Sigrún Davíðsdóttir's Icelog

It’s not that there is any lack of interesting subjects that nothing is coming up on Icelog. For the time being, my focus is elsewhere: I’m in the final stage of finishing a novel, in Icelandic, that will be published in Iceland in autumn or late winter if I reach the final paragraph. The novel, hopefully a thrilling one if not outright a thriller, takes place in London and Iceland Dec. 2009 until spring 2010. It’s a docu-drama, with a background of financial matter, written into the events of Icelandic banking and business and the contacts with international tycoons and banks.

As to interesting development in Iceland there is of course the Icelandic EU membership negotiations, ongoing investigations by the Office of the Special Prosector, new evidence on well known persons and events and what the formerly so famous Icelandic tycoons and bankers are doing now. More on all this later.

Follow me on Twitter for running updates.

‘Business but not breaking the law.’ This is how Justice Arngrimur Isberg described some of the most blatant money-making tricks at the heart of the charges in the Baugur case, brought against Jon Asgeir Johannesson and his companions in 2005. At the time, Isberg threw out charges of fraud and breach of fiduciary duty since in his opinion it was normal business that caused a loss of ISK325m to Baugur whereas Johannesson and his companions made at least ISK200m in a deal where Johannesson had hidden his ownership of a company sold to Baugur.

On Tuesday, Isberg yet again caused a major surprise, now with his ruling* in the Byr case.

As explained in an earlier Icelog the Byr saving society wasn’t among the heavy-weights in the Icelandic financial world. Prosecutor Bjorn Thorvaldsson had demanded a jail sentence of five years for Jon Thorsteinn Jonsson chairman of the board of Byr, a saving society, Byr CEO Ragnar Gudjonsson and the CEO of MP Bank Styrmir Thor Bragason for breach of fiduciary duty. In addition, Bragason was charged with money laundering. The investigation centered on two overdraft loans, in total ISK1bn (now €6m), from Byr, in October and December 2008 to a holding company, Exeter Holding. Exter then bought Byr shares from Jonsson and others related to Byr at a conspicuously favourable rate. Byr investors were being pursued by MP Bank with margin calls since MP Bank had earlier lent a group of Byr employees to buy into Byr.

I was in Iceland during the court hearings. It was interesting to see one Byr- and MP Bank-employee after the other, as well as others related to the case, give witness. Their memory was often so poor that one wonders how they get out of bed in the morning. They didn’t understand emails they had sent or received. And so on.

At the core of the Byr case were loans to buy shares in Byr with only these shares as collateral. Justice Isberg didn’t pose many questions himself to the witnesses but he did, at some point, ask if this type of loan was necessarily a bad thing for a bank. Maybe he thought his question would clarify something but it mainly seemed he was trying to figure out himself what was so harmful about these loans.

Yesterday, Justice Isberg acquitted the three of them. This ruling was done at the County Court. No doubt, the Special Prosecutor will appeal to the Supreme Court.

According to the ruling, Byr clearly broke its own rules on collaterals, loan ratio and loans to related parties. It lent to a company, Exeter, with a negative equity, owned by a heavily indebted individual. All of this characterised loans to the favoured clients of the Icelandic banks. But no, nothing of this amounted to breach of fiduciary duty nor, in the case of Bragason, to money laundering. According to Isberg, the three couldn’t possibly have been defrauding the bank with these loans since they didn’t realize these loans could cause harm to the bank. Isberg sees nothing intentional about these bad loans. According to Justice Isberg the three couldn’t possibly have known the harm these loans did to Byr.

There were indeed three judges on the case. The second, who used to work as a broker, was in accordance with Isberg. The third, Ragnheidur Hardardottir, wanted to sentence the Byr managers but acquit Bragason.

It’s interesting to keep in mind that lending against own shares was one of the characteristics of Icelandic banking and consequently a major topic in the SIC report a year ago. That Justice Isberg didn’t seem to have understood how wrong and how harmful to a financial institution these loans are was nothing less than frightening. It’s intriguing to keep in mind that Eva Joly has often pointed out that in cases regarding financial crimes it’s often a major problem how ignorant judges often are of finance and business.

