Sigrún Davíðsdóttir's Icelog

Yesterday, a team of 70 people, at the request of the Office of the Special Prosecutor, searched 16 properties in Iceland related to shareholders, clients and directors of Glitnir Bank. The action continues today where some people have been brought in for questioning.

The names figuring in Icelandic media are Jon Asgeir Johannesson, Palmi Haraldsson, Larus Welding. Welding who lives in London is said to be on his way to Iceland and already seems to have an appointment with the OSP. Johannesson has said in an interview with the paper owned by his wife that he has not been called in for an interrogation by the OSP.

According to Olafur Hauksson at the OSP the searches are connected to five cases, all familiar to those who follow the new Icelandic sagas of the collapsed banks:

1 Loans to a company called Stim, almost the name for the alleged market manipulation inherent in so many deals in the Icelandic banks. Stim was related to FL Group where Jon Asgeir Johannesson, Hannes Smarason and Palmi Haraldsson were among well-known names connected to Stim. Stim got a loan from Glitnir of ISK20bn to buy shares in FL and Glitnir itself. A major owner in Stim when it surfaced in November 2007 was a fishing company, Samherji, one of the largest Icelandic fishing companies.

2 Loans to FS-38, to buy shares in Aurum Holding Ltd (the UK Goldsmith jewellery chain), already a famous case in Iceland where a loan of ISK6bn was in the end offloaded for 1 krona.

3 Loans to Stodir (Landic Properties, a Baugur real estate company), Baugur and 101 Capital (owned by Ingibjorg Palmadottir, Johannesson’s wife).

4 A deal where GLB FX, a fund with Glitnir, bought a Stim bond from Saga Capital (now Saga Investment Bank). Saga Capital, based in Akureyri, was one of the owners of Stim.

5 Glitnir’s buying of shares in Tryggingamidstodin, TM, an Icelandic insurance company. This deal figures in the Glitnir charges against Johannesson, Haraldsson e.al. in New York.

All of these cases are well known in Iceland and these companies all figure in the report of the Althingi Investigative Commission. There is absolutely nothing unexpected here and now it seems that premises of Johannesson, Haraldsson, Larus Welding ex-CEO of Glitnir and others have been searched. According to Visir, the media owned by Johannesson, Thorvaldur Ludvik Sigurjonsson the CEO of Saga Investment Bank has been imprisoned earlier this morning, to be interrogated by the OSP. Sigurjonsson was on TV yesterday, claiming that neither he nor Saga was a part in the Stim case but that they had only dealt with a Stim bond. However, it was more than that since Saga, in November 2007, owned 25% of Stim.

When and if these people will be interrogated by the OSP remains unclear but it’s an ongoing investigation. Icelanders have long expected that the OSP would move in on the group around Glitnir. People connected to Kaupthing were interrogated and taken into custody in spring, now Glitnir. Now it’s only Landsbanki people who haven’t, at least not yet, been in the same situation as those of Glitnir and Kaupthing.

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How can a bank break all rules to lend ISK6bn, £30m, to a shelf company without any assets – and buy back this company, debt and all, for 1 krona? This might seem to run counter to both business sense and common sense – but welcome to the Icelandic way of banking.

This tale, not a fairy tale but a bank tale, rotates around Fons, a now bankrupt company owned by Palmi Haraldsson and closely connected to Baugur, the now bankrupt company of Jon Asgeir Johannesson. In early 2008 Fons’ debt to Glitnir was so ominous that Glitnir could hardly avoid making margin calls. Johannesson and Haraldsson then rather insistently presented a plan to Glitnir: the bank agrees to finance a deal between two Fons’ subsidiaries that triggers a loan of ISK6bn whereby Fons’ debt of ISK4bn is paid and ISK2bn in cash is released to Fons out of which ISK1bn goes into Johanesson’s private current account.

