Sigrún Davíðsdóttir's Icelog

‘This was froth, bought and borrowed, and then the froth just subsided.’ This is how Guðmundur Kristjánsson, in an interview with the Icelandic newspaper Morgunblaðið last December, described loans he got to buy bank shares. The froth was loans that Kristjánsson, whose wealth stems from the fishing industry, got from Landsbanki to buy shares in Straumur. And nota bene: the major owners of Landsbanki and Straumur were the same, Björgólfur Guðmundsson and his son Björgólfur Thor Björgólfsson. Guðmundsson was chairman of the board of Landsbanki, Björgólfsson was his father’s opposite number at Straumur.

Although Kristjánsson described his dealing so light-heartedly, he had been a member of the board of Straumur from March 2007 until the bank collapsed exactly two years later. The story of his loan has recently been revealed in DV, an Icelandic newspaper. In December 2006, ca four months before Kristjánsson became a member of the Straumur board, a company he owned, Hafnarhóll, got a loan of ISK5bn (now, £25.6m) to buy 4,2% in Straumur. The transaction was done through Landsbanki Luxembourg, through the bank’s nostro account. Consequently, neither Kristjánson nor Hafnarhóll’s name, were found on Straumur shareholders’ list.

Two of Kristjánsson’s fishing companies guaranteed the loans but this guarantee was later lifted. By the end of March 2008 the loan had gone up by 30%, to ISK6.4bn (£34m) but the Straumur shares had gone down. As was the rule with loans to favoured clients the bank made no margin calls. When Hafnarhóll went bankrupt last year its debt had risen to ISK9,5bn (£50m) but there were no assets (the loans were in foreign currency and rose as the krona fell whereas the shares had lost value).

‘These were bank shares, bought in a bank, financed by a bank and kept in a bank,’ Kristjánsson said in the Morgunblaðið interview. ‘This was froth, bought and borrowed, and then the froth just subsided.’

Another story, also recently revealed by DV, is about a family, a mother and two sons, who ended up owing Landsbanki close to ISK23bn. Erna Kristjánsdóttir is the widow of a pharmacist who died in 1991. Together with her two sons, Ólafur Steinn and Kristján Sigurður Guðmundsson, she owned eight offshore companies through Landsbanki Luxembourg and financed by Landsbanki, that ended up with this total debt of ISK23bn (£122m). The family was a big shareholder in Actavis and, together with other Actavis shareholders, became very rich when Björgólfur Thor Björgólfsson bought Actavis in 2007.

The Guðmundsson family investments, through the eight companies financed by Landsbanki, followed an interesting pattern: all their investments were in companies where Björgólfsson was a major shareholder. They borrowed from Landsbanki to buy in Straumur, Landsbanki, in the Bulgarian telecom company BTC and Netia, a large Polish mobile phone company and in Novator Pharma Holding I, a company belonging to Björgólfsson’s investment vehicle Novator. According to Björgólfsson’s spokeswoman, he was completely unaware of the Landsbanki loans to the family that trailed his investments. These loans are part of the investigations of the Office of the Special Prosecutor.

Recently, movements around the investment bank Straumur August 2006 were brought to my attention. At the time there were about 20.000 shareholders in Straumur, nine Icelandic pension funds among the bank’s twenty biggest shareholders and the bank’s capital amounted to ISK140bn (£740m). Samson, the holding company of Björgólfur Guðmundsson and his son, was Straumur’s biggest shareholder, with 30.67%. Landsbanki, where Samson was also the biggest shareholder with ca. 42%, was Straumur’s second largest shareholder, owned 21.5%, so father and son controlled over ca 52% in Straumur.

At this point, Straumur decided to sell 75% of its own holding of Straumur shares, amounting to just over 5% of Straumur’s shares. In the weeks before the sale the shares had been trading for well over 20 a share. The share price for this big chunk of shares was 18.6. That day, the share price went up to 19.4, meaning that by the evening on the day of the sale the lucky buyer had already made ISK440m on his acquisition. The shares kept going up and around two weeks later, his profit was ISK1bn (£5.3m), or 10% since the total price paid had been ISK10bn.

This sale was conducted just when the so called ‘mini-crisis’ hit Iceland, caused by some critical analysis by foreign banks who had were just starting to pay attention to the Icelandic bank-upcomlings on the international finance arena and didn’t like what they saw.** In the Icelandic banking sector many wondered why Straumur was selling at all, at an apparently low price.

The sale was conducted under the auspice of Straumur’s new CEO, William Fall.* His Icelandic predecessor had been sacked earlier in 2006. Björgólfsson claimed that a foreign CEO would strengthen Straumur’s international profile. Others whispered that the former CEO had opposed that Straumur should be a mere investment vehicle investing in tandem parallel with Björgólfsson’s Novator. Novator was already a fund manage for a Straumur fund making Björgólfsson a nice profit.