The Byr ruling was a test case for the Special Prosecutor. So many of the cases that he will bring to court will most likely reflect similar situation: the charged has done things that cause a loss to a listed company. Since these were clever people and there is a certain purpose to the deals the Prosecutor will charge them for a criminal intent. The Byr case shows that there can be judges who absolutely can’t see any criminal intent. Just negligence.

There are many cases in Iceland where a drug dealer has been caught with a bag of ‘goods’ and he just says he didn’t know what it was whereas the judge rules that it had to be clear to him what he was supposed to do with the drugs. In these cases, the judge reads into the circumstances certain intent. In the Byr case, the judge sees the loans, sees the losses they cause, but he can’t see anything intentional though the loans make no sense except understood in the context they were made.

If this will be the case regarding pending charges, it’s clear that it will be very hard for the Special Prosecutor to get rulings in his favour. It will be of utmost interest and importance to see what the Supreme Court makes of the Byr case. Not all is yet lost and it’s still too early to send the Special Prosecutor packing. The Byr case shows that the Special Prosecutor has some formidable hurdles in court. And Icelanders are asking if it really is the case that circa 30 individuals who turned the Icelandic economy on its head will be able to live happily ever after with the proceeds that most Icelanders will be as ill begotten.

*The ruling is here, in Icelandic.

Follow me on Twitter for running updates.

The Monetary Policy Committee of the Central Bank of Iceland has decided to keep the CBI’s interest rates unchanged, see the press release below:

The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged. The deposit rate (current account rate) will remain 3.25%, the maximum bid rate for 28-day certificates of deposit (CDs) 4.0%, the seven-day collateralised lending rate 4.25%, and the overnight lending rate 5.25%.

The inflation outlook has deteriorated since the last MPC meeting, at least in the near term, and real Central Bank rates have fallen. Recent data do not materially change the overall outlook for growth and employment. However, given recent announcements, the outlook is for a more expansionary fiscal stance than previously forecast.

Headline inflation has increased for four consecutive months, reaching 3.4% in May, and will likely remain elevated through next year. However, core inflation still remains close to target. The increase in inflation reflects a weak króna and the recent rise in commodity and oil prices. To the extent that the króna is broadly stable and these price increases are temporary, they are unlikely to have a lasting effect on inflation over the medium term.

Given the current exchange rate, however, pay increases implied in recent wage agreements are not consistent with the inflation target over the medium term. As the recovery progresses, wage pressures stemming from the traded goods sector may therefore cause longer-term inflation expectations to drift upwards. To reduce the risk of such an outcome, tighter monetary policy may become warranted in the near term, with actual policy moves depending, as always, on developments and prospects.

The MPC stands ready to adjust the monetary stance as required to achieve its interim objective of exchange rate stability and ensure that inflation is close to target over the medium term.

Follow me on Twitter for running updates.

“Iceland is obliged to ensure payment of the minimum compensation to Icesave depositors in the United Kingdom and the Netherlands, according to the Deposit Guarantee Directive.” This is the conclusion in a reasoned opinion on 24 pages the EFTA Surveillance Authority, sent to Iceland Friday June 10. Further, ESA concludes:

In its emergency response to the banking crisis in October 2008, the Icelandic Government made a distinction between domestic depositors and depositors in foreign branches. Domestic deposits continued to be available after they were taken over by New Landsbanki, whereas the foreign depositors lost access to their deposits and did not enjoy the minimum guarantee. It is not possible to differentiate between depositors to the extent they are protected under the Directive. By acting as it did Iceland failed to ensure that the depositors received the compensation to which they are entitled under the  Directive.

The Icelandic Government is now requested to take the measures necessary to comply with this reasoned opinion within three months. Should Iceland not comply, the Authority will need to consider taking the case to the EFTA Court.

An overview of the opinion is found in the ESA press release that also has links to earlier documents regarding Icesave.

As stated above, Iceland now has three months to fulfil the Directive. All this had been negotiated and settled in the Icesave III agreement. Now there is the order to pay, in addition to the interests on the loans to the UK and the Netherlands as they paid out their Icesave depositors.

Follow me on Twitter for running updates.

