Sigrún Davíðsdóttir's Icelog

‘This was froth, bought and borrowed, and then the froth just subsided.’ This is how Guðmundur Kristjánsson, in an interview with the Icelandic newspaper Morgunblaðið last December, described loans he got to buy bank shares. The froth was loans that Kristjánsson, whose wealth stems from the fishing industry, got from Landsbanki to buy shares in Straumur. And nota bene: the major owners of Landsbanki and Straumur were the same, Björgólfur Guðmundsson and his son Björgólfur Thor Björgólfsson. Guðmundsson was chairman of the board of Landsbanki, Björgólfsson was his father’s opposite number at Straumur.

Although Kristjánsson described his dealing so light-heartedly, he had been a member of the board of Straumur from March 2007 until the bank collapsed exactly two years later. The story of his loan has recently been revealed in DV, an Icelandic newspaper. In December 2006, ca four months before Kristjánsson became a member of the Straumur board, a company he owned, Hafnarhóll, got a loan of ISK5bn (now, £25.6m) to buy 4,2% in Straumur. The transaction was done through Landsbanki Luxembourg, through the bank’s nostro account. Consequently, neither Kristjánson nor Hafnarhóll’s name, were found on Straumur shareholders’ list.

Two of Kristjánsson’s fishing companies guaranteed the loans but this guarantee was later lifted. By the end of March 2008 the loan had gone up by 30%, to ISK6.4bn (£34m) but the Straumur shares had gone down. As was the rule with loans to favoured clients the bank made no margin calls. When Hafnarhóll went bankrupt last year its debt had risen to ISK9,5bn (£50m) but there were no assets (the loans were in foreign currency and rose as the krona fell whereas the shares had lost value).

‘These were bank shares, bought in a bank, financed by a bank and kept in a bank,’ Kristjánsson said in the Morgunblaðið interview. ‘This was froth, bought and borrowed, and then the froth just subsided.’

Another story, also recently revealed by DV, is about a family, a mother and two sons, who ended up owing Landsbanki close to ISK23bn. Erna Kristjánsdóttir is the widow of a pharmacist who died in 1991. Together with her two sons, Ólafur Steinn and Kristján Sigurður Guðmundsson, she owned eight offshore companies through Landsbanki Luxembourg and financed by Landsbanki, that ended up with this total debt of ISK23bn (£122m). The family was a big shareholder in Actavis and, together with other Actavis shareholders, became very rich when Björgólfur Thor Björgólfsson bought Actavis in 2007.

The Guðmundsson family investments, through the eight companies financed by Landsbanki, followed an interesting pattern: all their investments were in companies where Björgólfsson was a major shareholder. They borrowed from Landsbanki to buy in Straumur, Landsbanki, in the Bulgarian telecom company BTC and Netia, a large Polish mobile phone company and in Novator Pharma Holding I, a company belonging to Björgólfsson’s investment vehicle Novator. According to Björgólfsson’s spokeswoman, he was completely unaware of the Landsbanki loans to the family that trailed his investments. These loans are part of the investigations of the Office of the Special Prosecutor.

Recently, movements around the investment bank Straumur August 2006 were brought to my attention. At the time there were about 20.000 shareholders in Straumur, nine Icelandic pension funds among the bank’s twenty biggest shareholders and the bank’s capital amounted to ISK140bn (£740m). Samson, the holding company of Björgólfur Guðmundsson and his son, was Straumur’s biggest shareholder, with 30.67%. Landsbanki, where Samson was also the biggest shareholder with ca. 42%, was Straumur’s second largest shareholder, owned 21.5%, so father and son controlled over ca 52% in Straumur.

At this point, Straumur decided to sell 75% of its own holding of Straumur shares, amounting to just over 5% of Straumur’s shares. In the weeks before the sale the shares had been trading for well over 20 a share. The share price for this big chunk of shares was 18.6. That day, the share price went up to 19.4, meaning that by the evening on the day of the sale the lucky buyer had already made ISK440m on his acquisition. The shares kept going up and around two weeks later, his profit was ISK1bn (£5.3m), or 10% since the total price paid had been ISK10bn.

