Sigrún Davíðsdóttir's Icelog

“Corruption and the role of tax havens” was the headline of the annual workshop of the Tax Justice Network – and the word Luxembourg was heard quite often there.

There were plenty of interesting talks, much to learn. Two things are still playing around in my head: an exchange on the offshore bubble inside, not outside, of our Western countries – and the destructive role of Luxembourg when it comes to both taxation and finance.

Offshore is actually onshore

I was on a panel today about “Stories of secrecy;” I gave a talk about “Iceland, the offshorisation of an economy” and Richard Smith from Naked Capitalism talked about the role of Scottish LPs in the Moldova bank robbery where $800 were syphoned off, into offshore companies. Nicholas Shaxson, author of “Treasure Islands,” was the moderator.

Shaxson mentioned the increasing focus on financial stability and the offshore universe, something that is very clear when it comes to Iceland and events in autumn 2008 – the offshorisation did not alone cause the banking collapse but it played its role in hiding money, connections, ownership, debt and everything else that can be hidden offshore.

One image I have been toying with lately, in order to explain the dangerous effect of offshorisation, is that each Western country is like a balloon where law and order, civil society seems to permeate the whole balloon. However, at a closer look, the offshore is like a bubble inside the balloon, where civil society is kept out, where bankers, accountants and other facilitators, together with companies and wealthy individuals act as if the rules of society, the social pact, didn’t exist; i.a. have created this safe haven from law and order.

What we should really be focusing on is that offshore isn’t outside of our countries, it is right within, creating a space immune to all the things the social pact otherwise touches, the social pact of taxation, rule of law etc. And it hugely undermines financial stability… as we saw in 2008, not only in Iceland.

Luxembourg: at the heart of dirty deals and tax destruction

Omri Marian is an assistant professor of law at the Irvine School of Law, University of California. He has studied 172 of the tax contracts the Lux Leaks brought into the open. His very illuminating point is that at first glance the Luxembourg tax laws looks just as sophisticated as tax laws normally do in Western countries. However, there is simply no execution of this convincingly looking legal tax code.

It sounds insane but one person, a certain Marius Kohl, was in charge of agreeing to all the privately negotiated “advance tax agreement,” effectively the tax for individual companies. The agreements, normally running to hundreds of pages, would often be signed off by the very hard-working Kohl on the day of application.

This reminded my of my experience with the Luxembourg financial regulator, Commission de Surveillance du Secteur Financier, CSSF. After the collapse of the Icelandic banks in October 2008 it slowly dawned on me that most of the banks’ dirty deals, especially in Kaupthing and Landsbanki, had been run through their Luxembourg operations.

Yet, when I asked lawyers and accountants I was told that all was in good order in Luxembourg, they had strict laws regarding the financial sector; the CSSF was there to keep an eye on things.

Listening to Marian it dawned on me that yes, this is how Luxembourg does it: it pays lip service to European rules and regulation and what you normally expect from a Western democracy by having a legal code on tax and the finance sector. But that’s all: the laws exist but only on paper – there is no execution to speak of.

Some years ago I visited the CSSF, got an audience with some six or seven people there. A very memorable meeting; we sat at the largest meeting table I have ever sat at; I on one side, the CSSF-ers on the other side. I told them what was slowly coming to light in Iceland: the alleged fraud and shenanigans, the loans with light covenants and little or no collaterals and guarantees, alleged market manipulations via the banks’ proprietary trading and share parking in companies the banks finances etc. – so, weren’t they going to look into the banks’ operations. There were darting eyes and down-cast faces: no, no need to do anything, all in good order in Luxembourg. D’accord…

I intend to write further on the thoughts above – but suffice it to say that if the European Union is at all serious about acting on the offshorisation of the European economies it has to make sure that Luxembourg not only adorns itself with all the correct-looking legal codes but actually enforces it, i.a. by having the staff needed to do so.

*Nicholas Shaxson blogged today on the Tax Justice Network on these aspects of Luxembourg and quoted some of my earlier blogs on Luxembourg, i.a. my observations that Luxembourg attract financial companies because they know full well that Luxembourg is a safe haven… from regulatory scrutiny.

Follow me on Twitter for running updates.

The largest landowner in Iceland owns around 1% of Iceland, mostly land adjacent to salmon rivers in the North East of Iceland – and he is not Icelandic but one of the wealthiest Brits, James or Jim Ratcliffe, a Sir since last year, of Ineos fame. His secretive acquisitions of farms with angling rights have been facilitated by the Icelandic businessmen who for years have been investing in salmon rivers through offshore companies. Opaque ownership is nothing new. Though the novelty is the grip on these rivers now held by a foreigner, with no ties to the community and assets valued at just above the Icelandic GDP, the central problem is mainly the nationality of the owner, but the concentration of ownership.

“If you are doing honest business, I assume you would feel better if you could talk freely about it. This secrecy breeds suspicion,” says Ævar Rafn Marinósson, a farmer at Tungusel in North East Iceland. The secretive business he is talking about is the business of buying farms adjacent to salmon rivers in his part of Iceland.

The secrecy is not new: for more than a decade, the ownership of the attractive salmon rivers in Iceland has been hidden in an opaque web of on- and offshore companies. That opacity might now hit the community when rivers and land is increasingly being held by one man, Jim Ratcliffe, whose assets are estimated £18.15bn. Through direct and indirect ownership, Ratcliffe owns over forty Icelandic farms concentrated in and around Vopnafjörður, which gives him the control of angling rights in some of the best salmon rivers in Iceland.

The petrochemical giant Ineos is Ratcliffe’s source of wealth. Interestingly, his salmon investments are part of his recent, rapidly growing investment in sport, from cycling, sailing and football to his, so far, tentative interest in British Premier League football clubs with price tags of billions. Ratcliffe claims that his petrochemical industries are run in an environmentally friendly way and strongly denies that his sport investments are any form of green-washing.

The secrecy surrounding Ratcliffe’s Icelandic investments, so out of proportions in this rural community of salmon and sheep farmers, has bred both rumours and suspicion that splits apart families, neighbours and the local communities as they debate whether the funds on offer are a substitute for losing control of the angling and the land.

Also, because Ratcliffe is a distant owner. He leaves it to his Icelandic representatives to talk to the farmers some of whom, like Marinósson, refuse to sell and as a consequence feel harassed. And then there are the pertinent questions of how Ratcliffe’s funds flow into the local economy, as one farmer opposed to Ratcliffe’s growing hold of the region, mentioned in an interview in the Icelandic media.

Following Ratcliffe’s purchases, foreign ownership of land is now a hot topic in Iceland. The government is looking at legal restrictions to limit foreign ownership. A new poll shows that 83.6% of Icelanders support this step. – But that might be a mistaken angle: the problem is not foreign ownership but concentrated ownership.

“I’m not upset with Ratcliffe, he’s just a businessman pursuing his interests. I’m upset with the government of Iceland that is letting this happen,” says Marinósson. He is not the only one to point out that a new legislation might come too late for the salmon rivers in the North East.

Angling – strictly regulated

Though far from being a mass industry, angling has long been both a beloved sport in Iceland and attracted wealthy foreigners. In the early and mid 20^th century, English aristocrats came to fish in Iceland. In the 1970s and 1980s, the Prince of Wales was fishing in Hofsá, now controlled by Ratcliffe. With the changing pattern of wealth came high-flyers from the international business world.

As angling interest grew, net fishing for salmon was restricted so as to let the angling flourish. In 2011, 90% of the salmon caught in Iceland was from angling. The annual average salmon catch is around 36.000 salmon, with the figures jumping over 80.000 in the best years. There are in total 62 salmon rivers with 354 rods allowed; the rivers in the North East are thirty, with 124 rods (2011 brochure in English; Directorate of Fisheries).

According to the Salmon and Trout Act from 2006, the fishing rights are privately owned by those who own the land adjacent to rivers and lakes. The fishing rights come with a string of obligations, supervised by the Directorate of Fisheries and most importantly: the fishing rights cannot be split from the land – the only way to control the angling is to own a farm or farms holding the angling right.

The owners of the farms owning a river or lake are obliged to set up a fishing association to manage the angling; both the necessary investment and the profit has to be shared according to the amount of land owned. The ownership is split according to voting rights and percentage owned.

Wielding control over the angling, these associations can decide either to manage the angling themselves or lease out the rights to angling clubs or other consortia.

From overfishing to highly regulated angling regime

Already in the 1970s, the fishing associations run by the farmers owning the best salmon rivers were increasingly leasing out the angling rights to groups of wealthy Icelandic anglers, mostly business men from Reykjavík.

In some rare cases, foreign anglers who frequented Iceland, held the angling rights through a lease. One attractive salmon river in the North East, Hafralónsá, where Ævar Rafn Marinósson and his family are among the owners, was leased by a Swiss angler from 1983 to 1994; from 1995 to 2003, a British and a French angler leased the river.

During the 1990s, the popularity of angling led to overfishing in many salmon rivers with tension between biology and the financial profits from the angling rights. But the owners of the angling rights quickly came to understand that overfishing would kill the goose laying the golden eggs, or rather the salmon that brought wealth to the community.

The angling is now restricted in many ways: each river has only a certain number of rods; the angling time is restricted to certain hours of the day and a certain amount of annual angling days, often 90 days, from mid-June.

In addition, some form of “fish and release” is in place in most if not all the highly sought after and expensive salmon rivers. All these protective measures have been driven by those who control the angling, i.e. the fishing associations owned by the landowners.

Foreign anglers mainly pursue the sporty fly-fishing, whereas Icelanders tend not to frown upon using spoons and worms. Icelandic anglers know it is good to fish with spoons and worms after the foreign fly-anglers have been “beating the river” as we say in Icelandic. That normally ensures great catch, a trick the Icelandic anglers are happy to use.

Angling – from farmers to wealthy business men

The leases related to the salmon rivers normally run for some years. The fees to the fishing associations are a significant part of income for the farmers. The lessees are normally obliged to undertake investment in the infrastructure around the river.

Part of cultivating the salmon population in the rivers is expanding the habitat. This is for example done by building “salmon-ladders,” enabling the salmon to migrate beyond waterfalls or other hindrances, potentially increasing the rods allowed in each river and thus making the river more profitable.

Those who rent the rivers try to sell each rod at as high a price as the market can tolerate. Angling in the best rivers in Iceland is an expensive sport, also because the fishing is sold as a package with accommodation and meals included.

No longer primitive huts, the best fishing lodges are like boutique hotels, where the best chefs in Iceland come and cook for discerning anglers with the wines to match. Part of the summer news in the Icelandic media is reporting on the number of salmon caught in the well-known rivers, size and weight, what tools were used and sometimes also who is angling where.

This is the angling of the very wealthy. But angling is also popular with thousands of ordinary Icelanders. Angling for salmon, trout and sea trout in less famous rivers and lakes, is an affordable and ubiquitous sport in Iceland.

The opaque ownership web that Ratcliffe is buying into

Incidentally, this development of buying farms, not just licensing the angling rights, has been going on in Iceland for decades. In the early 1970s, a medical doctor and keen angler in Reykjavík, Oddur Ólafsson, bought five farms along Selá. Decades and several owners later these farms are now owned by Ratcliffe.

Orri Vigfússon (1942-2017) was a businessman and passionate angler, who in 1990 set up the North Atlantic Salmon Fund as an international initiative in order to protect and support the wild North Atlantic salmon. Vigfússon was influential in Icelandic angling circles and well known in angling circles all around the North Atlantic. He was also primus motor in Strengur, a company that for decades has controlled the best rivers in the North East, now controlled by Ratcliffe.

The web of on- and offshore companies related to angling has been in the making in Iceland since the late 1990s, when the general offshorisation of wealthy Icelanders boomed through the foreign operations of the Icelandic banks. A key person in this web is an Icelandic businessman.

Born in 1949, Jóhannes Kristinsson has been living in Luxembourg for years. Media-shy in Iceland he was in business with flashy businessmen like the duo Pálmi Haraldsson and Jón Ásgeir Jóhannesson of Baugur fame, synonymous with the Icelandic boom before the 2008. Kristinsson seems to be linked to around 25 Icelandic companies.

By 2006, it was attracting media attention in Iceland that wealthy anglers were no longer just licencing the angling rights but were outright buying farms holding angling rights. One name figured more often than others, Jóhannes Kristinsson. In an interview at the time, Kristinsson said he probably owned only one farm outright but was mostly a co-owner with others, without wanting to divulge how much he owned.

The farmers felt they knew Kristinsson, a frequent guest in the North East and the opaque ownership did not seem much of an issue. However, the effect of the opacity is now becoming very clear as Kristinsson is selling to a foreigner with no ties to the community, leaving the community potentially little or no control over some of its glorious rivers and land.

Luxembourg, Ginns and Reid

Kristinsson’s ownership of lands and rivers in the North East seems to have been held in Luxembourg from early on. Dylan Holding is a Luxembourg company, registered in 2000, by BVI companies, which Kaupthing owned and used to offshorise its clients. No beneficial owner is named in any of the publicly available Dylan Holding documents but the company was set up with Icelandic króna, indicating its Icelandic ownership.

According to Dylan Holding’s 2018 annual accounts, the company, still filing accounts in Icelandic króna, held assets worth ISK2.6bn. Its 2017 accounts list eleven Icelandic holding companies, fully or majority-owned by Dylan Holding, among them Grænaþing. Last year, Ratcliffe bought Grænaþing, as part of the deal with Kristinsson; an indication of Kristinsson being the beneficial owner of Dylan Holding.

The names of two of Ratcliffe’s trusted Ineos lieutenant, Jonathan F Ginns and William Reid, are closely linked to Ratcliffe’s Icelandic ventures as to so many other Ratcliffe ventures. According to UK Companies House, Ginns sits or has been on the board of over seventy Ineos/Ratcliffe related companies, Reid on seven.

Ginns and Reid sit on the boards of three Icelandic companies previously owned by Dylan Holding indicating that these companies are now under Ratcliffe’s control. Whether Ratcliffe has bought Dylan Holding outright or where exactly his ownership stands at, remains to be seen but it seems safe to conclude that Ratcliffe now owns significantly more land on his own rather than, as earlier, through joint venture with Kristinsson and others. Kristinsson seems to be withdrawing, leaving Ratcliffe as the sole owner.

Ratcliffe’s rapid rise to being Iceland’s largest landowner

Jim Ratcliffe, the angler with the funds to indulge his salmon passion was nr.3 on the Sunday Times Rich List this year, with assets valued at £18.15bn, down from £20.05bn in 2018, when he ranked nr.1. A Brexiteer who is not waiting for Brexit to happen: after relocating to the UK from Switzerland, where Ratcliffe and Ineos were domiciled from 2010 until some months after the EU referendum in 2016, Ratcliffe moved to Monaco last year. Tax and regulation seem to be his main concerns.

Ratcliffe had been fishing in Vopnafjörður for some years without attracting any attention. It was not until late 2016, when he visibly started buying into the Icelandic angling consortia, that his name first appeared in the Icelandic media. By then, he already owned eleven farms in the area, both through sole ownership and through his share in Strengur. Local sources believe Ratcliffe started investing earlier in angling assets, hidden in opaque ownership structures.

In December 2016 it was announced that Ratcliffe had bought the major part of the single largest farmland in Iceland, Grímsstaðir. This mostly barren wasteland of glorious beauty in the highlands beyond Mývatn had been owned by Grímstaðir farmers and their families for generations. The Icelandic state was a minority owner and has retained its share of the land. Ratcliffe stated at the time he was buying Grímsstaðir because it was part of the Selá water system; buying the land was part of his plan to support and protect the wild salmon.

