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Resolution committees posed to sue Icelandic state over FX loans

So, the resolution committee of [collapsed] Glitnir bank has made a public apology to its creditors on account of the foreign currency loans being deemed illegal.

“I just have to apologize to the creditors. It is impossible to feel proud when legislation on lending that has been in effect for nine years is declared illegal,” says Árni Tómasson, head of the committee, in Fréttablaðið today.

Interesting that no public apology has been made to the borrowers.

Meanwhile, both the Glitnir and Kaupthing resolution committees are looking into initiating legal proceedings against the Icelandic state. When the bank’s assets were transferred to the state [i.e. when the bank collapsed], no allowance was made for the billions of ISK in costs associated with illegal FX loans. And meanwhile, if the same ruling is made to apply to housing loans AND at the lower interest rates [as outlined here] … well, then we have big trouble.

Meanwhile, the courts have yet to decide whether or not the recalculation of the loans should be based on the [lower] interest rates that originally applied, or on the ones that the Icelandic authorities have recommended be used.

Only one thing is sure: it is a colossal f*cking mess and one more testimony to the utter incompetence of those who used to be in charge around here.

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  • Michael Lewis July 5, 2010, 12:11 pm

    “Only one thing is sure: it is a colossal f*cking mess and one more testimony to the utter incompetence of those who used to be in charge around here. ”

    You see, to the casual observer outside, it looks a mess, because of the re-writing of laws after the effect. Its bailing out people. Far cleaner for the government to have announced that people would be allowed to make a partial default on the loans.

  • Bjarni Kristjansson July 5, 2010, 1:14 pm

    @Michael Lewis

    Actually, this is NOT re-writing of any laws, but rather finally applying correctly the laws 2001/38 that have been in place since 2001. These laws were written for the specific purpose of protecting consumers from the dangers of FX-indexed loans.

    It was only after this was pointed out in April 2009 by a well-known blogger in Iceland, Marino G. Njalsson :

    http://www.marinogn.blog.is/blog/marinogn/entry/855575/

    that consumers became publicly aware of that these loans were almost certainly all illegal and should never have been offered in the first place.

    It took about one year for the first cases to wind themselves through the court system, culminating in the following Supreme Court decisions, that were issued on June 16, 2010:

    http://www.haestirettur.is/domar?nr=6715
    http://www.haestirettur.is/domar?nr=6714

    This is indeed a bailout for the people with FC-indexed loans, but at least its a bailout based on actual laws. The government itself had no active role in the matter, and were in fact caught by surprise, as they were clearly expecting a different outcome from the court.

  • Bjarni Kristjansson July 5, 2010, 1:35 pm

    CORRECTION: To be completely accurate, the second sentence in my previous comment should rather be:

    Articles 13. and 14. of those laws, concerning indexing of loans, were specifically added for the purpose of protecting consumers from the dangers of FX-indexed loans, by only allowing indexing in Icelandic currency based on the official CPI.

  • andy July 5, 2010, 3:14 pm

    probably work out roughly similar over the term of the loan incomparison to the ISK / index loan for the same amount?

  • andy July 5, 2010, 4:01 pm

    As for comment asbout the mess. Query…some challenged individuals (bankers / politicians / professionals), with the palpable assistance of the Icelandic people (You borrowed and bought) crashed and burned.

    The same politicos / bankers / professionals are still around, and the peple are stuck with houses / cars / loans that they paid too much for, with no exit in sight.

    Need significant economic growth to dig a way out of this, and a large chunk of the Icelandic provate economy is in Zombie state (Owned by banks with same bright sparks in charge who got the comapnies there).

    As nothing appears to have changed, why expect anything other than a colossal mess?

  • Michael Lewis July 5, 2010, 4:33 pm

    @ Bjarni
    If so, very fortunate for borrowers that this wasn’t noted when the loans favored them, not the lenders. As these loans would have done for a period before the Krona collapse. Otherwise, they’d have been out of pocket.

