Sigrún Davíðsdóttir's Icelog

Archive for July, 2011

The price of politeness

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Rubbish heaps in Naples and ever-increasing eurozone bail-outs are two sides of the same phenomenon within the EU: unresolved underlying problems

‘Why are you taking a photo of the rubbish heap?’ A swarthy man, in his early 40s, double chin and flabby belly in a wife-beater, appeared from nowhere. I had just snapped a photo of a rubbish heap ‘lungo mare’ in downtown Naples. I told him that Naples is my favourite city in the world, I’ve been coming there for twenty years and I find it painful to watch the decline of this glorious city with its spirited inhabitants. ‘But why do you want to take a photo of the rubbish?’ ‘Why shouldn’t I?’ I asked. ‘The city is now defined by this disgrace.’

The rubbish heaps in Naples have been in the news for years. It’s a miracle that there hasn’t been an outbreak of some horrific plague from the ominously smelly mounds in the sweltering summer heat. Every now and then, the military steps in to remove the rubbish but it’s only a temporary relief. After years of empty promises from politicians the underlying problem still hasn’t been solved.

The local ‘malavita’, the Camorra, dominates the city’s garbage sector and to them, rubbish is gold. Camorra-related companies ignore proper waste disposal but dump any amount of highly toxic amalgam of industrial waste, rubbish from hospitals and homes on land bought from farmers by making them a Camorra offer: an offer that can’t be refused. Whole regions of Naples upland are now horrendously polluted causing birth defects in children, cancer rate to escalate, poison to enter the food chain and making animals suffer.

The crime-infested rubbish sector isn’t confined to Naples. When a company in Northern Italy accepts an offer to have its rubbish removed for a pittance it knows full well that proper rubbish management costs much more. By saving money it supports the ‘malavita.’ The Neapolitan journalist Roberto Saviano, who has recounted the ghastly rubbish business in his books and numerous articles, is on the Camorra’s death list and lives in hiding.

Every time I visit Italy it strikes me how rich this country must be since it’s able to afford the waste of resources and human capacity that organised crime causes. Organised crime hinders progress because it stifles efficiency and the learning that promotes development. The Italians themselves bear the responsibility for the Italian situation. But sadly, the disgraceful rubbish heaps in Naples are also part of a European problem.

The rubbish sector is one part of the ‘clean’ side of Mafia Ltd. The ‘malavita’ managed to take hold of the rubbish sector via the private-public partnerships, widespread in Italy. This interaction of private and public bodies is a hugely lucrative operation ground for the Italian ‘malavita,’ be it the Camorra in Naples, the Mafia in Sicily or the ‘Ndrangheta in Calabria. Sadly, EU money has floated through these channels and fed organised crime. Incidentally, private public partnerships have also been a fertile ground for corruption in Greece. On the whole, the EU has been far from vigilant when it comes to corruption in the member countries.

In a recent FT article the Italian ex-EU commissioner Mario Monti blamed the euro debacle partly on the EU being too deferential and too polite to its member states. The large and powerful ones within the EU, have time and again prevented monitoring economic development. Greece’s unsustainable debt was hidden under incorrect official figures – and interestingly, Germany and France opposed giving Eurostat powers to conduct proper investigations. (It’s an interesting angle though it doesn’t quite explain the problem of the eurozone. Data on lending to the eurozone countries has at all times been available from Bank for International Settlements.)

Evidence for the same is evident in many other EU countries. The EU has systematically closed its eyes to corruption in Greece. In 2008 Bertie Ahern resigned as a prime minster due to corruption allegation. Amongst other things he had bought a flat for money he couldn’t account for. In Italy, 84 out of 945 MPs, almost 10%, are under investigation for corruption; 49 out of the 84 are members of prime minister’s Silvio Berlusconi’s party. Minister of agriculture in Berlusconi’s government Saverio Romano has been under investigation for eleven years for alleged Mafia connections, going back more than two decades. France had its Elf affaire. – Only corruption in Bulgaria and Romania seems visible enough for the EU to worry the EU.

