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Glitnir’s Kiddiegate Affair

A few off-topic comments were written beneath the last post referring to the loans that Glitnir [bank] made to children. Most commenters expressed a mixture of outrage and indignation that a bank would make loans to minors and – not least – that the children’s parents would have applied for those loans on behalf of their kids.

Which was precisely my initial reaction. How unscrupulous and consumed with greed can people be to exploit their children in this way? – thought I.

It wasn’t until I heard a report by Sigrún Davíðsdóttir – RÚV‘s most excellent UK correspondent – in the equally excellent current affairs programme Spegillinn [The Mirror], that I realized how glib those headlines were.

The Glitnir Kiddigate Affair began with the sordid matter of the Byr Affair, which I blogged about here. Byr is a savings bank created through the merger of two other savings banks, which Baugur Group – one of Iceland’s flashiest companies during the economic boom – gained acquisition of through some serious backroom wrangling and underhanded deals. I seriously recommend that anyone wishing to gain an understanding of this matter follow the link.

The premise behind a savings bank is essentially a noble one. Savings banks were generally owned by members of the community in which they operated, and they were set up in order to help finance business and other activities within that community. Note that ‘community’ is the operating word, here. It was people pitching in for the common good.

In some cases, people would buy shares in their community savings banks to give as gifts. An example of this might be when grandparents purchased shares in a savings bank to give to their grandchild as christening or confirmation gifts. Such gifts are not uncommon here in Iceland and reflect the value that the older generation placed on the sense of community and common good.

And so, a handful of children came to own shares in Byr savings bank.

After it gained control of Byr, Baugur – through a shell company in Luxembourg – decided it wanted to increase Byr’s initial equity. Create more money. So the people who already owned shares in the bank were sent a letter in which these plans were outlined, and they were invited to increase their share. And if they didn’t have the money, no problem, Glitnir bank would take care of it. They would lend them the funds needed and – BONUS – the only collateral they would need for the loans were the shares themselves. The shares in Byr.

Oh by the way, Baugur also owned a controlling share in  Glitnir.

The letter also stated explicitly that, if the shareholders decided not to take advantage of this stellar offer, their share would become diluted by some outrageous percent [I don’t remember exactly how much, but it was somewhere around 70-80%]. In other words, people had the choice of taking advantage of this fantastic offer, or see their shares devalue substantially.

And so, a number of parents, no doubt with their children’s interests at heart, decided to apply for the loans in their names, in order to prevent the dilution of their already-existent share in Byr.

The problem was that loans to minors are illegal in Iceland. The only way they can be made is with the express permission of the sýslumaður – the district commissioner. And so, the parents applied to the sýslumaður, and the sýslumaður in turn sent a letter to Glitnir saying that he would grant permission for the loans only if Glitnir supplied a statement guaranteeing that, in the unlikely event that everything went tits-up, Glitnir would not demand any extra collateral from those children.

Glitnir, however, never supplied that statement. It just approved the loans.

And now, of course, the very unlikely event has come to pass – Byr has gone tits-up.

A rather nasty twist in all this is that, while the small print on the agreement stated that the only guarantee for the loans were the shares, it did not explicitly state that the bank would only try to claim back the shares as a first resort – and if the shares no longer existed [which has come to be the case] they would move to collect from the shareholders in other ways. And that’s what they’re doing now.

Which is why those loans to the children have become the focus of attention. Since they were illegal in the first place [because Glitnir never supplied that documentation to the sýslumaður] the bank has had no other choice but to write them off.

Which is precisely as it should be. And I totally understand that the parents are blaming the bank.

Byr, however, paid out dividends to those shareholders, which were pretty substantial [outlined here], so it’s not like there were no gains – but on the other hand, those dividends apparently went towards paying off the Glitnir loans.

In any case, it’s important to look at the whole picture before passing judgments on those parents who took out loans for their children. I’m sure I would have been in a conundrum myself, had I been in their position.

IT’S A BEAUTIFUL WINTER’S DAY
Car windshields were covered with a paper-thin film of ice this morning and puddles were frozen over. King Winter [as the Icelanders call it] is here. Right now it is 2°C [36F] with mostly sunny skies, although at this time of year, the shadows are loooong as the sun does not rise very high in the sky. It came up this morning at 9.19 and will set at 5.01 pm.