This is the apparent structure behind charges brought recently by Glitnir’s resolution committee against Jon Asgeir Johannesson who built up the Baugur empire in Iceland, the UK, Denmark and elsewhere, Palmi Haraldsson the present owner of Iceland Express as well as a string of failed companies and a frequent business partner of Johannesson, Larus Welding former CEO of Glitnir, brought in when Johannesson and Haraldsson became the bank’s major shareholders in 2007 and three employees of the bank who, after Glitnir’s collapse, have continued to work at Islandsbanki, the new Glitnir. All six claim innocence. The case will open in late April. The charges clarify news that has been brewing in the Icelandic media over the last few weeks, complete with excerpts from emails of the personae dramatis.

The loan was structured around the sale of a Fons subsidiary to another subsidiary of Fons’ share in Aurum, the holding company of Goldsmiths, a UK jewelry chain, where Baugur and Fons were major shareholders. Glitnir valued the shares at no more than ISK1,5bn but in emails Johannesson and Haraldsson insist on a loan of ISK6bn against the shares. In an email to the bank Johannesson ‘expects’ his plan to be carried out. Welding ordered his employees to ‘prepare a loan agreement’ according to the plan outlined by the two businessmen.

Out of the 6bn 4bn were used to pay up older loans – and 2bn in cash put into Fons’ account. Fons sends 1bn to Kaupthing Luxembourg, allegedly to settle a loan there. Johannesson claims a billion for himself. In an email Johannesson explains that he absolutely doesn’t want to be overdrawn since that doesn’t look good – accordingly, the bank settles the overdraft and puts 750m in ready money into Johannesson’s account. Fixing the overdraft and providing cash of the bank’s major shareholder seems to be enough for the bank to give a helping hand.

According to the charges the only motive for the loan is to the help an already insolvent Fons from Glitnir’s inescapable claims, to dump Baugur’s and Fons’ obligations into an empty shelf company and to provide the two businessmen with cash without any collaterals or obligations. According to the charges all three motives were perfectly clear to the bank.

In an email written as the loan was in the making, a Glitnir employee points out to Welding that he can’t understand why Glitnir needs to go to this length of setting up the Aurum sale – it would have been a lot simpler just to send 2bn directly into Fons’ account in the Cayman Islands.

The emails quoted in the charges give an interesting insight into the minds of the two businessmen and the bankers ordered to prepare the loan. In an email at the end of May Johannesson explains how the loan should be structured, adding that if these requirements won’t be met ‘I should perhaps consider becoming an executive chairman of Glitnir.’ – This has been widely understood as a threat. After the charges became public Johannesson claimed that by deleting a smiley after this sentence the resolution committee had changed its meaning. Apparently, a smiley is no laughing matter to the businessman.

Smiley or not: only three weeks later, this was a threat without any claws. June 5 2008 the Icelandic High Court confirmed an earlier verdict over Johannesson by the Reykjavik County Court Johannesson of three months conditional prison sentence – thereby excluding Johannesson from sitting on any company boards for the next many years.

But there is a further twist to this tale. As the loan agreement was finally in place in July 2008 and FS38, the shelf company, saddled with the loan Fons did a call option with Glitnir obliging the bank to buy FS38 for 1 krona in December 2008 if FS38 so wished. In December, Fons made use of its option and Glitnir, by then taken over by the resolution committee, was forced to buy back its own glorious 6bn debt structure for the agreed 1 krona. In April 2009 Fons went bankrupt. One of Glitnir’s credit claims in Fons is the 6bn loan that then gave rise to the present charges.

According to the charges, Johannesson and Haraldsson were the instigators who commanded the four bankers to fix the loan that was only a make-believe deal, made to provide the two businessmen with 2bn in cash. The businessmen are charged with violations of company law. The bankers are charged with breaking the bank’s internal rules and violating company law.

