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Archive for January, 2012

Splitting apart debt and assets – and the lost sense of honour to pay one’s debt

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Sean Quinn, who four years ago was Ireland’s richest man, has been forced into bankruptcy by his largest creditor, Anglo Irish. The man who over the years amassed a debt of €2bn with Anglo Irish now declares that his assets are worth only £50,000.

Similar losses have happened to the Icelandic billionaires. In the summer of 2010 the Glitnir Winding-Up Board sought a freezing order on the assets of Jon Asgeir Johannesson, the bank’s largest debtor. At the trial, Justice Steel was intrigued by the fact that a man who once was said to be worth £600m, who had in the years 2001-2008 a monthly expenditure £280,000-350,000 (!) and also had £11m flowing through his Glitnir account in autumn 2008, as the banks were collapsing, only had a paltry £1,1m worth of asset to show for it. The judge felt that such a substantial expenditure couldn’t but leave behind more substantial assets and confirmed the freezing order.

In the case of Quinn, Anglo is pursuing a case against him in Cyprus, thinking that Quinn and members of his family have conspired to move assets beyond the bank’s reach. Quinn speaks of a “vendetta” against him. Similar complaints have also been heard in Iceland from those pursued by WUBs.

It’s interesting to compare Quinn and other who go bankrupt leaving behind mountains of debt with stories from earlier decades and centuries about people doing everything to pay off their debt because their honour depended on it. Towards the end of the 19th Century, Mark Twain lost money on attempts to develop a new type of a printing machine and the company went bankrupt. Although the debt wasn’t in his name Twain toured Europe for some years, giving lectures to a paying audience and publishing as he could, until he had paid off his debt.

Now a days some of those who got astronomically rich quickly and equally lost their fortune in a short time, are unperturbed to use their meagre assets to hire lawyers to defend themselves from the creditors. It’s as if using all means to avoid paying one’s debt has become the natural thing to do – instead of using all one’s possible means to pay it back.

But before it comes to bankruptcy, there are ways to siphon assets off. This was done in the Iceland – not only in the banks but also in the smaller financial institutions such as the building societies. The basic way is to use a cluster of companies as a centrifuge where, in the course of a few years, debt and asset is split apart: the debt stays in certain companies, the assets migrate elsewhere. When things go badly, the debt-ridden companies go bankrupt, little or nothing is left for the creditors whereas assets, bought with the help of loans, have been spirited away.

There are three basic ways to split apart debt and assets. One is to pay out dividends. Secondly, to buy assets from related parties – at whatever price that suits you – and thirdly, to lend money to related parties, not bothering about collaterals or security of any sort. In all three cases the debt doesn’t disappear but the assets bought are beyond the reach of creditors.

In addition, the Icelandic lenders lent exorbitant amount of money into holding companies such as FL Group, Exista, Samson, Baugur and Milestone, which in turn lent the money on to related parties, paid out dividends or did in other ways split apart debt and assets. By lending money into these holding companies, the companies turned into banks with no risk management.

The three main banks in Iceland all lent to big borrowers who used these methods. But not only the big lenders lent in this way. The building societies lent much smaller amounts to a number of people, often related to the managers or to the board members in such a way that the borrowers could split apart assets and debt.

One example that I have looked as it a cluster of six related companies. Debt was split from assets and debt by paying dividends and by buying assets of doubtful value. After a few years, the debt was in one company that went bankrupt after 2008. No assets were there to speak of. What however troubled the borrowers in this case was that at some point they were obliged to take on a personal guarantee of ISK50m (€310,000) though not much for a debt of more than ISK200m.

During 2007 and 2008, some of the big Icelandic borrowers were forced to accept a personal guarantee since the banks found it increasingly difficult to justify little or no collateral in their accounts. Magnus Thorsteinsson, who together with Bjorgolfur Thor Bjorgolfsson and his father got rich in Russia during the 1990s and bought the newly privatised Landsbanki in 2002, was sued by the Landsbanki WUB in 2010 to enforce a personal guarantee.

During the trial, Thorsteinsson claimed that yes, he had accepted a personal guarantee but only because the Landsbanki managers had promised it would never been enforced. The WUB begged to differ, Thorsteinsson couldn’t pay and went bankrupt in Iceland. He has now returned to St Petersburg where he got rich in the 1990s.

In trials related to his Oscatello pledge, Vincent Tchenguiz – a major client of Kaupthing though dwarfed by his brother Robert – has claimed that Kaupthing never intended to liquidate this collateral. Quinn has spoken of a similar treatment by Anglo: he put up collaterals that the bank had given him verbal assurance would never be liquidated.