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  • James November 4, 2009, 2:03 pm

    It’s interesting that the district commissioner was willing to authorise the loans to children if only the shares themselves (and nothing else) was pledged as collateral. So, he viewed it as okay for children to benefit from the upside of risk (eg share price increase and dividends), but without the downside (eg not having to pay for the shares if the share price is wiped out). In such a case, the bank providing the loans is effectively donating depositors funds to Iceland children. It’s unlawful for any bank to do that – and that’s why Glitnir didn’t provide the statement.

  • Alex November 4, 2009, 2:13 pm

    What surprises me the most in this whole “kreppa” situation is that even after all this irregularities have been discovered NOBODY is arrested or even brought in for questioning..

  • Joerg November 4, 2009, 3:45 pm

    Thanks for providing this background information.

    I still think that taking out loans in the name of their children is something, parents shouldn’t do. Particularly not, if they have no full understanding of the terms of this loan. Even, if it is supposed to be in the interest of their children. So, it’s probably not only the bank to blame.

    My understanding of your article about the Byr affair is, that the price of the shares was exploding at the time, when the Baugur related parties got involved. So, people already holding those shares should have made a – unnatural – high profit at the time of Baugur’s decision to increase equity, already. Were the 70-80% mentioned above only dilution in ownership percentage? If so, what would the reduction in the price of the shares have been, if they had not accepted this offer? I might see some greed involved.

    In your article about the Byr affair you wrote:

    “And it takes a strange kind of pleasure in watching its [i.e. Baugur’s] former ringleader teeter and fall”

    Apparently, the ringleader is back on his feet – at the expence of foreign creditors -, considering the following article:

    http://www.icelandreview.com/icelandreview/daily_news/?cat_id=29314&ew_0_a_id=351379

    A couple of days ago, we had a whole evening program about Iceland on ARTE-TV in Germany. In one of the contributions, Jón Ásgeir Jóhannesson had been interviewed and asked about his responsibility for the crisis. He couldn’t find anything, he had done wrong, except probably being a tad too pushy (or whatever his words were) and was still of the opinion, that most of his deals had been good. So, you know what to expect from him.

  • Eliza November 4, 2009, 5:46 pm

    Well, in the US nobody got arrested for the “subprime” crisis even if I suspect that on the whole the wrong doings have been no less than in Niceland. Hopefully we have our “special prosecutor” to take care of our bad guys. But I suspect that even if he recruits the whole Reykjavik area, it will take years before someone could be brought to justice.

  • Gauti Sigurdsson November 4, 2009, 7:25 pm

    Wow! To use the term Niceland when referring to Iceland seems a bit more gratuitous than deserved but I have to submit to you bloggers who are much more informed than than us common folk.

  • hildigunnur November 5, 2009, 12:23 am

    Gauti – irony’s lost on you, I suppose…

  • Lissa November 5, 2009, 12:40 am

    Apparently Forseti was on vacation from Glitnir when this happened.

  • hassan November 5, 2009, 12:18 pm

    “And so, a number of parents, no doubt with their children’s interests at heart, decided to apply for the loans in their names”

    Some of them were the children of Sigrun Karlsdottir, the wife of BYR’s former chairman of the board.

    Why could the parents not take the loans in their own names?

    After all, “the only collateral they would need for the loans were the shares themselves”

  • Bromley86 November 5, 2009, 2:37 pm

    >Why could the parents not take the loans in their own names?

    The only good news is that I suspect that they did:

    So the people who already owned shares in the bank were sent a letter in which these plans were outlined, and they were invited to increase their share. And if they didn’t have the money, no problem, Glitnir bank would take care of it.

    So it’s probable that some/all of the the parents also took loans to maintain their share. And those loans weren’t illegal. And, whilst the collateral is valueless, they will be collected from the people’s other assets. Unless someone intervenes and writes them all off, but that seems unlikely to happen now that it has hit the press.

  • idunn November 5, 2009, 7:25 pm

    If I understand this correctly (perhaps), people had their savings with Byr, or possibly one of the other two savings banks that merged to form it. Then through skullduggery the Baugur Group gains control of Byr, and their savings.

