Sigrún Davíðsdóttir's Icelog

Today, several persons have been brought in for questioning with the Office of the Special Prosecutor. The investigation centres on Glitnir and FL Group, both of which were under control of Jon Asgeir Johannesson. The CEO of FL Group was Hannes Smarason, who left FL Group late 2007, when the company had run out of steam and money.

Apparently, some were employees of Glitnir, some said to be now working for Islandsbanki, the going concern of Glitnir’s domestic operations. DV has named two present employees of Islandsbanki, Johannes Baldursson and Elmar Svavarsson.

According to Ruv, Larus Welding, who was brought in as a CEO of Glitnir, when Johannesson and his associates took Glitnir over, has been sent to a week’s custody. In an email, published in the SIC report, Welding complains that Johannesson treats him like a branch manager, not like the CEO of a bank. Soon after the collapse of the banks, Welding moved to London.

As earlier media coverage, and the SIC report shows there was a wealth of intriguing affairs going on in Glitnir related to FL- and Baugur-related companies. The present investigation centers on ten cases, involving Glitnir’s prop trading and other business related to shares in Glitnir and in the aforementioned companies.

This is the first time that people related to Glitnir have been brought in for questioning. With the Glitnir case, in addition to earlier investigations related to Landsbanki and Kaupthing all the three major banks are now being investigated. In all cases, fraudulent activity involving billions of krona is being investigated, showing the outline of something far bigger and deeper than just failed attempts to save failing banks.

Many Icelanders feel the OSP is taking a long time to investigate alleged fraud related to the three banks that collapsed in October 2008. However, it’s well known that fraud investigations tend to be time-consuming. In terms of the economy, Iceland is doing well but the feeling is that as long as the fraud investigations are ongoing the events of October 2008 and the boom years are still an open book to the Icelandic mind.

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Views, in the literal sense. Here is a website with some webcams in Iceland. You can see people in Reykjavik walking over Austurvollur (the little square in front of Althingi), walking along Tjornin, the pond in the centre, or swimming in the Blue Lagoon (though that would mostly be foreigners; I wonder if they realise they can wave to mom and dad back home).

For those needing their fix of Icelandic nature there are webcams by Eyjafjallajokull (no visibility these minutes), Katla and Hekla (the mountains are hidden in clouds right now). There is a view of Thingvellir (like a Christmas card), Geysir (webcam not working for the moment), Gullfoss (a melé of something that could be clouds or water) and Jokulsarlon (very soothing to watch the flowing water in a landscape of ice and snow).

An absolutely brilliant way to nourish your soul on beauty and calm and let nature remind you that there is something larger and mightier than eurozone worries, currency regulations, creditors and politicians who lack direction.

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Minister of Interior Ogmundur Jonasson has refused the Chinese enrepreneur Huang Nubo the right to buy the big plot of land, Grimstadir a Fjollum, that he had his eyes on. As reported on Icelog earlier, the sale was a hot topic in Iceland.

Jonasson, from the Left Green party, seems to have angered his coalition partner, the social democrats. Minister of Economy and Trade Arni Pall Arnason said this weekend that this was a test for the coalition. Other leading social democrats have also expressed anger and irritation. Jonasson has already expressed his doubts. The answer hardly comes as a great surprise.

Nubo’s Icelandic plans have attracted great attention in the international media, ia the FT which yesterday had the latest development in the Nubo case on its front page, as has been the case with the paper’s earlier reporting. This interest indicates the focus not only on Iceland but on Chinese ventures abroad.

In my Ruv reporting I have pointed out that Nubo, though portrayed as one of China’s dollar billionaires, has no business ventures outside of China that indicate his ability to develop the huge tourism plans he seemed to have in mind for Grimstadir. His main foreign ventures are in the US where he ia owns a plot of land, plans to build a shopping mall, but hasn’t had the money, because of the crisis, to commence. He is also developing tourist fascilities at a ranch in Nashville. Due to opacity in the Chinese business environment, Nubo’s ventures are yet another example of how difficult it is to ascertain the real standing of Chinese companies.

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The last log, ia on the state loans to VBS and Saga Capital was timely. The EFTA Surveillance Authority has just announced that it will open an inquiry into these loans, as well as into loans to Askar Capital.

Here is what ESA announces:

The EFTA Surveillance Authority decided today to open a formal state aid investigation into loans granted to the investment banks Saga, VBS and Askar Capital.

The loans, of a total amount of 52 billion ISK (330 million EUR), were granted on favourable terms by the Icelandic Treasury in March 2009. The Authority received a complaint concerning the loans from an interested party in July 2010.

The purpose of the loans was to reschedule short-term collateral and securities loans from the Central Bank of Iceland to long-term loans. This was thought necessary because the Central Bank loans were in default.

The Central Bank collateral loans were secured amongst others with bonds issued by the three commercial banks, Glitnir, Kaupthing and Landsbanki Islands. Following the collapse of those banks in October 2008, the value of the underlying security diminished severely. The investment banks were unable to provide other security or settle the debt.

