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Benediktsson’s saga, the 2008 crash and how some were luckier than others

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Nine years after the October 2008 financial crash Iceland is doing well, some justice was done as bankers and businessmen have been sentenced for criminal deeds up to the crash that has been better clarified than anywhere else. Yet, the collapse still looms large in Icelandic politics. Prime minister Bjarni Benediktsson leader of the Independence party is now being asked questions regarding certain transactions before the banking collapse 6 October 2008. An impertinent question is why the banks did indeed open on that day – it did allow some well-connected people to diminish the hit as the banks collapsed.

The family of PM Bjarni Benediktsson can lay claim to being the only political dynasty in Iceland. Often referred to as “Engeyingarnir” – the “Eng-islanders,” Engey being the island on the gulf by Reykjavík – the family has been wealthy and powerful for most part of the past century and still is. The family rose on the basis of fishing industry in the early 20th century but later extended into transport, insurance and banking. The minister of finance and leader of the coalition party Revival Benedikt Jóhannesson is closely related to the PM.

As some other big shareholders in the banks and other companies “Engeyingarnir” were heavily involved in conspicuous transactions in the months and hours up to 4pm 6 October 2008 when the Emergency Act was passed. That Act and that day mark the realisation of the collapse (the three banks had all failed by 9 October). One chapter relating to Benediktsson has now been added to that saga, as told in the Guardian and the Icelandic newspaper Stundin – it was known earlier that Benediktsson sold a position in Glitnir investment funds but the latest reports provide the figures: in total, ISK80m or c €643.000.

Most aspects of the collapse were painstakingly recounted in the 2010 report of the Special Investigation Commission, SIC, the most thorough report any nation has written on the 2007 and 2008 financial crisis. But Benediktsson’s story is a reminder of one catastrophic mistake of the government at the time: to open the banks on Monday 6 October 2008, thus giving privileged clients like Benediktsson the opportunity to make transactions, which minimised their losses following the collapse that no one except a small group around the prime minister knew of.

Last minute transactions under dark clouds

The core of the Guardian story is that up to the October 2008 crash Benediktsson sold assets in two investment funds, managed by Glitnir, the smallest of the three large Icelandic banks.

Late September 2008 it was clear that Glitnir could not meet its obligations in the following October. At the time, Glitnir was controlled by its largest shareholder Jón Ásgeir Jóhannesson and his partners. Jóhannesson is a famous name in the British business community as he owned at the time large retail companies on the UK high street.

The bank’s leadership had no option but to agree to a government takeover of 75% of the bank, thus saving the bank but almost wiping out the shareholders. Only days later it was clear that the bank was in such a state that the 75% takeover was not viable.

Just before midnight of 29 September Bjarni Benediktsson attended an emergency meeting with MP Illugi Gunnarsson, a friend of Benediktsson and also on the board of Fund 9, one of the two investment funds of this story. Together with chairman of Glitnir Þorsteinn Már Baldvinsson they met with Glitnir’s CEO Lárus Welding and Glitnir’s legal council. Why exactly the two MPs were at this meeting is not clear: their connections to Glitnir seems a better explanation rather than the fact they were both MPs.

Why was Fund 9 so toxic?

During these tumultuous days Benediktsson set in motion some private transactions. On 24 September he sold off ISK30m, €241.000 in a Glitnir fund called Fund 1, and bought Norwegian krone, which turned out to be a wise transaction given how much the ISK fell in the coming days and weeks. Incidentally, this happened on the same day that the chairman of Glitnir, Þorsteinn Már Baldvinsson met with governor of the Central Bank Davíð Oddsson to inform him that the bank could not meet its obligations in October.

On 2 October Benediktsson again sold ISK30m, this time in Fund 9 and then again ISK21m on 6 October. In an email the week before Benediktsson had specifically instructed for this latter transaction to be carried out on 6 October.

Late on 5 October PM Geir Haarde said to the Icelandic media that no further actions were needed regarding the Icelandic banks. At 11.29am 6 October the Icelandic financial surveillance authority, FME, effectively closed the Icelandic financial institutions. Benediktsson was one of several well-positioned people who made transactions on that morning.