The Grímsstaðir deal drew a lot of media attention in Iceland because in 2011, a Chinese businessman and poet, Huang Nubo, had tried to purchase this land with unclear intentions. Nubo had some Icelandic friends from his university years but practically no assets abroad except some real estate in the US, which he seemed to struggle to maintain. In 2014, the Icelandic government vetoed Nubo’s plans: he was not European, and his plans lacked clarity.

For decades, Strengur, under changing ownership, has managed the angling rights in Selá and Hofsá, two of the best salmon rivers in the North East and bought up farms adjacent to the rivers. In 2012, a new 960sq.m fishing lodge opened by Selá, a good example of the investment done in order to improve the angling experience and cater to wealthy anglers.

Following a 2018 transaction Ratcliffe owns almost 87% of Strengur, a jump from the 34% he had owned earlier, meaning that he controls the angling rights in both Selá and Hofsá. Ratcliffe bought the 52.75% by purchasing a company owned by Jóhannes Kristinsson. Strengur’s director Gísli Ásgeirsson (who features in this Ineos PR video) is now seen as Ratcliffe’s mouthpiece. He has ties to around twenty Icelandc companies, many of which are linked to Kristinsson.

The Ratcliffe Kristinsson consortium now owns 40 to 50 farms. But Ratcliffe is looking for more: earlier this year, Ratcliffe added one farm to his Icelandic portfolio. He now seems trying to secure ownership of yet another river, Hafralónsá.

The Icelandic media had reported that he had now secured majority in the angling association of that river but that does not seem to be the case. Ævar Rafn Marinósson is one of the owners of Hafralónssá. He says to Icelog that as far as he knows, Ratcliffe is still a minority owner.

The suspicion among those who are not in Ratcliffe’s fold is rife as a change in ownership might bring about drastic changes. With majority hold, Ratcliffe might for example drive the farmers in minority to bankruptcy by forcing through investments in the Hafralónsá angling association, which would wipe out the profits that make an important part of the farmers’ annual income.

Ratcliffe’s representative made Marinósson an offer to buy his farm. His answer was that the farm, which he owns with his parents, was not for sale. The representative then visited his elderly parents with the same offer, although it had been made clear to him that the farm was not for sale.

Misinformed passion

In a PR video from Ineos, Jim Ratcliffe talks of “overfishing and ignorance” that threat the salmon populations in Iceland. In the video Ratcliffe’s passion for salmon fishing is given as his drive for investing “heavily in the region to help expand the salmon’s natural breeding grounds” through constructing of salmon ladders in six rivers. The latter part of the video is about his investment in safari parks in Africa, with both initiatives presented as rising from Ratcliffe’s environmental concerns.

As mentioned earlier, the times of overfishing in Icelandic salmon rivers are long over. To portray Ratcliffe as a saviour of the salmon rivers in the North East is at best misinformed, at worst profoundly patronising to the farmers who have lived and bred salmon all their live and whose livelihoods have partly depended on the silvery fish. But the fact that Ratcliffe has the funds to follow his passion cannot be disputed.

In August this year Ineos Technology Director Peter S. Williams signed an agreement on behalf of Ratcliffe with the Marine and Fresh Water Institute in Iceland, where Ratcliffe takes on to fund salmon research to the amount of ISK80m, around £525.000. At the time it was announced that any profit from Strengur will be ploughed into maintaining and supporting the salmon populations in the rivers that Strengur controls. Strengur’s director Gísli Ásgeirsson said at the time that the aim was sustainability in cooperation with the farmers and local councils. There will be those in the local community who feel that cooperation is exactly what is lacking.

In a Rúv tv interview I did with Ratcliffe in 2017 (unfortunately no longer available online), Ratcliffe said he was driven by his passion for angling and the uniqueness of the unspoiled nature in Iceland, a value in itself. There is some speculation in Iceland that Ratcliffe’s angling investments might be driven by something else then his passion for angling.

Some think water as commodity in a world facing water shortage is his real interest, which would explain his emphasis on buying the rivers outright instead of joint venture or just renting the angling rights. Others, that plans by Bremenport to build a port in nearby Finnafjörður in order to service the coming Transpolar Sea Route might be in Ineos’ interest. Again, total speculation but heard in Iceland. – Ineos is investing in facilities in Willhelmshaven, where Bremenport is building a new container terminal.

Mushrooming sport investment: from millions in salmon and safari to, possibly, billions in Premier League football  

Ratcliffe’s UK holding company for his Icelandic assets is Halicilla Ltd, incorporated in 2015, its business being “mixed farming.” Halicilla’s 2017 accounts list two Icelandic companies as assets, Fálkaþing, incorporated in 2013 and Grenisalir, incorporated in 2016, “Icelandic companies, which in turn hold land and fishing rights.”

Ratcliffe has been unwilling to divulge how much he has invested in Iceland but that can be gleaned with some certainty from the Halicilla accounts: its assets amounted to £9.7m in 2016, which with further acquisitions in 2017, had grown to £15.3m by the end of 2017, financed directly by the shareholder, i.e. Ratcliffe.

In addition to investments in Icelandic salmon rivers, Ratcliffe’s sports investments have mushroomed in the recent years. In December 2017, he announced his investment in luxury eco-tourism project in safari parks in Tanzania through a UK company, Falkar Ltd, incorporated in 2015. As Halicilla, Falkar is financed by Ratcliffe, with a loan of £6.3m, at the end of 2017. With his interest in sailing, Ratcliffe owns two yachts, one of them, Hampshire II a superyacht worth $150m, with two of his Ineos partners owning three yacths. In addition, Ratcliffe owns four jets, three Gulfstream jets and one Dassault Falcon.

Ratcliffe’s other sport investments involve much higher figures than his investments in salmon and safari. Last year, he invested £110m in Britain’s America’s Cup team. His investment in March in the cycling Team Sky, now Team Ineos, seemed to imply that the Team’s earlier budget of £34m would increase significantly. In 2017 he bought the Lausanne-Sport football club, where his brother is now the club’s president, and has recently completed a £88.7m deal to buy Ligue 1 club Nice.

The figures might rise: last year, Ratcliffe led an unsuccessful bid of £2bn for Chelsea FC and has aired his interest to buy his favourite team, Manchester United – one day, some super-star footballers might be practicing fly-fishing under Ratcliffe’s instructions in Vopnafjörður.

Split families and farming communities, threats and bullying

The farmers in the North East face a dilemma. It is in the interest of farmers to be able to sell their farm for a reasonable price if they intend to retire or give up farming for other reasons. However, seeing whole fjords and entire rivers now owned not by a consortium of wealthy anglers in Reykjavík but by a single foreigner, wholly unrelated to the country and the North East, with a strangle hold on the community, has spread unease.

When the Icelandic consortia started buying farms in order to gain control of the angling, the farmers often continued to live on the farm, as tenants. On the whole, the farms have continued to be farmed, though there are exceptions.

Ratcliffe has stated he is keen for the farmers to keep living on the farms and has offered them to stay as tenants. With money in the bank the tenants can profit from the land as earlier but no longer benefit from the angling rights as earlier or have any say on the use of the river.

Ratcliffe’s acquisitions have completely changed the game around the rivers. The novelty is his immense buying power. His entrance into the angling circles has split families and communities. To sell or not to sell is a burning question for many since Ratcliffe’s representatives keep making lucrative offers to the few farmers who have so far been unwilling to sell.

This is, as such, not entirely Ratcliffe’s fault – he simply has an exorbitant amount of money to indulge in one of his hobbies though he has shown little interest in learning from the farmers who know the rivers like the back of their hands. But this sowing of anger and unease has been the side effect of his investments. Perhaps also to some degree because of the people he has chosen to work with in Iceland; how well informed Ratcliffe is of the circumstances surrounding his investments is unclear.

Ratcliffe flies in and out of Iceland. The Icelanders who work for him are there and some live in the communities Ratcliffe has already bought or is trying to buy. His salmon shopping spree may be backed by the best intensions, but the side effect is effectively making him the ruler of a few hundred Icelanders who live off the land they love dearly. The land, which Ratcliffe visits at his leisure, once in a while.

Restrictions on ownership of land may come too late for the North East

Foreign ownership is a hot topic in Iceland for the time being, given the quick and enormous concentration of Ratcliffe’s ownership in the North East. But it would be wrong to focus on foreign ownership – the real problem is concentrated ownership.

Ratcliffe is not the only foreign landowner in Iceland. There are a few others but there is increased interest from abroad for land in Iceland. One foreign owner closed off his land with signs of “Private road,” much to the irritation of his Icelandic neighbours since free passage in the country side is seen as a general right in Iceland. One practical reason is the gathering of sheep: sheep roam freely in summer and farmers need to roam just as freely when the sheep is gathered in autumn.

Though rapidly developing, luxury tourism is still a rarity in Iceland, and has so far not led to land being closed off. As Ratcliffe’s Tanzania investment shows, he is interested in luxury tourism. Seeing angling turning into an even more rarefied luxury than it already is, marketed mainly for people in Ratcliffe’s wealth bracket, is not an enticing thought for most Icelanders.

The government led by Katrín Jakobsdóttir, leader of the Left Green party (Vinstri Grænir), with the Independence party (Sjálfstæðisflokkur) and the Progressives (Framsóknarflokkur), is now under pressure to consider means to limit foreign ownership. A working group has been gathering material and new law is promised this coming winter. One step in the right direction of focusing on concentrated ownership, not just foreign ownership, would be to reintroduce pre-emptive purchase rights of local councils, abolished in 2004.

Finding the proper criteria that drive rural development in the right direction will not be easy. But Icelanders are certainly waiting for that to happen – having stratospherically wealthy people, Icelandic or foreign, owning entire rivers and fjords on a scale not seen since the time of the feudal lords of the Icelandic sagas is not seen as positive rural development. When law is finally passed, it might be too late to prevent that to happen in the North East.

*This image is from a July 21 July 2018 article on Ratcliffe’s acquisitions in the Icelandic daily Morgunblaðið and shows ownerships of farms in Vopnafjörður (there are other farms in the neighbouring communities.)

Follow me on Twitter for running updates.

In August 2017, French prosecutors lost their criminal case against ex Landsbanki chairman of the board Björgólfur Guðmundsson* and eight former employees of Landsbanki Luxembourg. These nine were charged in relation to the bank’s equity release loans. The prosecution won an appeal and the case is now in court again at Palais de Justice, expected to run into June.

Over the last few decades, equity release loans have wrecked havoc for borrowers in many countries. Like FX loans (see Icelog here), they have been a wandering financial curse. When circumstances change, bankers claim they could not have known – a hollow claim given the history of these loans.

The Landsbanki equity release lending saga has now been running for over a decade, closely followed on Icelog for the last few years (an overview here; link to earlier coverage here). This is a saga in three chapters:

1 The Landsbanki Luxembourg lending – how the loans were sold (an interesting aspect, given that banks all over Europe have lost FX lending cases due to EU consumer directives); the (unrealistically high?) evaluation of the properties used as collaterals; was there ever a viable plan in place in the bank to properly invest that part of the loan that was suppose to pay for the payout part; how credible and trustworthy was the bank’s information to customers? Given that Landsbanki was in dire straits when it started selling these loans it is also of interest what the bank’s purpose was with the loans: just another financial product or a product to save the bank? – This chapter is part of the criminal case in Paris.

2 The administration of Landsbanki Luxembourg has raised many and serious questions that Luxembourg authorities have so far been utterly unwilling to consider. The administrator, Yvette Hamilius, accuses the borrowers of simply trying to avoid paying. In 2012, the Luxembourg prosecutor Robert Biever issued a statement in her favour, without ever having investigated the case; an interesting if scary example of how the justice operates in the Duchy that depends on banking for its good life. – However, as earlier recounted on Icelog, the borrowers have a very different story to tell, of misleading and conflicting information on their loans and then an unwillingness on behalf of the administrator to engage with them and answer their questions. – Interestingly, Landsbanki Luxembourg has recently been losing in civil cases in Spain where equity release borrowers have brought the estate to court, mainly on the ground of consumer protection (see ERVA for various moves in Spain).

3 The sole creditor to Landsbanki Luxembourg is LBI., the estate of the failed Landsbanki Iceland. LBI has no direct control over Landsbanki Luxembourg but as seen from its webpage, it follows the case closely. The assets in Luxembourg are now the only assets left for LBI to distribute to its creditors. The question is if the administrator’s hard line against the borrowers, with the accruing legal cost and the clock ticking in eternity, really is in the interest of Landsbanki Luxembourg’s sole creditor.

This time there is a formidable presence on the borrowers’ legal team. Originally Norwegian, Eva Joly studied law in France. She was appointed an investigative judge in the early 1990s, famous for taking on the great and the not so good in major corruption case, where dozens of people, who never expected to see the inside of a prison cell, ended up just there. Joly, an MEP since 2006, cooperates with her daughter, Caroline, also a lawyer.

It remains to be seen how things progress this time in the Paris court room at the grandiose Palais de Justice.

*Together with his son Thor Björgólfsson, Björgólfur Guðmundsson was the largest shareholder of Landsbanki; father and son owned just over 40% of the bank but in reality, controlled over 50% of the bank since ca. 10% of the bank’s shares were in several offshore companies, controlled by the bank itself. This is one the many things exposed by the 2010 report by the Icelandic Special Investigative Commission. Guðmundsson was declared bankrupt following the banking collapse, his son is still one of the wealthiest people on this planet.

Follow me on Twitter for running updates.

The Icelandic SIC report and court cases in Iceland have made it abundantly clear that most of the questionable, and in some cases criminal, deals in the Icelandic banks were executed in their Luxembourg subsidiaries. All this is well known to authorities in Luxembourg who have kindly assisted Icelandic counterparts in obtaining evidence. One story, the Landsbanki Luxembourg equity release loans, still raises many questions, which Luxemburg authorities do their best to ignore in spite of a promised investigation in 2013. Some of these questions relate to the activities of the bank’s liquidator, ranging from consumer protection, the bank’s investment in the bank’s own bonds on behalf of clients and if the bank set up offshore companies for clients without their consent.

The Landsbanki Luxembourg equity release loans were issued to clients in France and Spain. Indeed, all these loans were issued to clients outside of Luxembourg. One intriguing fact emerged during the French trial in Paris last year against Landsbanki Luxembourg and nine of its executives and advisors: the French clients got the bank’s loan documents in English, the non-French clients got theirs in French.*

Landsbanki Iceland went into administration October 7 2008. The next day, Landsbanki Luxembourg was placed into moratorium; liquidation proceedings started 12 December. Over the years, Icelog has raised various issues regarding the Landsbanki Luxembourg equity release loans, mostly sold to elderly people (see here). These issues firstly relate to how the bank handled these loans, both the marketing and the investments involved and secondly, how the liquidator Yvette Hamilius, has handled the Landsbanki Luxembourg estate and the many complaints raised by the equity release clients.

A liquidator is an independent agent with great authority to investigate. There is abundant material in Iceland, both from the 2010 Report of the Special Investigative Commission, SIC and Icelandic court cases where almost thirty bankers and others close to the banks have been sentenced to prison. These cases have invariably shown that the most dubious deals were done in the banks’ Luxembourg operations.

Already by June 2015, liquidators of the estates of the three large Icelandic banks were ending their work, handing remaining assets over to creditors. In the, in comparison, tiny estate of Landsbanki Luxembourg there is no end in sight due to various legal proceedings. Yet, its arguably largest problem, the so-called Avens bond, was solved already in 2011. At the time, Már Guðmundsson governor of the Icelandic Central Bank paid tribute to the help received from amongst others Hamiliusfor “considerable efforts in leading this issue to a successful conclusion.”

The Landsbanki Luxembourg equity release clients have another story to tell, both in terms of their contacts with the liquidator and Luxembourg authorities. In May 2012, these clients, who to begin with had each and everyone been struggling individually, had formed an action group and aired their complaints in a press release, questioning Luxembourg’s moral standing and Hamilius’ procedures.

