Sigrún Davíðsdóttir's Icelog

As could be expected, there has been hefty debate in Iceland following the trial of ex-PM Geir Haarde. Haarde and many others from his party, the Independence Party, say the trial was a game of politics and have accused the High Court judges of having succumbed to political pressure. A former High Court judge says these allegations are preposterous. Four of the five High Court judges who were on the case ruled in favour of sentencing Haarde, with no punishment, for being in breach of the Constitution. One judge was against.

The trial is part of a process that was set in motion after the collapse of the Icelandic banks in October 2008 to clarify what had happened and how. The SIC report pointed at the role of politicians – but in the end, the Icelandic Althing voted on sending only Haarde on trial. Most people thought that former Minister of Finance Arni Matthiesen, former Minister of Banking Bjorgvin Sigurdsson and former Minister of Foreign Affairs and leader of the Social Democrats (in coalition with the Independence Party at the time) should also have been put on trial. Quite surprisingly, some MPs changed that course of events and in the end only Haarde was charged.

The ruling on Monday made news all over the world. This was also debated on al Jazeera’s Inside Story, where I was on the panel. One of the points I made was that although not saying that Iceland is a leading example in handling its crisis, there has at least been some efforts made to explain and clarify. Losing main banks – or saving them as others have done – is not a natural catastrophe like an earthquake or a volcanic eruption but happens slowly slowly due to human actions.

Follow me on Twitter for running updates.

Ex-PM Geir Haarde used harsh words to criticise the Court that found him guilty of one charge, but without a punishment. Claiming the verdict was “laughable, he compared Iceland to Ukraine and the trial of Julia Tymochenko now that he had been held victim to this process, which has taken two years.

There are various views in Iceland regarding the trial. But whatever the opinion, Althingi has at least attempted to place the political accountability for the crash. Ex-PM Gordon Brown can be grateful that the British Parliament isn’t doing anything as drastic to investigate who is to blame for the 5% of GDP that the UK bank collapse in October 2008 cost the UK. The same counts for the US and many European countries.

Follow me on Twitter for running updates.

Ex-PM Geir Haarde is acquitted by the Court convened by Althingi to judge his ministerial actions related to his actions during 2007 and 2008 – but the majority, 9 out of 15, rule that he broke law on ministerial duty to hold cabinet meetings on important issues. No punishment is given.

The charges were:

(1 A serious omission to fulfil the duties of a prime minister facing a serious danger)

(2 Omitting to take the initiative to do a comprehensive analysis of the risk faced by the state due to danger of a financial shock)*

3 Omitting to ensure that the work of a governmental consultative group on financial stability led to results

4 Omitting to guarantee that the size of the Icelandic banking system would be reduced

5 For not following up on moving the Landsbanki UK Icesave accounts into a subsidiary

Follow me on Twitter for running updates.

The ruling in the trial over former Prime Minister Geir Haarde is expected today at 2pm Icelandic time. This court can only be convened to judge ministers and can only be set in operation by the Icelandic Parliament, Althingi. The prosecutor in the case prosecutes on the behalf of Althingi. The judges are fifteen in total. Five of them are High Court judges and two with a judge competence – in this case, one is an academic in law and the other a County Court judge. The remaining eight are nominated by Althing.

This court is called “Landsdómur” in Icelandic and is, as so many things in the Icelandic constitution, based on a Danish example, “Rigsret,” last convened in 1995 in a case against Minister of Justice Erik Ninn-Hansen. In the Danish “Rigsret” there are 15 High Court judges and 15 MPs.

It’s the first time this court is convened Iceland.

Follow me on Twitter for running updates.

The verdict in the Althing trial against ex-Prime Minister Geir Haarde will be announced next Monday at 2pm, Icelandic time (GMT). The ruling will be transmitted live. Yes, I will be watching.

Follow me on Twitter for running updates.

After much criticism that the trial over ex-PM Geir Haarde wasn’t broadcasted, the Court, Landsdomur, has now put all the audio recordings of the witness statements online (obviously only in Icelandic). It was a great shame that the trial wasn’t broadcasted but, as they say in Icelandic, better late than never.