Bankrupt companies related to Baugur and Fons now come by the dozen and their combined debt amounts to hundreds of billions of kronas that will never be paid. Each of the three Icelandic banks lent tens of billions, in some cases hundreds of billions, to these companies. Around 2000, Kaupthing was instrumental in the making of Baugur as the company started expanding abroad. Landsbanki later lent Baugur astronomical amounts, even when Kaupthing appears to have become more reticent. Baugur and Fons had already done pretty well for themselves when these two became the principal shareholders in Glitnir in summer 2007.

As the credit crunch was slowly crushing the Icelandic banks in the summer of 2008, Glitnir decided on the loan and the call option of 1 krona with the foreseeable final loss shouldered by the bank. The loan of 6bn is not only an offense to all business ethics and to common sense but also runs contrary to good business practice.

It’s an intriguing question why all the three major Icelandic banks went down the same path of lending only a handful of people exorbitant amounts of money on such shaky premises – in deals that time and again run against the interests of the banks, all listed companies.

The Italians have a great expertise when it comes to organised crime – and one of their lessons is that crime propagates in a vacuum beyond the state. The charges against the six haven’t yet been resolved in court – and as long as it hasn’t happened the six are innocent – but these charges and other cases seem to indicate that there was a lawless vacuum in the banks. Hopefully, the report of the Investigative Commission, coming out tomorrow will clarify these issues.

It’s deals like these that have left the Icelanders somewhat perplexed as to what kind of bank system was actually run in Iceland. At the root of this modern amorality tale are bankers prepared to break every rule in the book and major shareholders pulling the strings.

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Upset that the British government was still too keen on protecting the financial sector, Germany’s Chancellor Angela Merkel said in exasperation that she wanted to remind everyone that something did indeed happen in the financial markets. It made ‘no sense,’ she said, ‘to keep behaving as if nothing had happened.’

Her words describe all too well to the situation in Iceland. The three resurrected banks – New Landsbanki previously Landsbanki, Arion bank previously Kaupthing, Islandsbanki previously Glitnir (but Islandsbanki before that) – have now amassed a sizeable collection of assets and are, in some cases, reselling these assets. In the Icelandic media the banks have been criticised for lack of transparency, especially Landsbanki. There seems good reason to be worried that old habits die hard – but how were the old habits?

A banker working at one of the collapsed Icelandic banks told me recently that it had been quite remarkable to see how the banks’ ‘chosen’ customers – the big customers that in many cases also happened to be the banks’ largest shareholders – were content to pocket the profits but expected the bank to compensate for any losses they might suffer. Documents stemming from the now bankrupt companies Baugur, where Jon Asgeir Johannesson was a major shareholder and Fons, Baugur’s regular co-investor owned by Palmi Haraldsson and Johannes Kristinsson, throw some light on the old habits. Claims lodged against Fons amount to ISK40bn, almost £207m. Claims against Baugur Iceland amount to ISK319bn, £1,65bn.

At the end of 2005 Fons borrowed ISK800m from Glitnir. Three months later 300m were paid off in accordance with the loan agreement. The remaining 500m, supposed to be paid off by the end of 2006, are now part of Glitnir’s claims against Fons. – There are many other examples where the banks’ main borrowers, often their main shareholders as well, apparently did not expect to pay back their loans (even though refinancing was never an issue). The Fons loan from 2005 seems to be a case in point and shows that the banks’ leniency towards their big customers started well before the panic of 2008.

In December 2007 as the credit crunch was seriously starting to hit the leveraged Icelandic companies, Fons borrowed ISK10bn from Glitnir against shares in FL Group, the faltering investment company closely connected to Baugur and Fons. A few days later Glitnir lent Fons another ISK2,5bn. The collateral was a ISK3,7bn loan agreement whereby Fons financed sale of assets to Baugur, i.e. Fons both sold and financed the sale. Nothing was paid off this 2,5bn, most likely because Baugur didn’t pay off its loan from Fons.