When Fall took over he said in an interview that Straumur had ‘fantastic opportunities’ abroad.  Yet, the CEO who vehemently believed in Straumur’s prospects, was more than willing to sell the bank’s own share at a heavily discounted price. The name of the buyer who got the attractively priced shares wasn’t revealed. According to Fall, the buyers were foreign investors who had turned to Straumur with an offer too good to refuse and who, in the long run, would bring both growth and opportunities, justifying a discounted price.

However, it quickly transpired that these international and ambitious investors had bought the shares through Landsbanki Luxembourg nostro account, meaning that they wouldn’t be exercising their voting rights – and were indeed hiding their identity. Fall then said that these investors didn’t after all intend to be active in Straumur. At this time, Landsbanki Luxembourg held in total 28% of Straumur shares, meaning that 28% of the owners were not exercising their voting rights.

Fall’s appointment showed that Björgólfsson’s grip on the bank after a fight on the board for over a year. Quite exceptionally, the fight did at times erupt in the media. Magnús Kristinsson, whose wealth stems from the fishing industry in the Vestmann Islands and who had been a major shareholder and board member in Straumur, wrote a lengthy article after Fall’s appointment. According to him, Björgólfsson had i.a. wanted Straumur to only invest in companies in the Novator sphere, explaining in some detail how Björgólfsson had abused his position. Under Fall, Straumur’s business was basically tracking Novator companies or companies of interest to Björólfsson.

A further tail to this Straumur story is that Vilhjálmur Bjarnason who runs the Association of Small Investors, sued Straumur’s board claiming that with the sale of Straumur’s share the bank had caused a loss to other investors. In January last year the Icelandic High Court ruled that no clear loss stemmed from the sale nor was Bjarnason entitled to know who the lucky investors were. From the ruling it’s clear that Fall took all the decisions regarding the sale. The board never discussed it.

We still don’t know who the lucky investors were. However, from what we now know about the operations of the Icelandic banks it wouldn’t have been above Straumur to either itself lend the lucky buyers the ISK10bn or that Landsbanki might have issued a loan. As to who these investors might have been I can’t say but again, according to what is known about the banks, it’s most likely that they were investors that Straumur and/or Landsbanki wanted to profit.

The Althingi Special Investigative Commission’s report on the collapse of the Icelandic banks pointed out alleged and widespread market manipulation in all of the three banks as well as in Straumur. The stories above could show in detail how this might have bee done as well as showing that the favoured clients were allowed all the upside while the banks took all the downside. These, together with so many other stories, all seem to indicate a breach of fiduciary duty on behalf of the boards and managers.

Over the last decade, foreign financial institutions merrily lent to the privatised Icelandic banks. The lenders were unperturbed by the fast growth of the Icelandic banks, first at home, then abroad, though the rule of thumb is that fast growing banks in mature markets tend to make bad loans. Nor were the Icelandic pension funds worried. And most of all, the financial services authorities in i.a. UK seem to have paid no attention to how the Icelandic banks operated although the earliest foreign analysis raised serious issues regarding cross ownership and incestuous relationships. The fact that the UK FSA didn’t do anything came to cause a lot of harm to UK councils and other public and private institutions and investors.

The Landsbanki loans and the Straumur sale are just two of innumerable stories connected to a small circle of chosen investors. Loans that seem to indicate that the Icelandic banks thought they could defy the laws of business gravity. However, Kristjánsson is wrong: the froth doesn’t merely subside. It’s turned into heavy losses for Icelandic pension funds, UK councils and lenders (mostly foreign banks) that merrily – and perhaps also greedily – were so generous in their lending to the Icelandic banks.

*Fall left Straumur shortly before it went bankrupt and is now on the RBS senior executive team as a global head of financial institutions group.

**In an earlier Icelog I mentioned some facts about the crisis that came to be called the Geysir crisis.

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EFTA Surveillance Authority has now published its summaries of the decisions to initiate a formal investigation into the state aid granted ‘in 2008 and 2009 to rescue domestic operations of the three main Icelandic banks; Glitnir, Kaupthing and Landsbanki; and to establish and capitalise new successor banks, now called Islandsbanki, Arion Bank and NBI (Landsbankinn).’ The investigation was made public on December 15 2010.

The summaries of the three banks – Glitnir, Landsbanki and Kaupthing – offer an insight into the conclusions of the SIC report from April last year. The three summaries are an interesting read for those unfamiliar with the Icelandic report. The summaries provide a wealth of basic information and facts on the Icelandic banks and the Icelandic economy though there is a certain overlap in the summaries regarding general information.

Stakeholders and other interested parties are now invited to submit comments and observations to ESA by March 11 2011.

The original press release on the decision in December can be found here. ESA opened the investigation because Iceland has, according to ESA, not gone correctly about the state aid, i.a. not informed ESA though it has had ample time to do so.

