Last night, news magazine Kastljós ran a rather illuminating report on the Icesave debacle.
For those who don’t know, Icesave was an online bank launched in the UK by Landsbanki, Iceland’s oldest and most established banking institution, in October 2006. [It was subsequently launched in the Netherlands, as well.] With its offer of top interest rates guaranteed to exceed the Bank of England base rate by .25%, it was a runaway success. Within six months, 80,000 new accounts had been opened and total deposits amounted to 2.8 billion pounds Sterling.
When Landsbanki collapsed in October, the Icelandic public was stunned to discover that Icesave was not a subsidiary of Landsbanki in the United Kingdom [as most of us had assumed] but rather a branch of the Icelandic mother company. This meant that the Icelandic Deposit Guarantee Fund was responsible for covering the minimum guaranteed amount in the British accounts – a colossal sum in view of the tiny size of the Icelandic nation [roughly 300,000 peeps]. Needless to say, the guarantee fund did not have the capacity, so the bill had to be footed by the Icelandic state [read: taxpayers].
Icesave, meanwhile, became a full-blown diplomatic dispute between Iceland and the UK when the UK decided to freeze Landsbanki assets under its controversial anti-terrorist legislation. This was allegedly done in response to a conversation between the UK’s Chancellor of the Exchequer Alistair Darling and former Finance Minister Árni M. Mathiesen, when the latter told Darling that he did not know whether the Icelandic government could pay out those guarantees. Speculation has also been rife that the move came in the wake of infamous words that Davíd Oddsson, former Central Bank governor, let fall in Kastljós in early October, in which he announced that the Icelandic government had no intention of paying the foreign debts of the banks.
In an interview with now-defunct news magazine Kompás in October, Björgólfur Thor Björgólfsson, one of the owners of Landsbanki prior to its nationalization and one of the notorious handful of “moguls” charged with bankrupting this nation, claimed that the British Financial Supervisory Authority had offered to fast-track the Icesave accounts into a British subsidiary the weekend before the Icelandic government nationalized the bank. Obviously this would have been hugely significant for us, the Icelandic people, as it would have meant that we were not saddled with massive debts that we did nothing to incur.
According to Björgólfur Thor, on that fateful Sunday prior to the nationalization, the British government – which until then had been “difficult” in all dealings – did a 180-degree turn and offered Landsbanki the option of moving Icesave into British jurisdiction within five days, provided Landbanki coughed up a guarantee of GBP 200 million before noon on the Monday. BTB claims in the Kompás interview that the head of the British FSA, Hector Sands, was called out on the Sunday to deal with the matter personally. Landsbanki approached the Central Bank of Iceland the following morning and formally requested a loan of GBP 200 million in order to secure the move. According to BTB the Central Bank took its time in responding, and finally – just past noon – sent Landsbanki its refusal.
When that interview was broadcast in October, there was – predictably – a massive outcry against the Central Bank. After all, GBP 200 million is peanuts [well, maybe not peanuts, but relatively …] next to the potential bill for the Icesave accounts, or ISK 33 billion at the current rate of exchange, as opposed to ISK 640 billion that the Icesave guarantees allegedly amount to. Had the Central Bank only agreed to the loan – went the reasoning – Icesave would have been moved into British jurisdiction [which, note bene, should have been done months earlier, as it was operating pretty much as a British bank] and the Icelandic nation would have been spared a huge amount of debt – not to mention grief.
Meanwhile.
A freelance journalist, Friðrik Þór Guðmundsson, took it upon himself to investigate Björgólfur Thór’s claim about the British FSA and the alleged agreement to fast-track Icesave into British jurisdiction. At his own personal instigation he sent emails to both the British FSA and HM Treasury asking for documentation of those agreements. A few days ago he received their responses, and both deny that any such agreement with Landsbanki took place.
In other words, they did NOT offer to fast-track Icesave into British jurisdiction for GBP 200 million. At least not formally.
So, was Björgólfur Thór Björgólfsson, former owner of Landsbanki, lying? To the Kompás reporter, to the Icelandic nation, and to the Central Bank? And why did no Icelandic reporter working for the Icelandic media follow up on these claims and allegations?