The Icelandic authorities claim that through the loan conversion, they have endeavoured to protect the interest of the state and acted in line with the conduct of a private creditor. The Authority, however, has doubts whether the terms agreed by the Treasury are consistent with commercial conditions. If  not, the loan conversion could be regarded as unlawful state aid within the meaning of the EEA rules.

VBS Investment Bank and Askar Capital Investment Bank are already in liquidation and the operating license of Saga Investment Bank has recently been revoked. The Authority nevertheless considers it appropriate to finalise its assessment of whether or not the terms of the loans are compatible with the state aid provisions of the EEA Agreement.

Should the Authority conclude that the loan conversions are to be regarded as unlawful state aid, it would be obliged to require the national authorities to recover the aid from the recipients. If the recipient of such aid is in liquidation, claims shall, if possible, be filed against the estate for recovery of incompatible aid.

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Now that so many European countries are struggling, how is Iceland doing? Iceland is doing rather well, thank you. A growth of around 2% is forecasted for this year and the unemployment, though at a horrible high, from the Icelandic point of view, 8% isn’t too bad compared to the neighbouring countries. When reading about Iceland’s good standing, compared to many other countries, the usual refrain is that Iceland didn’t bail out its banks. As shown below, that’s only partially true. Iceland’s economy is indeed weighed down by the cost of its banking crisis.

Iceland’s recovery was the topic of an IMF conference in Reykjavik October 27, most appropriately at Harpa, the new concert house (and since I happened to be in Iceland I was there). Harpa was half-built when the crisis struck but instead of letting it stand as a sad reminder of the insane optimism, it’s now finished, much to the delight of the culturally gluttonous Icelanders.

Martin Wolf from the FT was there and has just published an excellent overview of some of the topics. In addition, he uses the opportunity to show-case Iceland as a good example of a country profiting from not being in the euro. One of the reasons why so many economists seem to be interested in Iceland is that they find there facts and figures to underpin their ideas. Hence, Iceland is quickly becoming all things to many economists.

At Harpa, leading luminaries from the dismal science, such as Willem Buiter and Paul Krugman, pondered on the state of Iceland. But from my point of view, it was most interesting to hear Gylfi Arnbjornsson president of the Confederation of Trade Unions and professor of economy Gylfi Zoega speak, as well as Stefán Olafsson, professor of sociology, both from the University of Iceland. In addition, professor Fridrik Mar Baldursson, Reykjavik University, gave an excellent overview of the Icelandic economy. All this is accessible here.

Arnbjornsson was adamant that with the krona Iceland couldn’t prosper. Export had deteriorated, in spite of sharp depreciation. Such a small open economy wasn’t sustainable with its own currency.

Stefan Olafsson underlined that in spite of cuts, the worst off in society had not lost out the most as seems to be happening elsewhere. The gap between the worst off and those at the top has not widened. This is perhaps the success saga, less that Iceland didn’t save its banks. More on that below.

Gylfi Zoega underlined that it was a fairy tale that Icelanders are different. He characterised Icelandic banking rather well: “others talk about related party lending; we call it banking.”

Jon Danielsson, LSE, argued vehemently against the currency control and has just published an article on the matter, together with Ragnar Arnason, University of Iceland.

But let’s look at this popular belief, running through the IMF conference and most things written on Iceland, that Iceland didn’t bail out its banks. Correct, Iceland didn’t bail out its three large banks that all collapsed in October 2008. The Government tried to safe Glitnir end of September but failed miserably. This attempt made it abundantly clear, that it was, of course, beyond the Central Bank of Iceland to be a lender of last resort for these three, compared to the Icelandic economy, gargantuan institutions. The Government was unable to do anything but watch in horror.

Because these banks failed and weren’t saved, Iceland has become the heroic example of a country that, contrary to ia Ireland, didn’t bail out its banks. So much drivel has been written about this as Grapevine, an Icelandic magazine published in English, pointed out earlier.  In this heroic story that’s going around in the world, Iceland didn’t let the debt of private banks migrate from the private to the public sector. I wish this was true but it isn’t. Not quite. Quite some myth-making here.

In the Emergency Act, passed on Oct 6, 2008, there was a provision for helping the Icelandic building societies (similar to the German ‘Sparkassen’). This was later done. Also, the Government helped two banks, VBS and Saga Capital.

With documents from Landsbanki, I have already shown that many years before the crash, Landsbanki kept VBS afloat. Just before Landsbanki collapsed there was the last helping. This kept VBS alive until the following spring when the Government propped it up with ISK26bn (€16.2m), which prolonged its life until early 2010. Together with support to Saga Capital, the Icelandic Government helped these two banks with almost 3% of GDP 2009.

The building-societies system has collapsed, partly because it was taken over – as everything else with a cash flow – by the main banking protagonists, the banks and its main shareholders and clients. The core functions in this system, such as lending, was very unprofitable during the years before the collapse but this fact was masked by prop trading and financial engineering.

In the Icelandic IMF programme, ISK25bn (€15.5m) was set aside to fix the building societies. Out of ten remaining societies, five have been saved by the state. If the cost of saving these banks and a few others are all added it, the amount is over ISK70bn (€43.6m). By adding the cost of saving Sjova, an insurance company, and ILS, the state mortgage company, this bail-out sum rises to ISK118bn (€73.6m) – and that amounts to 7,7% of GDP, not a trivial sum.