The following day, the group got an unexpected answer: Luxembourg State Prosecutor Robert Biever issued a press release. As I mentioned at the time, it was jaw-droppingly remarkable that a State Prosecutor saw it as his remit to address a press release directed at the liquidator of a private company in a case the Prosecutor had not investigated. According to Biever, Hamilius had offered the borrowers “an extremely favourable settlement” but “a small number of borrowers,” unwilling to pay, was behind the action.

In 2013 Luxembourg Justice Minister promised an investigation into the Landsbanki products that was already taking “great strides.” So far, no news.

The Landsbanki Luxembourg equity release scheme: high risk, rambling investments

In theory, the magic of equity release loans is that by investing around 75% of the loan the dividend will pay off the loan in due course. I have seen calculations of some of the Landsbanki equity release loans that make it doubtful that even with decent investments, the needed level of dividend could have been reached – the cost was simply too high.

If something seems too good to be true it generally is. However, this offer came not from a dingy backstreet firm but from a bank regulated and supervised in Luxembourg, a country proud to be the financial centre of Europe. And Landsbanki was not the only bank offering these loans, which interestingly have long ago been banned or greatly limited in other countries. In the UK, equity release loans wrecked havoc and created misery some decades ago, leading to a ban on putting up the borrower’s home as collateral.

Having scrutinised the investments made for some of the Landsbanki Luxembourg clients the first striking thing is an absolutely staggering foreign currency risk, also related to the Icelandic króna. Underlying bonds on the foreign entities such as Rabobank and European Investment Bank were nominated in Icelandic króna (see here on Rabobank ISK bond issue Jan. 2008), in addition to the bonds of Kaupthing and Landsbanki, the largest and second largest Icelandic banks at the time.

Currencies were bought and sold, again a strategy that will have generated fees for the bank but was of dubious use to the clients.

The second thing to notice is the rudderless investment strategy. To begin with the money was in term deposits, i.e. held for a fixed amount of time, which would generate slightly higher interest rates than non-term deposits. Then shares and bonds were bought but there was no apparent strategy except buying and selling, again generating fees for the bank.

The equity release clients were normally not keen on risk but the investments were partially high risk. The 2007 and 2008 losses on some accounts I have looked have ranged from 10% to 12%. These were certainly testing years in terms of investment but amid apparently confused investing there was indeed one clear pattern.

One clear investment pattern: investing in Landsbanki and Kaupthing bonds

Having analysed statements of four clients there is a recurring pattern, also confirmed by other clients and a source with close knowledge of the bank’s investments: in 2008 (and earlier) Landsbanki Luxembourg invariably bought Landsbanki bonds as an investment for clients, thus turning the bank’s lending into its own finance vehicle. In addition, it also bought Kaupthing bonds. The 2010 SIC report cites examples of how the banks cooperated to mitigate risk for each other.

It is not just in hindsight that buying Landsbanki and Kaupthing bonds as equity release investment was a doomed strategy. Both banks had sky-high risk as shown by their credit default swap, CDS. The CDS are sort of thermometer for banks indicating their health, i.e. how the market estimates their default risk.

The CDS spread for both banks had for years been well below 100 points but started to rise ominously in 2007 as the risk of their default was perceived to rise. At the beginning of 2008, the CDS spread for Landsbanki was around 150 points and 300 points for Kaupthing. By summer, Kaupthing’s CDS spread was at staggering 1000 points, then falling to 800 points. Landsbanki topped close to 700 points. The unsustainably high CDS spread for these two banks indicated that the market had little faith in their survival. With these spreads, the banks had little chance of seeking funds from institutional investors (SIC Report, p.19-20).

The red lights were blinking and yet, Landsbanki Luxembourg staff kept on steadily buying Landsbanki and Kaupthing bonds on behalf of clients who were clearly risk-averse investors.

Equity release investment in some details

To give an idea of the investments Landsbanki Luxembourg made for equity release borrowers, here is some examples of investment (not a complete overview) for one client, Client A:

Loan of €2.1m in January 2008; the loan was split in two, each half converted into Swiss francs and Japanese yens. The first investment, €1.4m, two thirds of the loan,was in LLIF Balanced Fund (in Landsbanki Luxembourg loan documents the term used is Landsbanki Invest. Balanced Fund 1 Cap but in later overviews from the liquidator it is called LLIF Balanced Fund, a fund named in Landsbanki’s Financial Statements 2007 as one of the bank’s investment funds).

Already in February 2008 Landsbanki Luxembourg bought Kaupthing bond for this client for €96.000. End of April 2008 €155.000 was invested in Landsbanki bond, days before €796.000 of the LLIF Balanced Fund investment was sold. Late May and end of August Landsbanki bonds were bought, in both cases for around €99.000. In early September 2008 Landsbanki invested $185.000 in Kaupthing bonds for this client. The next day, the bank sold €520.000 in LLIF Balanced Fund.

Landsbanki’s investments were focused on the financial sector that in 2008 was showing disastrous results. For client A the bank bought bonds in Nykredit, Rabobank, IBRD and EIB, apparently all denominated in Icelandic króna. In addition, there were shares in Hennes & Maurits, and a Swedish company selling food supplement.

A similar pattern can be seen for the other clients: funds were to begin with consistently invested in LLIF Balanced Fund but later sold in favour of Kaupthing and Landsbanki bonds. Although investment funds set up by the Icelandic banks were later shown to contain shares in many of the ill-fated holding companies owned by the banks’ largest shareholders – also the banks’ largest borrowers – a balanced fund should have been seen as a safer investment than bonds of banks with sky-high CDS spreads.

MiFID and the Landsbanki Luxembourg equity release loans

Landsbanki certainly did not invent equity release loans. These loans have been around for decades. Much like foreign currency, FX, loans, a topic extensively covered by Icelog, they have brought misery to many families, in this case mostly elderly people. FX lending has greatly diminished in Europe, also because banks have been losing in court against FX borrowers for breaking laws on consumer protection.

There might actually be a case for considering the equity release loans as FX loans since the loans, taken in euros, were on a regular basis converted into other currencies, as mentioned above. – This is, so far, an unexplored angle of these cases that Luxembourg authorities have refused to consider.

Another legal aspect is that the first investments were normally done before the loans had been registered with a notary, as is legally required in France.

The European MiFID, Markets in Financial Instruments Directive was implemented in Luxembourg and elsewhere in the EU in 2007. The purpose was to increase investor protection and competition in financial markets.

Consequently, Landsbanki Luxembourg was, as other banks in the EU, operating under these rules in 2007. It is safe to say, that the bank was far below the standard expected by the MiFID in informing its clients on the risk of equity release loans.

The following paragraph was attached to Landsbanki Luxembourg statements: “In the event of discrepancies or queries, please contact us within 30 days as stipulated in our “General Terms and Conditions.”– However, the bank almost routinely sent notices of trades after the thirty days had passed.

It is unclear if the liquidator has paid any attention to these issues but from the communication Hamilius has had with the equity release clients there is nothing to indicate that she has investigated Landsbanki operations compliance with the MiFID. MiFID compliance is even more important given that courts have been turning against equity release lenders in Spain due to lack of consumer protection – and that banks have been losing in courts all over Europe in FX lending cases.

Clients offshorised without their knowledge

The “Panama Papers” revealed that Landsbanki was one of the largest clients of law firm Mossack Fonseca; it was Landsbanki’s go-to firm for setting up offshore companies. Kaupthing, no less diligent in offshoring clients, had its own offshore providers so the leak revealed little regarding Kaupthing’s offshore operations. The prime minister of Iceland Sigmundur Davíð Gunnlaugsson, who together with his wife owned a Mossack Fonseca offshore company, became the main story of the leak and resigned less than 48 hours after the international exposure.

In September 2008, a Landsbanki Luxembourg client got an email from the bank with documents related to setting up a Panama company, X. The client was asked to fill in the documents, one of them Power of Attorney for the bank and return them to the bank. The client had never asked for this service and neither signed nor sent anything back.

In May 2009, this client got a letter from Hamilius, informing him that the agreement with company X was being terminated since Landsbanki was in liquidation. The client was asked to sign a waiver and a transfer of funds. Attached was an invoice from Mossack Fonseca of $830 for the client to pay. When the client contacted the liquidator’s office in Luxembourg he was told he should not be in possession of these documents and they should either be returned or destroyed. Needless to say, the client kept the documents.

Company X is in the Offshoreleak database, shown as being owned by Landsbanki and four unnamed holders of bearer shares. – Widely used in offshore companies, bearer shares are a common way of hiding beneficial ownership. Though not a proof of money laundering, the Financial Action Task Force, FATF, considers bearer shares to be one of the characteristics of money laundering.

This shows that Landbanki Luxembourg set up a Panama company in the name of this client although the client did not sign any of the necessary documents needed to set it up. Also, that the liquidator’s office knew of this. (This account is based on the September 2009 email from Landsbanki Luxembourg to the client and a statement from the client).

Other clients I have heard from were offered offshore companies but refused. The story of company X only came out because of the information mistakenly sent from the liquidator to the client.

Landsbanki Luxembourg clients now wonder if companies were indeed set up in their names, if their funds were sent there and if so, what became of these funds. This has led them to attempt legal action in Luxembourg against the liquidator. Only the liquidator will know if it was a common practice in Landsbank Luxembourg to set up offshore companies without clients’ consent, if money were moved there and if so, what happened to these funds.

The curious role of a certain Philomène Ruberto

Invariably, the equity release loans in France and Spain were not sold directly by Landsbanki Luxembourg but through agents. This is another parallel to FX lending characterised by this pattern. According to the Austrian Central Bank this practice increases the FX borrowing risk as agents are paid for each loan and have no incentive to inform the client properly of the risks involved.

One of the agents operating in France was a French lady, Philomène Ruberto. In 2011, well after the collapse of Landsbanki, the Landsbanki Luxembourg was putting great pressure on the equity release borrowers to repay the loans. At this time, Ruberto contacted some of the clients in France. Claiming she was herself a victim of the bank, she offered to help the clients repay their loans by brokering a loan through her own offshore company linked to a Swiss bank, Falcon Private Bank, now one of several banks caught up in the Malaysian 1MDB fraud.

Some clients accepted the offer but that whole operation ended in court, where the clients accused Ruberto of fraud and breach of trust. In a civil case judgement at the Cour d’appel d’Aix en Provence in spring 2013, the judge listed a series of Ruberto’s earlier offenses, committed before and during the time she acted as an agent for Landsbanki:

This case was sent on a prosecutor. In a penal case in autumn 2014 Ruberto was sentenced by Tribunal Correctionnel de Grasse to 36 months imprisonment, a fine of €15,000 in addition to the around €190,000 she was ordered to pay the civil parties. According to the 2104 judgement Ruberto was, at the time of that case, detained for other causes, indicating that she has been a serial financial fraud offender since 2001.

But Ruberto’s relationship with Landsbanki Luxembourg prior to the bank’s collapse has a further intriguing dimension: GD Invest, a company owned by Ruberto and frequently figuring in documents related to her services, was indeed also one of Landsbanki Luxembourg largest borrowers. The SIC Report (p.196) lists Ruberto’s company, GD Invest, as one of the bank’s 20 largest borrowers, with a loan of €5,4m.

In 2007, at the time Ruberto was acting as an agent in France for Landsbanki Luxembourg, she not only borrowed considerably funds but, allegedly, on very favourable terms. In March 2007, GD Invest borrowed €2,7m and then further €2.3m in August 2007, in total almost €5,1m. Allegedly, Ruberto invested €3m in properties pledged to Landsbanki but the remaining €2m were a private loan. It is not clear what or if there was a collateral for that part.

By the end of 2011, Ruberto’s debt to Landsbanki Luxembourg was in total allegedly €7,5m. In January 2012 it is alleged that the Landsbanki Luxembourg liquidator made her an offer of repaying €2,4m of the total debt, around 1/3 of the total debt. Ruberto’s track record of fraudulent behaviour from 2001, raises questions to her ties first to Landsbanki and then to Landsbanki Luxembourg liquidator. (The overview of Ruberto’s role is based on emails and court documents provided by Landsbanki Luxembourg equity release borrowers.)

Inconsistent information from the Landsbanki Luxembourg liquidator

From 2012, when I first heard from Landsbanki Luxembourg equity release borrowers, inconsistent information from the liquidator has been a consistent complaint. The liquidator had then been, and still is, demanding repayment of sums the clients do not recognise. There are also examples of the liquidator coming up with different figures not only explained by interest rates. The borrowers have been unwilling to pay because there are too many inconsistencies and too many questions unanswered.

As mentioned above, Landsbanki Luxembourg was put in suspension of payment, in October 2008 and then into administration in December 2008. As far as is known, people who later took over the liquidation were called on to work at the bank during this time. During this time, many clients were informed that their properties had fallen in value, meaning that the collateral for their loan, the property, was inadequate. Consequently, they should come up with funds. At this time, there was no rational for a drop in property value. This is one of the issues the borrowers have, so far unsuccessfully, tried to raise with the liquidator.

Other complaints relate to how much had been drawn. One example is a client who had, by October 2008, in total drawn €200,000. This is the sum this client want to repay. Mid October 2008, after Landsbanki Luxembourg had failed, this client got a letter from a Landsbanki employee stating that close to €550,000, that the client had earlier wanted transferred to a French account, was still “safe” on the Landsbanki account. This amount was never transferred but the liquidator later claimed it had been invested and demanded that the client repay it.

The liquidator has taken an adversarial stance towards these clients. The clients complain of lack of transparency, inconsistent information, lack of information and lack of will to meet with them to explain controversies.

The role and duty of a liquidator

By late 2009 the liquidator had sold off the investments. This is what liquidators often do: after all, their role is to liquidate assets and pay creditors. However, a liquidator also has the duty to scrutinise activity. That is for example what liquidators of the banks in Iceland have done. A liquidator is not defending the failed company but the interests of creditors, in this case the sole creditor, LBI ehf.

Incidentally, the liquidator has not only been adversarial to the clients of Landsbanki but also to staff. In 2011 the European Court of Justice ruled against the liquidator in reference for a preliminary ruling from the Luxembourg Cour du cassation brought by five employees related to termination of contract.

Liquidators have great investigative powers. In addition to documents, they can also call in former staff as witnesses to clarify certain acts and deeds. If this had been done systematically the things outlined above would be easy to ascertain such as: is it proper in Luxembourg that a bank systematically invests clients’ funds in the bank’s own bonds? Was the investment strategy sound – or was there even a strategy? Were clients’ funds systematically moved offshore without their knowledge? If so, was that done only to generate fees for the bank or were there some ulterior motives? And have these funds been accounted for? A liquidator can take into account the circumstances of the lending and settle with clients accordingly.

And how about informing the State Prosecutor of Landsbanki’s investments on behalf of clients in Landsbanki bonds and the offshoring of clients without their knowledge?

But having liquidators in Luxembourg asking probing questions and conducting investigations is possibly not cherished by Luxembourg regulators and prosecutors, given that the country’s phenomenal wealth is partly based on exactly the kind of dirty deals seen in the Icelandic banks in Luxembourg.

LBI ehf – the only creditor to Landsbanki Luxembourg

Landsbanki Luxembourg has only one creditor – the LBI ehf, the estate of the old Landsbanki Iceland. According to the LBI 2017 Financial Statements the expected recovery of the Landsbanki Luxembourg amounts to €84,3m, compared to €74,3m estimated last year. The increase is following what LBI sees as a “favourable ruling by the Criminal Court in Paris on 28 August 2017,” i.e. that all those charged were acquitted.