The verdict is expected later this month, nothing more exact than that. It’s not clear how far in advance the exact date will be given.

Follow me on Twitter for running updates.

There has widespread dismay in Iceland at the trial over ex-PM Geir Haarde – but not everyone is dismayed for the same reasons. Some are irritated that politicians and civil servants generally claimed nothing could have been done to prevent the collapse of the banks and that bankers can’t see they have done anything wrong. Others are upset that only one politician is on trial – there should have been more… or none.

When asked why Kaupthing had failed, the bank’s former CEO Hreidar Mar Sigurdsson said straightforwardly it had failed because of the Emergency Bill – the legislation passed on Monday Oct. 6 2008 to prevent a total chaos in Iceland as the banks were collapsing. Sigurdsson’s view is, to say the very least, quite narrow. On Friday Oct. 3 the Bank of England had already taken action against Kaupthing by taking over all new deposits to Kaupthing. Sigurdsson didn’t mention this action, which marked the beginning of actions against Kaupthing in the UK.

It needn’t come as any surprise that no one accepts any responsibility – that was already clear from the SIC report, ia based on extensive interviews with many of those involved. This tone of “it wasn’t me” or “nothing could be done” is abundantly clear from the quotes in the report.

It’s unlikely that any of the witnesses took much joy in bearing witness. Many of them will still feel uneasy about the past – and their future. Several of the witnesses at the Haarde trial have already been indicted by the Office of the Special Prosecutor – Sigurdsson is one of them – and/or are being sued by the Winding-up Boards of the banks and others might face lawsuits and charges. Everything they say will be coloured by their situation. Many of them have most likely rehearsed their answers with their lawyers.

Complaints that the trial is a farce seem to rest on a wholly unrealistic understanding of the nature of the trial. The trial is held because Haarde is accused of failures in office. The charges are built on a documentation of alleged failures. The trial is an act where the prosecutor seeks to clarify the documents and Haarde’s defence lawyer seeks to defend his client. The High Court Judges will come to their conclusion in 4-5 weeks.

Follow me on Twitter for running updates.

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.

Follow me on Twitter for running updates.

The previous list of witnesses due to appear tomorrow at the Haarde trial has been changed. Those who now have been called in are Tryggvi Palsson previous head of financial stability at the Central Bank of Iceland, Joh Thorsteinn Oddleifsson former head of treasure, Landsbanki, Steingrimur Sigfusson member of Parliament (and now Minister for Economic Development) and Arni Mathiesen former Minister of Finance. It is also expected that Geir Haarde will again be questioned tomorrow.

The link to the charges, in Icelandic, is here.

Follow me on Twitter for running updates.

Although it’s tempting to think of the trial of ex-PM Geir Haarde as a national katharsis and a truth commission that’s not the case at all. There is one person on trial and that’s Geir Haarde. The witnesses throw their own light on facts and events and it’s of great interest to hear the different versions of events. Even though much of it is already known from the SIC report it’s interesting to hear the different persons recount different things. As is in the nature of the whole exercise, prosecutor Sigridur Fridjonsdottir uses the questioning to fill in and clarify documents, which have been collected.

The charges against Haarde are the following:*

1 A serious omission to fulfil the duties of a prime minister facing a serious danger

2 Omitting to take the initiative to do a comprehensive analysis of the risk faced by the state due to danger of a financial shock

3 Omitting to ensure that the work of a governmental consultative group on financial stability led to results

4 Omitting to guarantee that the size of the Icelandic banking system would be reduced

5 For not following up on moving the Landsbanki UK Icesave accounts into a subsidiary

The five charges against Haarde do steer the questioning but a whole range of issues has been touched upon.

During his day in court, Haarde underlined that by 2008 there was nothing that he as a PM could have done to prevent the collapse of the three banks – Glitnir, Landsbanki and Kaupthing. Any necessary measures would have taken too long – selling assets would for example have been impossible at the time – and he would hardly have had the support of Althing. The main point was also, said Haarde, how far the state should go to save private companies. Ia it transpired from Haarde’s testimony that the FSA was more reluctant to accept Icesave than has been thought earlier.