  • sylvia hikins July 5, 2010, 5:42 pm

    No wonder you elected a comedian to be Mayor of Reykjavik:)
    sylvia from viking wirral

  • None July 5, 2010, 6:09 pm

    Seems Iceland has gotten what so many wanted
    a consumer based happiness
    Though little thought was given at the costs
    Oh the endless lawsuits clogging the court
    everyone is now a potential victim
    no more personal responsibility
    just alot of butts(excuse the bun)
    i did not read the fine print
    i thought it meant
    he said this
    she did that
    Welcome to day to day living in America
    here on the Big island of Hawaii
    75% of the folks are poor enough to qualify
    for food stamps(food program for the poor)
    yet there are the mcmansions,tourists visit
    the low wages allow those with jobs
    to made minimum payments on
    happiness
    the cell phone
    the rented house
    the used car
    welcome to the America/Britian business model
    99 plus workers support one overstuffed fat cat
    in closing,best future career in Iceland
    Lawyer
    Fat Cat

  • Michael Lewis July 5, 2010, 8:39 pm

    @None
    “here on the Big island of Hawaii”
    Kia Kaha None, I presume you are Hawaiian? In favour of sovereignty for Hawai‘i ? Not some fat a-$%d American sitting in Hawaii, by the tone of your post? 😉

  • Bjarni Kristjansson July 5, 2010, 9:11 pm

    @andy

    I think you are simply misinformed, when you say that the same politicos / bankers / professionals are still around.

    We have a left-wing government, which may not be much better than the previous conservative government (that allowed the crash to happen), but it is definitely not the same people. Many of the political parties have completely changed their leadership and upper management. Again, the new people may in many cases not be much better, but they are not the same as before.

    The banks have been more or less cleaned out of the previous management with new owners. The one exception to this, is Birna Einarsdottir the CEO at new Islandsbanki, which held management position at the old Glitnir bank before the crash.

    The upper management of the Central bank and FME were also replaced, although the previous CBI Chair David Oddson and former prime minister is now the chief editor for the Morgunbladid newspaper. He therefore regularly writes editorials and opinion pieces about what is happening in Iceland, which not everyone is too happy about, but this a privately owned newspaper and the new owners favor him.

  • Bjarni Kristjansson July 5, 2010, 9:22 pm

    @sylvia hikins

    Well, compared to our regular politicians, who managed to ruin the whole economy (including Reykjavik, which is heavily in debt, due to some bad investments with their energy company), the general thinking was, why not try something different. It remains to be seen how the new major Jón Gnarr (the comedian) will perform, but so far he has not done too badly.

  • Bjarni Kristjansson July 5, 2010, 9:35 pm

    @Michael Lewis

    Yes, this outcome is a complete life safer for the people that were saddled with double or triple their original debt, facing bankruptcy and no way out.

    But, there is no free lunch and someone in the end will have to carry the losses from this. It remains to be seen, exactly who will end up paying for this mess, whether its the banks themselves (rather unlikely they can afford it), the Icelandic tax-payers (through the government ownership of the new banks), the creditors of the old banks (which clearly are not too happy about this development), or somehow the government succeeds in forcing the borrowers to pay higher interest or apply CPI-based indexing (legally dubious).

    My hope is, that some negotiated solution will somehow be reached, where the burden will be shared by everyone involved, rather than let this drag through the courts for years.

  • James July 5, 2010, 10:29 pm

    So, why didn’t the regulators spot this illegality?…

  • alda July 5, 2010, 10:58 pm

    James — because they were incompetent. Like everyone else who was running this country.

  • kevin oconnor,waterford ireland July 6, 2010, 12:11 am

    Yet another thing to chuck onto the ICESAVE pile etc etc.

  • Knute Rife July 6, 2010, 12:45 am

    What on Earth is Árni Tómasson talking about? As Bjarni points out, the law wasn’t changed, it was enforced in the SC ruling. Good luck successfully suing any government for failure to enforce its regulations. And Alda, I submit that failure was not the product of incompetence but rather of the deliberate, anti-regulatory policies of the government (and Iceland was far from unique in this).