The only assets in Landsbanki Luxembourg are the equity release loans. The breakdown of the loans, in EUR millions, in the LBI 2017 Statements is the following:

Further to this the Statements explain that “LBI’s claims against the Landsbanki Luxembourg estate amounted to EUR 348.1 million, whereas the aggregate balance of outstanding equity release loans amounted to EUR 293.0 million with an estimated recoverable value … of EUR 84.3 million.”

As pointed out, the information “regarding legal matters pertaining to the Landsbanki Luxembourg estate is mainly based on communications from that estate‘s liquidator, and not all of such information has been independently verified by LBI management.”

Apart from the criminal action in Paris and the appeal of the August 2017 judgment, the Financial Statements mention other legal proceedings: “Landsbanki Luxembourg is also subject to criminal complaints and civil proceedings in Spain. … In November 2012, several customers in France and Spain brought a criminal complaint in Luxembourg against the liquidator, alleging that the former activities of Landsbanki Luxembourg are criminal and thus that the estate’s liquidator should be convicted for money laundering by trying to execute the mortgages. Other criminal complaints have been filed in Luxembourg in 2016 and 2017 based on the same grounds against the liquidator personally.”

This all means that “LBI’s presented estimated recovery numbers are subject to great uncertainty, both in timing and amount.”

What is Luxembourg doing?

It is not the first time I ask this question here on Icelog. In July 2013 there was the news from Luxembourg, according to the Luxembourg paper Wort, that there were two investigations on-going in Luxembourg related to Landsbanki. This surfaced in the Luxembourg parliament as the Justice Minister Octavie Modert responded to a parliamentary question from Serge Wilmes, from the centre right CSV, Luxembourg’s largest party since founded in 1944.

According to Modert both cases related to alleged criminal conduct in the Icelandic banks. One investigation was into financial products sold by Landsbanki. “…the deciding judge is making great strides,” she said, adding that in order not to jeopardize the investigation, the State Attorney was unable to provide further details on the results already achieved.”

Sadly, nothing further has been heard of this investigation.

In spring 2016 the Luxembourg financial regulator, Commission de surveillance du secteur financier, CSSF had set up a new office to protect the interests of depositors and investors. This might have been good news, given the tortuous path of the Landsbanki Luxembourg clients to having their case heard in Luxembourg – CSSF has so far been utterly unwilling to consider their case.

The person chosen to be in charge is Karin Guillaume, the magistrate who ruled on the Landsbanki Luxembourg liquidation in December 2008. As pointed out in PaperJam, Guillaume has been under a barrage of criticism from the Landsbanki clients due to her handling of their case, which somewhat undermines the no doubt good intentions of the CSSF. From the perspective of the Landsbanki Luxembourg clients, CSSF has chosen a person with a proven track record of ignoring the interests of depositors and investors.

So far, Luxembourg authorities have resolutely avoided investigating Landsbanki and the other Icelandic banks. In Iceland almost 30 bankers, also from Landsbanki, and others close to the banks have been sentenced to prison, up to six years in some cases (changes to Icelandic law on imprisonment some years ago mean that those sentenced serve less than half of that time in prison before moving to half-way house and then home; they are however electronically tagged and can’t leave the country until the time of the sentence is over).

In the CSSF 2012 Annual Report its Director General Jean Guill wrote:

During the year under review, the CSSF focused heavily on the importance of the professionalism, integrity and transparency of the financial players. It urged banks and investment firms to sign the ICMA Charter of Quality on the private portfolio management, so that clients of these institutions as well as their managers and employees realise that a Luxembourg financial professional cannot participate in doubtful matters, on behalf of its clients.  

Almost ten years after the collapse of Landsbanki, equity release clients of Landsbanki Luxembourg are still waiting for the promised investigation, wondering why the liquidator is so keen to soldier on for a bank that certainly did participate in doubtful matters.

*In court, the French singer Enrico Macias mentioned that all his documents were in English. I found this strange since I had seen documents in French from other clients and knew there was a French documentation available. When I asked Landsbanki Luxembourg clients this pattern emerged. All the clients asked for contracts in their own language. When the non-French clients asked for contracts in English they were told the documentation had to be in French as the contracts were operated in France. Conversely, the French were told that the language was English as it was an English scheme. I have now seen this consistent pattern on documents for the various clients. – Here is a link to all Icelog blogs, going back to 2012, related to the equity release loans. Here is a link to the Landsbanki Luxembourg victims’ website.

Follow me on Twitter for running updates.

The Bill passed by the Icelandic parliament in December 2008 on setting up an independent investigative commission, the Special Investigative Commission did not catch much attention at the time. The goal was nothing less than finding out the truth in order to establish events leading up to the 2008 banking collapse, analyse causes and drawing some lessons. The SIC report was an exemplary work and immensely important at the time to establish a narrative of the crisis. But in hindsight, there is yet another lesson to be learnt: its importance does not diminish with time as it helps to counteract special interests seeking to rewrite history.

There were no big headlines when on 12 December 2008 Alþingi, the Icelandic parliament, passed a Bill to set up an investigative commission “to investigate and analyse the processes leading to the collapse of the three main banks in Iceland,”which had shaken the island two months earlier. The palpable lack of enthusiasm and attention was understandable: the nation was still stunned and there was no tradition in Iceland for such commissions. No one knew what to expect, the safest bet was to not expect very much.

That all changed when the Commission presented its results in April 2010. Not only was the report long – 2600 pages in print in addition to online-only material – but it did actually tell the real story behind the collapse: the immensely rapid growth of the banks, from one GDP in 2002 to ten times the GDP in 2008, the stronghold the largest shareholders, incidentally also the largest borrowers, had on the banks’ managements, the political apathy and lax regulation by weak regulators, stemming from awe of the financial sector.

Unfortunately, the SIC report was not translated in full into English; see executive summary and some excerpts here.

With time, the report’s importance has not diminished: at the time, it clarified what had happened thus preventing those involved or others with special interest, to reshape the past according to their own interests. With time, hindering the reshaping of the past has become of major importance, also in order to draw the right lessons from the calamitous events in October 2008.

What was the SIC?

According to the December 2008 SIC Act (in Icelandic), the goal was setting up an investigative commission, that would, at the behest of Alþingi, seek “the truth about the run-up to and the causes of the collapse of the Icelandic banks in 2008 and related events. [The SIC] is to evaluate if this was caused by mistake or neglect in carrying out law and regulation of the financial sector in Iceland and its supervision and who could be held responsible for it.” – In order to fulfil its goal the SIC was inter alia to collect information on the financial sector, assess regulation or lack thereof and come up with proposals to prevent the repetition of these events.

In some countries, most notably in South Africa after apartheid, “Truth Commissions,” have played a major part in reconciliation with the past. Although the remit of the Icelandic SIC was to establish the truth, the SIC was never referred to as a “truth commission” in Iceland though that concept has been used in foreign coverage of the SIC.

The SIC had the power to make use of a vast array of sources, both by calling in people to be questioned and documents, public or private such as bank data, including data on named individuals, data from public institutions, personal documents and memos. Data, normally confidential, had to be shared with the SIC, which was obliged to operate as any other public body handling sensitive or confidential information.

Although the SIC had to follow normal procedures of discretion on personal data the SIC could “publish information, normally subject to discretion, if the SIC deems this necessary to support its conclusions. The Commission can only publish information on personal matters of named individuals, including their financial affairs, if the public interest is greater than the interest of the individuals concerned.” – In effect, this clause lift banking secrecy.

One source close to the process of setting up the SIC surmised the political intentions behind the SIC Act did not include lifting banking secrecy, indicating that the extensive powers given to the SIC were accidental. Others have claimed the SIC’s extensive powers were always part of the plan. I am in two minds about this but my feeling is that the source close to the process was right – the powers to scrutinise the main shareholders were far greater than intended to begin with.

Naming the largest borrowers, incidentally also the largest shareholders

Intentional or not, the extensive powers enabled naming the individuals who received the largest loans from the banks, incidentally their largest shareholders and their closest business partners. This was absolutely essential in order to understand how the banks had operated: essentially, as private fiefdoms of the largest shareholders.

In order to encourage those called in for questioning to speak freely, the hearings were held behind closed doors; there were no public hearings. The SIC had extensive powers to call people in for questioning: it could ask for a court order if anyone declined its invitation, with the threat of taking that person to court on grounds of contempt in case the invitation was declined.

Criminal investigation was not part of the SIC remit but its power to call for material or call in people for questioning was parallel to that of a prosecutor. As stated in the report, the SIC was obliged to inform the State Prosecutor if there was suspicion of criminal conduct:

The SIC’s assessment, pursuant to Article 1(1) of Act no. 142/2008, was mainly aimed at the activities of public bodies and those who might be responsible for mistakes or negligence within the meaning of those terms, as defined in the Act. Although the SIC was entrusted with investigating whether weaknesses in the operations of the banks and their policies had played a part in their collapse, the Commission was not expected to address possible criminal conduct of the directors of the banks in their operations.

As to suspicion of civil servants having failed to fulfil their legal duties, the SIC was supposed to inform appropriate instances. The SIC was not obliged to inform the individuals in question. As to ministers, the SIC was to follow law on ministerial responsibility.

The three members

The SIC Act stipulated it should have three members: the Alþingi Ombudsman, then as now Tryggvi Gunnarsson, an economist and, as a chairman, a Supreme Court Justice. The nominated economist was Sigríður Benediktsdóttir, then lecturer at Yale University (director of Financial Stability at CBI 2012 to 2016 when she returned to Yale). The chairman was Páll Hreinsson (since 2011 judge at the EFTA Court).

In addition to the Commission there was a Working Group on Ethics: Vilhjálmur Árnason professor of philosophy, Salvör Nordal director of the Centre for Ethics, both at the University of Iceland and Kristín Ástgeirsdóttir director of the Equal Rights Council in Iceland. Their conclusions were published in Vol. 8 of the SIC report.

In total, the SIC had a staff of around 30 people. As with the Anton Valukas report, published in March 2010, on the collapse of Lehman Brothers, organising the material, especially the data from the banks, was a major task. The SIC had access to the databases of the three collapsed banks but had only limited data from the banks’ foreign operations.

There were absolutely no leaks from the SIC, which meant it was unclear what to expect. Given its untrodden path, the voices expressing little faith were the most frequently heard. I had however heard early on, that the SIC had a firm grip on turning material into searchable databases, which would mean a wealth of material. With qualified members and staff, I was from early on hopeful that given their expertise of extracting and processing data the SIC report would most likely prove to be illuminating – though I certainly did not imagine how extensive and insightful it turned out to be.

Greed, fraud and the collapse of common sense

After the October 2008 collapse, my attention had been on some questionable practices that I heard of from talking to sources close to the failed banks.

One thing I had quickly established was how the banks, through their foreign subsidiaries, had offshorised their Icelandic clients. This counted not only for the wealthy businessmen who obviously understood the ramifications of offshorising but also people with relatively small funds. These latters had in many cases scant understanding of these services.

In the last few years, as information on offshorisation has come to the light via Offshoreleaks etc., it has become clear that Iceland was – and still is – the most offshorised country in the world (here, 2016 Icelog on this topic). Once the “art” of offshorisation is established, with all the vested interests accompanying it, it does not die easily – this might be considered one of the failed banks’ more evil legacies.

Another point of interest was how the banks had systematically lent clients, small and large, funds to buy the banks’ own shares, i.e. Kaupthing lent funds to buy Kaupthing shares etc. Cross-lending was also a practice: Bank A would lend clients to buy Bank B shares and Bank B lent clients to buy Bank A shares. This was partly used to hinder that shares were sold when buyers were few and far behind, causing fall in market value. In other words, massive market manipulation had slowly been emerging. Indeed, the managers of all three failed banks have in recent years been sentenced for market manipulation.

It had also emerged, that the banks’ largest shareholders/clients and their business partners had indeed been what I have called “favoured clients,” i.e. enjoying services far beyond normal business practices. One side of this came to light in the banks’ covenants in lending agreements: in the case of the “favoured clients,” the lending agreements tended to guarantee clients’ profit, leaving the banks with the losses. In other words, the banks took on far greater portion of the risk than these clients.

Icelog blogs I wrote in February 2010, before the publication of the SIC report, give some sense of what was known at the time. Already then, it seemed fair to conclude that greed, fraud and the collapse of common sense had been decisive factors in the event in Iceland in October 2008.

Monday morning 12 April 2010 – when time stood still in Iceland

The excitement in Iceland on Monday morning 12 April 2010 was palpable. The press conference was transmitted live. All around Iceland employers had arranged for staff to watch as the SIC presented its conclusions.

After Páll Hreinsson’s short introduction, Sigríður Benediktsdóttir gave an overview of the main findings regarding the banks, presenting “The main reasons for the collapse of the banks,” followed by Tryggvi Gunnarsson’s overview of the reactions within public institutions (here the presentations from the press conference, in Icelandic).

The main reason for the collapse of the three banks was their rapid growth and their size at the time they collapsed; the three big banks grew 20-fold in seven years, mainly 2004 and 2005; the rapid expansion into new/foreign markets was risky; administration and due diligence was not in tune with the banks’ growth; the quality of loans greatly deteriorated; the growth was not in tune with long-time interest of sound banking; there were strong incentives within the banks grow.

Easy access to short-term lending in international markets enabled the banks’ rapid growth, i.e. the banks’ main creditors were large international banks. With the rapid expansion, also abroad, the institutional framework in Iceland, inter alia the Central Bank and the FME, quickly became wholly inadequate. The under-funded FME, lacking political support, was no match for the banks, which systematically poached key staff from the FME. Given the size of the humungous size of the Icelandic financial system relative to GDP there was effectively no lender of last resort in Iceland; the Central Bank could in no way fulfil this role.

This had no doubt be clear to the banks’ management for some time. In his book, “Frozen Assets,” published in 2009, Ármann Þorvaldsson, manager of KSF, Kaupthing’s UK operation, writes that he “always believed that if Iceland ran into trouble it would be easy to get assistance from friendly nations… despite the relative size of the banking system in Iceland, the absolute size was of course very small.” (P. 194). – A breath-taking recklessness, naivety or both but might well have been the prevalent view at the highest echelons of the Icelandic financial sector at the time.

The banks’ largest shareholders and their “abnormally easy access to lending”

When it came to “Indebtedness of the banks’ largest owners” the conclusions were truly staggering: “The SIC concludes that the owners of the three largest banks and Straumur (investment bank where the main shareholders were the same as in Landsbanki, i.e. Björgólfur Thor Björgólfsson and his fater) had abnormally easy access to lending in these banks, apparently only because their ownership of these banks.”

The largest exposures of the three large banks were to the banks’ largest shareholders. “This raises the question if the lending was solely decided on commercial terms. The banks’ operations were in many ways characterised by maximising the interest of the large shareholders who held the reins rather than running a solid bank with the interest of all shareholders in mind and showing reasonable responsibility towards shareholders.” – Creative accounting helped the banks to avoid breaking rules on large exposures.

Benediktsdóttir showed graphs to illustrate the lending to the largest shareholders in the various banks. It is worth keeping in mind that these large shareholders all had foreign assets and were all clients of foreign banks as well. In general, the Icelandic lending shot up in 2007 when international funding dried up. At this point, the Icelandic banks really showed how favoured the large shareholders were because these clients were, en masse, getting merciless margin calls from their foreign lenders.

In reality, the Icelandic banks were at the mercy of their shareholders. If the large shareholders and/or their holding companies would default, the banks themselves were clearly next in line. The banks could not make margin calls where their own shares were collateral as it would flood the markets with shares no one wanted to buy with the obvious consequence of crashing share prices.

