Sigrún Davíðsdóttir's Icelog

On September 30, the Icelandic Government answered the EFTA Surveillance Authority, ESA, reasoned opinion concerning alleged failure of Iceland to comply with Directive on deposit guarantee schemes and/or an article in the EEA agreement on non-discrimination.

Yet again, the Icelandic answer seems to consist of matters irrelevant to the ESA opinion, such as the state of the Landsbanki estate and its pay-out schedule. Regarding the deposit guarantee the answer reiterates earlier points, going against the ESA understanding of  ‘obligation of results’ and denying that foreigners were left worse off than Icelanders.

The Icelandic government denies that a declaration of will, issued by the Icelandic and the Dutch Government October 8 2008, indicates an acceptance on behalf of Iceland of the EU deposit guarantee. Iceland also points out new aspects of the deposit guarantee put forward in a draft of a new EU deposit guarantee.

It is now up to ESA to ponder its next step. It could either accept the Icelandic arguments – which is, to say the very least, extraordinarily unlikely – or it will send the case to the EFTA Court, which is nigh certain.

The only thing that could possibly hinder a court case is if the Brits and the Dutch – satisfied that the Icelandic Deposit Guarantee Fund, with its priority claim in the Landsbanki estate, will soon start paying back its debt to the two countries – would drop their claims. That’s however not entirely plausible since the two countries aren’t only seeking a refund of the deposits but some interests on their pay-out.

Landsbanki is still hampered by ongoing law-suits and its pay-out schedule is consequently unclear. Ergo, it’s unclear when exactly the two countries can expect to recover the money they paid to their Icesave depositors. Landsbanki recovery will, according to the latest estimates, cover priority claims and possibly interests of the UK and Dutch payout. Bondholders will more or less be left with nothing, which might lead to further court cases as bondholders seek to cover their damages.

In an interview with Ruv, Lee Buchheit who led the third and last Icesave negotiations recently pointed out that in its answer to ESA Iceland should have underlined that all depositors had indeed been paid out and that it didn’t really matter who had paid them. The main thing was that no depositor was left unpaid. Further, Iceland should have made the case to ESA that the Icesave dispute was now solely a matter for the three countries to resolve and had nothing to do with ESA any longer.

In its first answer to ESA the Icelandic Government failed to make this point except in a footnote.

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The British use of the a legislation with the word ‘terrorism’ in its name to freeze the assets of Landsbanki cost Icelandic companies and other entities ISK5.2bn, (€32.6m) according to a new report, done at the behest of the Icelandic Ministry of finance. The Ministry has indicated it will use the report to prepare litigation for damages against the UK Government.

Although the sum of ISK5bn is not a trivial sum it dwarfs the potential cost that the collapse of the banks caused the Icelandic economy. A Norwegian comparison indicates that the cost might have equivalent to 18-40% of the Icelandic GDP, or ISK300-600bn. The question is who should be sued for these much more substantial damages to the Icelandic economy.

It’s clear from the SIC report and from the Ruv interview with Alistair Darling, at the time Chancellor of the Exchequer, that both the Chancellor and other UK public bodies felt they were not getting correct information on the state of the Icelandic banks. That is not to say that the Icelandic Government was misleading the UK authorities. The Icelandic banks did allegedly not provide a clear data on their positions.

Without placing any blame here, it’s well possible that if the Icelandic Government considers damage litigation the UK Government might evaluate its options. On the other hand, Icelandic issues, Icesave included, are of no burning importance in the UK Treasury. The political discussion between the two countries now mostly focuses on the prospects of an Icelandic EU membership.

With an increased insight into the collapse of the Icelandic banks it’s become clear that the banks’ financial position was already questionable in late 2007. The damages would have been less if the banks had collapsed earlier. How the messy collapse would have come about if the Brits had not stepped in, is unknown. However, any delays might have increased the cost. Seen from this angle, albeit possibly too flippant for some Icelanders, it could be argued that the UK action against Landsbanki and Kaupthing potentially lessened the cost to the Icelandic economy.

If the cost of the British action against Iceland can be estimated to be ISK5.2bn (the report points out the cost could range from ISK2-11bn but lands on 5.2bn as a likely sum), what about the cost of the collapse to the Icelandic economy? There is no direct data on this but an earlier Norwegian crisis is an indication. The Norwegian banking crisis was on a much smaller scale and was estimated to have cost the Norwegian economy around 13-22% of their GDP. Taking into consideration the scale of the Icelandic banking crisis, it can be argued that the cost to the Icelandic economy was 18-40% for Iceland, or ISK300-600bn.