Monti is right that had the EU been less polite and taken a more critical approach the problems of the eurozone would not have risen. But the EU reflects the individual countries. In all the European countries, and in the US, debt has been extolled and welcomed, both at private and public level and the purveyor of debt, the banks, have been praised to the skies and the architects of debt, the bankers, have been awarded obscene remuneration.

It’s now abundantly clear that there wasn’t a credit crunch but a debt crunch, caused by reckless over-lending by banks who thought they would forever be able to securitise and sell it off. Yet, the European politicians keep on being polite. Polite to the bankers that armed with excel and inspired by greed and badly structured incentives over-lent to Greece, Ireland, Portugal, Spain, Italy and now clearly to Cyprus as well. Belgium could very well be going the same way – and then it’s no longer a crisis in the periphery but right at the heart of Europe.

It’s now four years since the European Central Bank first provided liquidity ‘to permit an orderly functioning of the money market.’ In a statement 14 August 2007 Jean-Claude Trichet president of the ECB said: ‘We are now seeing money market conditions that have gone progressively back to normal… This attitude… will help to consolidate a smooth return to a normal assessment of risks in liquid markets.’ That was wishful thinking – but this same wishful thinking still prevails: that by bailing out the banks everything will be normal.

That key question is ‘what’s normal?’ It’s clearly not returning back to the over-lending of this last decade. And it’s clearly not following the risk assessment of the last decade. Risk was miscalculated and underpriced.

Trichet’s view in August 2007 still guides the action of the ECB and the European Union, expressed in ever more insane amount of money tied up in bailing out the banks that got it all wrong in the first place. In autumn 2008 many politicians gravely warned against socialising the losses and privatising the profits. Yet, this is exactly what’s going on.

In her comment to Monti’s article the economist Megan Greene pointed out the dangers to this route: ‘A new political class will be brought to power by electorates in the core countries that are fed up with contributing to bail-out programmes.’ There will be ample room for demagogues and unsavoury forces to play on voters’ anger and frustration.

Europe is a rich continent. So rich that it’s now inflating the EFSF with €440bn, though €2 trillion is needed to pre-empt a meltdown in Italy and Spain. The second Greek rescue packet of €160bn, added to the €110bn last year, will only tide Greece over for a limited period.

So far, the ECB and EU politicians have pretended there is only one way of resolving the problem: by letting the tax payers pay. When will the European Union and the ECB drop the politeness and say bluntly to the banks: ‘Your calculations were wrong, you over-lent and as you know, in the financial sector rectifying this kind of mistake is called a write-down. In this case the mistake was huge. Alors, the write-down has to reflect the size of the mistake.’ Any other solution will be like the rubbish heaps in the centre of Naples: they are removed but new heaps grow because the underlying problem hasn’t been resolved.

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Written by Sigrún Davídsdóttir

July 31st, 2011 at 10:14 pm

Posted in Iceland

Il lungo silenzio

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It’s not that there is any lack of interesting subjects that nothing is coming up on Icelog. For the time being, my focus is elsewhere: I’m in the final stage of finishing a novel, in Icelandic, that will be published in Iceland in autumn or late winter if I reach the final paragraph. The novel, hopefully a thrilling one if not outright a thriller, takes place in London and Iceland Dec. 2009 until spring 2010. It’s a docu-drama, with a background of financial matter, written into the events of Icelandic banking and business and the contacts with international tycoons and banks.

As to interesting development in Iceland there is of course the Icelandic EU membership negotiations, ongoing investigations by the Office of the Special Prosector, new evidence on well known persons and events and what the formerly so famous Icelandic tycoons and bankers are doing now. More on all this later.

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Written by Sigrún Davídsdóttir

July 20th, 2011 at 11:56 am

Posted in Iceland

The Special Prosecutor and the difficult task of bringing bankers to justice

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‘Business but not breaking the law.’ This is how Justice Arngrimur Isberg described some of the most blatant money-making tricks at the heart of the charges in the Baugur case, brought against Jon Asgeir Johannesson and his companions in 2005. At the time, Isberg threw out charges of fraud and breach of fiduciary duty since in his opinion it was normal business that caused a loss of ISK325m to Baugur whereas Johannesson and his companions made at least ISK200m in a deal where Johannesson had hidden his ownership of a company sold to Baugur.

On Tuesday, Isberg yet again caused a major surprise, now with his ruling* in the Byr case.