An earlier log on the ESA decision is here.

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Contrary to popular foreign belief, Iceland isn’t all about crisis and gloom. The the creative juices are flowing all over the country. Amateur actors, all farmers, in Horgardalur close to Akureyri in the North of Iceland, are these days rehearsing a play, based on the comedy ‘Full Monty.’ In the 1997 English film, jobless steel workers in Sheffield found a way out of misery by staging a strip act where nothing was hidden, hence the name ‘Full Monty.’

The Horgardalur farmers have adapted the play to Iceland. The director is a brilliant young Icelander, who studied in London, Jon Gunnar Thordarson. The premier is on March 5th. Whether the show will offer the ‘full mounty’ is shrouded in mystery but according to rumour the farmers have been practicing hard (no pun intended) for the strip scene.

The farmers have made a calendar, for sale at tank stations and elsewhere in the region. Here is a photo from the calendar of the handsome Icelandic farmers from Horgardalur, both young and old. As you can see the photo is taken in their every day setting, though probably not in their every day outfit.

Icelandic women are famous for their good looks. It’s time that the Icelandic male population gets some attention.

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Yesterday, the Office of the Special Prosecutor formally received the documents that the Appeal Court in Luxembourg recently ruled that could be handed over to the OSP. The documents were seized during three days of house searches at Kaupthing Luxembourg, now Banque Havilland, and other locations. Who those 19 parties are who, together with Banque Havilland, tried to oppose the handing-over still remains in the dark.

The paper documents weigh 150 kg but in addition to that there are electronic documents. Needless to say, these are copies so the Luxembourg authorities retain the documents as well. Due to security, the OSP didn’t announce that they had the documents until after they received them.

This being a prosecutor’s office there was most surely no champagne to celebrate. The real feast lies in the 150 kg of documents and the electronic data.

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As reported earlier on Icelog the Glitnir Winding-up board brought charges against Glitnir’s major shareholders, Jon Asgeir Johannesson, Johannesson’s wife Ingibjorg Palmadottir, Palmi Haraldsson, Hannes Smarason, some of their close allies, Glitnir’s CEO Larus Welding and the bank’s auditors, PwC, in New York last year. The fact that the case was brought before a US court brought out a whole raft of information as to how the shareholders allegedly controlled the bank and used it as their piggy bank. The US jurisdiction was chosen on the base of Glitnirs $1bn bond offering in the US, meaning that the actions by shareholders, managers and auditors caused a real loss to the bond buyers.

Last December, the New York court ruled that the case shouldn’t be heard in the US. According to the judge, it would be indefensible to the US tax payer that he, as a US judge, should use his time on a case that belonged in Iceland, not in the US. However, he put some constraints on the defendants: i.a. they wouldn’t be off his hook unless they acknowledged the Icelandic courts jurisdiction in this case.

It seems that the defendants didn’t exactly jump to sign to the prerequisites to throw the case out of the New York court and there was a lot of toing and froing. In the end, the Glitnir WuB lost patience and announced last week it would appeal the ruling. That sped things up. According to Johannesson’s lawyer he couldn’t at all understand this move. There was no reason to appeal since the defendants all accepted what they needed to accecpt.

Today, it was announced that the defendants have, at last, signed what they needed to sign and they have now i.a. acknowledged the Icelandic courts jurisdiction in this case. Consequently, there won’t be any appeal before the New York Court. However, it probably means that the Glitnir WuB will soon be suing the New York defendants in Iceland. By now, the WuB will know a whole deal more than they would if they had taken the cases straight to an Icelandic court. And thanks to the New York charges the general public is now much more informed on how, according to the Glitnir WuB major shareholders, together with managers and with information from the auditor, robbed the bank from inside.

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Olafur Margeirsson, PhD student in Economics at the University of Exeter, is a new Icelog guest writer. His research is in Foreign Direct Investment in financial services and its effects on financial stability. Earlier, he was a part-time analyst at Kaupthing Research. Olafur has written about the sustainability and weaknesses of the Icelandic pension system and has criticised the general indexation of mortgages.

During the Icesave debate the cost of Icesave has been a contentious issue. The Icelandic government has sought to minimise it, others have seen it as a real threat. Olafur’s log is an echo of that debate.

Now that Althingi has passed the newest version of the Icesave bill, “all that is left” is to get it through the parliament for the third round (all bills must be discussed, amended if needed and passed three times in Althingi), pop the cork and celebrate the disclosure of this nagging matter. The fact has not changed though that nobody knows how much this will cost the Icelandic already-neck-deep-in-debt taxpayer.