As is clear from the SIC report Minister of Banking at the time Bjorgvin Sigurdsson (soc.dem.) didn’t seem to have much understanding of what was going on in the banks and his co-ministers seem not to have trusted him. His testimony indicated much the same.

Arnor Sighvatsson was the chief economist at the CBI at the time. He said that already in 2005 – two years after the privatisation of Landsbanki and Bunadarbanki ended – the banks were facing problems and their CDS were rising. In hindsight, Sighvatsson said, already at that time there were some danger signals though only later did it become clear how poor the assets of the banks were and that they were financing the acquisition of their own shares.

Sighvatsson wasn’t aware of Icesave opening in the Nethelands (in May 2008) until later. At this time, said Sighvatsson, there was nothing the CBI could do. The FME should have acted on Icesave at the beginning. Deposits are a standard solution to lack of liquidity – the banks, met with suspicion already in 2005, lacked liquidity and Landsbanki turned to Icesave.

The prosecutor asked if Sighvatsson thought Landsbanki should have been required to put Icesave into a subsidiary. His answer was that since Icesave was set up to solve a liquidity problem and the lack of foreign liquidity putting Icesave in a UK subsidiary wouldn’t have solved the bank’s problem.

Lack of liquidity is like a heart attack, he explained, whereas lack of own capital is like cancer. In the end, a terminally ill cancer patient got a heart attack. People were hoping the liquidity problem would pass – now, said Sighvatsson, it’s clear there was never any of hope of that. If the state had lent to the banks, Iceland’s sovereign debt would be close to Italy’s.

Sighvatsson thinks that from the beginning the Icelandic banks were met with great suspicion abroad. In 2005, he attended at meeting with bankers from Barclays who already then were rattled by the rapid growth of the Icelandic banks and their lack of transparency. At the time, neither he nor Barclays knew of the poor quality of the banks’ assets. This suspicion eventually led to European banks stopping all lending to the Icelandic banks in 2006 but the banks saved themselves by borrowing from US banks.

Interestingly, said Sighvatsson, the banks didn’t seem to worry that their CDS shot up. They didn’t seem to care about the rates they had to pay on their loans.

Would asset sales have solved the problem in 2008? No, Sighvatsson thought that was out of the question. If the banks had sold their best assets they would have been left with only junk. Any buyers would also have conducted due diligence – and that would have thrown light on various things, Sighvatsson said.

No matter what, the banks were doomed and they had much better rating than they deserved – yet another indication of the colossal failure of the rating agencies.

In Iceland, David Oddsson widely seen as one of the main culprits in the collapse of the banks – as a PM in the 90s he led the privatisation of the banking system and shaped the political climate at the time. A climate both favourable to and uncritical of the banks. And he was a Governor of the CBI in the critical time from 2005-2009.

The thrust of his testimony was that he had been very worried for a long time but his views had not been appreciated within the bank. – This is interesting, considering how worried and critical Sighvatsson evidently was. It’s been said that Oddsson was isolated within the CBI, not necessarily because of his views but because he wasn’t an economist and didn’t know how to steer this machine that a central bank is.

He himself underlined that he wasn’t the only governor – there were three – but says that by 2007 his colleagues agreed with him. Anyone used to reading central bank reports, he said, should have seen that the CBI was issuing warnings. Oddsson said that for a long time he didn’t believe the infrastructure of the banks was weak. After all, their accounts were signed by the banks’ managers and the leading auditing firms. There didn’t seem to be any reason to distrust them.

An insight into little Iceland: Oddsson said that after he stepped down as a PM there were fewer meetings between the PM and the CBI governor. There was less formality because Haarde and Oddsson had known each other since they were kids.

Oddsson said that the crisis in 2006 had been a close call – the PM at the time Halldor Asgrimsson had called him one weekend, telling him that the banks would all fail the following Monday. That’s what the CEOs themselves thought, said Oddsson. But the banks did survive in the end. This had taught Oddsson that things might be a lot more precarious than they appeared and move swiftly.