Fund 9 was a particularly toxic fund because it was full of bonds connected to Jóhannesson’s companies and Glitnir, which, given that these companies relied so heavily on Glitnir funding, would clearly be heavily hit if Glitnir failed. That was indeed the case: these companies suffered heavy losses.

When Fund 9 opened again at the end of October 2008 its assets had been written down: the fund was now only 85.12% of what it had been on 6 October. However, if PM Haarde and the minister of finance had not bolstered Fund 9 with ISK11bn, now €88.5m, of public funds after the fund was closed the situation of the Fund 9 investors had been much worse. It has never been clarified why public funds were used to help Fund 9 investors and not investors in many other funds.

As Benediktsson had sold his Fund 9 assets worth ISK51m he was unaffected by the Fund 9 losses. In addition, there were the Icelandic króna Benediktsson converted into Norwegian krone. – In a media interview last year Benediktsson said he had owned “something” in Fund 9, nothing substantial and could not really remember the figures.

Benediktsson sold Glitnir shares in bleak February 2008

These were however not the only transactions Benediktsson made in 2008. In early February 2008 the future of the banks looked worryingly bleak though publicly bankers and politicians denied it. In addition to evaporating funding on international markets foreign banks were making margin calls on all the major Icelandic businessmen who also happened to own large parts of the banks.

The banks were now in a turbo-drive to help this selected group of businessmen to pay off their foreign loans, thus increasing lending to the selected few when lending was generally withdrawn. One of these businessmen was Karl Wernersson who in 2006 had bought large part of the Engeyingar’s shareholding in Glitnir.

The foreign margin calls led to some financial acrobatics for Wernersson, which also involved the Engeyingar because of the 2006 sale. This case, called the Vafningur (Bundle) case centres on loans from Glitnir and Sjóvá, an insurance company controlled by the Engeyingar.

Benediktsson signed some of the documents on behalf of Vafningur. The Sjóvá lending involved alleged fraudulent use of Sjóvá’s insurance funds. In the end, the case was not prosecuted and Benediktsson has always claimed that in spite of his signature he really did not know what the whole case was about.

One key event in February 2008 was a meeting of the three governors of the Central Bank with PM Geir Haarde, Árni Matthiesen minister of finance and leader of the social democrats Sólrún Gísladóttir minister of foreign affairs. The governors were profoundly pessimistic and news of this meeting flew around among politicians and others though it did not reach the media.

It’s not known if Benediktsson knew of the meeting and the unhappy tidings there. However, on 19 February Benediktsson and his friend Illugi Gunnarsson met with Lárus Welding CEO of Glitnir and the bank’s legal council, a meeting Benediktsson did ask for. Two days later Benediktsson set in motion to sell ISK119m, now €960.000, of his Glitnir shares, keeping only ISK3m. The transaction was carried out between 21 to 23 February 2008. On the 26 February Benediktsson and Gunnarsson wrote a much noted article in Iceland, outlining the dire straits of the Icelandic banks with no mention that Benediktsson had already sold the lion share of his shares in Glitnir.

Of the ISK119m worth of shares he sold he placed ISK90m in Fund 9. In March his assets in Fund 9 amounted to ISK165m, €1.3m. – In 2011, the daily DV told the story of the share sale, incidentally written by Ingi Freyr Vilhjálmsson who is also behind the latest and revealing reports in Stundin. At the time, Benediktsson refused to comment.

The power and influence of a prominent family

What was Bjarni Benediktsson doing in 2008? He was an MP, investor, close friend with some of the Glitnir staff, a member of a family who had been one of Glitnir’s largest shareholder and wielded considerable power in Icelandic politics and businesses. And Benediktsson had been a guest on some of Glitnir’s more ostentatious trips in the years before, such as football in London and salmon fishing in Siberia.

Benediktsson, born in 1970, became a member of Alþingi in 2003 but held at the same time positions in family companies. Not until after the 2008 collapse did he leave the family businesses where he had been on the boards of several companies.

Stundin has now exposed a far more detailed account of Benediktsson’s business dealings than was previously known, such as a failed property adventure in Dubai, related to his offshore company found in the Panama Papes and a much more successful venture in Miami, where Benediktsson was in charge of payments to constructors, literally all through the October 2008 collapse.