If the Icelandic Government is considering litigation against the UK Government why isn’t it doing anything about the serious damages caused by the reckless banking causing the collapse of the banks? As far as I know, that’s not being looked into, not a simple case. However, the Office of the Special Prosecutor is investigating possible crimes related to the collapse, with a focus on recovering any funds obtained illegally.

But it is a greater surprise that the Icelandic pension funds, which suffered serious losses as the banks collapsed, haven’t taken a clear stance on the issue of possible damages and means to recover these damages by suing the banks’ managers and their major shareholders who also benefitted from the banks’ reckless lending.

The Icelandic pension funds, sitting on one of the best funded pension systems in the world, were very slow at admitting losses and slow at investigating their cost and connections with the bank. In the small Icelandic society, the personal relationship between bankers and pension funds were quite cosy. There is now an investigative commission, working at the behest of the Icelandic Pension Funds Association, but it’s report is delayed and isn’t expected until towards the end of the year or later.

Broadly speaking, the pension funds could investigate two things: on one hand, the advice the banks provided; on the other, the funds’ losses stemming from being shareholders in the banks, ie the losses the banks suffered by their managers’ ill-advised lending. In general, the banks advised the funds to hedge their foreign assets by being long on the ISK. Though there could have been a clear rational behind this advice it turned out to cause disastrous losses. The question is if everyone was receiving similar kind of advice or if losses were heaped on the funds because they were strong anyway.

The OSP had been investing a case related to a few pension funds, sent to it by the FME, for breach of the funds’ investment framework and incorrect FME reporting on their investment in 2008. This investigation has now been terminated with no charges brought. Other cases regarding damages is a case brought by Landsbanki’s Winding-Up Board against three of the bank’s managers for certain loans to its major shareholders just before the collapse of the bank, alleging the managers caused the bank a loss of ISK37bn.

The feeling in Iceland is still that thirty men or so, bank managers and the banks’ main shareholders, caused the collapse of the banks. For many Icelanders it’s a disturbing thought if this group, possibly causing losses of 18-44% of GDP, will be able to simply brush the dust of the collapse off their shoulders and carry on as if nothing did happen. The major shareholders still seem to be leading a good life, though somewhat scaled down compared to pre-collapse times.

Iceland has moved on after the collapse and can now positively seen to be doing better than badly hit countries in the eurozone like Ireland and Portugal, not to mention the Greek catastrophe. There might even be close to a 2% growth of GDP this year, though partly depending on external factor like the state of the European economy. But so long as Icelanders feel that this group of thirty could wreck the Icelandic economy and then walk away as if nothing had happened there is likely to be a latent and brewing discontent.

The feeling is that if those who grew their businesses because of access to favourable financing from friendly bankers are still in business it’s partly because they are still enjoying the old favours.

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The Kaupthing settlement ends one part of Vincent Tchenguiz Kaupthing saga. But the other part is the SFO investigation into Kaupthing and the Tchenguiz brothers.

As the settlement between Vincent Tchenguiz and the Kaupthing ResCom is private and confidential there is no clear answer to the question above, but some guesses can made from the sparsely worded Kaupthing press release:

The Resolution Committee and the Winding-up Committee of Kaupthing confirm that all claims against Kaupthing lodged by the trustee of the Tchenguiz Family Trust (the “Trustee”) have been withdrawn pursuant to an agreement made between Kaupthing and the Trustee. The Trustee’s claims against Kaupthing were rejected by the Winding-up Committee of Kaupthing in March 2010, who referred the dispute to the Reykjavik District Court in Iceland, on 3 August 2010. The Trustee commenced litigation proceedings in the High Court of England on 1 July 2010. Both sets of proceedings have been withdrawn on the same basis.

The court cases in the UK and Iceland are withdrawn. But there must be more to the settlement than just this. Tchenguiz took a loan of £100m. That loan is, most likely, still there and has to be paid off and will not be written off. In that case, Kaupthing can claim victory since recovery is paramount to the Kaupthing creditors.

What Tchenguiz gains is control, in some shape or form, over corporate structures where Kaupthing claimed to hold collaterals. There are several banks, beside Kaupthing, that have lent into these structures. Tchenguiz has been held back in restructuring and re-negotiating his debt as long as Kaupthing upheld its claims. With the Kaupthing settlement, Tchenguiz will be free to seek new deals with his creditors. The Kaupthing settlement doesn’t solve all his problems but is an important step for him to work out how to proceed.

But there is still the other Tchenguiz, Robert, who has unresolved issues with Kaupthing. Kaupthing took over his company, Oscatello, into which Vincent had pledged collaterals, turning him into a Kaupthing client with an additional loan of 100m. It will now be interesting to see what happens re Robert’s dealings with Kaupthing and the giant debt of well over €2bn that Robert amassed with Kaupthing.