Two of the graphs from the SIC report, shown at the press conference in April 2010, exposed the clear drift in lending at a decisive time: to Björgólfur Thor Björgólfsson, still an active investor based in London and to Fons, a holding company owned by Pálmi Haraldsson, who for years was a close business partner of Jón Ásgeir Jóhannesson, once a king on the UK high street with shops like Iceland, Karen Millen, Debenhams and House of Fraser to his name.

The lending related to Fons/Haraldsson is particularly striking since Haraldsson was part of the consortium Jóhannesson led in spring of 2007 to buy around 40% of Glitnir: after the consortium bought Glitnir, the lending to Haraldsson shot up like an unassailable rock.

Absolution of risk

The common thread in so many of the SIC stories was how favoured clients – and in some cases bank managers themselves – were time and again wholly exempt from risk. One striking example is an email (emphasis mine), sent by Ármann Þorvaldsson and Kaupthing Luxembourg manager Magnús Guðundsson, jokingly calling themselves “associations of loyal CEOs,” to Kaupthing’s chairman Sigurður Einarsson and CEO Hreiðar Sigurðsson.

“Hi Siggi and Hreidar, Armann and I have discussed this (association of loyal CEOs) and have come to the following conclusion on our shares in the bank: 1. We set up a SPV (each of us) where we place all shares and loans. 2. We get additional loans amounting to 90% LTV or ISK90 to every 100 in the company which means that we can take out some money right away. 3. We get a permission to borrow more if the bank’s shares rise, up to 1000. It means that if the shares go over 1000 we can’t borrow more. 4. The bank wouldn’t make any margin calls on us and would shoulder any theoretical loss should it occur.We would be interested in using some of this money to put into Kaupthing Capital Partners [an investment fund owned by the bank and key managers] Regards Magnus and Armann”

This set-up, where the borrower is risk-free and the bank shoulders all the risk, has lead to several cases where bankers being sentenced for breach of fiduciary duty, i.e. lending in such a way that it was from the beginning clear that losses would land with the bank. (Three of these Kaupthing bankers, Guðmundsson, Einarsson and Sigurðsson, not Þorvaldsson, have been charged and sentenced in more than one criminal case).

The “home-knitted” crisis

Due to measures taken in October 2008 in the UK against the Icelandic banks, there was a strong sense in Iceland that the Icelandic banks had collapsed because of British action. The use of anti-terrorism legislation by the British government against Landsbanki greatly contributed to these sentiments.

A small nation, far away from other countries, Icelanders have a strong sense of “us” and “the others.” This no doubt exacerbated the understanding in Iceland around the banking collapse that if it hadn’t been for evil-meaning foreigners, hell-bent on teaching Iceland a lesson, all would have been fine with the banks. Some leading bankers and large shareholders were of the opinion that Icelanders had been such brilliant bankers and businessmen that they had aroused envy abroad: British action was a punishment for being better than foreign competitors (yes, seriously; see for example Þorvaldsson’s book “Frozen Assets”).

The story told in the SIC report showed convincingly and in great detail how wrong all of this was: the banks had dug their own grave. Icelandic politicians and civil servants had tried their best to fool foreign countries and institutions how things stood in Iceland. Yes, the turmoil in international markets toppled the Icelandic banks but they were weak due to bad governance, great pressure by the largest shareholders and then weak infrastructure in Iceland, as I pointed out in a blog following the publication of the SIC report.

This understanding is at times heard in Iceland but the convincing and well-documented story told in the SIC report has slowly all but eradicated this view.

Court cases and political controversies

Some, but by far not all, of the dubious deals recounted in the SIC report have ended up in court. The SIC brought a substantial amount of cases deemed suspicious to the attention of the Office of Special Prosecutor, incidentally set up by law in December 2008. However, most if not all of these cases had also been spotted by the FME, which passed them on to the Special Prosecutors.

CEOs and managers in all three banks have been sentenced in extensive market manipulation cases – the bankers were shown to have directed staff to sell and buy shares in a pattern indicating planned market manipulation. In addition, there have been cases involving shareholders, most notably the so-called al Thani case (incidentally strikingly similar to the SFO case against four Barclays bankers) where Ólafur Ólafsson, Kaupthing’s second largest shareholder, was sentenced to 5 1/2 years in prison, together with the bank’s top management.

In total, close to thirty bankers and major shareholders have been sentenced in cases related to the old banks, the heaviest sentence being six years. The cases have in some instances thrown an interesting light on operations of international banks, such as the CLN case on Deutsche Bank.

The SIC’s remit was inter alia to point out negligence by civil servants and politicians. It concluded that the Director General of the FME Jónas Fr. Jónsson and the three Governors of the CBI, Davíð Oddsson, Eiríkur Guðnason and Ingimundur Friðriksson, had shown negligence as defined in the law “in the course of particular work during the administration of laws and rules on financial activities, and monitoring thereof.” – None of them was longer in office when the report was published in April 2010 and no action was taken against them.

The Commission was of the opinion that “Mr. Geir H. Haarde, then Prime Minister, Mr. Árni M. Mathiesen, then Minister of Finance, and Mr. Björgvin G. Sigurðsson, then Minister of Business Affairs, showed negligence… during the time leading up to the collapse of the Icelandic banks, by omitting to respond in an appropriate fashion to the impending danger for the Icelandic economy that was caused by the deteriorating situation of the banks.”

It is for Alþingi to decide on action regarding ministerial failings. After a long deliberation, Alþingi voted to bring only ex-PM Geir Haarde to court. According to Icelandic law a minister has to be tried by a specially convened court, which ruled in April 2012 that the minister was guilty of only one charge but no sentence was given (see here for some blogs on the Haarde case). Geir Haarde brought his case to the European Court of Human Rights but the judgment went against him. Haarde is now the Icelandic ambassador in Washington.

The SIC lacunae

In hindsight, the SIC was given too short a time. With some months more, the role of auditors in the collapse could for example have been covered in greater detail. It is quite clear that the auditing was far too creative and far too wishful, to say the very least. The relationship between the banks and the four large international auditors, who also operate in Iceland, was far too cosy bordering on the incestuous.

The largest gap in the SIC collapse story stems from the fact that the SIC had little access to the banks foreign operations. Greater access would not necessarily have altered the grand narrative. But court cases have shown that some of the banks’ criminal activities, were hidden abroad, notably in the case of Kaupthing Luxembourg. – As I have time and again pointed out, it is incomprehensible that authorities in Luxembourg have not done a better job of investigating the banking sector in Luxembourg. The Icelandic cases are a stern reminder of this utter failure.

As mentioned above, only excerpts of the report were translated into English. To my mind, this was a big error and extremely short-sighted. Many of the stories in the report involve foreign banks and foreign clients of the Icelandic banks. The detailed account of what happened in Iceland throws light on not only what was going on in Iceland but also in other countries where the banks operated. The excerpts are certainly better than nothing but by far not enough – publishing the whole report in English would have done this work greater justice and been extremely useful in a foreign context.

Why the SIC report’s importance has grown with time

It is now just over eight years since the publication of the SIC report. Whenever something related to the collapse is discussed the report is a constant source and the last verdict. The report established a narrative, based on extensive sources, both verbal and written.

Some of those mentioned in the report did not agree with everything in the report. When they sent in their own reports these have been published on-line. However, undocumented statements amount to little compared to the report’s findings. Its narrative and conclusions can’t be dismissed without solid and substantiated arguments to counter its well-documented conclusions.

This means the story of the 2008 banking collapse cannot easily be reshaped. This is important because changing the story would mean undermining its conclusions and lessons to be learnt. In a recent speech, Tory MP Tom Tugendhat mentioned the UK financial crisis as the “forces of globalisation.” These would be the same forces that caused the collapse of the Icelandic banks – but from the SIC report Icelanders know full well that this is far too imprecise a description: the banks, both in the UK and Iceland, collapsed due to lack of supervision and public and political scrutiny, following year of lax policies.

Lessons for other countries

In order to learn from the financial crisis, countries need to know why there was a crisis – with no thorough analysis no lessons can be learnt. Also, not only in Iceland was criminality part of the crisis. Though not a criminal investigation, many of these stories surfaced in the SIC report, another important aspect.

Greece, Cyprus, UK, Ireland, US – five countries shaken and upset by overstretched banks, which needed to be bailed out at great expense and pain to taxpayers. However, all of these countries have kept their citizens in the dark as to what happened apart from some tentative and wholly inadequate attempts. The effect of hiding how policies and actions of individuals, in politics, banking etc, caused the calamities has partly been the gnawing discontent and lack of trust, i.a. visible in Brexit and the election of Donald Trump as US president.

Although Iceland enjoyed a speedy recovery (Icelog Sept. 2015), I’m not sure there are any particular economic lessons to be learned from Iceland. There were no magic solutions in Iceland. What contributed to a relatively speedy recovery was the sound state of the economy before the crisis, classic but unavoidably painful economic measures, some prescribed by the IMF, in 2008 and the following years – and some luck. If there is however one lesson to learn it is the importance of a thorough analysis of the causes of the crisis.

The SIC was, and still is, a shiny example of thorough investigative work following a major financial crisis, also for other countries. It did not alleviate anger; anger is still lingering in Iceland. An investigative report is not a panacea, nothing is, but it is essential to establish what happened and why, with names named.

There are never any mystical “forces” or laws of nature behind financial crisis and collapse. They are caused by a combination of human actions, which can all be analysed and understood. Without analysis and investigations it is easy to tell the wrong story, ignore the causes, ignore responsibility – and ultimately, ignore the lessons.

This is the second blog in “Ten years later” – series on Iceland ten years after the 2008 financial collapse, running until the end of this year.

Follow me on Twitter for running updates.

Deutsche Bank has studiously tried to hide some transactions with Kaupthing in 2008 – and in December 2016 probably thought it had succeeded when it agreed to settle for €425m to Kaupthing and two now bankrupt BVI companies set up in 2008 by Kaupthing. The story behind these deals figured in two Icelandic court cases and one of them, the so-called CLN case, has now taken an unexpected turn: the Supreme Court has ordered the Reykjavík Country Court to scrutinise the transactions as it reopens the CLN case. But what is Deutsche Bank hiding? “It’s not unlikely that an international bank wants to avoid being accused of market manipulation,” said Prosecutor Björn Þorvaldsson in Reykjavík District Court on October 11.

In early 2008 Kaupthing managers were rightly worried about the sky-rocketing credit default swap, CDS, spreads on the bank; in spring of 2008 the spreads had crept up to 900 points, a wholly unsustainable rate for any bank. According to multiple sources over the years, Deutsche Bank came up with a simple plan: Kaupthing should buy CDS on itself linked to credit linked notes, CLNs, Deutsche Bank would issue. Except Kaupthing should not be seen doing it: finance it, yes – but through two BVI companies owned by trusted clients in deals set up by Deutsche Bank. Thus, the market manipulation was neatly out of sight.

Only later did it transpire that Deutsche Bank was not only the broker in deals it knew were set up to manipulate the market – hence the remark by Prosecutor Björn Þorvaldsson – but it was actually on the other side of the CDS bets, a player in that market. Consequently, the bank profited handsomely, both from fees and from the actual CDS deals.

In the Deutsche Bank universe this unglorious saga of transactions to manipulate the market etc is however not at all true. Yes, Deutsche Bank admits it was the broker but it knew nothing of the purpose of the transactions, had no idea Kaupthing did finance the two BVI companies and certainly was not on the other side of the bets. This is what Deutsche Bank has stated in a London court and in witness statements in criminal proceedings Iceland (where Deutsche Bank is not being charged).

However, outside of the Deutsche Bank universe (and well, probably in some hidden corners inside Deutsche given the email trail that has surfaced in Icelandic court) there is abundant evidence showing the Deutsche Bank involvement. Certainly, Icelandic prosecutors are in no doubt Deutsche Bank was involved in the planning, knew of the Kaupthing funding and made money from the funds.

Kaupthing had poured €510m into the CDS bets. Early on, the administrators of Kaupthing and the two BVI companies eyed an interesting opportunity to claw these funds back. Until December last year, the administrators, in separate actions, have been suing Deutsche Bank in various places over these transactions.

When the legal fights were about to come up in court Deutsche Bank relinquished: to avoid having the whole well-documented saga exposed in court, with evidence running counter to the Deutsche Bank version of the CDS saga, Deutsche Bank finally agreed to pay €425m, around 85% of the millions that went through Deutsche Bank into the CDS schemes.

Intriguingly, in 2010 the Serious Fraud Office, SFO, had its eyes on Deutsche Bank’s CDS transactions with Kaupthing but this case seems to have evaporated as so many of the suspicious deeds in UK banks.

The story of these CDS transactions is a central part in the still on-going so-called CLN case. Kaupthing bankers have been charged for fraudulent lending and breach of fiduciary. Below, the focus is on the role of Deutsche Bank in the CDS transactions – what its real role was and why Deutsche Bank was in the end so keen to settle when nothing in the original 2008 agreements obliged it to pay anything back.

DB’s own version

In June 2012, Kaupthing hf, an Icelandic stock corporation, acting through its winding-up committee, issued Icelandic law claw back claims for approximately € 509 million (plus costs, as well as interest calculated on a damages rate basis and a late payment rate basis) against Deutsche Bank in both Iceland and England. The claims were in relation to leveraged credit linked notes (“CLNs”), referencing Kaupthing, issued by Deutsche Bank to two British Virgin Island special purpose vehicles (“SPVs”) in 2008. The SPVs were ultimately owned by high net worth individuals. Kaupthing claimed to have funded the SPVs and alleged that Deutsche Bank was or should have been aware that Kaupthing itself was economically exposed in the transactions. Kaupthing claimed that the transactions were voidable by Kaupthing on a number of alternative grounds, including the ground that the transactions were improper because one of the alleged purposes of the transactions was to allow Kaupthing to influence the market in its own CDS (credit default swap) spreads and thereby its listed bonds. Additionally, in November 2012, an English law claim (with allegations similar to those featured in the Icelandic law claims) was commenced by Kaupthing against Deutsche Bank in London (together with the Icelandic proceedings, the “Kaupthing Proceedings”). Deutsche Bank filed a defense in the Icelandic proceedings in late February 2013. In February 2014, proceedings in England were stayed pending final determination of the Icelandic proceedings. Additionally, in December 2014, the SPVs and their joint liquidators served Deutsche Bank with substantively similar claims arising out of the CLN transactions against Deutsche Bank and other defendants in England (the “SPV Proceedings”). The SPVs claimed approximately € 509 million (plus costs, as well as interest), although the amount of that interest claim was less than in Iceland. Deutsche Bank has now reached a settlement of the Kaupthing and SPV Proceedings which has been paid in the first quarter of 2017. The settlement amount is already fully reflected in existing litigation reserves and no additional provisions have been taken for this settlement. (Emphasis here and below is mine).

This is Deutsche Bank’s very brief story of the CNL saga and the settlement in the bank’s 2016 Annual Report. – Not admitting anything and yet, for no reason at all judging from the Annual Report, it paid Kaupthing an undisclosed sum, now known to be €425m.

Sigurður Einarsson’s letter to friends and family January 2009: the first tangible evidence of the CDS transactions

As recounted in an earlier Icelog there were rumours soon after the October 2008 banking collapse that Kaupthing had funded transactions connected to the bank’s CDS in order to manipulate the spread, thus lowering the bank’s ominously high financing cost.

At the end of January 2009 former chairman of the Kaupthing board Sigurður Einarsson told his side of the various stories swirling in the media. Yes, it was true that Kaupthing had funded transactions by what he called Kaupthing’s “trusted clients” to influence the bank’s CDS spread but it had done so on advice from Deutsche Bank.