Tomorrow: an interview with journalist Friðrik Þór Guðmundsson.*
WINTER IS BACK
It started snowing yesterday and now the ground is all white. It looks decidedly frosty out there right now, with flurries and some wind … although not as much as up on the West Fjords, where there is a major winter storm on as we speak and people have had to be evacuated from their homes due to possible avalanches. Right now -3°C [and windchill - brrrr] which is 27 on the Farenheit scale, the sun came up this morning at 8:28 am and will set at 6:52 pm.
* Hopefully tomorrow.
{ 14 comments… read them below or add one }
I think everything claimed was “off the record” at the time and lets both governments off the hook and hangs BTB out to dry,so to speak.
Could the reason that no one has investigated this at the time be down to Bjorgolfurs owning most of the media ?
Over the course of the winter I have read some articles about the Bjorgolfurs online at visir and morgunblaidd only to notice they have been removed shortly after!
i am thankful to have found your writing.
i am currently in england, but i am an american, now living in iceland, since september of 2007. i am embarassed to say that i still do not have a handle on the icelandic language, so i am really enjoying getting caught up on all the details of the events in iceland.
Björgólfur Thór Björgólfsson built a brewing business in Russia, having to negotiate – as everyone does – with the mafia, left around 100,000 holidaymakers stranded when he and his father bankrupted XL Leisure, and the latter has single handedly ruined West Ham. Who would believe anything these people say? Jón Ásgeir Jóhannesson and BTB tried after the crash but no-one was buying it anymore, so they went off and hid!
Icelanders are justifiably a little scared to call these people what they are, unlike the UK & US, where they would probably be in handcuffs.
Iceland is being touted in travel pages as a great bargain right now. Hardly comforting for you.
V.
Politicians and big businessmen, run the world and would love to do it in secret. ‘off the record’
Alda,
There still is a transcript between Darling and Mathiesen
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5005915.ece
detailing their conversation just before the UK government freezes Landsbanki’s assets. In the conversation Darling says to Mathiesen-
What I…I take it therefore that the promise Landsbanki gave to us that it was going to get £200 million of liquidity back into it has gone as well.
Mathiesen replies-
Yes, they didn’t get that liquidity.
So apparently somebody in the UK knew about the deal between Landsbanki and the British FSA. Whether there were written records is another thing. Has Friðrik requested information from the Icelandic Central Bank about Landsbanki’s loan request? Perhaps you can bring this up in the interview.
p.s. Tell him “Hi” from me when you see him. Please let him know that if someone states they are “strongly opposed” to something they are “denouncing” it. (private joke)
Yipes! I get the feeling we have not seen the last of this issue despite the lawsuit being dropped.
Alda wrote:
> Obviously this would have been hugely significant for us, the
> Icelandic people, as it would have meant that we were not saddled
> with massive debts that we did nothing to incur.
The Icelandic Government, whom the Icelandic people voted into power, enacted legislation to guarantee bank deposits. The Icelandic people did not object. I expect they were probably in favour – “ah, so if the bank fails, my money is safe? okay!”. But if you choose to take responsibility for something, *that means you take responsibility for it*. The Goverment created this mechanism whereby deposits at Icelandic banks were backed up by the Icelandic people via tax. Certainly it was never intended to cover British deposits – but those deposits were held in an Icelandic bank *which was using those deposits to make money*. On what basis therefore should the *British* taxpayer backstop those deposits?
Karl Popper pointed out that the unintended consequences of an action almost invariably greatly exceed the intended consequences.
If you vote in laws which guarantee deposits, people are going to try to take advantage of those laws to help their business. You would have been better off not creating these laws in the first place. People would have known they needed to take care, rather than placing responsibility on the State; and those laws, those guarantees, have actually turned out to be totally empty and hollow, because the money to make the “guarantee” real simply does not exist.
Foolishness, all of it, of the worst kind, compounded by blindness. And so you get what you get – disaster and massive human suffering.
In fact, there is no ethical rational for these guarantees. They are pure socialism and entirely unethical. They violate the principle that contracts must be voluntary and well-informed *and* they assume that individuals are incompetent to run their own affairs.