  • Bjarni July 6, 2010, 2:00 am

    @James

    Probably little bit of everything. Definitely incompetent. Anti-regulatory, non-interference policies of the government also. Everybody assuming this was legal, since the banks called it a lease instead of a loan. Then finally the ultimate excuse: somebody else must have already checked this and determined it was legal, since everyone is doing it.

  • Easy July 6, 2010, 2:01 am

    @Bjarni.
    I don’t think andy is misinfoemed, acctually:
    “I think YOU are simply misinformed, when you say that the same politicos / bankers / professionals are NOT still around”.

    They are acctually the same people, just from different parties but with the same inerests, just sell to the people as diferent ideoogies.

  • Peter - London July 6, 2010, 7:23 am

    “As Bjarni points out, the law wasn’t changed, it was enforced in the SC ruling. ”
    Actually he said that the banks set the loans up as some sort of lease arrangement to by pass the law. The judge decided that this method wasn’t acceptable – it was for many years, but not now.

    Thats why I’d say this was a political decision, there is no reason to decided for or against them and no reason why that decision should be taken now – except its most convenient for those who took out the loans.

  • Mike (UK Nordic analyst) July 6, 2010, 9:02 am

    Two points:

    1. My understanding (passed to me by an Icelanidc civil servant) is that the original provisions were NOT passed to “protect” Icelanders from the dangers of foreign currency loans but rather to force them into the local indexing scheme set up to ensure that capital wasn’t eroded by inflation. I tend to believe that line since it is hard to think that anyone had fx loans to consumers in mind when the provisions were enacted.

    2. Many posters (including Bjarni) have made reference to the fact that the “ordinary Joe” in Iceland didn’t know about these legal provisions when they took out the loans. I will quote Bjarni from above as an example:

    “It was only after this was pointed out in April 2009 by a well-known blogger in Iceland, Marino G. Njalsson :

    http://www.marinogn.blog.is/blog/marinogn/entry/855575/

    that consumers became publicly aware of that these loans were almost certainly all illegal and should never have been offered in the first place. ”

    Fine, as a financial observation but false as a point of law. Certainly in every country I know the principle is that ignorance is no defence. The legal assumption must be that the consumers who took out the loans knew full well that they were illegal but were happy to do so because these loans circumvented the local indexation rules. I am not quibbling about the legality/illegality of the loans – that has been clearly stated. But the issue of who is at fault, who actually committed the infringement isn’t so obvious. Liability is not clear. I would imagine that any loan-maker could sue any loan-taker on exactly the same grounds that they are being sued – namely that they acted contrary to the law. And please remember, Bjarni is quite right, it is the law we are talking about, not about the asymmetries of financial information that always exist in any transaction, and legally Marino appears to have broken the law as much as the car dealer by taking the loan in the first place.

  • Bjarni Kristjansson July 6, 2010, 9:54 am

    @Peter – London

    If you read through the Supreme Court decisions, one of the arguments put forth by the car-finance companies is that articles 13. and 14. of laws 2001/38 should not apply to them, since these are not loans. The Supreme Court did not accept that argument and ruled these leases were indeed loans.

    When you say this judgment was a “political decision”, you are going to have to be more specific. Who exactly in your view was making this political decision?

    The Supreme Court does not decide by itself what lawsuits are filed. After the blog entry appeared in April 2009, it became immediately apparent that this FC-indexing would be challenged by the borrowers. Through the blogs and web pages of the consumer advocate groups I listed, you can follow the discussion pretty much in detail when they are trying to figure out how best to move forward on this. It is all there in the open for anyone interested to read.

    Are you trying to imply this was somehow all “prearranged” and directed by someone that specifically wanted to go this roundabout and slow way to get this particular verdict? Which by the way, most people in power predicted the Supreme Court would go the other way. If you have any references or evidence to back this conspiracy theory of yours up, please show us.

  • Bjarni Kristjansson July 6, 2010, 9:58 am

    @ Easy,

    Ok, please name then the actual people that were in top-level positions before the crash, and are still there, so we know who specifically you are referring to.

  • Bromley86 July 6, 2010, 10:54 am

    @Bjarni, Alda, Easy, or any Icelanders

    the government succeeds in forcing the borrowers to pay higher interest or apply CPI-based indexing (legally dubious).

