Sigrún Davíðsdóttir's Icelog

State prosecutor Sigridur Fridjonsdottir has now summed up her reasoning in the case against ex-PM Geir Haarde. She points out that Haarde is not on trial for not preventing the collapse but for not taking action. She has listed a whole raft of warnings, meetings and other interaction that Haarde did not act upon. She also points out that there were plenty of warnings, ia from the CBI and Haarde as an economist and minister should have been able both to understand the warnings and take action. Maximum sentence is two years imprisonment. The prosecutor stated that the seriousness of the offence could constitute extenuating circumstances.  In contrast, a clean criminal record and the time, which has elapsed since the offence was committed, might be alleviating circumstances.  The sentence can be up to two years’ imprisonment.

Haarde’s defense lawyer will be speaking tomorrow.

One of the witnesses, Tryggvi Palsson former head of financial stability at the CBI, pointed out in his testimony that CBI’s reports from 2003 indicated that financial stability never improved. In May 2008 it said: “Present circumstances will test the banks’ resistance.” – Testing indeed. This is central bank speak for an unmitigated and colossal catastrophe.

Both Palsson and other CBI staff pointed out that there were signs of grave problems in the banks already in 2005. – It’s still a mystery why rating agencies and others who sounded warnings in 2006 seemed to retract these warnings. Many of the witnesses spoke of the mini crisis in 2006, which almost led to the collapse of the banks. They did recover in the sense that they saved themselves but they were in a bad shape. Instead of selling assets and strengthen the operations bad loans and loans to buy their own shares escalated. Bad assets replaced good ones.

The central question is if the Government had the tools to do anything. There was abundant evidence at the trial that yes, the Government could have taken action but didn’t. And interesting example of how indirect action could be used is the Government’s opposition to Kaupthing’s acquisition of NIBC. When the Kaupthing management sensed the political opposition it backed off. – If the acquisition had gone through with it, it would most surely have spelled an earlier demise of Kaupthing but that’s another story.

Former Minister of Finance Arni Mathiesen indicated the lack of implementing policy when he said it was the Government’s policy to reduce the size of the banking sector. It’s difficult to find any indication of implementation. The bankers have said that they didn’t sense that there was any ongoing action in this direction. It was at most mentioned or loosely indicated. Nothing more. In general, the banks led the way, the Government followed.

The ongoing question through the trial is: what could have been done? David Oddsson former Governor of the CBI said that something could always be done. If the meaning behind this question is: could the banks be saved? No, not from 2005 or so. The state and the banks were like a mouse and an elephant. The mouse can’t lift the elephant. In addition to size, the banks were in reality Siamese triplets – if one failed, they would all fail.

Moving the banks abroad was vaguely discussed. Kaupthing had a plan to move. The question is how realistic this was. It would have taken 1-2 years, by 2008 it was too late as a solution for an imminent problem. Was there any country that would have wanted the banks to register there? And what would the due diligence, taken by any FSA have shown? The fact that the Winding-Up Boards of Landsbanki and Glitnir have now sued the auditors, incidentally PwC for both banks, for the audits of 2007 and 2008 makes this plan of moving dubious if not wholly unrealistic.

At the end of 2007 the banks were way beyond what the state could shoulder and save. At that point, with a catastrophe in sight – for anyone who was in the position to see it – the Government should have prepared for the banks’ end. There were some tentative actions such as a draft by mid 2008 for an Emergency Bill, passed on October 6 2008. Another tentative action was the consultative group, which never functioned properly.

Tryggvi Palsson said that the testimonies of the bankers at the Haarde trial showed they were still in denial of what happened. Kaupthing’s former chairman of the board Sigurdur Einarsson said that one reason for the bank’s fate was CBI’s high interest policy. – That’s one way of seeing it but banks were truly good at exploiting it, ia by selling forex loans and by selling the Glacier bonds – and all of this strengthened the krona, which influenced the CBI rates. The question is: where the banks perpetrators or victims? The understanding from the many witnesses is that the banks really ruled, not the Government.

The trial finishes tomorrow. The court’s ruling is expected in 4-6 weeks.

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