A source familiar with large bankruptcy cases says it is quite common that people in these large cases make claim of this type. From a source familiar with Kaupthing it seems though to be the case that, as is so often seen in the Icelandic bank deals, Kaupthing had given its favoured clients reasons to believe that collaterals would not be liquidated.

A prerequisite of splitting apart assets and debt is a willingness on part of the lender to accept weak or no collaterals, to lend into a cluster of companies and to turn a blind eye as to how the loans are used.

Ordinary mortals can’t get loans like these. By these lending practices, the Icelandic financial institutions (and Anglo Irish?) created a two-tier system: on one hand the normal loans with careful scrutiny of lenders; on the other, the abnormal loans for the chosen few who could split apart debt and assets. In the case of the really big lenders, with a vast system of off shore companies, it’s a kid’s play to get the assets well beyond the reach of any WUB – just as Anglo is experiencing in Cyprus, which interestingly has traditional ties to wealthy Russians.

There are many examples of companies amassing enormous debt, then going bankrupt with return to creditors is 1-5%. This is happening with many Icelandic companies. Where did the assets go? It takes a lot of work to trawl through transactions to find the invoices to companies, which have been paid high sums of money for consultancy though there is no employee to carry out the consultancy. Or to find sales contract for worthless assets.

And it doesn’t only take a lot of work: it also takes expertise to recognise the signs. An accidental hiker who sees a trail in the snow, can’t necessarily distinguish between the trail of a rabbit and a hare. The experienced hunter can.

Once money has been channelled out of sight and reach of WUBs and authorities such as tax authorities it isn’t trivial to get the money back into the country of origin, let’s say Ireland or Iceland. One way is through back-to-back loans. A man called Midas has borrowed – or rather been lent money – beyond all rhyme and reason. He has used a part of these loans to buy assets, pay dividend and with time these assets ended up in Panama.

In the end, Midas has to declare himself bankrupt but luckily for Midas his creditors don’t know about the assets in Panama. Midas doesn’t want to pay more of his debt than strictly necessary and he has lawyers working for him to keep the creditors away. How can Midas pay his lawyers when he has no money?

Midas is lucky. His friend Croesus has a company in Cyprus. Midas sends £1m to Croesus’ company. In London, Croesus “lends” £1m to Midas who can then pay his legal team there. To his creditors Midas points at how lucky he is to have such a good friend as Croesus, willing to lend him money. There isn’t much the creditors can do against this sign of pure friendship.

Midas is of the new breed of rich men. Unlike Mark Twain, Midas doesn’t see it as a matter of honour to repay his debt. On the contrary, he sees it as a matter of pride that he was clever enough to channel money off shore before things turned nasty. And clever enough to have such understanding lenders. The question is if the creditors to the financial institutions run by these understanding lenders are equally understanding of the fact that managers have not only lent beyond rhyme and reason but also lent in such a way that the creditors get much less than if the managers had been really tough on collaterals. Isn’t that called a breach of fiduciary duty?

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Written by Sigrún Davídsdóttir

January 26th, 2012 at 12:25 am

Posted in Iceland

More on Landsbanki’s last hours

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The Landsbanki Winding-Up Board writ against managers and board members of Landsbanki contains further insight into ownership and the bank’s status just before its demise. Here are some excerpts from the writ:

* The assets of father and son, Bjorgolfur Gudmundsson and his son Bjorgolfur Thor, were convoluted and not clearly separated. They had, according to the writ, joint ownership of Grettir, Eimskip and Icelandic Group. As a consequence of Landsbanki’s collapse both father and son became insolvent. Gudmundsson later went bankrupt but his son managed to renegotiate with his creditors.

* This connected ownership led the Icelandic FME to look at the bank’s risk assessment in April 2005. Things moved slowly, FME was even softer than the FSA in the UK, but in February 2008 FME concluded that Bjorgolfsson’s exposure to the bank was not 16.1% as the bank itself claimed but 42.1%, far above the legal limit of 20%. – Interestingly, the bank’s own rules were clear but they were not followed when it came to risk assessment of the bank’s major shareholders.

* According to the WUB, by September 30 2008, father and son did not only control the 41.85% they owned in the bank but had in reality control over 73.38% through shares owned by Landsbanki and Straumur, the investment bank where father and son were also the largest shareholders and where Bjorgolfsson was the chairman.

* The writ claims that Landsbanki was insolvent by October 3 2008, “if not earlier” (an interesting point and whole saga in itself) thus making it illegal for the managers to dispose of money to three entities on October 6.