As a consequence of being Kaupthing clients, both brothers are now being investigated by Serious Fraud Office. Both deny any wrongdoing and have taken action against the SFO, which so far hasn’t brought any charges. The burning question is: what is the SFO investigating? The very laconic answer from the SFO is that it’s investigating if value was extracted from the bank in the period leading up to the bank’s demise.

Reading the SIC report, it seems clear that the SFO, just like the Office of the Special Prosecutor in Iceland, has a whole buffet of possible financial issues to choose from. There is alleged market manipulation, wrong information to markets, breach of fiduciary duty and so forth. But no, SFO isn’t touching any of this. It’s investigating loans into the Oscatello structure and to the two brothers.

As demonstrated earlier, Kaupthing took collaterals that it didn’t intend to enforce. It raises questions both regarding the valuation of these assets and if this kind of service was open to all clients of the bank. There must be something about these loans that the SFO sees as highly questionable, possibly incriminating not only the bank managers involved but also the clients, the two brothers, who got the loans. Looking at the loans, the SFO must detect something that makes these loans and the deals connected to them, stand out.

Since the brothers have called for judicial reviews on SFO’s actions against them, the SFO can’t, for the time being, make use of material confiscated during house searches related to the brothers. This means that the whole investigation will stretch over a longer time. The SFO does at times open an investigation that doesn’t lead to any charges. It remains to be seen what happens with its Kaupthing investigation.

Robert was heavily involved with Kaupthing, as its biggest client. Vincent only got involved through his brother, by posting a collateral for his brother and taking out a loan with Kaupthing as well. This has meant long and intense negotiations with the Kaupthing ResCom. His settlement now means that one part of his Kaupthing saga has come to a close. As long as the SFO investigation is running Vincent isn’t quite finished with this Icelandic bank that offered its chosen clients sweet deals, which in some cases have turned into a bitter pill.

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Kaupthing and The Tchenguiz Family trust have reached a settlement regarding exposure to the bank and claims. The collaterals related to the disputed loans give an interesting insight into correlations between lenders and borrowers

‘It’s interesting to keep in mind that the collapse of the three Icelandic banks is the largest corporate failure ever, the biggest bankruptcy in the world,’ said an Icelander to me the other day. It is indeed striking that a tiny economy, with a population like a London Borough, was able, so to speak, to produce the third largest corporate default in the whole wide world, after Lehman and Washington Mutual.

An obvious reason for the size of the default is that the banks were way bigger than the underlying Icelandic economy and in a way unrelated to it. The banks were funded by international banks who thought nothing of pouring vast sums of money into these three banks, newcomers to the international world of finance, run by people who mostly had no banking experience at all except from the Icelandic bank.

As the report of the Special Investigative Commission, set up by the Icelandic Parliament shows, one of the reasons for the banks’ demise was reckless lending to very few individuals. The largest borrower was the UK property billionaire Robert Tchenguiz. Tchenguiz owned a small stake in Exista, the largest shareholder of Kaupthing and sat on the board of Exista. At the beginning of 2008, Kaupthing had lent €1.2bn to Tchenguiz. When the bank collapsed in October 2008, his loans had gone up by 80%, to €2.18bn – during a period when banks were mostly not lending at all.

During the summer of 2008 the value of collaterals that Kaupthing had against loans to Tchenguiz fell. He had no assets to top-up the gap that was estimated to be £200m. His brother Vincent, who hadn’t been a client of Kaupthing, came to his brother’s rescue and placed the necessary assets to fullfil the requirements, not with £200m but with £222.5m because Kaupthing deemed the collaterals not to be very liquid and added 10% to the original request. At the same time, Vincent borrowed £100m from Kaupthing.

How this was all done tells an interesting story of the nature of the relationship between big borrowers and the banks. It’s a well-known fact that if you owe a bank 10.000 it’s your problem. If the loan is 10bn it’s the bank’s problem. Another extension of the correlation of power between a borrower and a lender is the nature of collaterals. The two brothers deny any wrongdoing and in fact are each suing Kaupthing, claiming that the bank’s former management fraudulently misrepresented the bank’s financial position to them, costing them dear.

Company structures seem to get more complicated with every year. The level of complications does not only make assets ephemeral and opaque when it comes to tax and beneficial ownership. It also makes the assets difficult to lay hands on for the banks that take these structures, or slices of them, as collaterals. It raises the question how well these structures serve the banks as liquid assets, at hand for the banks to claw back possible losses or if assets, structured in this way, are of any use at all as collaterals.

