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.