As explained in an earlier Icelog the Byr saving society wasn’t among the heavy-weights in the Icelandic financial world. Prosecutor Bjorn Thorvaldsson had demanded a jail sentence of five years for Jon Thorsteinn Jonsson chairman of the board of Byr, a saving society, Byr CEO Ragnar Gudjonsson and the CEO of MP Bank Styrmir Thor Bragason for breach of fiduciary duty. In addition, Bragason was charged with money laundering. The investigation centered on two overdraft loans, in total ISK1bn (now €6m), from Byr, in October and December 2008 to a holding company, Exeter Holding. Exter then bought Byr shares from Jonsson and others related to Byr at a conspicuously favourable rate. Byr investors were being pursued by MP Bank with margin calls since MP Bank had earlier lent a group of Byr employees to buy into Byr.

I was in Iceland during the court hearings. It was interesting to see one Byr- and MP Bank-employee after the other, as well as others related to the case, give witness. Their memory was often so poor that one wonders how they get out of bed in the morning. They didn’t understand emails they had sent or received. And so on.

At the core of the Byr case were loans to buy shares in Byr with only these shares as collateral. Justice Isberg didn’t pose many questions himself to the witnesses but he did, at some point, ask if this type of loan was necessarily a bad thing for a bank. Maybe he thought his question would clarify something but it mainly seemed he was trying to figure out himself what was so harmful about these loans.

Yesterday, Justice Isberg acquitted the three of them. This ruling was done at the County Court. No doubt, the Special Prosecutor will appeal to the Supreme Court.

According to the ruling, Byr clearly broke its own rules on collaterals, loan ratio and loans to related parties. It lent to a company, Exeter, with a negative equity, owned by a heavily indebted individual. All of this characterised loans to the favoured clients of the Icelandic banks. But no, nothing of this amounted to breach of fiduciary duty nor, in the case of Bragason, to money laundering. According to Isberg, the three couldn’t possibly have been defrauding the bank with these loans since they didn’t realize these loans could cause harm to the bank. Isberg sees nothing intentional about these bad loans. According to Justice Isberg the three couldn’t possibly have known the harm these loans did to Byr.

There were indeed three judges on the case. The second, who used to work as a broker, was in accordance with Isberg. The third, Ragnheidur Hardardottir, wanted to sentence the Byr managers but acquit Bragason.

It’s interesting to keep in mind that lending against own shares was one of the characteristics of Icelandic banking and consequently a major topic in the SIC report a year ago. That Justice Isberg didn’t seem to have understood how wrong and how harmful to a financial institution these loans are was nothing less than frightening. It’s intriguing to keep in mind that Eva Joly has often pointed out that in cases regarding financial crimes it’s often a major problem how ignorant judges often are of finance and business.

The Byr ruling was a test case for the Special Prosecutor. So many of the cases that he will bring to court will most likely reflect similar situation: the charged has done things that cause a loss to a listed company. Since these were clever people and there is a certain purpose to the deals the Prosecutor will charge them for a criminal intent. The Byr case shows that there can be judges who absolutely can’t see any criminal intent. Just negligence.

There are many cases in Iceland where a drug dealer has been caught with a bag of ‘goods’ and he just says he didn’t know what it was whereas the judge rules that it had to be clear to him what he was supposed to do with the drugs. In these cases, the judge reads into the circumstances certain intent. In the Byr case, the judge sees the loans, sees the losses they cause, but he can’t see anything intentional though the loans make no sense except understood in the context they were made.

If this will be the case regarding pending charges, it’s clear that it will be very hard for the Special Prosecutor to get rulings in his favour. It will be of utmost interest and importance to see what the Supreme Court makes of the Byr case. Not all is yet lost and it’s still too early to send the Special Prosecutor packing. The Byr case shows that the Special Prosecutor has some formidable hurdles in court. And Icelanders are asking if it really is the case that circa 30 individuals who turned the Icelandic economy on its head will be able to live happily ever after with the proceeds that most Icelanders will be as ill begotten.

*The ruling is here, in Icelandic.

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Written by Sigrún Davídsdóttir

July 1st, 2011 at 12:25 am

Posted in Iceland