The collaterals provided by Vincent Tchenguiz, valued at £222.5m, related to a handful of his corporate structures, all highly leveraged, where he had a slice of equity. Through court cases involving Oscatello, the company where further collateral were needed, it’s possibly to gauge the outline of these structures.

The court cases show that if Kaupthing had enforced the collaterals, in effect Vincent’s equity, the banks that had lent into the leveraged companies, lower down the corporate structures would have called in their loans, causing a domino effect of defaults where everyone would have lost. It’s the so-called ‘change of control’ clauses in loan contracts that trigger these defaults.

Now, almost three years after Kaupthing failed, Vincent Tchenguiz and Kaupthing have come to a settlement. There were no doubt myriads of things to sift through but the ‘change of control’ has been a tough one, meaning that the borrower had huge power over the lender. When it comes to settlements, both parties normally agree to non-disclosure, meaning that terms and conditions won’t be in the public domain. It’s therefore unlikely that we will ever know the sums involved, what the bank has to write off and how much the borrower will indeed pay in the end.

The fundamental idea with a collateral is that if a borrower can’t repay a loan, the bankers can shrug their shoulders and say ‘no problem, we take the collateral, liquidate it and use the proceeds to settle the debt.’ Therefore, quality collaterals tend to be liquid and of low price volatility, making them easy to turn into money to settle the unpaid debt, if needed.

A ‘change of control’ clause within a collateralised structure is like a fuse that can blow up the whole thing and atomise the assets if touched and treated the wrong way. This opens up a question of how to value assets with these possibly lethal consequences. What’s the value of a collateral that can’t be fairly easily liquidated?

But did Kaupthing know how illiquid the Oscatello collaterals were? As far as can be gauged from a court case involving Oscatello and Kaupthing (Hight Court of Justice, Queen’s Bench Division, Commercial Court, Claim no. 2010 Folio 773), it transpires that Kaupthing at first offered not to touch the collaterals for a year and then offered not to touch them at all. The collaterals could be used for making the books look in order. But in reality, the collaterals were unenforceable, raising the question what story the bank’s accounts told.

The collaterals in Oscatello are no doubt not unique to this structure. It also explains why it took such a long time to find a settlement. The Oscatello collaterals are almost certainly not unique but explain why the large borrowers in the Icelandic banks, borrowers whose loans broke regulation on limited exposure, are by and large walking away with extremely favourable settlements: the loan deals were all too often in the favour of the borrowers, securing the borrowers all the upside and the bank the downside.

It’s fair to assess that this was nothing that Kaupthing invented. Shareholders should be asking bank managers some serious questions as to loans against collaterals with ‘change of control’ clauses. And so should regulators and financial services authorities. Since these collaterals are in reality illiquid, their value has to be estimated in connection to the illiquidity. It also raises the question who gets to place collaterals of this kind and why. And ultimately, if these loans simply turned out accidentally to have these unintended consequences so strongly in favour of the borrower, at the cost of the interests of the lender.

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As is stated on the Guardian/Observer website, the article by Simon Bowers and me, published in the Observer last Sunday, is now the subject of a legal complaint from Bjorgolfur Thor Bjorgolfsson.

Last winter, Bjorgolfsson filed a complaint with the Ethical Committee of the Icelandic Press Association for my reporting on a series of off-shore companies owned by Landsbanki, used to hold shares in the bank. After considering the matter, the Ethical Committee dismissed the complaint.

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The FT dedicates a front-page article today to a Chinese property billionaire, Huang Nubo, who wants to buy the largest single farmland in Iceland, Grimstadir, for a major development of all-year tourist facilities and a hotel. He is also planning to build a bigger hotel in Reykjavik, though he hasn’t yet secured property or land there. The two hotels will be linked by his own air company, another angle to this grande scheme. Nubo has offered 1bnISK (€6m) for the land, saying he plans to invest further 20-30bnISK (€120-180m) in the project.

Nubo’s Icelandic connections go back to his student years, when he had an Icelandic friend. He has lately cultivated his Icelandic connections and taken some Icelandic friends to the North Pole. One of his Icelandic friends is married to the former leader of the Social democrats, former minister of foreign affairs Ingibjorg Solrun Gisladottir. This friend of Nubo is also closely related to the present minister of foreign affairs Ossur Skarphedinsson.

Huang Nubo worked for the Chinese communist party, was an official until he emerged as the owner of Chinese properties in 2003. His company, Zhongkun Group, owns properties in China, resorts and tourist facilities. His company website indicates that most of this is still no further developed than to the computer picture stage.