The saving society Byr wasn’t among the heavy-weights in the Icelandic financial world. These days, two previous Byr managers and the CEO of MP Bank are on trial in Reykjavik following an investigation by the Office of the Special Prosecutor. Today, prosecutor Bjorn Thorvaldsson demanded a jail sentence of five years for Jon Thorsteinn Jonsson chairman of the board of Byr, its CEO Ragnar Z Gudjonsson and MP Bank’s CEO Styrmir Thor Bragason for breach of fiduciary duty. In addition, Bragason is charged with money laundering.

The investigation centres on two overdraft loans, in total ISK1bn (now €6m), from Byr, in October and December 2008 to a holding company, Exeter Holding. In October, as the banks were collapsing and Byr hardly lending anything at all, Byr lent ISK800m to Exeter, which proceeded to buy Byr investment from Jonsson and others related to Byr at a rate not seen elsewhere on the market. It so happened that these Byr people were being pursued by MP Bank with margin calls since MP Bank had earlier lent a group of Byr employees to buy into Byr.

It wasn’t until late December 2008 that the board of Byr was told of the ISK800m loan. At the same meeting, the loan was increased by ISK200m. The board of Byr was told that the additional loan was to serve interests and cost of the previous loan. In fact, the ISK200m was used to buy Byr investment from a certain Birgir Omar Haraldsson who at the time was an alternate on the board.

The money paid into Exeter flowed into MP Bank, at a time when liquidity was scarce. The Exeter deal solved personal problems for many key employees at Byr and for MP Bank.

But who was the owner of Exeter, the company chosen to do the deals? The owner was an investor, Agust Sindri Karlsson, who in 1989 was one of the founders of MP Bank and sat on the board of MP and other related companies until summer of 2008 when he left all these boards, upset that the bank was making what he felt were unjustified margin calls on him. Intriguingly, at the same time that Karlsson was being chased by MP to pay his debt with the bank the CEO of MP found Exeter, as a party in the Byr deal, adding ISK1bn to the Karlsson company sphere that was already over-indebted.

The Byr managers are charged with breach of fiduciary duty, sacrificing the interests of Byr for themselves and a few Byr-related parties. Bragason is charged for participating in their illegal activity, as well as money laundering when he received money procured by criminal action. The three deny all wrongdoing.

Byr has been in the news since 2009 when a couple, Sveinn Margeirsson and Rakel Gylfadottir, who had invested in Byr, became suspicious of the Byr management. They set up a website, Margeirsson was elected on the board of Byr and from within he was able to track relevant document and the course of action that laid bare serious breach in lending to related parties. The couple handed their documents to the OSP that pursued the investigation. If there had been more people like the inquisitive couple, the situation in Iceland would have been different.

The Byr loans don’t amount to much, compared to the lending of the three big banks to favoured clients. But Byr shows all the trends of the big banks in a nutshell.

Byr broke its own rules on collaterals, loan ratio and loans to related parties. It lent to a company, Exeter, with a negative equity, owned by a heavily indebted individual. All of this characterised loans to the favoured clients of the Icelandic banks: loans that were only for the well connected few.

It’s also clear from the Exeter loans that the Byr managers, who originally got the loans from MP Bank to buy into Byr, believed at the time they were making a ‘risk-free’ investment. They didn’t expect margin calls and such nuisance. The loans were supposed to be ‘risk-free’ for the investors whereas all the risk was shouldered by the lender who didn’t take the necessary precaution in securing collaterals and guarantees.

It’s also symptomatic for the two Exeter loans that they were tunnelled via a SPV owned by a man who was already heavily indebted to MP Bank. In return, MP Bank seems to have stopped making margin calls on him. As seen elsewhere, there seems to be a certain quid pro quo, built into the transaction.

Compared to cases where the OSP might later bring charges the Exeter case is a simple one. A clear case of crude breaches. The three charged were unknown outside the Icelandic banking world. If the managers and the big owners of the three big banks in Iceland will ever be charged it’s clear that they will buy the service of the best lawyers in Iceland and no doubt seek foreign advisers. That will be a real test for the Special prosecutor and his team. The Exeter case was a dress rehearsal for the great legal spectacles to come.