Oddsson said that Ingibjorg Solrun Gisladottir leader of the Social democrats and Minister of Foreign Affairs had suggested the state should lend €30-40bn to the banks. That would have killed the Icelandic state, said Oddsson. – As far as I know, this is news; Gisladottir will be a witness later and must address this point since it won’t do her political legacy much good.

Following the acute 2006 crisis the CBI tightened its liquidity control and posed serious questions to the FME regarding the cross-ownership and cross-lending of the banks. Not until the collapse of Glitnir was it clear how loosely the FME defined “related party,” the banks’ lending beyond legal limits to their biggest shareholders and how the banks were lending each other. Oddsson says he never hid his opinion that the FME was much too weak to put up any fight with the banks.

Oddsson is a known humorist. It caused some laughter when he pointed out that Landsbanki didn’t define the bank’s largest shareholders, the father-and-son duo Bjorgolfur Gudmundsson and Bjorgolfur Thor Bjorgolfsson, as “related parties” – and that he had once asked Gudmundsson’s wife is she didn’t find this embarrassing.

In February 2008 Oddsson had met abroad with foreign bankers and rating agencies, which made him very alarmed over the situation in Iceland. Back home he tried to communicate this anxiety but realises in hindsight that the banks were already beyond salvation and there wasn’t much the Government could have done. Though the banks were complaining that they could only borrowed in ISK it later transpired that by getting loans from the ECB their euro loans were indeed higher than their ISK loans. These were smart men, Oddsson said.

Asked about a letter from Mervy King in spring 2008 where King refused a currency swap but offered some help – Haarde said on Monday that the offer from King was never refused; it just wasn’t reacted on in Iceland – Oddsson said that this offer had just been a bit of “nicety.” The main thing was the refusal of doing a swap.

It seems clear both from Oddsson and Sighvatsson’s testimonies that not even at the beginning of Icesave, in autumn 2006, did Landsbanki have the assets to back up Icesave in a UK subsidiary. Much less was this possible in 2008. Landsbanki complained bitterly over the FSA demands. Oddsson said that Landsbanki Iceland clearly didn’t have assets that would have satisfied the FSA and even if it did, the transfer would have weakened the bank in Iceland.

Jon Th Sigurgeirsson, who became head of the Office of the board of Governors at the CBI in April 2008, said that already in November 2005 it was clear where the Icelandic banks were heading because he heard that foreign banks were ready to short-sell Icelandic bank shares. He also pointed out that it’s incredible how renowned auditors could sign the audit of the banks.

In a few words: The above is just a much digested version but it’s clear that the real problem of the Icelandic banks wasn’t lack of liquidity – they were short of capital. They had massively eroded their own capital by lending to buy shares in themselves. This didn’t start in 2008 as a way to save the banks – this tendency had started earlier. The feeble standing of the Icelandic banks is an indictment over those foreign banks that lent them money, the rating companies and the auditing companies.

It seems that from the beginning Landsbanki didn’t have the assets to back up Icesave in a UK subsidiary. The FSA wasn’t tough enough in dealing with Landsbanki. The Icelandic FME was of the opinion that it couldn’t stop the accounts. It’s absolutely incredible that the Dutch FSA allowed Landsbanki to open Icesave in the Netherlands in May 2008. It can’t hid behind EU rules – certainly, the EU passport rules can’t set a lower limit than the home banks have to follow (I understand that these rules have now been changed).

By 2008 the banks couldn’t be saved – but the question is why they were allowed to become so big, relative to the Icelandic economy, considering how weak they were already in 2006. It’s not unique in a country that the banks are beyond and above the political power but it’s unique that the banks, which had demonstrated their weaknesses early on, were still allowed to grow so wildly.

Oddsson was sure that the Icelandic Deposit Guarantee Scheme didn’t apply to Icesave. Others have been less clear on it – but even though many understood the implication for the Icelandic economy, no one seems to have done anything to clarify how these matters stood.

*Revised from an earlier blog.

Follow me on Twitter for running updates.