* The WUB is suing CEOs Halldor Kristjansson and Sigurjon Arnason, Jon Thorsteinn Oddleifsson head of treasury and board members Andri Sveinsson, Kjartan Gunnarsson, Svafa Gronfeldt and Thorgeir Baldursson, in addition to 25 insurers.

* These seven are claimed to have caused damages of total ISK35bn (€219m) to the bank by allowing or not hindering three payments on October 6 when the WUB claims the bank was already insolvent. In addition, ISK11bn is sought from the insurers.

* And who were these three entities that the Landsbanki managers were so hell-bent on paying out large sums of money when it seemed clear that the bank was destined only for a moratorium? These three were the above-mentioned Straumur, a Landsbanki’s money-market fund Landsvaki and MP Bank.

* Half an hour before the Prime Minister Geir Haarde addressed the nation in the afternoon of Oct 6 2008, Straumur asked to draw on a loan line of ISK7.2bn (€44.7m). This loan line had been negotiated in January 2007, as part of a deal where Straumur took on to finance Landsbanki’s off shore companies that apparently were set up for employees’ option though never used. – These offshore companies are an interesting story: controlled by the bank, increasing the two major shareholders’ control. –  According to the loan agreement Straumur could only draw on the loan line on the same day if a request was made before 13:30. Even though the request came much later in the day, Landsbanki paid out the money. The payment was made after the time of the day banks were allowed to make large payments.

* Landsbanki bought bonds, hugely above market price in the preceding days and weeks – on a day where there was literally no market. For some reason, the managers felt a pressing need for these purchases, in total ISK20bn.

* MP Bank demanded to draw on a loan, related to previously negotiated loans, just over ISK7bn (€44m). Landsbanki legal adviser denied the request but an hour later had a change of mind and the loan was paid out at the same time as the Straumur loan.

* Everyone who runs a company knows that an insolvent company is prohibited by law to pay out money. For some reason, the Landsbanki managers thought it vital to pay out money to Straumur, Landsvaki (even more irregular since it was paying way above market price) and MP Bank. There are no doubt still untold stories from Landsbanki’s last hour.

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Written by Sigrún Davídsdóttir

January 20th, 2012 at 9:26 am

Posted in Iceland

Tina C trying to understand the global crisis, via Iceland

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Tina C is quite a character, created by the English comedian Christopher Green. But Green and Tina are ambitious, they want to understand the financial crisis so Tina, the American country and western singer, set out to talk to people, for a programme on BBC radio 4. She had heard about the crisis in Iceland and asked me to join her in a hot tub to explain it all to her. And that’s what I did, in a few words.

Here is the programme’s website – and here is the programme on Iceland (for the next 7 days). The programmes are short, Tina has a limited capacity for the depression, especially a global one and it’s all short and relatively simple, with some Tina music.

 

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Written by Sigrún Davídsdóttir

January 19th, 2012 at 1:14 am

Posted in Iceland

Landsbanki Winding-Up Board sues managers, non-execs and insurers for ISK45bn

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The Landsbanki Winding-Up Board is suing the top management of the bankrupt bank, board-members and insurers for damages caused by not stopping the bank’s operations on October 3 2008 when, according the the WUP, the bank was de facto bankrupt. In total, the WUB claims the damages amount to ISK45bn (€282m).

Those who are sued are CEOs Sigurjon Arnason and Halldor K Larusson, board-members Andri Sveinsson, Kjartan Gunnarsson, Svafa Gronfeldt and Thorgeir Baldursson, in total for £89m, in ISK, euros and dollars. In addition, 25 companies that insured the bank’s management are being sued by the WUP to pay together with these indivivuals, in total £91m. In addition, Jon Thorsteinn Oddleifsson, who was head of treasury, is sued for ISK11bn (€69m). Bjorgolfur Gudmundsson, the bank’s chairman, who, together with his son Bjorgolfur Thor, was the bank’s biggest shareholder, is not being sued. He is bankrupt and consequently unable to pay any damages.

The claims are based on money going out of the bank on its last day of operation October 6 2008, in total ISK35bn (now €219m). This money went onto the accounts of MP Bank, Straumur and Landsvaki, one of Landsbanki’s own money market funds. The dates are important because this means that according to the WUB the bank was already bankrupt when the British authorities closed down the bank.

The claims have beein presented to those who are being sued but have not yet been made public. It’s likely that the claims contain quite a bit of interesting information on the bank’s ownership. Father and son owned 41.5% in Landsbanki at the time it collapsed but the feeling is that they did in effect control a much larger part of the bank.