The Icesave debacle is a fairly complicated mess that derives from very simple basics. Icesave was doing business in Britain as a British retail banking entity: It was taking deposits from Britons in sterling, paying premium in sterling. Landsbanki was a foreign business enterprise doing business in another nation. The rules controlling it as such were the host-nation’ s rules. In its Brit branches, Landsbanki hired Brits and paid Brit taxes, rates and fees. Its obligation was to pay to the Brit depositor insurance scheme. The FSA (Brit) ought have been collecting from it for that fund. The 200,000, if asked, being asked in sterling, would properly have been premium on such insurance. For reasons of sovereignty between nations, one nation cannot be responsible for business activities defined by another nation. It is for this employment insurance is nation-specific. It is the same for deposit insurance. The Jonas case is illustrative: For his work in Iceland he is properly entitled to Icelandic employment insurance (as those from Poland who worked in Iceland, then went home, were, which I believe the ones who applied were provided). It is probable that Jonas is denied employment insurance for extension of reason that if Iceland is responsible for deposit insurance in sterling to brit depositors, America, in Jonas case, is responsible for employment insurance to Jonas. It is incorrect in both cases, so the one may be being put forward to point this up.
Britain should have sorted out the deposit insurance business, making a demand of Landsbanki Island when it began taking deposits, especially as it knew Iceland had no sterling and so many fewer people it could not possibly insure Brit deposits.
In fact, the whole debacle began with the Icelandic Central Bank indicating it would not stand behind Icelandic banks, back in the Glitnir case, which was a text-book case of a bank asking for a guarantee, a co-signer, and being peculiarly denied. That peculiarity put the world on notice that Iceland was going to play politics instead of band responsibly.
>Its obligation was to pay to the Brit depositor insurance scheme.
Pretty sure it was obliged to pay into the Icelandic scheme as it was a branch. KE paid into the UK scheme as it was a subsidiary.
>Britain should have sorted out the deposit insurance business, making a demand of Landsbanki Island when it began taking deposits, especially as it knew Iceland had no sterling and so many fewer people it could not possibly insure Brit deposits.
It couldn’t. The Dutch tried (i.e. Landsbanki agreed to limit their deposit taking in the Netherlands), but Lansbanki ignored those agreements (they had their reasons, but that’s not important here) and there was nothing that the Dutch could do.
Thanks, everyone!
Martin – yes the Björgólfurs are notorious for their censoring, particularly B sr. So that does not surprise me.
katie – hi and welcome!
V. – nothing wrong with Iceland being marketed as a tourist destination. That’s miles off from assets being sold.
BG – Steve is right, Icesave was a branch, but it should have been made into a subsidiary since it was effectively operating as a British bank. Kaupthing had online banks in the UK as well, but they were subsidiaries. Landsbanki claimed that work was underway for months to make the transfer but that they “didn’t have time” to finish it. I have heard it said, however, that because it was a branch they were more easily able to use the funds back at the mother company than they would otherwise have been able to do.
As for the Brits taking action against Landsbanki – I’m not sure they could have, since Iceland is party to the EEA agreement with free movement of capital, labour, etc.
GB wrote:
> Britain should have sorted out the deposit insurance business, making
> a demand of Landsbanki Island when it began taking deposits,
> especially as it knew Iceland had no sterling and so many fewer people
> it could not possibly insure Brit deposits.
Yes. Another fine example of regulatory failure. Regulations only work when there are no problems.
because it was a branch they were more easily able to use the funds back at the mother company
Indeed. Also, think of Lehman’s twice daily transfer of its UK funds (to be held overnight in US); when Lehman’s collapsed at night, all the £bns were retained in US. In the days before Landsbanki’s collapse, its execs undoubtedly wanted to keep a similar preemptive option open (ie funds transfer immediately prior to collapse), even though that will never be admitted.
Sorry to leave so much unclear. I did not want to go too technical, or too long. As Björgólfur Thor Björgólfsson is noted to have noted, the Brits were “”difficult”" until they made the GBP200.000 offer: The Brits did not want Landsbanki taking deposits in Britain and were not cooperating with them. The offer was made after Iceland’s Central Bank refused to back Glitnir. The offer is corroborated by the times article Greg Thomas Batson references, above. The offer would have one reason: To learn if Landsbanki was an international orphan, as Glitnir had been made to be. In other words, the offer was a question to Iceland’s Central Bank, would they back Landsbanki? As the referenced article indicates, the official Iceland answer was “No.” That meant Landsbanki was an orphan and, by assumption, Kaupthing would be, too. Both banks were dead meat at that point. Britain was not going to let them remain and do business, and did not have to, as they were then effectively banks without a country.