The SIC report April 2010, the CDS story in some details

The story was told in greater detail in the 2010 report by the Icelandic Special Investigations Committee, SIC (p. 26-28, Vol. 2; in Icelandic). It was clearly stated and documented that Deutsche Bank came up with and concocted the plan. Summarised, the SIC recount of the CDS transactions is the following:

Kaupthing set up two BVI companies, Chesterfield and Partridge, for the sole purpose of carrying out the CDS transactions. Chesterfield was owned by three companies, in turn owned by four Kaupthing clients: Antonios Yerolemou, Skúli Þorvaldsson and the fashion entrepreneurs Karen Millen and Kevin Stanford, respectively owning 32 %, 36% and 32%. The Icelandic businessman Ólafur Ólafsson owned Partridge, also through another company.

Kaupthing lent funds to the four companies owning the two BVI companies that acted in the CDS transactions – all the companies were in-house with Kaupthing, which carried out all the transactions. The beneficial owners were only asked for consent to begin with but were not involved in the transactions themselves.

All of the owners were, as Einarsson said in his letter, longstanding and “trusted clients” of Kaupthing. In 2001, Yerolemou, a Cypriot businessman prominent in the UK Cypriot community and a Conservative donor, had sold his business, Katsouris, to Exista, Kaupthing’s largest shareholder and stayed close to Kaupthing, also briefly as its board member. Stanford had a long-standing relationship with Kaupthing as with the other Icelandic banks and Ólafsson was the bank’s second largest shareholder.

Like Einarsson, the SIC report traced the origin of the transactions to Deutsche Bank:

“At the beginning of 2008, Kaupthing sought advice from Deutsche Bank as to how it could influence its CDS spreads. In a presentation in early February, Deutsche Bank advised Kaupthing, for instance, to spend all liquid funds it received to buy back its own short-term bonds in an attempt to normalise the CDS curve. In the summer the idea of a credit-linked note transaction appeared in an email communication from an employee of Deutsche Bank. It states that this would mean a direct impact on the CDS spreads rather than an indirect one, as in the case of buy backs of own notes. It also states that this transaction will be financed. The message concludes by stating that the issue has to be timed right to get the ‘most “bang” for the buck’. In e-mail messages exchanged by Sigurdur Einarsson and Hreidar Mar Sigurdsson following this, the two agree that they do not need to involve pension funds, but that there is ‘no question’ that they should do this. 


Sigurdur Einarsson said that the initiative for the transaction had come from Deutsche Bank. ‘It involved getting parties to write CDSs against those who wanted to buy them. This was to create a supply of CDSs, of which there were none. Because what we saw was happening on the market, or what we thought we saw, was that the screen price was always rising and there were certain parties, certain funds that put in a specific bid, no transaction, raised the bid, no transaction, raised it, raised it, raised it, raised and raised.‘” (As translated in Akers and Anor v Deutsche Bank AG 2012.)

According to the SIC the CLN transactions “can be assumed to have actually made an impact on the CDS spreads on Kaupthing.” The SIC report came up with the total amount lost by Kaupthing on these trades: €510m, all of which had been paid to Deutsche Bank as the broker of the underlying deals.

The administrator of Partridge and Chesterfield also wondered about Deutsche Bank’s role

Further information came up in a London Court in 2012: soon after Kaupthing failed, Partridge and Chesterfield unavoidably went bankrupt; after all, their only assets were the CLN linked to the failed CDS bet. Their administrators, Stephen Akers from Grant Thornton London and his colleague, quickly turned to Deutsche Bank to get answers to some impertinent questions regarding the two companies. When Deutsche Bank was not forthcoming Akers took a legal action demanding from Deutsche Bank documents related to the transactions. A decision was reached in February 2012.

In his affidavit in the 2012 Decision, Akers said: “It is very difficult to see how the transactions made commercial sense for the Companies. This request for information is in part to explore how the Companies might have expected to benefit from the transactions, to identify what the Companies’ purposes and objectives in entering into the transactions were and how the Companies were expected to repay the loans from Kaupthing if there was movement in the market in the ‘wrong’ direction (as transpired). … The Joint Liquidators are keen to understand, through requests for information and documents from key parties, why these particular transactions were entered into by these particular companies. 

46. From the information that the Joint Liquidators have been able to gather about the transactions …, it seems possible that the Companies were involved in a wider package or scheme, although it is too early to comment definitively on the purpose of such scheme, contemporaneous reports and documents suggest that the purpose might have been to manipulate the credit market for Kaupthing.“

In his Decision, Justice Newey holds up the “possibility of market manipulation” quoting the above statement from the SIC report, noting the report’s conclusion “that the CLN agreements “can be assumed to have actually made an impact on the CDS spreads on Kaupthing.””

In the 2012 Decision it’s pointed out that “Deutsche Bank strongly denies any suggestion that it entered into the CLN transactions in order to manipulate the market. In other respects, too, it takes issue with the picture painted in the Icelandic report. Among other things, it says that the CLNs were not in any way unusual or commercially unreasonable transactions; that it was not aware that Kaupthing was itself financing the purchase of the CLNs, if that is what happened; and that it did not act as adviser to Chesterfield, Partridge or Kaupthing.”

DB was right that the CLNs were not in any way unusual – but the CLNs per se were not the problem that drove Akers to collect information but the whole transactions. However, there is abundant documentation, inter alia emails to and from Deutsche Bank etc. to show that Deutsche Bank was indeed aware that Kaupthing was financing the two companies’ bet on the Kaupthing CDS. And Deutsche Bank definitely advised Kaupthing in this set up, again born out by emails.

The “bang for the buck” email, quoted in the SIC report was written by Venkatesh Vishwanathan, a senior Deutsche Bank banker who oversaw the CDS deal with Kaupthing. In his witness statement in the Akers 2012 case he gave his interpretation: “I say the way to proceed would involve ‘hitting the right moment in the market to get the most bang for the buck’ because an investor investing in a CLN product would want the best return and the coupon available over the term of the CLN, should it run to maturity, is set when the CLN is issued. That was why market timing was important. I was not suggesting, as Mr Akers says, that Kaupthing would get ‘bang for its buck’ by Deutsche selling CDS protection.”

Vishwanathan’s interpretation runs contrary to what Akers claimed and other sources support: that the transactions were set up for Kaupthing, via the two companies, in order to influence the market.

DB placed Wishwanatahn on leave in 2015, in autumn 2016 he had sued the bank for unfair dismissal. According to his LinkedIn profile, Wishwanathan now lives in Mumbai (he has not responded to my messages).

Additional evidence: the Icelandic CLN case

In 2014, Sigurður Einarsson, Kaupthing’s CEO Hreiðar Már Sigurðsson and head of Kaupthing Luxembourg Magnús Guðmundsson were charged of breach of fiduciary duty and fraudulent lending to the two BVI companies, Partridge and Chesterfield, causing a loss of €510m to Kaupthing.

The charges (in Icelandic) support and expand the earlier evidence of Deutsche Bank role in the CDS trades. Deutsche Bank made for example no attempt to be in contact with the Kaupthing clients who at least on paper were the owners of the two companies. Deutsche Bank was solely in touch with Kaupthing. When the two companies needed for example to meet margin calls its owners were not averted; Deutsche Bank sent all claims directly to Kaupthing, apparently knowing full where the funding was coming from and who needed to make the necessary decisions.

But who was on the other side of the CDS bets, who gained in the end when the Kaupthing-funded companies lost so miserably?

According to the Icelandic Prosecutor, the three Kaupthing bankers “claim they took it for granted that the CDS would be sold in the CDS market to independent investors and this is what they thought Deutsche Bank employees had promised. They were however not given any such guarantee. Indeed, Deutsche Bank itself bough a considerable part of the CDS and thus hedged its Kaupthing-related risk. Those charged also emphasised that Deutsche Bank should go into the market when the CDS spread was at its widest. That meant more profit for the CLN buyer Chesterfield (and also Partridge) but those charged did not in any no way secure that this profit would benefit Kaupthing hf, which in the end financed the transactions in their entirety.”

DB fees amounted to €30m for the total CDS transactions of €510m.

The oral hearings in the CLN case were in Reykjavík in December last year. I attended the hearings, which further not only supported the story of Deutsche Bank’s involvement but provided ample tangible evidence as witnesses were questioned and emails and other documents projected on a screen.

The side story in the al Thani case

A short chapter in the CDS saga is the fact, already exposed in the SIC report, that Kaupthing had indeed planned with Deutsche Bank to set up yet another company to trade on Kaupthing’s CDS. Kaupthing issued a loan of $50m to Brooks Trading Ltd, via another company called Mink Trading, both owned by Sheikh Mohamed Khalifa al Thani. The purpose was to invest in CLN linked to Kaupthing’s CDS, via Deutsche Bank, identically structured as the CDS transactions through Chesterfield and Partridge. CDS transactions through Brooks were however never carried out.

Sheikh al Thani played a role in another Kaupthing case, the so-called al Thani case; the Sheikh was not charged but the three Kaupthing managers, charged in the CLN case, and Ólafur Ólafsson were sentenced to three to 5 ½ years in prison. The bankers for fraudulent lending, breach of fiduciary duty and market manipulation; Ólafsson was sentenced for market manipulation.

The 2008 last minute CBI loan to Kaupthing

The evidence brought out in the CLN case – the tracing of the transactions, emails, phone calls etc. – shows that the Kaupthing managers were extremely focused on exactly these transactions. Kaupthing was teetering and yet they never wavered from paying to Deutsche Bank, the agreed sums and the margin calls that followed. It almost seemed as if nothing else mattered in their world, a sense further strengthened by some back-dated documents related to the CDS transactions.

The last payments were made just as the bank was collapsing, 7 October 2008; the bank went into administration 8 October. During these last weeks, foreign currency was scarce at the bank in Iceland where the payments originated. On 6 October, prime minister Geir Haarde addressed the stunned nation on radio and television at 4pm, to announce the Emergency Act enabling Icelandic authorities to deal with collapsing banks in an orderly manner. – Hreiðar Már Sigurðsson, then CEO of Kaupthing but only for 48 more hours, has said in court that when he heard of the Emergency Act he knew it was over for the banks.

At noon of 6 October, Geir Haarde and the governor of the Central Bank, CBI, Davíð Oddsson, who both knew the Emergency Act was coming later that day, agreed the very last lending to the banks: Kaupthing would be given a loan of €500m. This, to permit Kaupthing to meet payments the Bank of England and the FSA were demanding as a guarantee for the bank’s UK subsidiary, Kaupthing Singer & Friedlander.

The reasons for this loan have never been completely clarified (see Icelog on this story): documents and an audio of the phone call between Oddson and Haarde remains classified in spite of valiant attempt by the Icelandic media to unearth this evidence. The CBI has promised a report on the Kaupthing loan “soon” but so far without a publication date.

Whatever the motivation, the CBI issued the loan directly to Kaupthing without securing it would be used as promised, i.e. to strengthen Kaupthing’s UK subsidiary. Instead, part of it was used 7 October when Kaupthing paid, via the two BVI companies, the last €50m CDS transactions to Deutsche Bank.

This is how much the CDS transactions mattered to the Kaupthing managers who never, not even in the mid of the cataclysmic events engulfing the bank these early days in October 2008, took their eyes off the CDS transactions with Deutsche Bank.

When the Deutsche Bank December 2016 agreement surfaced…

In January 2016, the Reykjavík District Court acquitted the three Kaupthing managers of the fraudulent lending and breach of fiduciary duty they had been charged with in the CLN case. In February this year, the Office of the Special Prosecutor (now Office of the District Prosecutor, encompassing the earlier OSP and other duties), appealed that decision to the Supreme Court.

In March 2016, I reported on Rúv (in Icelandic) that Deutsche Bank had indeed come to an agreement with Kaupthing: on-going legal cases, mentioned in Deutsche Bank’s annual reports 2015 and 2016 (but not in earlier reports), had now been settled with Deutsche Bank agreeing to pay Kaupthing more than €400m.

The agreement had been sealed in December 2016. Kaupthing made no big deal of the millions accruing from Deutsche Bank – no press release, just silence.

I pointed out that what Deutsche Bank had stated in the 2012 court case in London was not in accordance with other sources. Also that the bank had mentioned the Kaupthing claims in its 2015 Annual Report but stated it had filed defence and continued to defend them.

I concluded that Deutsche Bank 1) refuted it knowingly participated in transactions knowing set up to mislead the market 2) refuted that Deutsche Bank planned the transactions 3) denied knowing Kaupthing was itself financing the transactions aimed at lowering its CDS spreads. Further, I pointed out that statements from the Prosecutor in the CLN case showed that Deutsche Bank was not only the broker in these transactions but was actually on the other side of the bet it set up for Kaupthing and gained handsomely when Kaupthing failed.

I did at the time send detailed questions to Deutsche Bank regarding the bank’s statements in the 2012 London court case and its version of the case in its annual reports. Deutsche Bank’s answer to my detailed questions was only that bank was not commenting “on specific aspects of this topic,” only that “Deutsche Bank has reached a settlement over all claims relating to credit-linked note transactions referencing the Icelandic bank Kaupthing. The settlement amount is already fully reflected in existing litigation reserves.”

In my email exchange with Deutsche Bank I mentioned that this matter had wider implications – Deutsche Bank has stated in court and in its annual reports that it had nothing to do with the CDS trades except selling the CLN related to it. Thus, it could be argued that the stance taken by Deutsche Bank, compared to abundant evidence, has been misleading and that has much wider implications than just being a matter between Deutsche Bank and Kaupthing. – The answer was, as before: settlement reached, no further comments.

It’s interesting to note that at the time Deutsche Bank reached an agreement of paying €425m to Kaupthing it was struggling to reached its required capital level, looking for €8bn. That did allegedly force the bank to finish several outstanding cases, the Kaupthing case being one of them.

Why did Deutsche Bank change its mind and meet 85% of the Kaupthing claims?

Following my March reporting on the agreement between Deutsche Bank and Kaupthing where Kaupthing did indeed recover around 85% of its CDS transactions with Deutsche Bank the three Kaupthing managers charged in the CLN case, now fighting an appeal by the Prosecutor, turned to the Supreme Court asking for the case to be dismissed: according to them, the basis of the claims had been the €510m loss to Kaupthing – and now that there was apparently hardly any loss the case should be dismissed.

Their demand for dismissal came up at the Supreme Court 11 October where the Court stipulated that in order to understand the demand for dismissal the Court needed to get a deeper understanding of the Deutsche Bank agreement with Kaupthing. The District Prosecutor had obtained a copy of the agreement handed to the Court but not made public in its entirety.

During the oral hearings that day Prosecutor Björn Þorvaldsson maintained that the agreement did not change the charges in the CLN case to any substantial degree: the loans had been illegal, no matter if the money was then much later clawed back. He said that according to the agreements in 2008, Deutsche Bank had been entitled to the funds and Kaupthing had no claim for clawing them back.

So what did then change, why did Deutsche Bank decide to meet the Kaupthing claims and pay back €425m of the original €510m it got from the CDS transactions?

The Prosecutor said one could only guess: 1) Perhaps Deutsche Bank wanted to hide that the Kaupthing loans to the two companies did indeed end up with Deutsche Bank 2) Did Deutsche Bank see it as harmful to the bank’s reputation that the details of the transactions would be exposed in a court case? 3) Was it accusation of being part of market manipulation that irked Deutsche Bank?

As Þorvaldsson said in court 11 October: “It’s not unlikely that an international bank wants to avoid being accused of market manipulation.”

The Supreme Court ruling on issues related to the Deutsche Bank Kaupthing agreement

The Supreme Court decided on the dismissal request 19 October. According to the Decision, Deutsche Bank signed two agreements in December 2016 regarding the 2008 CDS transactions. One was an agreement with the two companies involved, Chesterfield and Partridge. The other one is with Kaupthing.