According to the SIC Report at least 12.5% of the bank’s shares were held in Landsbanki’s own offshore companies, controlled by the bank. The companies was apparently to hold employee option but were never used for that purpose. Other entities owned by the bank might have owned shares in the bank, in addition to shares owned by Straumur Investment bank, where father and son were the major shareholders and the son chairman of the board.

A group of small investors in Landsbanki, who are preparing to file a private suit against Bjorgolfur Thor, might find some interesting ammunition in the WUB claims.

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Written by Sigrún Davídsdóttir

January 17th, 2012 at 11:17 pm

Posted in Iceland

Tim Ward QC in the Icesave case at the EFTA Court

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Tim Ward QC in London has been selected to act on behalf of Iceland in the pending Icesave case at the EFTA Court. He will work with an Icelandic team, under the auspice of the Ministry of Foreign Affairs.

Ward has a tough case ahead of him, also in explaining to his Icelandic colleagues, and later to the nation, the course and nature of this case. Objectively seen, ESA has a strong case and Iceland’s possibilities of winning the case seem limited. Remains to be seen.

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Written by Sigrún Davídsdóttir

January 11th, 2012 at 10:06 am

Posted in Iceland

The new Icelandic Cabinet (updated with the parties)

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As the reshuffle and the new Cabinet is introduced on the webpage of the Ministry of Foreign Affairs:

A new Cabinet was unveiled in Iceland on 31 December. During the reshuffle former finance minister Mr Steingrímur J. Sigfússon was named Minister of Fisheries and Agriculture as well as Minister of Economic Affairs. Mrs Oddný G. Harðardóttir was promoted into Cabinet as  Minister of Finance. Mr Jón Bjarnason, Minister of Fisheries and Agriculture, and Mr Árni Páll Árnason, Minister of Economic Affairs, stepped down from the Cabinet. Other ministers retained their posts.

New Cabinet of Iceland:

  • Jóhanna Sigurðardóttir, Prime Minister (PA)
  • Steingrímur J. Sigfússon, Minister of Fisheries and Agriculture and Minister of Economic Affairs (LG)
  • Össur Skarphéðinsson, Minister for Foreign Affairs (PA)
  • Katrín Jakobsdóttir, Minister of Education, Science and Culture (LG)
  • Katrín Júlíusdóttir, Minister of Industry Energy and Tourism (PA)
  • Svandís Svavarsdóttir, Minister for the Environment (LG)
  • Ögmundur Jónasson, Minister of the Interior (LG)
  • Guðbjartur Hannesson, Minister of Welfare (PA)
  • Oddný G. Harðardóttir, Minister of Finance (LG)

With the new cabinet in place, Prime Minister Jóhanna Sigurðardóttir said: „The new cabinet marks the positive turning point that women now outnumber men in the government for the first time and a woman has also been appointed finance minister for the first time in Iceland. It gives me particular pleasure to end the year 2011 by achieving this important milestone for gender equality in Iceland.”

(PA: the People’s Alliance; a socialdemocratic party) (LG: Left Green)

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Written by Sigrún Davídsdóttir

January 11th, 2012 at 9:59 am

Posted in Iceland

An Icelandic outlook anno 2012

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In Iceland, the economic outlook isn’t too bad: a rising economic growth with unemployment falling. An enviable outlook, compared to many European countries. Yet, Icelanders are still in a bleak crisis mood – many are still struggling with the loans tied to foreign currencies that shot up after the collapse of the krona during and after 2008. The loans have in particular hit those who bought their first property in 2005-2008, in effect the 30-40 year old while other Icelanders are now again spending the Icelandic way: sales of most goods and services, from clothes to travels abroad rose in 2011.

All in all 2012 in Iceland might be even better than 2011 but that depends on the rest of the world. If the crisis and political frost in the eurozone continues, the effect will be felt in Iceland and the outlook might change.

The Government, a coalition of the Left Green led by the People’s Alliance, social democrats, ended the year with a reshuffle. The now ex-minister of fisheries and agriculture Jon Bjarnason (LG) ran a vocal EU opposition to the Icelandic EU membership talks and tensed the atmosphere in the Government. His stance is shared by his party but less vocally expressed by his fellow party-members in Government.

After criticising Bjarnason in harsh words earlier this winter, it was clear that minister of finance Steingrimur J Sigfusson and prime minister Johanna Sigurdardottir were ready to let Bjarnason go. Their strong words but no action made them seem impotent and weak. Sigfusson’s dilemma was that Bjarnason’s anti-EU position, in accordance with the party’s manifesto, made Sigfusson look too pro-EU and thus too close to the social democrats who are in favour.