Lately, his interests have been turned to the US but a planned project in Tennessee hasn’t materialised. Now he seems to have his attention turned to Northen Europe, Iceland first and foremost, inspired by his love of and interest in nature and poetry. One article states he has invested 1m yuan (€108,000) another mentions $1m in ‘China-Iceland Culture Fund,’ a noticeable sum in Icelandic culture life that has so far, as so many of Nubo’s other projects, has failed to reach the tangible state.*

He is also said to be one of the largest shareholders in Royal Business Bank, an American-Chinese bank, investing $1m. Unfortunately, the bank’s website gives no indication of who the shareholders are but this allegedly largest shareholder doesn’t sit on the board of the bank. The bank was set up in 2008 with a capital of $71m.

The leader of the Progressive party, Sigmundur David Gunnlaugsson whose constituency would benefit from the Chinese enterprise, has welcomed the investment, saying it really doesn’t matter if the investor is French, German or Chinese. Svandis Svavarsdottir environment minister says that big plans need to be carefully scrutinised. Prime minister Johanna Sigurdardottir says that investors like Huang Nubo is just what Iceland sorely needs. With strong regulations, that Iceland has, according to Sigurdardottir, there is nothing to afraid of.

This Chinese interest in Iceland is one of several Chinese projects under discussion in Iceland. China plans to build a huge embassy, indicating that its interest must be for something more than just normal diplomatic relationship. A Chinese research institution is exploring the viability of building an unmanned research station, in addition to its station in the Antarctica, to investigate the Northern lights. In addition, there is great interest in China for the sea route through the ice cap around the North pole.

Only foreigners from the EEA can buy land in Iceland, which means that this matter has to go through official channels in Iceland.

Icelandic politicians must now decide whether and to what extent Iceland should welcome Chinese investors. Investors from a country where no one is rich unless deemed worthy by the Chinese Communist Party and its officials. A country that is avidly seeking investments abroad though at the same time foreign investment in China is a tortuous process. That’s the fundamental difference between investors from, say EU countries, and from China. A difference much noted in Africa where Chinese investors have invested vast sums in land, mining and infrastructure.

In case, Icelandic politicians haven’t noticed, the questions asked everywhere in democratic countries is if politicians and business leaders are content with dancing to the Chinese flute or if they think pressure should be exerted on the Chinese to open China to foreign investments, ia. by improving fundamental rights such as human rights and rights of private property.

*This is wrong. The money has materialised, is held by a fund in China, which sponsored a poetry festival in Iceland last year. The next festival, now in autumn, will take place in China.

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A feature in the latest Observer, by Simon Bowers and me, tells the story of the yacht Bjorgolfur Thor Bjorgolfsson was planning to have built, inspired by James Bond films, named ‘Project Mars.’ As the pictures on the designer’s website show, the Bond connection is hinted at by a Bond film playing on a screen in the lounge. On one of the walls there is a big picture of an Aston Martini, a witty reference to Bjorgolfsson’s own Aston Martini.

The specifications indicate that the yacht would have space for fifteen passengers, catered for by captain, crew and staff of 34 people. The yacht allows for a truly off-shore life, providing perfect living quarters and work space, as well as leisure and entertainment zones.

Bjorgolfsson has for a number of years had business interests in Finland where he has been co-operating with three Finnish investors – Ahti Vilppula, Ari Salmivuori and Kai Mäkelä –  who all have been in the Finnish media for questionable affairs. Salmivuori was involved in the telecom company Elisa, which Bjorgolfsson invested in. The company became a battle field of a bitter power struggle, making headlines in 2007-2008. Bjorgolfsson was forced to sell his stake in Elisa in October 2008 as his empire was shaken to the core by the collapse of Landsbanki. Salmivuori invested in Amer Sports, one of the world’s largest producer of sports equipment, where Novator also held shares for a while, later bought by Mike Ashley, who also had Icelandic connections, via Kaupthing.

Another long-time partner of Novator is Altima Partners, an investment fund in the UK, set up in 2004 by several bankers from Deutsche Bank, specialised in Eastern Europe. These bankers cooperated with Bjorgolfsson earlier, while at Deutsche and the relationship has continued. Among these contacts are Georg Tzvetanski, Radenko Milakovic and Dominic Redfern – all of them involved in Eastern European privatisation projects after 2000, led by or done with Bjorgolfsson: Bulgartabak (which they didn’t get), Balkanpharma (later merged with Actavis), Bulgaria Telecom and in the Czech Republic, Cesky Telecom and Ceske Radiokomunkace. Bjorgolfsson and Altima have also co-invested in properties, through their Luxembourg fund, Landmark, i.a. in Bulgaria.