The aim was to effectively end three court cases where Kaupthing was suing Deutsche Bank in addition to cases brought by the two companies against Deutsche Bank. According to the agreement the two companies and Kaupthing agreed to put an end to their legal proceedings against Deutsche Bank – and Deutsche Bank concurred to pay €212.500.000 to Kaupthing and the same amount to the two companies, in total €425m. Further, the agreement stipulated that Kaupthing (as the largest creditor of the two companies) would get 90% of the Deutsche Bank payment to the two companies. In total, Deutsche Bank paid €425m to end all dispute, whereof over €400m would go to Kaupthing.

The thrust of the arguments, on one side the Prosecutor, on the other side the three defending bankers was that the Prosecutor said that issuing the loans was the criminal deed, that’s what the three were being charged for – whereas the three defendants claimed that since Deutsche had now paid most of the transactions back it showed that the bank felt legally obliged to pay on the basis of the 2008 contracts.

In its Decision the Supreme Court scrutinised the final settlement of the CDS transactions concluded at end of October 2008, which indicated that Deutsche Bank did indeed not feel obliged to pay anything back to the owners of the CLNs. Same when Icelandic police interrogated two (unnamed) Deutsche employees: nothing that indicated Deutsche Bank thought it was obliged to pay anything back.

The Supreme Court concluded that based on the information at hand on the December 2016 settlement it was neither clear “why the bank (DB) agreed to issuing these payments, what the arguments were nor what material was the basis for the claims by Kaupthing and the two companies in their legal actions against Deutsche Bank. It is also not clear what was the nature of the (December 2016) payments, if they related to earlier contracts (i.e. the 2008 contracts) or if they were damages and if they were damages then what was their nature.

Based on this, the Supreme Court then decided against dismissal, as demanded by the three bankers, sending the case back to the Reykjavík District Court for a retrial where questions regarding the December 2016 settlement should be clarified in addition to the charges brought by the District Prosecutor.

This means that although Deutsche Bank settled with Kaupthing and the two companies the actions of Deutsche Bank will be scrutinised by Icelandic Court, probably already next year.

A short revision of dodgy Deutsche Bank transactions

As other international banks, Deutsche Bank has had a lot to answer for over the last few years and paid billions in fines for its rotten deeds. Contrary to Iceland, bankers in the UK and the US, have mostly been able to wipe the cost of their criminal deeds on shareholders (and why on earth have shareholders such as as pension funds and other public-interest organisations been so patient with banks’ criminal deeds?)

In April 2015 Deutsche Bank settled LIBOR manipulation cases with US authorities, paying $2.175bn and £226.8m to the UK Financial Conduct Authority, FCA as mentioned in the bank’s 2015 Annual Report.

In January this year it paid £163m to the FCA, the largest fine ever paid to the FCA, for “serious anti money-laundering controls falings” in the so-called mirror trades, where $10bn were sent out of Russia to offshore accounts “in a manner that is highly suggestive of financial crime.” At the same time, US authorities fined the bank $425m for the same offense, pointing out that “Deutsche Bank and several of its senior managers missed key opportunities to detect, intercept and investigate a long-running mirror-trading scheme facilitated by its Moscow branch and involving New York and London branches.” – Many years ago, a source said to me Deutsche Bank really should be called Russische Bank.

In May, the US Fed fined Deutsche Bank $41m “for failing to ensure its systems would detect money laundering regulations.”

In additions, there have been fines for violating US sanctions. Lastly, there is focus on Deutsche Bank and its tight connection to US president Donald Trump. And so on and so forth.

Summing it up – seen from Iceland: why Deutsche Bank would want to settle

In this context it is interesting that Deutsche Bank has decided to pay €425m to Kaupthing, a high sum in any context, even in the context of fines Deutsche Bank has had to pay over the years.

From all of these various sources it is easy to conclude as did the State Prosecutor in October that yes, one reason why Deutsche Bank would want to bury it involvement in Kaupthing’s CDS trades in the summer of 2008 is that this looks like a market manipulation by a major international bank. Further, Deutsche Bank has questions to answer regarding its own involvement in the market, i.e. it did not only broker the CDS deals, knowing full well who financed the two BVI companies, but it was actually a player in that market, making a lot more from the deal than only the fees.

Updated 14.6.2018: a retrial has been ordered, the case will come up next winter. This time, there will also be some focus on DB’s role in order to understand the context better though neither DB nor any DB bankers are charged. 

Follow me on Twitter for running updates.

The outcome of the election provides no clear option in forming a government but it is clear that Icelandic politics is changing: the Independence Party, earlier the backbone of Icelandic politics, has lost  its strong position which it partly held because the Left kept splitting but on the Right the Independence Party was the only option. That is no longer the case. The many small parties now seem a fixture on the political scene in Iceland. Contrary to many other countries, nationalism and xenophobia do not colour Icelandic politics though these leanings can be detected. The narrative is unclear: the country of the pot and pan revolution votes in offshore company owners.

The opposition – especially the Social Democratic Alliance – won the election with the government losing twelve seats but it’s not a victory that they can make much use of. The favour of Icelandic voters is now split between eight parties in Alþingi but the political interest is huge with voter participation at 81.2%, up by just over one percentage point from 2016.

There have not been fewer women in Alþingi for a decade, so much for the land of gender equality – two of the new parties, the People’s Party and the Centre Party as utterly male-dominated. The Left victory, indicated by polls, did not materialise. The liberal global current that brought the Pirates, Revival (Viðreisn) and Bright Future 21 seats in 2016 has evaporated; these parties now hold ten seats and Bright Future did not get a single MP.

Forming a government will be tricky, even more so if this government is to last for more than a year or two.

Independence Party: the centre of power that was

The GOP of Icelandic politics is still old but no longer the grand centre of power. Gone are the elections when the party could count on the support of 30 to 40% of voters. In the party’s 2009 wipe-out it lost nine MPs, fell from 36.6% of the votes to 23.70% and 16 seats. It rose to 29%, 21 seats, last year but is now back at 16 seats and 25.2%. If it continues to attract only older voters, as is now the case, the party has a lot to worry about: it will, literally, die out.

The party’s position over the decades was strong: the Left kept shifting like a kaleidoscope the Independence Party ruled undivided and alone, except for very brief interludes. With Bright Future and in particular Revival, the latter is now lead by an ex-Indpenedence Party minister, those on the Right had and have other options.

Bjarni Benediktsson, though young and energetic, has not been able to shift or strengthen the party. He is however an undisputed leader, there are no obvious candidates in sight. Panama Papers companies, his IceHot1 registration on an affair website and his family’s connection to dubious deals and a pedophile have not undermined him. Rumblings in the party are just that, rumblings; unity on the surface.

The politcal centre 

Bright Future did not particularly like to place itself on the Left Right axis but it was largely seen as a liberal party, palatable to those on the political Right. It was pro-EU, as is Revival. Bright Future instigated the fall of the government but did not reap any benefits from that. In government it did not manage to make its mark. Bright Future leader Óttarr Proppé did not have a strong enough message though his sartorial style of three piece corduroy and turtlenecks certainly stood out.

The Progressive Party did the remarkable feat of not losing ground, kept its 8 seats, though its former leader Sigmundur Davíð Gunnlaugsson left the party and raked in 10.8% of votes, probably a bit from everyone but most from the Independence Party. Progressive leader Sigurður Ingi Jóhannsson is of the pure Progressive mold, level-headed and portly, ready to work with both the Left and the Right and now wooed from both sides.

The Pirates, the voters’ darling last year, did lose four MPs, now have six. In spite of measured policies and no reasoned promises they did not cut a striking figure on the political scene.

The new political forces: male-oriented populists with a touch of xenophobia

The most remarkable political entry is that of Inga Sæland who rose to fame on the Icelandic X Factor. Sæland is a divorced mother of four and has done this and that. Counting herself as one of them her motivation is to improve the life of poor people in Iceland. Her party, the People’s Party, running for the first seemed to be destined for not making it into Alþingi. At the leaders’ debate two days before the election Sæland, asked what she wanted to achieve in politics, burst into tears, she was so passionate for her causes.

Whether it was the tears or her politics, Sæland secured 6.8% of the votes and four seats. For a party lead by a single mother – many of them in Iceland – it’s rather remarkable that she is the only woman MP of her party’s four MP.

To begin with Sæland struck a tone of xenophobia but only at the very beginning. Later she emphasised the need to live with an influx of foreigners, utterly denied any racist leanings and made no such references. Instead, her message was populist promises of better life for the poorer part of society.

Sigmundur Davíð Gunnlaugsson showed that 10.8% of Icelandic voters do not care about his lying about his offshore company. His voters seem more taken up with his promises of giving Icelanders shares in Arion bank where the government only owns 13% but has options to buy more. Gunnlaugsson’s other policies were less striking but continued his earlier message of subsidised agriculture and anti-EU tones. He has earlier flirted with nationalism and xenophobia and the same could be heard this time.

Less liberal voices, fewer women

Compared to other European countries where nationalism and xenophobia have been on the rise, the same is not the case in Icelandic politics. These tendencies can be detected close-up but the parties that have flirted with them, the Centre Party and the People’s Party have not particularly gained from it.

This is all the more remarkable because the influx of foreigners in Iceland has been very large since 2000: foreign inhabitants have gone from 2.6% in 2000 to 8.9% now. The largest nationality is Polish who have integrated well. In general, foreigners come to Iceland to get work, more than plenty of work to be had.

However, given the leanings of the two new parties, it can be argued that outward looking liberalism and globalisation is now weaker in Iceland than earlier. Due to the electoral system, the densely populated area around Reykjavík has less weight than the countryside.

The People’s Party and the Centre Party have an aura of anachronism in the sense that women are largely absent, except for the People’s Party leader. Otherwise, the appearance is portly elderly males. In total, these two parties hold eleven seats with only two of them filled by women.

In its world view the Centre Party also has an aura of anachronism: its leader has been prone to look back in search for political references rather than the future when his old party was strong because agriculture was a strong sector. Gunnlaugsson is interested in city planning: during his time as PM he even gave the Reykjavík city council drawings – not much more advanced than a kid’s drawings – of houses he thought should be built in the city centre in stead of more modern buildings already planned. If the drawings hadn’t come from the PM Office most people would have considered this a rather embarrassing and amateurish attempt to have a say.

The political narrative in Iceland: rambling and flip-flopping 

Iceland very much debuted on the international scene as the first crisis-hit country in October 2008. The pots and pan revolution, which drove out an Independence Party-led government with the Social Democrats and also drove out a former Independent leader then governor of the Central Bank Davíð Oddsson, gave Iceland the image of a feisty young nation. The Office of a Special Prosecutor, which investigated and prosecuted people related to the banks, further supported that image.

However, it’s difficult to square that image with the fact that the Independence Party is still the largest party and the ousted Panama Papers ex-PM Gunnlaugsson secured almost 11% of the votes on Saturday. Icelanders may have flared up in the winter of 2008 and 2009 but they have partly turned to the conservatives, although riddled with scandals. And to Gunnlaugsson’s party, centred not only the political centre like the Progressives, his old party, but around Gunnlaugsson himself – after all, the Independence Party and the Centre Party together hold 36.1% of the votes.

Yet, the pots and pan spirit hasn’t quite disappeared – the Pirates are still in Alþingi and the Left is emboldened – but there certainly is no clear narrative of a country that doesn’t tolerate financial scandals, old family dynasties and their special interests. Flip-flopping and looking at persons rather than principles and ideals is still the Icelandic way to political choices.

Options for forming a government

With the Left Green touching 30% in opinion polls up to the election the Left clearly felt its time had now come. That’s less clear now though the Social Democrats have made a spectacular comeback, doubled their last year outcome. Its leader Logi Einarsson did not seem to have much going for him but rose and shone in the campaign, proved to be relaxed and passionate. He himself claims he has not been media trained and so, has preserved spontaneity and the human touch.

Forming a government is about making a team working towards the same goals. Bjarni Benediktsson did not achieve that with his government. He might have another go, will try to woo the Left Green. However, the opinion forming is that the government has lost, the opposition won.

Jakobsdóttir is adamant that a Left government could and is in the making but more time is needed. For her, it’s crucial that she will succeed, will be able to harness the momentum though she has already lost some of it. Otherwise, she could be destined to become the leader of great promise but ultimately unable to deliver power to her party, unable to show in a tangible way that she can be more than just a popular person.

When pundits were musing on the outcome before the election no one seemed to give it a serious thought that Gunnlaugsson could return to government. His gain came as a surprise but although no one is saying it aloud, it is highly unlikely he will be invited to join any government. He has a reputation for being unreliable also in the literal sense: as a PM he was often away, no one knew where, he rarely showed up in Alþingi for debates and as an MP he has stayed away though without calling in his substitute; most likely that will continue.

Contrary to the anchor of stability as the Independence Party likes to portray itself the party has been in the last three governments that sat for less than a mandate term. The Left government in power from 2009 to 2013 is the only government after the 2008 collapse that sat a whole term, or rather stumbled through it, more dead than alive due to enormous infighting in the two coalition parties Left Green and the Social Democrats who led the government.

Iceland is booming as growth figures around 7% of GDP show. Certainly an enviable situation, seen from the perspective of 0 to max 2% GDP growth in so many other European countries. But doing the “right thing” hasn’t necessarily benefited those in government since 2008 (see my pre-election blog) – and navigating the good times has never been easy in tiny Iceland. As we say in Icelandic: það þarf sterk bein til að þola góða daga, it takes strong bones to stand the good days – and that counts for governing in times of surplus.

Final results:

Bright Future: 0 seats, -4 seats; 1.2%
Progressive Party: 8 seats, as in 2016; 10.7%
Revival: 4 seats, -3; 6.7%
Independence Party: 16 seats, -5; 25.2%
People’s Party: 4 seats, new; 6.9%
Centre Party: 7 seats, new; 10.9%
Pirate Party: 6 seats, -4; 9.2%
Social Democrats: 7 seats, +4; 12.1%
Left Greens: 11 seats, +1; 16.9%

Follow me on Twitter for running updates.

To claim that Iceland has done all the right things since the financial crisis is hubristic. However, in the grand scheme of things it can be argued that the four governments, in power from 2008 until now, have broadly speaking done what needed to be done: the banks were dealt with without too great a public cost, an independent commission investigated the causes of the crash, matters related to the time up to the collapse have been investigated and individuals prosecuted; the economic policies have broadly stimulated growth, lately fuelled by boom in tourism. Yet, all of these sensible measures have not secured political stability as can be seen by elections held in 2016 and 2017.

Already by summer 2011 Iceland was back to economic growth in spite of the calamities of the banking collapse in October 2008. In spring the previous year, the Special Investigative Commission, SIC, had published its report. In the following years, the Office of the Special Prosecutor, now the District Prosecutor, was busy investigating and bringing bankers and their business partners to court. Well over twenty people have been imprisoned.

Iceland was not the only country hit by the financial catastrophe starting in 2007. In countries like the US and Britain, voters’ anger is often explained by the fact that in these countries little has been done to clarify what went on in the banks, the creators of the financial turmoil that hit various Western countries in 2007 and the following years.

In a long blog in September 2015 on the Icelandic recovery I pointed out that in spite of good recovery and growth the soul of the Icelanders was lagging behind: voters did not seem to embrace the parties bringing them a growing economy. That still seems to be the case judging from the political situation. Trust in political parties and party support is unstable and swinging.

This could very well be the future in Iceland as elsewhere: no matter the growing economy voters don’t put their trust in political parties as they once did, fewer belong to political parties or identify with a single party. It really isn’t about the economy any longer but a more elusive public mood.

Elections one year, minus a day, from the 2016 elections

Last year, the election was held on 29 October. This year it is on 28 October. Last year, the election was brought about by the then PM Sigmundur Davíð Gunnlaugsson leader of the Progressive Party having to step down due to the exposure in the Panama Papers of an offshore company held by him and his wife. The 2016 election ended the two-party coalition with the Independence Party (C) led by the Progressive Party.