But this isn’t the whole story of ‘not bailing out the banks.’ The two main problems from this system of small financial institutions are indeed not small. Byr, horribly abused by Glitnir Bank and its main shareholder Baugur and FL Group, was bought by Islandsbanki (the resurrected Glitnir, now owned by its creditors). Sparisjodur Keflavikur, a building society from Keflavik (yes, where the international airport is) has a huge gaping hole, a string of truly shabby loan stories and was taken over by Landsbanki, owned by the state (the Icesave bank that no creditors want to touch).

These two sales/mergers happened last year but the sales aren’t yet finalised, probably because the state then has to cough up a lot to make these institutions palatable to the new owners. Consequently, these two banks are now a walking danger, zombie banks. The rumour is that just for the Keflavik society, ISK30bn (€18.7) will be needed.

The worst thing is that there doesn’t seem to be any policy in all this bail-out activity. Saving VBS was clear and pure madness and amounted to throwing ISK26bn into the North Atlantic. There might very well be some good reasons to save some of the building societies but there just doesn’t seem to be any clear policy. The Government hasn’t made it clear if all the remaining 10 societies, out of which the state now is a stakeholder in 5, should be run as now, should be merged into one or into a few larger ones.

All in all, Iceland has some ISK200bn (€1.2bn)* at risk in the banking system, ca 14% of GDP. So here is the correct version of bank bail-outs in Iceland: the Icelandic Government at the time couldn’t save the three largest banks – but a lot of the undergrowth in the financial system has been saved. And it’s not clear why or what the policy is.

*The Icelandic number is correct but the conversion into euros was wrong; it should be €1.2bn, as is now stated, not €124.5m as was previously stated.

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‘Samhengi hlutanna’ (the English title is, so far, Not a Single Word) is my latest novel, published last week. It’s best described as a docu-drama and a financial thriller. It takes place from mid December 2009 till May 2010 in London and Iceland.

Hulda is an Icelandic journalist living in London. She has reported on the Icelandic boom-and-bust and the collapse of the Icelandic banks. When she dies in a bicycle accident her partner, the lawyer-turned-artist Arnar, struggles to hold his life together. A few months later Raggi, an Icelandic journalist and old friend of Hulda, turns up on Arnar’s doorstep. Raggi has decided that with Arnar’s help he is going to finish the book Hulda was working on before she died.

Arnar tries to dissuade him but Raggi, a stubborn Icelander and sober alcoholic, drags him into his scheme. Rambling, they start looking up people that Hulda had talked to, in order to pick up where she left off. One of Hulda’s contacts puts them in touch with Mara, a Hong Kong-based Finnish private investigator. Mara guides them through a maze of intrigues and whole galaxies of off shore companies but she also seems to have her own agenda.

They meet one person after the other who all shed some light on what happened but the bits and pieces don’t add up and no coherent picture emerges. Until, as Mara had predicted, the confusion begins to take shape though Arnar and Raggi find it much more difficult than Mara, specialised in financial fraud, to figure out what really took place.

The Icelandic title can be translated as ‘the context of things’ and that’s what Arnar discovers: a whole new context to what happened in Iceland and eventually to his own family. There is an Icelander who got rich in Russia, bought a bank in Iceland and is now investing in Africa. Another made his money in Latvia.

In the Icelandic context there are company groups stretching from Iceland to Germany, Luxembourg, London, Cyprus and other secrecy jurisdictions where money flows into unnamed bank accounts. Nothing makes much business sense but it all makes sense if the context is money laundering and bribes. And where did the money sloshing around in the collapsed Icelandic banks come from? Not just from Iceland, that’s for sure.

‘Samhengi hlutanna’ has a Facebook page (with comments and links to interviews, reviews etc) – and can be bought in most Icelandic book shops, so far only in Icelandic, and here on-line.

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From the Icelandic point of view, the decision of president George Papandreou to call a referendum on the EU bailout-deal is a deja vu. The situation is similar: a political leader who has nothing to lose.

Papandreou’s situation is dire. He is leading austerity measures that, understandably, are profoundly unpopular among his countrymen. He seems to have concluded that his best option in a bad situation is a referendum. On what exactly isn’t clear, not easy to formulate the appropriate question. Nor is it clear when the referendum will be held but it will hardly be until January. The EU Greek deal, seen as essential to stabilise and calm the euro-situation is now up in the air.

The situation of a leader in dire strait is well known in Iceland. The president of Iceland doesn’t have the power that his Greek counterpart has but Olafur Ragnar Grimsson was widely unpopular after the collapse of the Icelandic banks since he had been a keen advocate of the Icelandic banks. His decision to call a referendum on Icesave, not once but twice, was widely interpreted as his attempt to regain popularity.

Needless to say, the Euro bailout is in jeopardy. Or, as comments on Citywire today go: ‘What’s wrong with democracy?’ asks one. The prompt answer is: ‘You are just about to find out.’

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