Sigrún Davíðsdóttir's Icelog

Hvitsstadir, Kaupthing managers and a tale of cosy relationships

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Shortly after the collapse of the major part of Icelandic financial system in autumn 2008, widespread irregularities of lending started to surface. Loans to favoured clients were never paid but rolled on, collaterals were weak or insufficient. Financial institutions financed the buying of their own shares, essentially converting their loan book to own capital. And all of this happened through a web of cosy relationships.

An intriguing story that I have only recently unearthed regards an Icelandic company, Hvitsstadir, privately owned by five Kaupthing managers – Sigurdur Einarsson, Hreidar Mar Sigurdsson, Magnus Gudmundsson, Steingrimur Karason and Ingolfur Helgason – set up in 2003 to buy farmland next to a salmon river in Borgarfjordur, ca 150 km from Reykjavik. The entire Hvitsstadir enterprise was financed by loans from two small saving societies, Sparisjodur Myrasyslu and Spron, their business being heavily connected to and intertwined with Kaupthing.

In 2005, Hvitsstadir paid ISK300m for a farm, which earlier owners had bought just over a year earlier for ISK85m. The owners of this farm who pocketed ISK215m from the sale were Palmi Haraldsson and Johannes Kristinsson, who already then were major clients of Kaupthing, not least through their close connection with Baugur and its owner Jon Asgeir Johannesson. In the following years, Haraldsson was the steady companion of Johannesson and Kristinsson was Haraldsson’s companion.

The timing of this farm deal is interesting because at this time the Sterling transaction was in the making. Sterling was a Danish air company, bought and sold between related Icelandic parties, making billions of Icelandic krona for the Baugur sphere and its closest allies, such as Haraldsson and Kristinsson. At the time, the Sterling sales stunned observers both in Iceland and Denmark. It was very difficult to understand why this loss making air company went up in price every few months and absorbed ever more debt until 2008 when Sterling finally sank under its debt.

With the sale of the farm in Borgarfjordur, the duo Haraldsson and Kristinsson pocketed a tidy sum of money, just as the Sterling enterprise took off. Kaupthing was a party to the Sterling saga. The Hvitsstadir saga is interesting because this tiny company exposes the private connection between the Kaupthing managers, major clients of the bank and the two small saving societies. It shows how the duo got a very good deal and consequently money right into their bank account, just when the first chapters of the mysterious Sterling saga were being written.

As to Hvitsstadir, the company continued to buy assets, financed by the saving societies. The loans – bullet loans running for a few years – were never repaid but rolled over or new loans issued to pay off existing loans. Interestingly, the last loan issued to pay up an existing loan was in Decmember 2008, after the collapse of Kaupthing and at a time when both saving societies were experiencing severe problems. The two saving societies went into a technical default few months into 2009.

But in spite of favourable loans the five Kaupthing managers aren’t free of Hvitsstadir. There was a personal guarantee attached to the loans and the five men are now being sued for the repayment of at least one of the Hvitsstadir loans, now just over ISK1bn.

Personal guarantees were widely used in loans to favoured clients in Icelandic banks, apparently to make up insufficient collaterals. It may come as a surprise that personal guarantees were part of the loan obligations on loans that apparently seem to have been set up for not being repaid. The explanation seems to be that the personal guarantees were only for the records, to make the loans look better. Witness statements in several recent court cases indicate that those who took loans with a personal guarantee were told they would never be held accountable, ie the bank in question would never make use of the personal guarantee although they were written into the loan contracts.

The key element in this kind of lending was that it wasn’t for everyone – it was only for those who had the right kind of contacts. Apart from the intriguing contacts between bank managers and their clients, the Hvitsstadir saga exposes the general favours included in these deals: loans that weren’t repaid and personal guarantees that allegedly weren’t meant to be drawn on. These were the typical features of favours in the Icelandic banking system. There is no indication of any illegalities here but Hvitsstadir is an example of a cosy relationship between bank managers, major clients and small institutions closely connected to the bank.

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Written by Sigrún Davídsdóttir

November 12th, 2012 at 5:17 am

Posted in Iceland

3 Responses to 'Hvitsstadir, Kaupthing managers and a tale of cosy relationships'

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  1. Once again Sigrún you have dug out something that the regulators, prosecutors and other authorities have failed to publish. Regularly more offences of the major banks are brought to light, such as money-laundering, sharp tax practices, mis-selling and so on. Because the UK authorities have chosen not to publish a report on what the banks (large and small) did get up to and what the regulators and the Treasury missed (or concealed), the lessons cannot be learned. So we are condemned to suffer when the same mistakes are made again in the future.
    Taxpayers, depositors and management who did the right thing are all entitled to some vengeance and retribution. But we also need it so that the lessons are learned; and that those who think they can defraud taxpayers and depositors are aware that the consequences are serious.
    When Lord Sassoon told me in 2009 that the FSA had to be broken up as it was such a hopeless case from top to bottom, I thought he meant the structure had to be broken up so the people could be replaced. I didn’t think he meant the structure had to be broken up but the same useless people transferred across to the Bank of England!!

    Tony Shearer

    13 Nov 12 at 8:28 am

  2. Thanks again Sigrun for your persistent digging and to Tony for your comments, pertinent as ever.

    “Taxpayers, depositors and management who did the right thing are all entitled to some vengeance and retribution.” Indeed they are, but – as one of the victims of the Kaupthing collapse – I have lost any hope I ever had that we will get it. We long ago realised that no-one in high places cares a jot.

    If only, if only, some lessons could be learned so that others might be spared the anguish and despair experienced by the likes of the ordinary, law-abiding KSFIOM depositors whose stories still make heart-rending reading at But that too seems to be a forlorn hope. With too many vested interests at stake, any changes short of full-blown revolution (which might yet come!) will never be other than cosmetic.


    13 Nov 12 at 11:54 am

  3. This blog by Gordon Neave on Ian Fraser’s site pretty much sums up what he neatly calls the ‘mad banker disease’:


    14 Nov 12 at 9:40 am

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