    I know it’s water under the bridge, but what’s your take on the acceptability to the Icelandic public, legally and politically, if the government had done this back before there was a question of the illegality of the loans (i.e. early 2009)?

    Obviously, as things stand, if you have a basket loan you’d have to be insane to want to accept its conversion to a normal ISK indexed loan. But back in early 2009 I presume that that would have been a very welcome lifeline.

  • Bjarni Kristjansson July 6, 2010, 5:26 pm

    @Mike (UK Nordic analyst)

    I must admit I do not have specific documented details on the reason why those provisions banning FC-indexing were added. I do remember though reading some articles were protection was listed as one of the reasons (I could try to find those again). We could also try to dig up some of the speeches in parliament by the MP’s from 10 years ago, but that would take some time, and I do not think it would necessarily be worth the effort. Ff someone else, that actually was involved in writing the laws at the time, says something differently, I have therefore no reason to dispute that.

    Consumer protection is considered very important issue in Iceland. A contract is made between a financial company and a consumer is not always treated as being between two equal parties. In fact, the way consumer protection laws are written in Iceland, any doubt regarding interpretation of a contract, should always be given to the consumer. So you could say, that in Iceland at least, “ignorance” is a valid defense when a consumer sign a agreement with a financial company, that is later proven to contain illegal provisions.

    The Supreme Court in this case just looked at the three questions I mentioned earlier (was it a loan?, was it in ISK?, was the FC-indexing legal). In its judgment it determined the FC-indexing was in fact not legal. But it did not throw out the whole agreement, so the rest of it stands as it is written, with the interest rate unchanged.

    This outcome will probably be disputed by the finance companies, but according to numerous legal experts in Iceland that have been interviewed, the SC judgment was pretty clear on this point.

    The main question that is being discussed now in Iceland is rather which loan agreements this ruling does exactly apply to. For example what happens if the agreement itself does not refer to the purchase in ISK, but rather is written using the actual foreign currencies? What happens when the agreement is actually a real lease (leiga), rather than a purchase lease (kaupleiga)? Does this ruling also apply to mortgages and other types of loans? What about commercial loans, where there are no consumers involved?

  • andy July 6, 2010, 5:36 pm

    Bjarni

    Civil servants remain same, partners at law firms / accountancy firms remain the same. Independence MPS / Social Democrats remain the same…I believe the new Govt may not be entrirely new. Poeple at the bansk – second tier down eg Heads of, remain the same. TV journalists / economic reporters and political / economic philosophers (REy Uni) remain the same….so cannot see a change. New talent….rather still fishing in the same people.

  • Bjarni Kristjansson July 6, 2010, 5:55 pm

    @Bromley86

    I think there is no question, if the government and finance companies had taken some concrete steps 1-2 years ago, to alleviate the damage from the FC-indexed loans, we would probably not be where we are today. Marinó might also have decided to find something better to do with his time, rather than digging up and read through 10-year old laws on interest and indexing :-).

    As you mentioned, the logical solution in 2009, might have been to give people the chance to switch the FC-indexed loans to CPI based indexing. This would have been a logical solution for many people, when the FC-index loans had already gone up 2-3 times, which clearly no ordinary person could afford.

    For comparison the CPI-index typically has gone up only 4-8% for the past few years, except during 2008, when it went up 14%. Remember, this is just the indexing, the loan agreements then typically add about 5-10% in interest payments each year. The way the loan indexing works, is that each period there is a new CPI computed, which is then applied to everything, including the payment, the interest, and the balance of the loan.

    But this “correction” was not offered and people that have suffered through this are certainly not in a very forgiving mood anymore. That is why you saw this vehement negative response towards the “guidelines” posted by CBI and FME earlier. It remains to be seen if a negotiated solution can still be found. With people being so angry and suspicious of anything that comes from the government or the finance companies, it will be very difficult, now that they feel they have already “won” their case.

  • Bromley86 July 7, 2010, 12:33 am

    Cheers Bjarni 🙂 .