Follow me on Twitter for running updates.

Earlier, the EFTA Surveillance Authority had indicated that it would answer Iceland by the end of the May. It now seems that this time will be stretched until after the coming weekend.

In my reporting for Ruv in Iceland, I have indicated that to some ESA experts the Icelandic answer seemed feeble. I find it unlikely that ESA will be convinced by Iceland’s answer, which I found to be short on legal reasoning and long on beside-the-point arguments. In the end, it matters what the ESA lawyers think. We will know next week.

Follow me on Twitter for running updates.

Icelandic banks grew and expanded abroad and caught attention in countries where they operated but they never got rid of rumours of dodgy dealings, of money laundering and Russian connections. In spring of 2006, the expansion of Icelandic banks and businesses in Denmark attracted attention, causing worries and consternation. According to a Danish source this was even discussed informally on the board of the Danish National Bank. All along, the only people who seemed totally oblivious to these rumours were the financial services authorities in the countries where the Icelandic banks operated.

And so it was in Luxembourg, at the Commission de Surveillance du Secteur Financier, CSSF, the financial services authorities of this tiny state, which builds its wealth on offshore operations at the heart of Europe.

Only a few weeks after the collapse of the Icelandic banks in October 2008 my attention was drawn to the banks’ operations in Luxembourg. I spent months trawling through the Mémorial/Tagesblatt, the official publication that lists information on Luxembourg companies. The banks, especially Kaupthing, had from 1999, set up hundreds of companies for their Icelandic clients. In 2005, Kaupthing started a successful UK operation, which meant that many of the bank’s largest UK clients also had accounts and companies in Luxembourg.

On a visit to Luxembourg last year, I gathered that the CSSF had been completely ignorant of what was going on in the Icelandic banks. It seemed that the CSSF had not had any insight into the fact that the banks breached the limits how much they could lend to each entity/person and the insufficient or no collaterals/guarantees.

However, I have recently learnt that this wasn’t the case at all. The CSSF was indeed very worried about the situation in the Icelandic banks, at least in Kaupthing and Landsbanki (the Glitnir operation in Luxembourg was never big, it came too late to the game). So worried, that following the Q1 result in 2008 CSSF asked the external auditors of the two banks for a thorough report, ia on credit risk.

How Landsbanki responded I do not know but if they met the CSSF as they met demands from the UK FSA it’s safe to conclude that they were neither swift nor forthcoming. Kaupthing Luxembourg managers dragged their feet. The deadline was in June 2008, the report wasn’t finished until the latter half of July. The report was based on Kaupthing’s position at the end of March. The CSSF didn’t like what they saw but in reality the situation, by late summer 2008, was much worse than the report indicated since the underlying numbers had changed much for the worse.

Kaupthing answered in the Kaupthing way, claiming that the CSSF was entirely wrong about essential things. There was, according to the Kaupthing Luxembourg management nothing wrong and the credit risk well managed. However, Kaupthing Luxembourg was in the end forced to sell assets, providing some much needed liquidity. On Friday October 3 Kaupthing Luxembourg manager Magnus Gudmundsson told some employees that the Luxembourg operations were now secured for the coming months.

Evidently, Kaupthing’s management also convinced people at the Central Bank of Iceland that Kaupthing was, contrary to Glitnir and Landsbanki, in a strong position to weather the storm. On Monday 6 October 2008 the CBI agreed to provide Kaupthing a loan of €500m. Considering the fact that Kaupthing, as well as Landsbanki, was from Friday 3 October forced to put all new deposits into Bank of England, meaning that the banks were no longer operating freely, the loan is incomprehensible. I’ve never been able to certify if the CBI knew about the BoE action but my conclusion is that the CBI must have been aware of it.

It’s never been explained what happened to the €500m. Some of it seems to have gone to Sweden, some of it to Luxembourg. But the real mystery is why this money wasn’t used to save Kaupthing by strengthening Kaupthing Singer & Friedlander. Due to cross default clauses it was clear that if KSF collapsed it would trigger a Kaupthing default. KSF and Kaupthing were in a dialogue with the FSA during the last days. FSA set certain conditions for liquidity, Kaupthing claimed it could meet the limits but never did. Not even when it had the €500m.

