Sigrún Davíðsdóttir's Icelog

Sigurdur Bollason isn’t one of the most famous Icelandic businessmen and yet two of his now bankrupt holding companies have collapsed under ISK11bn (€66.8m) debt. To illustrate the size of ISK11bn, the cost of running the Icelandic Parliament is ISK2,9bn a year so this money would go a long way to run the Parliament for three years. Bollason’s story is illuminating, in order to understand banking and business, the Icelandic way, as practiced before the collapse of the Icelandic banking system in October 2008. Since end of 2010, Bollason’s registered address is Luxembourg but he is mostly seen in the UK.

Bollason’s parents ran a successful fashion shop in Reykjavik and that’s the way Bollason went. Around 2000 he met Kevin Stanford, through his fashion enterprise. As I have written on earlier, it was, allegedly, Bollason who introduced Stanford to Icelandic businessmen like Baugur’s owner Jon Asgeir Johannesson and to bankers at Landsbanki and Kaupthing. Stanford eventually became as valued a customer as some of the Icelanders, meaning that Kaupthing lent him money to buy shares and, towards the end, money to gamble with in the bank’s attempt to influence its sky-rocketing CDS, nota bene in co-operation with Deutsche Bank, but that’s another story for another log.

After the privatisation of the Icelandic banking system in 2003, the development was towards the three banks, each with a few major shareholders. At Kaupthing and Landsbanki these major shareholders stayed the same until the bitter end. At Islandsbanki, later called Glitnir, they changed: in summer 2005 the largest shareholders were a group connected to Samson, with Bjorgolfur Gudmundsson and his son Bjorgolfur Thor Bjorgolfsson, at the core. At the beginning of 2006 they sold their Islandsbanki shares to Karl Wernersson and Einar Sveinsson who in early 2007 sold to Johannesson and related parties.

Below these major bank investors/owners there was the second tier, smaller investors who got loans from the banks to aid and support the major players in their investments. Without naming names, the feeling is that these fellow travellers were useful in securing control without having to own all that much in the company. The banks were usually fellow travellers as well, both co-investing and lending.

Bollason belonged to this second tier and invested mainly in the Baugur orbit. He took out a loan both in Landsbanki and Glitnir in 2008 in share buying schemes in respective banks. Though owned by father and son, Landsbanki lent heavily to the Baugur sphere, as well as to father and son companies. Straumur, where the son was the chairman of the board lent almost exclusively to companies related to its chairman.

The two now bankrupt Bollason companies owe ISK6bn to Glitnir, as Glitnir gave Bollason a loan of ISK4bn to buy shares in the bank. Glitnir both sold the shares to Bollason and gave him the loan. The other company leaves a debt of ISK5bn, from an ISK3.5bn loan to buy 1,4% of Landsbanki in two instalments, in July and August 2008. The recovery from these companies is nill, meaning considerable losses to these two banks. After house searches early this year it’s clear that the Office of the Special Prosecutor is investigating the Landsbanki loan to Bollason.

The question is: was it ever a good banking practice for Landsbanki and Glitnir to lend Bollason this amount of money to buy shares in respective banks? The short answer is ‘no.’ There is nothing to indicate that he had the financial means to borrow by the billions. – It’s an unavoidable thought that loans like these would be a good ground for shareholders to sue the bank’s managers and board. These loans could indicate a colossal breach of fiduciary duty.

The next question is: why did both Landsbanki and Glitnir then think it was good business to give him these loans at no risk to Bollason and a huge risk to respective banks? Here, we need to keep in mind that the loans to Bollason were just one of many to people in the sphere of the major shareholders.

Taken as a phenomenon – a bank lends money to buy its shares when markets are falling and no one is buying its shares – it seems clear, that this was organised share parking on behalf of the banks, possibly indicating an organised market manipulation. This wasn’t just a question of single loans. This was part of banking the Icelandic way and all the banks were practicing it, as is amply demonstrated in the SIC report The vehicles set up to hold the shares have been going bankrupt one by one since the collapse of the banks.

All these banks operated abroad, with London being the harbour of their foreign operations. Two of these banks, Kaupthing and Landsbanki, took deposits from UK private and institutional investors. The private deposits were guaranteed, the institutional investors lose their deposits. The UK Serious Fraud Office is investigating Kaupthing, albeit in an apparently curiously narrow way, focusing on loans to the Tchenguiz brothers. Since Kaupthing and Landsbanki operated, in many ways, in a similar way it’s incomprehensible why Landsbanki and its major shareholders aren’t being investigated as well.

The Financial Services Authority has just fined a hedge fund chief executive a record £2m. Michiel Weiger “Visser deliberately misled investors by various means, including by engaging in market manipulation, to disguise the performance of the Fund and to secure continued and increased investment in the Fund.” This rhymes with what the SIC indicates regarding the Icelandic banks. Independent auditors’ reports, done by Jean-Michel Matt and Helge Berg, on Glitnir and Landsbank respectively point in this direction. Are hedge funds just a manageable size for the FSA or is there some higher reason?

Follow me on Twitter for running updates.