In autumn this year, the coalition with two new centre liberal parties, Bright Future and Revival, led by the Independence Party fell when Bright Future lost the trust in PM Bjarni Benediktsson, a story recounted earlier on Icelog. When leaked document on Benediktsson’s business dealings in 2008, conflicting with his earlier explanations surfaced recently it seemed this would weaken the party’s standing (see Icelog).

A swing from left to right – but yet an Independence Party disappointment 

To begin with, opinion polls indicated that a left government, albeit a coalition of three to four parties, was looming on the horizon – the only Icelandic left government that ever sat a full parliamentary term was the left government in power 2009 to 2013. The Left Greens and Katrín Jakobsdóttir, the party’s very popular leader, seemed to be raking up a lot of votes, at one point giving the Left Green a clear lead as the largest party. The Social Democratic has been in a limbo since the 2013 elections; its new leader, Logi Einarsson, did not seem to appeal to the voters but might have been a necessary support for the left government

In the last few days, the political landscape has been changing dramatically with the Independence Party surging ahead of the Left Greens. In a historic context the Independence Party surge is no surprise and also last year the party surged ahead in the last few days up to the elections. In one sense this indicates support for Bjarni Benediktsson and his party but the numbers are less uplifting: the party stands to lose around 3 to 5% and possibly four MPs. In addition, the forecast now would be a historic low for Benediktsson’s party, far from its 20th century earlier glory of licking the 40%.

The most surprising swing is the Social Democrats great gain in the polls. They seem to be attracting votes from the Left Green and the Progressive Party. Revival is crawling above the 5% threshold, needed to get the first MP elected. Only some weeks ago the party hastily elected a new leader, Þorgerður Katrín Gunnarsdóttir, after party founder Benedikt Jóhannesson’s unfortunate remarks on sufferers of sexual violence. Gunnarsdóttir is an earlier Independence Party MP and minister who left politics for some years after 2008 due to her links to Kaupthing where her husband worked. In a Parliament of very inexperienced MPs Gunnarsdóttir has proved a skilled politician.

Another surprise: former Progressive leader, the disgraced Gunnlaugsson, who resigned in autumn from his old party to form a new one, the Centre Party, is making good progress, well ahead of his old party. This, although Gunnlaugsson has mostly been invisible in Parliament all through the year though not calling in a substitute and hardly seen at all around in Iceland. Gunnlaugsson seems to be pinching votes from his old party and the Independence Party.

Nine parties are or have been likely to get an MP but it now seems that in the last spurt only seven parties will be represented in Alþingi, the Icelandic Parliament.

The 2016 results

(Regeneration is the party I call Revival, a name the party itself uses, Viðreisn in Icelandic)

A poll of polls 26 October 2017. From the left: Independence Party, Left Green, Social Democrats, Centre Party, Pirates, Progressive Party, Revival, People’s Party, other parties below the 5% threshold. From Kosningaspá.

The attraction of the new – this time it’s the new-old Centre Party

The Pirates were the stars of 2016 election though they did not make it into government. This time they are doing less well, judging from the opinion polls.

A populist party, the People’s Party, had some chance of being the new stirring choice. The party has an unclear policy except promising a lot of money for every good cause. At the very beginning it seemed it would take up the topic of immigration only to drop it very quickly. The party is now losing ground and might not even make it into Parliament.

The new political kid on the block, Gunnlaugsson’s Centre Party is doing remarkably well, showing that Gunnlaugsson has a strong appeal in spite of his Panama Papers disgrace, a story he tries to manipulate in the face of facts when he gets the chance. Gunnlaugsson is the only leader heavily playing the immigration card. This comes as no surprise, he has been dallying with the topic before but so far, it has not proved to be a winning topic.

In this respect, Iceland has so far proven to be a real exception compared to the US and most European countries. Although immigration is rising rapidly in Iceland there is plenty of work to be had, more than can be filled by only Icelanders. For years and now decades, foreigners have been crucial for the fishing industry and now they keep the tourist industry and other services going.

Gunnlaugsson has always had a populist flare, promising handouts to voters. In the election 2013 he promised to take money from the failed banks’ creditors and give to voters. The plan, introduced with fanfare in November 2013 was nothing of the sort: it was part publicly funded part funded by those who were qualified to apply.

That hasn’t stopped Gunnlaugsson from claiming he kept his promise and again he waves a bundle of money in the face of voters: he promises to give Icelanders publicly held shares in Arion Bank, seemingly similar to the Russian handout of shares in the early 1990s. The idea is to secure a spread ownership and give Icelanders shares in coming profits – an idea that doesn’t stand up to scrutiny. Gunnlaugsson has mentioned the shares will amount to ISK150.000-200.000, €1200-1600.

Topics and European thoughts

A membership of the European Union has not been on the campaign agenda. The leader of the Social Democrats Logi Einarsson has mentioned Icelanders could vote on continued membership negotiations as early as next spring. Due to lack of interest in all things European such a vote is unlikely unless the Social Democrats are in government. This got Einarsson a headline the day he said it but it is not a reverberating topic.

Revival was very much founded in order to offer conservative voters with European leanings a new option instead of the anti-EU Independence Party. However, Revival has put little emphasis on the European ticket and has been more taken up with classic Social Democratic welfare issues.

The main election issues have been welfare, health care and to some degree education as well as classic Icelandic topics such as fishing quotas and power plants versus preserving untouched nature.

Possible outcomes – again, back to the old conservative roots

With a swing from the left to the right, the outcome might be similar to last year when I pointed out that Iceland was, yet again, returning to its old conservative roots. The Independence Party has been the back-bone of Icelandic politics after World War II, left governments have been the exception, contrary to the social democratic Nordic countries (though less so the last few years: only in Sweden the social democrats are now in power).

For the time being it is very unclear what sort of government might be in sight after the elections on Saturday. Last year, it took over two months to form what eventually was the three-party coalition. It might not be much easier this time but as things stand now it is almost certain that Bjarni Benediktsson will first be given the mandate to form a government. Last year, he only managed to do it after failing the first time around and after other leaders had tried.

What sort of coalition?

There are speculations of a coalition over the political spectre, with the Independence Party and the Left Green join forces. An unpopular choice for many Left Green voters but perhaps less so if it proves to the party’s only viable path to government.

A blue-red-green government would most likely be arch-conservative, not in the sense of the Independence Party but beholden to special interests in the fishing industry, unwilling to great changes. However, as things stand now the two parties alone will not have a majority.

Benediktsson has said that he would not be keen on leading a three-party coalition. His experience as a PM has clearly not been a happy one: unable to turn the government into a good team he failed the prime minister test. His government lacked the necessary team spirit.

Will Gunnlaugsson made a come-back in government? It is uncertain that an election victory will bring the Centre Party into government because Gunnlaugsson is highly unpopular among the politicians he was in government with. He proved highly unreliable, often incommunicado for days, not showing up at the Prime Minister office, not taking the phone from his fellow ministers. And no one knew where he was. Benediktsson, who was minister of finance in the Gunnlaugsson-lead government, is rumoured to be most unwilling to repeat the experience.

Minority governments have been a rare occurrence in Iceland, not seen for decades, contrary to the other Nordic countries. A minority government will hardly come into being until all option for a majority government have been exhausted. But then, knowing the voters would appreciate it the political party may also be preparing a real surprise: a speedily formed majority government. Given the various alphabetical options, the depressing outlook is another elections in a year’s time.

Here is my overview of the results of the October 2016 elections.

Follow me on Twitter for running updates.

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 20^th 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.

Follow me on Twitter for running updates.

The Icelandic government has fallen due to lack of trust – Bright Future has decided to leave the government. That is the simple fact. The story behind this is a tad more complicated, based on a horrid story of sexual abuse, a strange system of “reviving honour” after an ended prison sentence and connections to the father of prime minister Bjarni Benediktsson leader of the Independence party. Benediktsson, the Teflon man of Icelandic politics, again has a case that raises questions but so far, he has not lost the trust of his party. He now wants to call elections in November. – This is not a case of pedophilia but of politics and trust.

The shortest lived government in the history of Iceland and the third government led by the Independence party to fall has now come to an end, greatly challenging the party’s claim to be the great stabiliser in Icelandic politics. The only government after the 2008 banking collapse that so far has lasted its full parliamentary term is the left government, which did manage to sit the full 4 years though struggling at times.

In spring last year, Bjarni Benediktsson pulled his party out of government led by the Progressives’ leader Sigmundur Davíð Gunnlaugsson; the reason was lack of trust. Gunnlaugsson, named in the Panama papers, had for weeks known of the infamous interview where confronted with evidence he walked out. When Benediktsson saw the interview he walked out of government.

This time, the story could not be more different but at the bottom is, again, lack of trust. Benediktsson did not inform his fellow ministers that his father had signed a statement of character for a sentenced pedofile seeking to rehabilitate his honour and thereby seeking to reclaim civil rights lost due to his long prison sentence.

The sordid origin of a political story

Róbert Árni Hreiðarsson is a lawyer, earlier convicted for grooming under-aged girls in a particularly vicious case. After ending his sentence he changed to name to Robert Downey (apparently taking up the name of his American father). A convicted lawyer can’t enter the legal profession again unless he goes through the process of rehabilitating, “reviving his honour” as it is called in Icelandic.

The process can be initiated five years after ending a prison sentence and implies inter alia getting someone to sign a statement confirming that this person is indeed a sound and good person. Though not without exceptions, this has mostly been a rather mechanical process where the rehabilitation is rarely denied.

The fact that Downey seemed so easily to get his place in society again caused a widespread disgust in Iceland. The father of one of his victims aired the distress of the family, shared by many Icelanders. Rúv, the Icelandic state broadcaster, tried for months to get minister of justice Sigríður Andersen, also an Independence party MP, to inform who had supported Downey in “reviving his honour.”

The very Icelandic story of a pedofile connected to the PM’s father

As a side story, the attention was also on others sentenced for sexual abuse and who had helped them to rehabilitate. One of them is a Hjalti Sigurjón Hauksson, sentenced for years of abusing his under-aged stepdaughter. It now turns out that one of those who assisted Hauksson was a well known businessman Benedikt Sveinsson, father of PM Bjarni Benediktsson.

Mostly, those who assist ex-prisoners to regain their full civil rights are people who have some standing in society and who known the convicted people for a long time. So what are the connections between Sveinsson, firmly in the centre of power and money in Iceland, and a sentenced pedofile?

In a press release, Sveinsson says that Hjalti Sigurjón Hauksson was for a while related to acquaintances of him and his wife from their school years and that Hauksson had over the years sometimes sought his help, mostly related to financial matters or work. Last year, Hauksson had brought him a letter for Sveinsson to sign, in order to use for his process of regaining his honour. Sveinsson signed the letter as it was, thereby signing off that Sveinsson now merited to be rehabilitated.

Hauksson has worked as a bus driver, also working for a bus company owned by Sveinsson and his family. This bus company has the license to operate on the very lucrative route Reykjavík – Keflavik airport.

Nagging suspicion and belated acknowledgment 

With the focus on Downey there had been some political manoeuvre, which caused suspicion and the media kept asking for more information. In hindsight, some media probably hard heard of a connection to the PM’s family that kept the Downey case alive in the media.

Following a Rúv Freedom of Information request, which ordered the ministry of justice to release information, Sigríður Andersen was just about to release information not only on Downey but all similar cases since 1995. On Monday, PM Benediktsson informed the two other coalition leaders that his father was implicated in one of these cases.

According to Óttarr Proppé leader of Bright Future he was then of the understanding that this information was about to be released. But when he then understood yesterday that Andersen had informed Benediktsson in July about his father’s involvement with the known pedofile, Proppé and his party concluded that this was such a breach of trust that leaving government was the only option.

Benediktsson adds to his list of political mishaps

There is no allegation of any connection between Benediktsson and a sentenced pedofile and this case has nothing to do with pedophilia, contrary to headlines in foreign media. The government did not fall due to a case of pedophilia but due to breach of trust, how Benediktsson had handled the case and if the minister of justice had acted properly by informing the PM of his family connections to this specific case.

But this case adds to Benediktsson’s list of mishaps that have so far not tainted his standing as a political leader. His father was connected to a banking collapse case, called the Vafningur case, related to illegal use of funds of Sjóvá, an insurance company where the family has for decades been a major shareholder. The case was not prosecuted. Benediktsson gave a witness statement where he claimed he had not known the details.

In 2014 Benediktsson was the minister of finance when the state-owned Landsbanki sold a credit card company to a consortium of businessmen. It later turned out the bank had grossly undervalued the company leaving a huge windfall to the consortium. Again, Benediktsson had been wholly aware of the whole thing.

Last, but not least, Benediktsson figured in the Panama Papers. He had owned an offshore company, holding failed investments in Macao. By saying this had all been only losses and was long gone, Benediktsson was able to move on and keeping his position as an undisputed leader of his party.

The political aftermath

So, what now? The first reaction was that the government had now fallen and there would be a quick election though there have also been rumours of other options. There are theoretical options for the government to continue operating for a limited time – for two months or so, long enough for the government to pass the budget, or if its live could be stretched until spring. Benediktsson has said he would prefer to call elections in November.

Sigurður Ingi Jóhannsson leader of the Progressive party, an old coalition partner of the Independence party, denied quite harshly today that he was interested in filling Bright Future’s seats in government. At the same time, the rumour mill claimed the party was indeed interested in this option. Less easy now after Jóhannsson’s firm denial.

One mealy-mouthed politician today is Benedikt Jóhannesson minister of finance and leader of “Revival,” partly a splinter party out of the Independence party touting itself as a liberal euro-phile party contrary to the old party of anti-European sentiments and special interests. Contrary to other Revival MPs, Jóhannesson was remarkably unwilling to criticise Benediktsson and unwilling to mention breach of trust. In a country where blood is thicker than water, all Icelanders know full well that Jóhannesson is closely related to Benediktsson.

Quite remarkably, Iceland has in many ways done all the right things following the banking collapse in 2008 – it investigated the collapse, prosecuted bankers and shareholders and its economy turned to growth already in summer of 2011. Yet, it has not yet found political stability or political strength. That however has perhaps more to do with the times we live in: in Iceland, the widespread demand for transparency keeps running against political love of opacity.

The Independence party and its loss of claim to stability

Given that the world has lately seen Brexit and Trump victory, I’ve been saying tongue in cheek that if there will be elections soon Iceland might wake up to a government of Independence party, the Progressives and a new anti-immigration populist party called Party of the People. So far, it is a joke (albeit not funny).

The new party has caught the favour of voters always looking for a new solution to the world’s ill. The Pirate party has held much of these votes but seems to be losing them to this new party. Compared to other European countries, anti-immigration sentiments have not surfaced as a political force in Iceland. Not for lack of trying: the Progressives have flirted with these sentiments but so far, no success. However, as we have seen, such a party can pull other parties in its direction. Remains to be seen.

In terms of political reputation, the greatest loser from this debacle is so far the Independence party: it has for decades laid claim to its central part in Icelandic politics as the great stabiliser. Now, the party has set a new record: the three last government is has sat in – after elections in 2007, 2013 and 2016 (with government formed in January 2017) – have fallen.

But as the Independence party knows better than any other party it can normally rely on its voters, no matter what. It has been hovering around 25% of votes in opinion polls lately, record low compared to its earlier glory of close to 40%. Our times of flimsy voters might test this but other parties have a lot harder battle, especially the two other coalition parties who are in danger of not getting any MP though Bright Future might have created some political sparks by walking out of government. All to be tested in November…

Follow me on Twitter for running updates.