This sale was conducted just when the so called ‘mini-crisis’ hit Iceland, caused by some critical analysis by foreign banks who had were just starting to pay attention to the Icelandic bank-upcomlings on the international finance arena and didn’t like what they saw.** In the Icelandic banking sector many wondered why Straumur was selling at all, at an apparently low price.

The sale was conducted under the auspice of Straumur’s new CEO, William Fall.* His Icelandic predecessor had been sacked earlier in 2006. Björgólfsson claimed that a foreign CEO would strengthen Straumur’s international profile. Others whispered that the former CEO had opposed that Straumur should be a mere investment vehicle investing in tandem parallel with Björgólfsson’s Novator. Novator was already a fund manage for a Straumur fund making Björgólfsson a nice profit.

When Fall took over he said in an interview that Straumur had ‘fantastic opportunities’ abroad.  Yet, the CEO who vehemently believed in Straumur’s prospects, was more than willing to sell the bank’s own share at a heavily discounted price. The name of the buyer who got the attractively priced shares wasn’t revealed. According to Fall, the buyers were foreign investors who had turned to Straumur with an offer too good to refuse and who, in the long run, would bring both growth and opportunities, justifying a discounted price.

However, it quickly transpired that these international and ambitious investors had bought the shares through Landsbanki Luxembourg nostro account, meaning that they wouldn’t be exercising their voting rights – and were indeed hiding their identity. Fall then said that these investors didn’t after all intend to be active in Straumur. At this time, Landsbanki Luxembourg held in total 28% of Straumur shares, meaning that 28% of the owners were not exercising their voting rights.

Fall’s appointment showed that Björgólfsson’s grip on the bank after a fight on the board for over a year. Quite exceptionally, the fight did at times erupt in the media. Magnús Kristinsson, whose wealth stems from the fishing industry in the Vestmann Islands and who had been a major shareholder and board member in Straumur, wrote a lengthy article after Fall’s appointment. According to him, Björgólfsson had i.a. wanted Straumur to only invest in companies in the Novator sphere, explaining in some detail how Björgólfsson had abused his position. Under Fall, Straumur’s business was basically tracking Novator companies or companies of interest to Björólfsson.

A further tail to this Straumur story is that Vilhjálmur Bjarnason who runs the Association of Small Investors, sued Straumur’s board claiming that with the sale of Straumur’s share the bank had caused a loss to other investors. In January last year the Icelandic High Court ruled that no clear loss stemmed from the sale nor was Bjarnason entitled to know who the lucky investors were. From the ruling it’s clear that Fall took all the decisions regarding the sale. The board never discussed it.

We still don’t know who the lucky investors were. However, from what we now know about the operations of the Icelandic banks it wouldn’t have been above Straumur to either itself lend the lucky buyers the ISK10bn or that Landsbanki might have issued a loan. As to who these investors might have been I can’t say but again, according to what is known about the banks, it’s most likely that they were investors that Straumur and/or Landsbanki wanted to profit.

The Althingi Special Investigative Commission’s report on the collapse of the Icelandic banks pointed out alleged and widespread market manipulation in all of the three banks as well as in Straumur. The stories above could show in detail how this might have bee done as well as showing that the favoured clients were allowed all the upside while the banks took all the downside. These, together with so many other stories, all seem to indicate a breach of fiduciary duty on behalf of the boards and managers.

Over the last decade, foreign financial institutions merrily lent to the privatised Icelandic banks. The lenders were unperturbed by the fast growth of the Icelandic banks, first at home, then abroad, though the rule of thumb is that fast growing banks in mature markets tend to make bad loans. Nor were the Icelandic pension funds worried. And most of all, the financial services authorities in i.a. UK seem to have paid no attention to how the Icelandic banks operated although the earliest foreign analysis raised serious issues regarding cross ownership and incestuous relationships. The fact that the UK FSA didn’t do anything came to cause a lot of harm to UK councils and other public and private institutions and investors.