    So then Baugur Group wants to expand and makes these people an offer they cannot refuse: either put more money with us by buying more shares, or we steal about 75% of your shareholdings by devaluing your stock. If you don’t have the money, no problem, our bank, Glitner, will loan it to you. BUT you must secure the loan with the collateral of your shares. In other words, put all your investment on our roulette wheel and let us spin it.

    Children unknowingly end up in this because it is customary to extend such gifts, even if the gifts somewhat dubious as in this instance.

    Then Baugur Group runs everything into the ground. Their bank, Glitner, discovers it cannot enforce judgements against children. The adults who participated are supposedly, technically, still liable to Glitner for loans extended. Maybe. But one thing is for sure, no one having invested with Baugur Group will see their money back.

    Shareholders aside, I wonder whatever happened to the original savings people kept with Byr. Were they caught up in this and gone as well, or perhaps at last protected, as those having put their money there always intended?

    This is what caught my attention at the outset: “the value that the older generation [of Iceland] placed on the sense of community and common good.” Is such sentiment now but historical footnote, or perhaps born again?

  • Joerg November 6, 2009, 10:31 am

    “…people had their savings with Byr…Then through skullduggery the Baugur Group gains control of Byr, and their savings”

    If I am not mistaken, this is not about savings but about shares in savings banks. And the dilution mentioned means a decrease in ownerhip percentage rather than a reduction of the value of existing investments in those shares.

  • Silvia Planchett November 6, 2009, 8:13 pm

    Try as I might, it is very difficult to understand how kiddies and multi-million kronur loans involving same can be mentioned in the same paragraph unless one is speaking of nefarious activities which of course would explain it all! Even with the bleach added, it still comes out dingy!

  • Berglind November 6, 2009, 9:19 pm

    I think Joerg has excactly right, the dilution didn’t mean that the prior owners lost any of their value, only their share got to be a lower percentage. Therefore I think, Alda, you will have to re-think the whole concept. The parents were controlled by nothing but greed – love of money, solely.

  • cactus zonie November 7, 2009, 6:17 am

    Keep drinking the COOL AID , Gauti

  • Great Eastern November 7, 2009, 5:11 pm

    What is timeline of those events? If year 2006 then first alarm bells were already sounded that year. Banks were struggling to get more money for their [write in anything you want.]
    Just another schema to lure depositors.
    Ironically, it is very probable bankers believed turbulent times of year 2006 were a temporary issue and that they were doing a good thing.
    On the bright side we managed to live through a very exciting years. It is not a war but for our lazy gadget generation it is something.
    And yes – I do want to point that our grandfathers lived through times uncomparably harsher than ours. Still we generate so mush flood on the internet that it is starting to look pathetic.

  • Bromley86 November 7, 2009, 10:44 pm

    >I think Joerg has excactly right, the dilution didn’t mean that the prior owners lost any of their value

    Yes it did.

    Have a look at the rights issue page on Wiki:
    http://en.wikipedia.org/wiki/Rights_issue

    In their simple example, Mr A had $40k of shares. If he didn’t participate in the rights issue, he’d only have $30k, despite still having all of his original 100 shares.

    joerg misunderstood idunn’s point. Their savings were in Byr – the savings were invested in shares, rather than deposited in a Byr account.

    The parents were offered an easy option that meant that they didn’t have to take a financial hit. Better still, they stood to gain lots of money. So they were greedy and frankly they should have had to pay if only because all loans/deposits to/by minors should be under the ultimate control/responsibility of an adult. But that’s not the case in Iceland, so they’re off the hook for the kid’s loans.

  • Joerg November 8, 2009, 11:12 am

    I was referring to the 70-80% devaluation mentioned, which for me sounds too much for a reduction of the value of shares. Of course, if there is no tranparent market for those savings banks shares and the percentage is based on inflated prices, then everything might be possible.

    And even though I think, those parents should have acted more prudent, the most greedy party in this plot is definitely located on the side of the Baugur related investors as they managed to strip the savings banks off their assets. 

  • Andrew November 9, 2009, 8:23 am

    Would I be right in thinking that every financial institution in Iceland has now gone bust!?