There are some ideas though. GAM Management, one of the few past-collapse established financial firms, was asked to estimate how much the cost of the Icesave agreement could be. Their results were shocking.*

They estimated the net cost somewhere between ISK26bn and 233bn. The base scenario (no change in the ISK exchange rate until 2017, return of failed Landsbanki’s assets according to the receivership committee’s estimate) approximated the net cost to be about ISK67bn. But if the ISK weakens by 2% per quarter, the cost would rise up to ISK155bn. Add that to 10% lower price of Landsbanki’s assets and the cost would spike up to ISK233bn.

The macroeconomic repercussions of this agreement would be quite frankly monstrous. ISK67bn may not sound too much but that is all the same equivalent to roughly 15% of the total income of the State in 2010. It took ages to squeeze a finance bill with ISK30bn cut in government spending through Althingi. The debt of the State was already 80% of GDP year end 2010. The gross cost of the Icesave is roughly 620bn. Passing the Icesave bill would mean that the ratio of government debt to GDP would spike up to about 120%. And all the risk of the agreement nests itself in the balance sheet of the Icelandic state.

Peculiarly enough, nobody has estimated the cost of taking this fight to the EU court.

*For those fluent in Icelandic, GAM Management’s Powerpoint show about their estimate is here.

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Two and a half years after Icelanders discovered that the clever thing about the Landsbanki Icesave deposits was that it was guaranteed by the Icelandic tax payers, Althingi has passed the Icesave guarantee. That removes a hurdle in settling the Icesave guarantee with the UK and the Netherlands. The vote was convincing: 40 MPs out of 63 voted in favour.

Although courage hasn’t been his most striking characteristic Bjarni Benediktsson the leader of the Independence Party showed the courage to come forward in favour of the Icesave agreement. Icesave III, the third agreement, was negotiated by a team led by Lee Buchheit who consequently won such popularity in Iceland that one of the newspapers voted him the man of the year 2010.

Benediktsson hasn’t won much praise in his party for his support of the Icesave agreement but a lot of anger and resentment. Some had predicted that the party might split on the issue but the question is if this issue is really worth it. Remains to be seen. But it’s almost certain that Morgunbladid, edited by David Oddsson – ex PM, ex IP leader, ex governor of the Icelandic Central bank and strongly against paying the Icesave guarantee – will spare nothing in venting its anger at Benediktsson. Oddsson doesn’t like to lose and is known for his vicious wit. Some of it might easily spill out into Morgunbladid in the coming days. Oddsson is also known for picking up the phone when he’s upset. It’s quite plausible that Benediktsson will get a call or two from the ex leader.

Around Christmas, an opposition MP, not from the IP, told me that according to the political rumour mill the IP would come out in favour of Icesave in return for the government going easy on any changes regarding the fishing quotas. Iceland has had transferable fishing quotas since the late ’80s. Ever since, the quota allotment has been a bone of contention in Icelandic politics. The system was originally designed by the IP. The present government, led by social democrats with the Left Green, has vowed to change the system, to make it, as the government says, more fair. The quota system will soon be on the agenda. It’s too soon to say if my source could possibly be right.

It’s also still too early to say if the passing of the Icesave guarantee by Althingi was the last hurdle in settling Icesave. President Olafur Ragnar Grimsson has yet to sign the bill. He didn’t do it last year, when Althingi passed an Iceave bill (on much harsher terms than the present agreement) but with a clear and convincing majority this time and with no one except some members of the IP up in arms about it it’s likely that this time the president will sign the agreement. However, it’s never been easy to gauge the president’s move so we better wait and see.

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An Icelog reader pointed out to me that my comment on bank secrecy and Luxembourg, re OSP and Kaupthing Luxembourg, had been somewhat misleading. He pointed out the following:

“In Luxembourg banking secrecy was never a hindrance to criminal judicial cooperation. Indeed, the rule of banking secrecy never plays in criminal investigations, whether it is a national case or a transnational one.

Banking secrecy received its famed name, because under Luxembourg law tax evasion (as opposed to tax fraud) is not a crime. Since it is not a crime, criminal rules do not apply and banking secrecy will withstand tax scrutinity (both national and international). This has now however been changed for international tax cooperation only.”

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Today, the Independence Party has declared that it will back the Icesave guarantee bill, now debated in Althingi. That means that even though some of the government’s own MPs might vote against it it’s now certain (bar unforeseen events) that Althingi will pass the bill.

The last hurdle will be the president: he might possibly do like a year ago and refuse to sign the Icesave guarantee bill. However, the political heat seems have evaporated from the Icesave issue now, making it more likely that he will sign. The president never speaks on the Icesave with the Icelandic media (or they don’t ask him) but he’s been very willing to air his views abroad. His recent remarks on Bloomberg seem to indicate that he will sign.

If all this comes to pass, Icesave might soon be a thing of the past, after blighting the political (and other) debate in Iceland since October 2008 when the country suddenly realised that the clever Icesave deposits that Landsbanki had been so proud of actually were a millstone around the neck of the whole nation.

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