Finally, between Christmas and New Year, the two party leaders had gathered political force and the time for action was ripe. Earlier election promises to cut down the number of ministries were executed. Apart from Bjarnason, Arni Pall Arnason minister of economy and trade was let go – or sacrificed, depending on the point of view.

Sigfusson was finally able to come to grips with his own party and make the shuffle without a mutiny from Bjarnason’s allies. In her party, Sigurdardottir had problems to the last moment: at the meeting in the parliamentary group where the PM set out her plan she was met with harsh resistance. It wasn’t until Arnason said he backed her, though losing his post as a consequence, that the others accepted the new plan.

In the media Bjarnson didn’t try to hide his anger and made it quite clear that his departure would be celebrated in Brussel. Whether he is seen as such a heavyweight there is uncertain but the ministerial staff might be quite pleased to see him leave. It’s difficult to imagine that Bjarnason will ever return as a minister.

Arnason was more diplomatic though he wasn’t at all happy to leave. He might have only a short break. Sigurdardottir will turn 70 in October and at some point she exits the political scene. Arnason could be a strong contender as a new leader. The Government is weak, with a majority of vote, after defections from LG during the last year and might last only because the other parties aren’t too keen on election before time. Some new parties are in sight, many voters are fed up with the four old parties but it’s still unclear what parties will rise out of the discontent and uncertainty of the voters.

The next election is due in spring 2013 and the political parties will be in election mode from next autumn. This might tempt the Government to unplanned spending, now that the IMF programme in Iceland has come to an end.

By next election it is almost certain that the social democrats will have a new leader. Bjarni Benediktsson leader of the Independence Party might face an uncertain future. He is seen by many to be tainted by investigations into the affairs of Milestone, a major shareholder in Glitnir before selling to Baugur and FL Group in 2007. Benediktsson and his relatives were in business with Milestone owner Karl Wernersson and Milestone is being investigated by Office of the Special Prosecutor.

Interestingly, Ireland voted out it political leadership after the Irish banking crash. This has only partially happened in Iceland. In 2008, the social democrats were in Government led by the conservatives. Some members of Althing, compromised by business connections took time off after the crash but have since returned. Most strikingly, the social democrat Bjorgvin Sigurdsson, minister of trade and banking in 2008, is still in Althing. His excuse at the time was that his fellow ministers had kept him in the dark. His party and his voters seem to have accepted this excuse, not questioning, like the SIC report does, whether he was really doing his job or competent enough.

The reshuffle has changed the governmental power structure. Sigfusson has created a new super-ministry, the most powerful ever seen in Iceland. It comprises fisheries, agriculture, trade, banking, economy but not his old ministry, the ministry of finance. He leaves the ministry of finance to a social democrat, Oddny G Hardardottir, who becomes the first female minister of finance. This move indicates that the stabilising of the economy is done. Sigfusson’s new goal is to strengthen the growth of economy. Hardardottir appears to be only an interim solution – Katrin Juliusdottir, the previous minister of industry, is thought to be destined for the ministry of finance after her maternity leave.

In his New Year address to the nation, president Olafur Ragnar Grimsson indicated he would not run for re-election in August this year, a topic of intense speculation. However, he didn’t say it very clearly. The question is whether he, the master plotter, is holding the door open for those who wish to beg him to stay. He has been in power for 16 years, a long time, but can sit at long as he is elected and wants to sit at Bessastadir.

There is nothing strange about him wanting to step down but the rumour is that he doesn’t want to be president if Iceland loses the Icesave case at the EFTA Court, a case that wouldn’t be there if he hadn’t sent the last agreement to a referendum. He has said it’s not for experts and foreigners to decide on Icesave. He might want to be out of office to lead against following the court decision. So far, no one has declared him/herself a presidential candidate.

At Christmas, many Icelanders living abroad return to the homeland. Since many of those who were earlier prominent bankers or businessmen now live abroad, Reykjavik was full of rumours of who was spotted where. A friend spotted a powerful ex-banker shopping with his coat collar turned up. A famous lawyer celebrated his birthday just before Christmas where many of the once so powerful business elite turned up, as did the president. One of the tabloids wrote of Hannes Smarason, of FL Group fame, and Magnus Armann, a Baugur business partner who still owns a property company in Berlin, working out together at the World Class fitness centre. Some things just don’t seem to change in Iceland – Christmas is celebrated as always.

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Written by Sigrún Davídsdóttir

January 9th, 2012 at 10:12 am

Posted in Iceland