Another part of Bjorgolfsson’s Bulgarian interests was the Economic and Investment Bank, EIBank, where he held a controlling stake of 48.6%. In the US cables, from 2006, published on Wikileaks EIBank is mentioned as one of the problem banks in Bulgaria. The three names mentioned are Bjorgolfsson, Tsvetelina Borislavova, who earlier shared bed with the Bulgarian prime minister Boyko Borissov, and Svetoslav Bozhilov. US diplomats expressed, at the times, worries of lending to connected parties and money laundering. Novator sold its share in EIB, now called CIB, in September 2007.

Bjorgolfsson has been investing in Bulgaria since 1999. His 2004 deal regarding Bulgaria Telecom has long been contested in Bulgaria. According to Bulgarian media in March this year, an investigation into the deal might be underway. It’s not the first time that an investigation has been attempted and this time it might well go as earlier, that nothing comes out of it.

Bjorgolfsson has lost his main assets, Landsbanki and Straumur Investment Bank but he is still an active investor with a vast network stretching over several continents. Part of that network is visible in Luxembourg where 16 Novator companies and 8 Actavis companies are still registered. He didn’t manage to realise his project Mars but if business continues to thrive he might well have another stab at another yacht in the future. After all, a yacht is the much desired trophy asset among alpha male investors.

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Earlier this summer, Ossur Skarphedinsson minister of foreign affairs visited Brussels to formally mark the beginning of the Icelandic accession talks. As it is now, Skarphedinsson is more or less the only leading Icelandic politician who speaks convincingly for an Icelandic membership of the European Union. If the political landscape in Iceland evolves with the little political enthusiasm there is and polls showing a falling interest in an EU membership, it seems unavoidable that Iceland will continue to stand shoulder to shoulder with Norway, firmly outside of the EU.

For the last many years, opinion polls have shown hesitating doubt towards membership, with the pro and con side swinging around the 50% line. With the Social democrats, firmly for membership and leading the government it might indicate a strong pro side. That doesn’t seem to be the case. The social democrats are in a difficult position with a coalition partner, the Left Greens, strongly against membership and by the struggle to pull Iceland out of the crisis.

The heavy-weight block in the political arena in Iceland has always been the Independent Party (C). Over the decades, the party has in many ways shaped the Icelandic foreign policy, when there has been any. After being back and forth on Europe, in the later years mostly indicating a mildly pro-EU stance, the party leadership has now firmly placed itself on the other side. It took great political courage to lead Iceland into NATO in 1949, something that seems lacking in the party now.

The first indication of a strong pull towards the ‘no’ side followed the results of the Icesave referendum in March. The IP leadership stood behind the ‘yes’ side, having participated in the negotiations and come to the conclusion that the new agreement was positive for Iceland. Party leader Bjarni Benediktsson tread lightly, didn’t state his case forcefully but did talk for the agreement.

The old IP leadership, led by David Oddsson, now editor of Morgunbladid, was vehemently against Icesave and Morgunbladid couldn’t find strong enough words to ridicule and belittle Benediktsson. Though unclear how powerful the Oddsson wing of the conservatives is, the ‘no’ victory seemed to strengthen it. There were rumours that Oddsson would try to use the ‘victory’ to oust Benediktsson though there was no obvious candidate to replace him. And a persistent rumour flew around that Oddsson himself might want to step in as a leader. This second coming, if ever a possibility, never materialised.

In an interview earlier this summer Benediktsson indicated that he was now doubtful as to the merits of an Icelandic EU membership. He has since spoken in unequivocal terms. He is against membership and in addition, he thinks Iceland should walk away from the membership talks and withdraw its application for membership. This would no doubt be an ideal solution for a party so long split by its position on EU.

The feeling is that Benediktsson’s change of mind isn’t entirely convincing. In 2008, Benediktsson came out as a strong supporter of Icelandic EU membership since it would add a much needed strength and stability to the depreciating Icelandic krona. Compared to his reasoning then, his EU stance now is seen as bowing to the Oddson wing, in order to secure his own position as a leader for the coming party conference in autumn. As one source said to me, Benediktsson and the men closest to him are all of one mind: Iceland should join the EU.

Though there seems to be a majority among Icelandic conservatives against EU membership there is a strong and vocal part of party members, among professionals, civil servants and other middle class voters for membership. Next election will be no later than spring 2013. At the time, EU membership could well be a hotly debated issue and could possibly drive some pro EU conservatives away, though they might have a hard time voting for the social democrats, already now weary from being in government since May 2007. But perhaps a referendum will already be over at that time.

With the IP turning its back on the EU it might again be inclined to turn to its old coalition partner, the Progressive Party, traditionally a centre party in the Scandinavian sense, born among farmers who now are few and far between. Under their new leader Sigmundur David Gunnlaugsson the progressives have progressively reinvented themselves as a more nationalistic party, finding idols in new parties like the ‘True Finns’ who now more modestly call themselves ‘The Finns.’

