Sigrún Davíðsdóttir's Icelog

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

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

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  1. Thanks again Sigrun for that extremely clear, but highly depressing, account of morality gone out of the window. What chance ordinary mortals?

    Obviously, as your rhetorical question suggests, the creditors are very far from being “equally understanding …”. But from what you say, breach of fiduciary duty or not, there’s precious little they can do about it. Do you see ANY glimmer of light at the end of the tunnel?


    26 Jan 12 at 10:09 am

  2. Indeed very clear and informative, thank you.


    26 Jan 12 at 1:31 pm

  3. Light is the best disinfectant

    Keep it up! People will google this in 20 years time and the travesties will be documented.

    If not convicted in court, then at least they will be convicted by public opinion.


    27 Jan 12 at 9:08 am

  4. Thank you for giving very nice example from Mark Twain’s life and principles. It really looks like New Rich like they call themselves are mostly lacking any principles except those gedonistic ones. But what can one expect from a culture of spending? They are only the byproducts of such a culture. Times of “labour ethics” which was popular during the lifetime of Mr Twain are long gone, and I am afraid this is irrecoverable.


    27 Jan 12 at 4:55 pm

  5. You’re story about Mark Twain is untrue, Ms. David’s Daughter. The truth is, in 1894 Mark Twain put his property in his wife’s name to keep it from his creditors and then filed bankruptcy. He then gave control of his writing royalties income to H.H. Rogers, a friend who was a Standard Oil Trust Robber Baron. Look all up on wikipedia. Find who Rogers and the Standard Oil Trust were and what Robber Barons were.

    Mark Twain went to Europe to write and lecture and live cheap and lay low, dodging his American creditors while Rogers managed his royalty income, investing Twain’s money as he invested his own, using Standard Oil Trust and robber baron methods to build his own fortune larger and rebuild Mark Twain’s.

    Mark Twain’s two main creditors were his wife and son-in-law. He’d spent his wife’s inheritance on his typesetting machine venture, and was a partner with his son-in-law in a printing and publishing venture, which went bust on a publication failure because Twain had committed the business to his typesetting machine venture, so all its reserve capital was tied up in worthless machinery that it couldn’t afford to replace when that failed. Other creditors were friends Twain had talked into investing in his venture.

    So, you see, Mark Twain was like Sean Quinn. We have to wait ’til Sean has recovered his fortune, with friends’ help, then see who he repays before we throw stones, don’t we? And why shouldn’t he have help from friends? Do you think everyone who once had money should be in the streets with nothing, for being rruined and having debts? Isn’t that what bankruptcy is to prevent?

    You’re telling more stories when you say how everyone you don’t care for who’s lost money really hasn’t lost at all, but has squirreled away in secret offshore accounts in Cypress. That’s detective story stuff, you know. It’s not real. It’s fast to write and easy to read and has nothing of the details that would have to be tended to. It’s good for fiction stories, but it doesn’t work that way in the world.

    For how defrauding banks and defrauding through banks, and how it’s really done in the real world where they do it, meaning in the U.K. and the U.S.A. read these:

    How many in Iceland that you rail against were doing things like these?


    Llewellyn Ronde

    30 Jan 12 at 1:48 am

  6. Anecdotes do not establish a norm. One of the driving forces for European emigration to the US and other colonies was debt avoidance. It has also been a big reason for migration within the US. If people can’t pay their debts, they don’t, and that’s historic, morality tales notwithstanding. Further, it wasn’t consumers who removed the moral elements from contract performance and made it so the bottom line controls. It was large, corporate players, including banks, who are now hypocritically claiming that borrowers are “immoral” for walking away from loans.

    Players like Quinn and Johannesson are gaming the system, but believing that players have not always gamed the system is a romanticized and unrealistic view of the history of contracts.

    Knute Rife

    30 Jan 12 at 5:24 pm

  7. I’m sorry of the Mark Twain story isn’t entirely correct – but he did at least work his socks off to repay his debt.

    Bear Sterns imploded on sub-prime loans that fell in value and no one wanted to buy. The link to the UK Parliament refers to lack of regulation. Both valid points but beside the point in what I’m taking about. More regulation would have helped but wouldn’t have been enough.