Due to the family assets and connections he had a far deeper relationship with Glitnir than just being an MP who happened to bank with Glitnir. His father Benedikt Sveinsson and his uncle Einar Sveinsson had been one of the largest shareholders of Glitnir 2003 to 2006. His uncle Einar was indeed the bank’s chairman at the time. Both his father and uncle sold both shares in Glitnir in 2008 and their positions in Fund 9 just before the banking collapse.

During these fateful autumn days Benedikt sold for ISK500m in Fund 9 and had the proceeds wired to Florida where the family has property. Einar sold for over ISK1bn. If the two brothers had waited Benedikt would have lost ISK24m due to falling value of Fund 9, his brother ISK183m.

An email from uncle Einar to a Glitnir employee on 1 October 2008 throws light on the kind of relationship the family had with Glitnir. The bank had made a margin call. “I don’t need to waste words,” wrote Einar, “that I don’t like this kind of message from the bank” expecting the employee to follow earlier decisions made.

The Teflon man of Icelandic politics

Benediktsson has been leader of the Independence party since 2009 but the rumours related to his family businesses have never left him. Apart from his sales of Glitnir shares and assets in Glitnir and the highly contentious Vafningur transactions, Benediktsson and his family have been associated to more recent cases.

In 2014 Benediktsson was minister of finance when Landsbanki, a state-owned bank, sold off a credit card company, Borgun. Borgun was sold without any bidding process, in fact it was sold without anyone knowing anything about the sale. Until it transpired Borgun had been sold to a consortium led by Benediktsson’s uncle Einar Sveinsson. This, in spite of the public policy of selling state assets in a transparent process to a highest bidder.

It later turned out that Borgun had been heavily undervalued. Less than a year after the sale, Borgun’s equity amounted to almost twice the sale’s price. Eventually, the Landsbanki CEO and board were forced to resign due to the Borgun sale. Benediktsson has always claimed he had been wholly oblivious of the whole thing, both that Borgun would be sold in a closed sale to a company of his uncle and the undervaluation.

Last year, the Panama Papers exposed that Benediktsson had owned part in a Seychelles company, set up by Mossack Fonseca. Only a year earlier, Benediktsson had staunchly denied he had owned a company in a tax haven. Asked about the Seychelles company he said he had not known it was offshore since it was set up through Luxembourg. Again, Benediktsson was blissfully ignorant and his party supported him.

The latest case, that also landed Benediktsson in international headlines, related to a bizarre relationship between his father and a sentenced paedophile. Iceland does not have a sex-offenders registry and people who have abused children can, as others who have been sentenced, recover their civil rights via a clemency process.

Called “honour revival” it requires a statement to confirm the soundness of character of the person in question. Benediktsson’s octogenarian father had given a statement to the sentenced paedophile who the father knew through old friends. What gave rise to questions was not that Benediktsson should be held responsible for his father’s action but that the minister of justice might have dealt with the case differently because of the family connections.

6 October 2008: the right and wrong decisions

As to the latest story of his Glitnir dealings Bjarni Benediktsson staunchly refuses he had any inside information. He just acted on what everyone could see: the banks were in serious trouble. His party still supports him.

It is worth keeping in mind that a large part of the Icelandic population owned shares in the banks. Many people saving up for their pension had, apart from obligatory savings via pension funds, privately saved by buying shares in the banks. Grandparents and parents had given children shares to save for their adult years. There were almost 40.000 shareholders in Kaupthing, the largest bank.

Benediktsson now says everyone knew the situation was precarious and he had only been trying to protect his assets. It is however not correct that everyone knew. The small shareholders quietly hoped the bankers were in control and that both bankers and politicians were right when they said publicly that everything would be fine.

The fact that the banks were kept open on the morning of 6 October 2008 was the wrong decision. It allowed the well-connected to take precautions but was of no help for the small shareholders who had no idea what was going on.

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Written by Sigrún Davídsdóttir

October 9th, 2017 at 11:22 pm

Posted in Uncategorised

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