It remains to be seen if the progressives will try to taka monopoly on nationalistic tendencies and turn them into political ideas, since these tendencies are to be found in all parties, as indeed among the whole Icelandic population. If these two parties will form a government it will most likely have its back staunchly to the EU, dreaming of a rapprochement with Canada and the BRIC, dividing and conquering through bilateral agreements. This works for Russia but might be difficult for Iceland.

There are plenty of Icelandic politicians who speak vehemently against Icelandic EU membership. Those familiar with the ‘no’ wings in Norway, Sweden and Denmark, at the time of their referenda, will recognise the tone and the arguments. This rhetoric was tried and tested up to the Icesave referendum with national pride in all hues against reason. Politicians who speak with passion for Icelandic membership do not seem to exist for the time being. There will be associations and organisations to speak for membership but the question is if there will be any convincing and passionate politicians among them.

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Iceland is a country where people have a strong sense of what family they belong to and most people know their family history quite well. Now that the story of Thor Jensen and his offspring Bjorgolfur Thor Bjorgolfsson is about to premiere as a film, it comes to mind that Jensen’s story is no less controversial than the one of his great-grandchild. There were people who thought that Jensen was a ruthless businessman who left losses to others while he himself walked away unscathed.

In 1907 Thor Jensen founded a company with another entrepreneur, Petur J Thorsteinsson. Thorsteinsson was at the time probably the richest Icelanders. He made his money up in Bildudalur in West Iceland running a shipping company and fishing and fish-processing company. When his businesses were at their biggest around 400 people worked for him. Quite something at a time since the population of Iceland was, in 1900, 78.000.

Thorsteinsson was an illustrious name and the new company he founded with Thor Jensen was called PJ Thorsteinsson & Co. Thorsteinsson had a long relationship with the Danish banks at the time and had been several decades in business. The aim of the new company was to get a share capital of ISK1m, at the time the size of the Icelandic state budget. They never quite reached that goal but the company was nicknamed ‘The Million Company.’ It built up a harbour at Videy, the tiny island off Reykjavik, and a vast empire related to fish-processing, even with a train running on the island to transport coal, salt and other goods.

Jensen and Thorsteinsson could combine their plans and ambitions in one company but it turned out that they could not work together. Thorsteinsson left the company though it still bore his name but he left his capital in it. Jensen now ran the company but four years after Thorsteinsson left, it went bankrupt. Thorsteinsson lost most of his once so vast wealth. Jensen was more fortunate, with his wealth if not intact then at least not badly dented. At the time, there was an investigation into the affair, where Jensen famously couldn’t remember a thing about the whole debacle.

Many years later, after Thorsteinsson had died, Jensen wrote his autobiography. He had now regained his memory and squarely blamed everyone except himself for the bankruptcy. Mostly he blamed Thorsteinsson even though the bankruptcy happened years after Thorsteinsson left the company. This was before the era of offshoring and it was pretty clear who had lost and who hadn’t.

Stories run in families in Iceland but the families of Jensen and Thorsteinsson became related through marriages. It’s been a quiet consent in both families not to discuss the demise of ‘The Million Company’ at family gatherings. The story was later told in a book, published in 1990, about the ‘Bildudalur King’ by Asgeir Jakobsson. The minor shareholders of Landsbanki and others who lost money on Landsbanki, such as pension funds, might be amused, or not amused, by the strong parallels of Jensen and his great-grandchild who from the beginning of his business entreprises was strongly drawn to the story of his forefather.

This is a family with spectacular success and no less spectacular bankruptcies, as is born out by ‘The Million Company,’ by Bjorgolfsson’s father who ran the shipping company Hafskip aground in the 80s and then father and son being the main shareholders of the now collapsed Landsbanki and Straumur, not to mention bankruptcies related to them such as the travel company XL and Eimskip.

The Thorsteinsson’s family might not be too amused by the story in the new film on Thor’ saga, if this film recycles only the Jensen saga from his autobiography. Historically aware viewers will wonder if the film is yet another example of plus ça change.*

*This log was inspired by a conversation with a descendant of Thorsteinsson who wanted to make me aware of the fact that there is another side to the Jensen’s own story of his success. Icelanders have long a long memory when it comes to families.

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Sigurdur Bollason isn’t one of the most famous Icelandic businessmen and yet two of his now bankrupt holding companies have collapsed under ISK11bn (€66.8m) debt. To illustrate the size of ISK11bn, the cost of running the Icelandic Parliament is ISK2,9bn a year so this money would go a long way to run the Parliament for three years. Bollason’s story is illuminating, in order to understand banking and business, the Icelandic way, as practiced before the collapse of the Icelandic banking system in October 2008. Since end of 2010, Bollason’s registered address is Luxembourg but he is mostly seen in the UK.