The Landsbanki loans and the Straumur sale are just two of innumerable stories connected to a small circle of chosen investors. Loans that seem to indicate that the Icelandic banks thought they could defy the laws of business gravity. However, Kristjánsson is wrong: the froth doesn’t merely subside. It’s turned into heavy losses for Icelandic pension funds, UK councils and lenders (mostly foreign banks) that merrily – and perhaps also greedily – were so generous in their lending to the Icelandic banks.

*Fall left Straumur shortly before it went bankrupt and is now on the RBS senior executive team as a global head of financial institutions group.

**In an earlier Icelog I mentioned some facts about the crisis that came to be called the Geysir crisis.

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Today, the Office of the Special Prosecutor conducted house searches at several premises in Iceland, related to an investigation into Landsbanki. Seven people, among them the bank’s ex-CEO Sigurjon Arnason, are being questioned but it’s unclear if anyone will be held in custody.

According to Icelandic media today, the searches are related to four topics:

1. Alleged market manipulation related to shares in Landsbanki.

2. Loans to four companies Hunslow S.A., Bruce Assets Limited, Pro-Invest Partners Corp and Sigurdur Bollason ehf. to buy shares in Landsbanki.

3. Landsbanki Luxembourg’s sale of loans to Landsbanki only a few days before the bank collapsed in Oct. 2008.

4. The buying of shares by eight offshore companies that supposedly were set up to hold shares related to employees’ options.

Sigurdur Bollason is an Icelandic businessman, often connected to Baugur companies and a friend and associate of Magnus Armann, another Baugur associate. According to my sources Bollason, who imported UK high street fashion to Iceland over a decade ago, met Kevin Stanford, through business with Karen Millen, then Stanford’s wife. That’s how Stanford became connected to Icelandic banks and businesses, first with Baugur, where he was often a co-investor, and later with Kaupthing where he was involved in the financial high-wire acts that Kaupthing engaged in.

Hunslow S.A. was registered in Panama in Feb. 2008. In November 2009 two Novator companies (Novator is the investment fund of Bjorgolfur Thor Bjorgolfsson who was a major shareholder in Landsbanki and Straumur investment bank together with his father) were registered in Panama with the same law firm as Hunslow. The same five directors are on the board of the two Novator companies and Hunslow but there are probably hundreds of companies registered at this one law firm. I have no information on Bruce and Pro-Invest.

The loans moved from Landsbanki Luxembourg to Landsbanki Iceland on Oct. 3 2008 amounted to €784m. By far the largest loan had been assigned to Bjorgolfsson, €225m. (The complete list of the loans is here, from the SIC report, ‘Tafla 20’) but the four companies mentioned above are also on the list.

I find it interesting that the OSP is investigating the offshore companies that Landsbanki set up to own shares in itself. The first of these companies was set up in Guernsey in 2000, before the privatisation of Landsbanki in 2002 but later seven more were set up in the BVI and in Panama. To begin with, the bank financed these companies but later one was financed by Kaupthing and six by Straumur, from 2006 when Bjorgolfsson and his father were major owners in Straumur. Bjorgolfsson was Straumur’s chairman.

In total, these companies owned 13,2% of the shares in Landsbanki. Normally, similar structures holding shares for staff option usually don’t own more than 1-2%. The SIC report maps these companies but the weird thing is that although they were apparently set up to hold shares for options they don’t seem to have been used for that purpose. The ownership in each company was held below 5%.

With the bank owning 13,2% via these companies (above the 10% legal limit of own shares) and father and son owning around 45,8% of the bank the majority was assured. Another interesting aspect of these companies is that Straumur lent them against no collaterals. This isn’t the only example of the very close relationship between the two banks where father and son were the major shareholders. Neither of the two are being questioned today.

*Last October I reported on these offshore companies for Ruv. Bjorgolfsson was very upset, according to his spokeswoman, about my reporting and did eventually file a complaint to the Icelandic Press Complaints Commission. The PCC has dismissed the complaint. Here is a story about his spokeswoman when she wasn’t happy about Iceland Weather Report reporting on Bjorgolfsson.

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