for foreign investment in Iceland. The new law is meant to put an end to laws on specific companies. The question still remains why Verne got its law when it was clear that there was a general framework in the making.

But now ESA has stepped in. There will be many in Iceland who think that it’s as well there is an independent organisation keeping an eye on Iceland in case the atavistic urge to give a helping hand to a friend gets too strong.

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