Although Fons didn’t pay off any of these loans Glitnir still lent Fons ISK6bn in July 2008 to finance the sale of shares in Aurum Holding, one of Baugur-Fons retail investments, from one Fons-company to another, i.e. like the left hand buying from the right hand. In an illiquid market the evaluation of the shares raises questions. Of the 6bn 1,5bn were set against Fons trading account at Glitnir and 2,5bn were supposedly used to pay off an older loan (though there are conflicting information as to which loan was paid off). Two billion kronur were put into Fons’ account at Glitnir where 1bn was used to pay off 1bn on a loan at Kaupthing, Luxembourg and 1bn was put into Jon Asgeir Johannesson’s private account at Glitnir.

The administrator of Fons has now sued Johannesson to claim back this billion kronur, claiming that the money was paid without the necessary paperwork to underpin the payment. This claim will be settled in court later this year.

This flow of money from Glitnir into and between companies related to the bank’s principal shareholders is a saga of obscure deals and loans that were never repaid. Other similarly questionable deals, related to Baugur and Fons, involve the Danish air company Sterling and the two Icelandic companies Skeljungur, a petrol company, and Securitas, a security company. – The two other Icelandic banks, Landsbanki and Kaupthing, are also big creditors in Fons and Baugur.

Another bankrupt company with an interesting story is ‘Solin skin’, meaning ‘The sun shines’, owned by Baugur, Fons, Glitnir and the UK businessman Kevin Stanford, a frequent co-investor in Baugur’s ventures, a client at Kaupthing and now being investigated by the Serious Fraud Office. The only asset of ‘Solin skin’ was a futures contract on shares in Marks & Spencer. The contract was renewed close to twenty times and incurred spectacular losses. The claims on this tiny company that no one outside of Baugur’s inner circle knew of until its bankruptcy amount to ISK15bn, £77m. – As a comparison the cost of running Althingi, the Icelandic parliament, this year will be ISK2,7bn. The losses of this, in Baugur-Fons’ grand-scheme-of-things, tiny company would be enough to run Althingi for over five years.

The administrator of ‘Solin skin’ has compared the company to a gamble on the house. It seems unlikely that a normal bank would have allowed the company to renew the contract time and again, steadily adding to the losses with no assets to cover them.

In 2007 Jon Asgeir Johannesson bought two flats in New York in one of the most hyped condos in the city, at 50 Gramercy Park. Landsbanki financed the acquisition. The bank’s resolution committee is unwilling to inform what is happening with the flat or if Johannesson has had access to it after he couldn’t fulfil the loan agreement. Attempts to sell the flat, last on the market now in January at $15m, have apparently been unsuccessful. The news of a possible court case against Johannesson for renting out one of the flats with an Ikea kitchen and not a designer kitchen expected in this condo drew some smiles – might it be that after many questionable deals Johannesson would in the end falter on a designer flaw and not a financial deal?

The year 2007 was a year of conspicuous private spending by many of the Icelandic high-flyers, giving rise to a new phrase in Icelandic, ‘it’s so 2007’, meaning ‘outrageously extravagant.’ Banque Havilland, that took over Kaupthing Luxembourg, has already repossessed the yacht bought that year by Johannesson and his wife, and sold it to a Russian buyer. In December 2009 GE Capital repossessed Johannesson’s private jet. Strikingly bold actions compared to Landsbanki’s veil of secrecy hiding the ownership of the New York flat where Johannesson and his wife are still registered as inhabitants.

What causes concern in Iceland is that many of those responsible for lending money ad infinitum to heavily indebted companies and individuals are still working for the three resurrected Icelandic banks (though it doesn’t make the Icelandic banks unique in the international banking sector). – In ‘Liar’s Poker’ Michael Lewis describes banks that were always willing to sacrifice the interest of their clients for their own. Interestingly, the Icelandic banks always set the interest of a few chosen clients/shareholders above their own. So far, no court case has tested the responsibility of the managers and the boards of these banks in deals like those mentioned above.

The report coming out on April 12 will no doubt clarify the operations of the banks. After the report it might be more difficult to continue ‘as if nothing had happened.’

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