Britain had held off recognising Icesave a British banking concern previously because including it in Britain’ s deposit insurance scheme would have granted it legitimacy. The British FSA did not want to legitimize Icesave because British banking did not want the competition for deposits, which the brit banks needed as much as Landsbanki did.
The ultimate problem, the one that killed Iceland’s international banking, was the failure to back Glitnir when it applied for backing for a clearly market-conditions caused shortfall problem. Backing in that kind of case is a thing central banks exist to do. In Glitnir’s case instant Central Bank agreement to guarantee, clearly what Glitnir’s CEO expected, would almost certainly have given commercial lenders confidence enough to loan to help it over the rough bit it had met for the Lehman collapse creating havoc. The hesitation by the Icelandic Central Bank suggested Glitnir not solvent, or in the Lehman boat. The longer the hesitation, the worse the immediate impression. The finish, with an Icelandic government low-ball offer for 75% was a predatory act, or had a predatory appearance. With that offer after the hesitation Iceland was suspect, and its Central Bank’s credibility was at ebb. Other nations began to question Iceland’s intentions toward its international banking. Hence, the query noted, and the harsh actions subsequent. The European financial community’ s perception of Glitnir and Iceland were indicated by the sale of Glitnir’s Norwegian branches and their more than doubling in value immediately for the transfer of ownership. When that happens it means the previous management was the problem, and with new, known to be fiscally competent management investors said “Yes!” Especially in the financial market of the time.
Worth reading is the transcript of Oddsson’ s November 2008 speech to the Icelandic Chamber of Commerce, in which he states his “warnings” and his views of the Icelandic international banks. All of the warnings are general and all, along with all the rest of D.O.s remarks, which include grumblings against the Central bank being without directing and controlling powers, show a bias against the nation’s expansion to international investment and banking, and a dissatisfaction with the power distribution status quo. From that speech, and events, it is fairly easy to conclude that the failure to suport Glitnir or then Landsbanki was purposed to paring down Iceland’s foreign banking and to send a signal to the Icelandic government that somebody in the Central Bank needed more power to control banks as well as banking. It is likely that the Icelandic Central Bank had no expectation that its actions toward Glitnir would destroy all confidence in Icelandic ability to handle its international banking responsibilities and that that would wipe out all of the Icelandic international banks.
Banking is business. Business is business. Nations are soveregn. Treaties notwithstanding, nation A cannot make a regulation and enforce it on Nation B. Especially in nation A’s currency, if the two have different currencies. Doing that is colonialism. In banking the handling of deposits in one business. It has nothing to do with lending. It only produces the funds that are available to lend. Those funds are “rented” from depositors, the rents are paid and the depositors are provided services. All of that business was done by Landsbanki in Britain, in British currency, using British employees and so forth. Landsbanki’ s actions were no different than had it been a roofing company that set up a branch in Britain and installed roofs there, hiring British workers, buying amaterials wherever, from whomever. Just as the roofing company branch of an Icelandic roofing company would have to pay Brit wages, in Brit currency and pay rates, taxes, employment insurance, and so on, Landsbanki, for its Brit operations was obligated to do the same, except it had to pay British spec deposit insurance, too, or should have. Had Icesave converted Brit depositors’ deposits to Kronur and staffed its branches with Icelanders, so the Brits were able to bank in Icelandic in an Icelandic bank in Britain, then Iceland’s deposit insurance would apply, whatever the nationality of any depositor, just as they apply to any depositor of any nationality who banks in kronur in Iceland.
Does this clarify the situation some? Both Britain and Iceland were playing dodgey around the deposit insurance question, for their own reasons. The correct resolution is that going on in the Isle of Man, where the local scheme is accepting responsibility to local depositors to Kaupthing, and will then collect for its costs from Britain, who collapsed Kaupthing, by proving in the EU courts, which have jurisdiction, if not British courts, or if British courts fail them, that Britain did collapse Kaupthing and strand account-holders elsewhere/