There she blows


An interesting essay by Englishman Paul Nathan who lives in Iceland and will be contributing to this blog from today: 

For over 1000 years the isolated Icelanders have, against all odds, fashioned a thriving society that was equal to those of their larger Nordic siblings.

At the turn of the Millennium, Iceland could boast economic parity with most of the European Union – without being part of it – and took full advantage of its membership of the EAA [European Economic Area] to leverage what was a quasi EU membership.

As part of a wide ranging economic liberalisation programme, between 1999-2005 it was decided to privatise the commercial banks, and this was masterminded by Davíð Oddsson, who was then Prime Minister, and Geir Haarde, who was Finance Minister throughout this period, and is currently Prime Minister.  Davíð Oddsson went on to run the Central Bank.

The Privatisation of the banks was an extremely Private affair, with foreign entities like Sweden being snubbed, and the whole process orchestrated to ensure the bank stakes ‘fell into appropriate hands’.  It was clandestine, with accusations and recriminations flying, that led Ingibjörg Sólrún Gísladóttir (now Foreign Minister and part of the ruling coalition, but then in opposition) to say on state radio that all the rules had been “grossly violated” and the whole process was reminiscent of the way it was done in former communist countries.

Ironically one of the main beneficiaries of the privatisation was Björgólfur Guðmundsson and his son Björgólfur Thor Björgólfsson who assumed effective control of Landsbanki.  The son had just returned from Russia having successfully negotiated with the mafia – not an easy task – to establish a successful brewery in St.Petersburg, and then sell it to Heineken.  The father was already notorious in Iceland having been charged with 450 bookkeeping offences and receiving a 12 month prison sentence suspended for 2 years.

And so the stage was set.

What transpired in the aftermath was a period of phenomenal growth, where three ‘super banks’ – Glitnir, Kaupthing & Landsbanki – emerged, whose market capitalisations dwarfed their purchase price, and displayed all the greater excesses that were common on Wall St.

Whilst Landsbanki remained the tool of Björgólfur & Thor, Kaupthing acquired some major new stakeholders in the shape of the Bakkavör brothers – Ágúst and Lýður Guðmundsson.  Their odyssey from humble beginnings to a food processing giant was facilitated through their connection to Sigurdur Einarsson – CEO of Kaupthing – enabling them to indulge their appetite for growth, and eventually eating the hand that fed them.

The final part of the troika, Glitnir, was the favourite of Baugur, and through a complex web of cross ownership – in the end Baugur controlled Stoðir (formally FL Group) which owned 32% of Glitnir – the two entities became aligned, with the former becoming a compliant lender, in order to help Baugur fuel its aggressive international expansion.

There was a completely deregulated environment, incredibly concentrated ownership and claustrophobic business and political connections.  Conflicts of interest were fully accepted – the wife of Geir Haarde sat on the board until 2005 of one of Iceland’s most notorious disasters FL Group – and there was rife insider trading with disregard for shareholders.

The party was in full swing and even Sir Elton John and the President were invited.

The President, Ólafur Ragnar Grímsson, started his political life on the left, and has seemingly moved increasingly to the right since his marriage to a wealthy socialite and heiress.  His daughter worked for Baugur, his wife flew in the Baugur jet, and the 2 dozen seats of Icelandair Business class would often resemble a presidential cocktail party.

Davíð Oddsson who has had his reputation battered by his tenure at the Central Bank, attempted in 2004 to introduce a bill into parliament that would limit media ownership to 15% .  It was immediately seen as part of a vendetta against Baugur who already owned nearly half of the media.  (Two years earlier Oddsson had initiated an investigation into Baugur business practices and was demonised in the media, largely owned by Baugur.)

Unprecedented for Iceland’s constitution, the President vetoed the bill.  In the Presidential election of 2004 which Ólafur Ragnar won, 1 in 5 ballots were empty in disgust.

But it wasn’t only Icelanders that were beginning to smell that something was rotten.  There was an increasing chorus of questions from academics and analysts.  The academics were marginalised as cranks, and the foreign analysts like the Danes, were just ‘jealous of the success of the little Icelandic brat’.  (In one now infamous incident Thorgerður Katrin Gunnarsdottir, the current Minister of Education and Culture, and whose husband worked for, and held a large shareholding in Kaupthing, told a respected academic who questioned the situation ‘to go back to school’.)

The last ‘failsafe’ – the auditors – were local branches of multinationals, and run by Icelanders.  KPMG for example was headed by Sigurdur Jonsson, the father of Jon Sigurdsson, who was CEO of FL Group, later Stoðir, and therefore inextricably linked with Glitnir.  There are few in Iceland that can claim to have no conflicts, especially at Christmas.

With no controls left the businessmen and banks moved into a frenzy of international expansion.  For three unbridled years the money kept flowing as the Icelandic banks borrowed and innovated. Under EEA laws the banks set up Internet banks in Europe offering high rates of interest and vacuumed up billions of deposits. Eventually they leveraged themselves to the stratospheric point where liabilities were 10 times Iceland’s GDP.

It was during this heady period that the world economy started stalling and Icelandic companies found it increasingly difficult to borrow abroad.  Increasingly Icelandic banks became the lender of last – but willing resort – always able to help out their friends.

On 29 September 2008, the highly leveraged game of musical chairs came to an abrupt end, when Davíð Oddsson, head of the Icelandic Central Bank, effectively nationalised Glitnir.

In the weeks that followed both Kaupthing and Landsbanki were nationalised and the Icelandic banking era came to an abrupt end.  The banks had not exposed themselves to toxic mortgages, but simply to the vagaries and turmoil of the global financial markets.

During the ensuing chaos massive transfers were being made out of Europe into unspecified accounts in Iceland and triggering all the money laundering systems.  In a clumsy response Gordon Brown deployed the UK anti-terrorism laws to freeze all UK assets, which further compounded a disastrous situation. (Blowing up the lifeboats when the ship is sinking.)

There followed a brief chess game between the grand masters of Iceland, Russia and the United States, before the IMF, Scandinavia and the heroes of the Faroes all offered support.


2 Responses to “There she blows”

  1. 2 Jon February 10, 2009 at 8:01 pm

    Transparency International is a great organization and their work is very important. But I’ve heard that even within the organization the corruption index is very controversial since it makes coutries that do well less vigilant against corruption and it often makes things more difficult for people to fighting corruption where the index is high.

    There has been some interest in setting a branch up in Iceland but it has never happened for some reason.

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