But back to Luxembourg in October 2008. Although CSSF had been chasing Kaupthing for credit risk and over-exposure to only a few clients it didn’t seem too concerned about the way the Kaupthing managers had run the bank. Kaupthing went into administration, Franz Fayot, a well connected Luxembourg lawyer, was appointed an administrator. But little changed at the bank where Gudmundsson and the other Icelanders kept on running the bank. Apparently, no questions were asked, in spite of CSSF serious doubts.

After JC Flowers and the Libyan Investment Agency had considered buying Kaupthing but decided against it, the English investor, David Rowland finally took Kaupthing over. His bank, Banque Havilland now acts as an administrator for the Kaupthing assets in Pillar Securitisation. The Luxembourg state risked a loan of €320m to facilitate the deal with Rowland, again no questions asked in spite of CSSF’s earlier doubts and worries.

Rowland fired all his Icelandic employees, except one, after the Office of the Special Prosecutor arrested Gudmundsson last year. The message was that Iceland wasn’t important for Havilland any longer. Yet, suddenly Rowland appeared as an investor in an Icelandic bank, the resurrected MP bank. Rowland seems to have an exotic interest in outliers, investing in Iceland and Belarus. MP bank has invested in Ukraine and the Baltic countries. The question is why Rowland, who was called ‘shady’ in the UK Parliament, is suddenly so interested in Iceland and a bank there.

Follow me on Twitter for running updates.

The ash plume has resided, looks like the eruption in Grímsvötn 2011 is over. There is however some ash floating around in the air, might cause local disruption here and there in the coming hours, over Iceland and elsewhere but that should be the end of it.

Today, there is glorious weather in Reykjavik, sunny and ca 12C. The darkness encroaching on the city and the whole of Southern Iceland has disappeared and the mood of the country improved.

Follow me on Twitter for running updates.

This morning, the ash from Grímsvötn has again increased. The eruption is steady, apparently it’s ten times bigger, in terms of ash production, than Eyjafjallajökull last year. The fumes rose highest up to 20 km, the best way of measuring and indicating the strength of the eruption. Since yesterday it’s been 10-15 km, falling under 10 km at times.

There is a crater building up, indicating that lava will start running at some point.* Then the ash production will stop. For the time being, it’s impossible to say when and if this happens but normally, ash rises only, at the most, for the first few days.

In terms of disruption, it all depends on winds and air currents as to where the ash will be floating. The outlook for the UK on Wednesday is uncertain. The UK authorities are bracing themselves for possible flight cancellations.

For the time being, there are no flights in and out of Iceland. This might change, later on. Icelandair hopes to be flying later in today but this will be announced in the coming hours.

*As it is now, there is plenty of water, melted glacier, in the crater. It’s the contact of water and lava from the crater that creates the ash. When the water has evaporated ash doesn’t form any more and the lava starts to flow.

Follow me on Twitter for running updates.

It now seems that the Eyjafjallajökull eruption was, in case you didn’t know, just a tiny eruption. The one now, in Grímsvötn, is producing much more ash. Tomorrow, the ash cloud might reach Reykjavik. The ash is spreading wide and far over Iceland.

According to the weather forecast on Ruv tonight, the air currents over the North Atlantic indicate that by Wednesday, the cloud might be close to the UK and Northern Europe. However, the eruption seems to be residing so we can only hope that by Wednesday, there isn’t much ash rising out of Grímsvötn.

According to geologist Magnus Tumi Gudmundsson, in an interview with Ruv, the normal pattern of a Grímsvötn eruption is ash for the first few days only whereas the eruption could continue for weeks and months. That means that there is only risk of flight cancellations for the first few days. This may seem dramatic right now but most likely only for a few days more, at most 3-4 days.

Here is an Icelandic blogger, Jon Frimann, blogging in English, keeping track of volcanos in Iceland, now covering the Grímsvötn eruption.

Here is a video from Grímsvötn where Matthew Roberts, who works at the Icelandic Meteorological Office, is telling the BBC about the eruption, just after returning from a flight over the glacier.

Follow me on Twitter for running updates.