    I can’t see there is any fiction involved in splitting assets and debt apart and channelling off the assets off shore. It’s happening all the time and that’s what I’m describing in this blog – anything but fiction: it’s tangible reality. Quinn is a good case in point – Anglo is searching for his assets in Cyprus. Icelandic tycoons, or ex-tycoons had offshore companies all over the place. In his book “Treasure Islands; Uncovering the Damage of Off Shore Banking and Tax Havens, Nicholas Shaxson gives an insight into this world; – My blog on JP Galmond gives a tiny insight into this world:

    Fiction? Could be the stuff that fiction is made of but I see very tangible reality. Many of the logs on Icelog are exactly on this subject – and there is no lack of material.

  8. Sigrun,
    As another example of possible (probable?) asset-siphoning to offshore (with an indirect Kaupthing connection), you might be interested in this blog about the latest Tchenguiz goings-on:


    31 Jan 12 at 8:41 am

  9. Thank you, anrigaut. The Vincent Tchenguiz universe comprises ca 600 companies. Not exactly a transparent universe. The latest sale is an after-shock from his loan with Kaupthing and the collateral he put up with the bank on behalf of Robert, his brother. A long saga in itself, mentioned before on Icelog, ia here – and here:

  10. >The link to the UK Parliament refers to lack of regulation
    No, the memo to Parliament is an explanation how to steal the assets from your own company. It says naught of regulation except how regulation may be dodged with having two auditors and telling each compliance is the other’s business so both assume the other’s done the legal when no one has. That part is beside the point, as you say, because by then the theft is done.

    The memo shows the theft done in three steps, 1. create a special vehicle company, an independent subsidiary, 2. securitise assets and transfer them as securities to the subsidiary, 3. draw a contract having the subsidiary hire the parent company to be a service provider, to look after the assets, to collect payments, keep books, see to insurance, collections and all, for a specified compensation, establishing an employer-employee relationship. The parent is then an empty shell with naught in the world but servicing contract obligations to the subsidiary.

    That’s as far as the memo takes us. It goes on then to how explain mortgagers may be beaten out of their properties, the parent company beating them out for being ordered to by its employer its subsidiary. We have to go on our own to where the parent is let founder when it’s no longer needed.

    The sale of assets and contract to service are legal. They would be approved by regulators and shareholders both, because both assumed the assets sold for money, with the money to be used to write more mortgages and build he company. Both learn better when the company goes bust and there is naught. For compensation they must look to the deposits insurer.

    Do you see the theft now? Neither assets nor perpetrators go anywhere, or have gone anywhere. Booty and buccaneers both remain in Britain. The booty stands in the independent vehicle, or has been sold to another vehicle for distance, and the executives who pulled the job hold their jobs in the parent company. They stand with the other shareholders then, with hand out to take depositor-shareholder compensation that they are entitled to, while in their other hand they hold the subsidiary that holds the stolen assets, or the money they sold those assets for. The memo tells how they sell if the assets are mortgages.

    >Bear Ste[a]rns imploded on sub-prime loans that fell in value and no one wanted >to buy
    Yes, Bear Stearns danced a bar too long on the mortgage bubble and so fell when it burst. That, though, is beside the point. The point is that before then, when it was selling derivative securities, Bear Stearns had AMBAC insure the securities it made, with the securities’ buyers the beneficiaries. Having the securities insured made them easier to sell and to sell for better prices.

    Ambac was the insurer, for several years, and its lawsuit is for breach of contract, abuses of trust, repeated failures to perform, lying, withholding and altering information, refusing to honor bad-mortgage buy-back contracts and perpetrating fraud, deliberately packaging known to be worthless securities and lying about them to get them insured then selling them quickly so the buyers and AMBAC would be holding them when they defaulted, all going back, and going on, through the several years of the mortgage bubble, before it burst. The lawsuit is a good read. Its filled with information and footnotes, but reads like a story.

    The two links expose ways of doing business that cheat and defraud, that take advantage of others and destroy people, businesses and economies. Next to the damage done by these ones who squirrel money away, whether in strongboxes buried in the garden, in French vaults or Swiss or Cyprean banks, are insects. Such off shore tax havens may be where traders like those of Bear Stearns may have slipped the few millions their greedy cheating got them to. Yes, those off shore accounts let them cheat the taxman, but what’s that to the fraudulent dealings they carried on that earned them their few millions?

    While there seem to be droves after the likes of Sean Quinn, scrambling to find any crusts or crumbs he may yet have, do you know any but the likes of AMBAC calling out the ones who’ve done the damage to us all? Not Parliament nor regulators nor any in the home countries or EU are doing a thing.


    Llewellyn Ronde

    2 Feb 12 at 1:56 am


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