Bollason’s parents ran a successful fashion shop in Reykjavik and that’s the way Bollason went. Around 2000 he met Kevin Stanford, through his fashion enterprise. As I have written on earlier, it was, allegedly, Bollason who introduced Stanford to Icelandic businessmen like Baugur’s owner Jon Asgeir Johannesson and to bankers at Landsbanki and Kaupthing. Stanford eventually became as valued a customer as some of the Icelanders, meaning that Kaupthing lent him money to buy shares and, towards the end, money to gamble with in the bank’s attempt to influence its sky-rocketing CDS, nota bene in co-operation with Deutsche Bank, but that’s another story for another log.

After the privatisation of the Icelandic banking system in 2003, the development was towards the three banks, each with a few major shareholders. At Kaupthing and Landsbanki these major shareholders stayed the same until the bitter end. At Islandsbanki, later called Glitnir, they changed: in summer 2005 the largest shareholders were a group connected to Samson, with Bjorgolfur Gudmundsson and his son Bjorgolfur Thor Bjorgolfsson, at the core. At the beginning of 2006 they sold their Islandsbanki shares to Karl Wernersson and Einar Sveinsson who in early 2007 sold to Johannesson and related parties.

Below these major bank investors/owners there was the second tier, smaller investors who got loans from the banks to aid and support the major players in their investments. Without naming names, the feeling is that these fellow travellers were useful in securing control without having to own all that much in the company. The banks were usually fellow travellers as well, both co-investing and lending.

Bollason belonged to this second tier and invested mainly in the Baugur orbit. He took out a loan both in Landsbanki and Glitnir in 2008 in share buying schemes in respective banks. Though owned by father and son, Landsbanki lent heavily to the Baugur sphere, as well as to father and son companies. Straumur, where the son was the chairman of the board lent almost exclusively to companies related to its chairman.

The two now bankrupt Bollason companies owe ISK6bn to Glitnir, as Glitnir gave Bollason a loan of ISK4bn to buy shares in the bank. Glitnir both sold the shares to Bollason and gave him the loan. The other company leaves a debt of ISK5bn, from an ISK3.5bn loan to buy 1,4% of Landsbanki in two instalments, in July and August 2008. The recovery from these companies is nill, meaning considerable losses to these two banks. After house searches early this year it’s clear that the Office of the Special Prosecutor is investigating the Landsbanki loan to Bollason.

The question is: was it ever a good banking practice for Landsbanki and Glitnir to lend Bollason this amount of money to buy shares in respective banks? The short answer is ‘no.’ There is nothing to indicate that he had the financial means to borrow by the billions. – It’s an unavoidable thought that loans like these would be a good ground for shareholders to sue the bank’s managers and board. These loans could indicate a colossal breach of fiduciary duty.

The next question is: why did both Landsbanki and Glitnir then think it was good business to give him these loans at no risk to Bollason and a huge risk to respective banks? Here, we need to keep in mind that the loans to Bollason were just one of many to people in the sphere of the major shareholders.

Taken as a phenomenon – a bank lends money to buy its shares when markets are falling and no one is buying its shares – it seems clear, that this was organised share parking on behalf of the banks, possibly indicating an organised market manipulation. This wasn’t just a question of single loans. This was part of banking the Icelandic way and all the banks were practicing it, as is amply demonstrated in the SIC report The vehicles set up to hold the shares have been going bankrupt one by one since the collapse of the banks.

All these banks operated abroad, with London being the harbour of their foreign operations. Two of these banks, Kaupthing and Landsbanki, took deposits from UK private and institutional investors. The private deposits were guaranteed, the institutional investors lose their deposits. The UK Serious Fraud Office is investigating Kaupthing, albeit in an apparently curiously narrow way, focusing on loans to the Tchenguiz brothers. Since Kaupthing and Landsbanki operated, in many ways, in a similar way it’s incomprehensible why Landsbanki and its major shareholders aren’t being investigated as well.

The Financial Services Authority has just fined a hedge fund chief executive a record £2m. Michiel Weiger “Visser deliberately misled investors by various means, including by engaging in market manipulation, to disguise the performance of the Fund and to secure continued and increased investment in the Fund.” This rhymes with what the SIC indicates regarding the Icelandic banks. Independent auditors’ reports, done by Jean-Michel Matt and Helge Berg, on Glitnir and Landsbank respectively point in this direction. Are hedge funds just a manageable size for the FSA or is there some higher reason?

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