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“The biggest bank robbery in Icelandic history”

All through the day yesterday, rumours circulated that the takeover of Glitnir bank by the state had been based on sinister motives. The word on the street was that this was yet another chapter in the ongoing saga of our former PM Davíð Oddsson’s personal vendetta against Jón Ásgeir Jóhannesson and Jóhannes Jónsson – the father-son team behind Baugur Group, one of Iceland’s [and northern Europe’s] most prominent companies. As the day wore on, the rumours escalated and basically went from a whisper to a shout.

The whole mess of the Baugur Affair is a bit hard to explain to someone outside Iceland, but make no mistake: there is not a single person in this country above the age of 20 or so who is not familiar with its intricacies. In a very brief nutshell it revolves around conflict between some very powerful individuals in this country … on the one hand the Old Power structures represented by what was once known as Kolkrabbinn [The Octopus – on account of its many tentacles in Icelandic society] and New Money personified by the Baugur family, which essentially usurped power from the old establishment. I wrote a series of posts about this a couple of years ago here and here and here.

The key players in this drama were the aforementioned Oddsson, child of The Octopus, and the Baugur father and son [mostly the son, Jón Ásgeir]. Oddsson is a bizarre figure in Icelandic society. Equally loved and hated, often by the same people, he was the longest-serving Prime Minister ever in this country [just over ten years, if I remember correctly] and a very powerful figure, able to sway and manipulate like the best of them. He is notorious for pushing through a pension bill just before he left office that hiked his [and other parliamentarians’] pension payments by some outrageous percentage AND allowed him to collect his pension while serving in his new job as Governor of the Central Bank [into which he segued after stepping down as PM, of his own free will].

If you’ve read through the links I provided above you’ll have some idea of what’s gone down between him and the Baugur camp, something which has virtually split the nation in two and which I declare would make a fantastic television miniseries, what with the intrigues and plot twists and sheer outrageousness that just proves that life is so much more insane than fiction.

Fast forward to the present. Davíð Oddsson is now one of the Governors of the Central Bank, while the Baugur camp is the main shareholder in Glitnir.

Last Thursday, the Chairman of the Board of Glitnir [a straight-up and honourable individual who has recently come into the bank and done an excellent job of trying to clean up the mess that was left by his predecessors] requested a meeting down at the Central Bank. The reason: Glitnir was in trouble. They had been promised a loan from a German [I think] bank that was to have come through in the succeeding days. However, just a day or so earlier the bank had announced that there would be no loan. Apparently it is common for banks to loan only a fixed amount to each individual country, and as it happened, the Central Bank of Iceland had been granted a loan from that bank just a few days before, so Iceland’s quota was effectively used up. Supposedly the Central Bank did not know of Glitnir’s application, and vice versa.

According to the Chairman, when he requested the meeting at the Central Bank his intention was merely to sit down with the Governors of the Bank “as equals” to discuss ways out of this tight situation. The way he tells it, he viewed this as a temporary setback, and he wanted a loan from the Central Bank to get Glitnir through the crisis, until they could finance their need for liquid funds through other means. Admittedly, the loan they needed was high – ISK 84 billion [USD 818 million, EUR 572 million] – but they were prepared to put up as collateral a portfolio of assets that was, in their opinion, solid. Also, the bank’s equity was strong, it was well managed, and it had shown a profit for the entire year so far [on that all experts seem to agree].

Glitnir staff went to a meeting at the Central Bank later that Thursday to go over the matter at hand as it had been presented to Oddsson by the Chairman. They [the CB staff] then became “very busy” and were unavailable for a meeting on Friday. On Saturday they could not be reached. Meanwhile, the Chairman had met once more with Oddsson on the Friday, and with the current PM on Saturday, who had just arrived home from abroad. By this time it had transpired that the original collateral portfolio was not suitable [some technicality about the types of loans not being able to be assigned to a third financial institution], so the Glitnir team had put together a second package that according to the Chairman was even more valuable than the first. The Glitnir people finally managed to get in touch with someone at the Central Bank on the Sunday – a staff member who said that the collateral portfolio had arrived in his mailbox but that he had “not had a chance to look at it.”

According to the Chairman, by Saturday he had a bad feeling about what might be going down [referring to the bad blood between Glitnir’s owners and the Governor of the CB], and requested a meeting with Oddsson. He did so again on Sunday, to no avail. Meanwhile, Glitnir’s staff was trying to reach people at the Central Bank, but no one could be reached. At 11 pm that evening, they were finally summoned to the Central Bank. There they were told that the CB on behalf of the Icelandic state would take a 75 percent share in Glitnir, in return for the ISK 84 billion. The agreement was already drawn up and had to be signed by the time the markets opened at 9 am the following morning. If they would kindly sign on the dotted line.

The Chairman was understandably taken aback; initially he had asked for a loan, had been pigeon-holed for the entire weekend, and now was being told that there was no other option – the state would take over the bank for that specific amount, take it or leave it – the only problem being that they couldn’t very well leave it. In their own words, their backs were up against the wall.

Meetings ensued throughout that entire night, and by early next morning the Chairman was off to get the signatures of the largest shareholders. Unbeknownst to him, the Central Bank had called a press conference for 9.15 on Monday morning to make the announcement. When he heard of this – by his own account – he called the Central Bank and spoke to one of the other Governors, saying the press conference could not be held, as he had not yet secured those signatures. The Governor assured him it would be postponed. Three minutes later Oddsson called back and said the press conference would go ahead. Davíð Oddsson then made the announcement to the press, even before those signatures were procured.

The interview in Kastljós with the Chairman, Þorsteinn Már Baldvinsson, aired last night and it was painful to watch. [It is here if anyone is interested.] Painful because of the way he presents those details, clearly highly emotional yet struggling to keep his composure. During the interview he repeatedly apologizes to the shareholders of Glitnir bank, claiming that by agreeing to the Central Bank’s terms he had failed them and made one of the biggest career mistakes he had ever made. And also painful because if his version of events is true, it is utterly shocking and undermines any faith we the citizens of this country can have in our Central Bank.

There are lots of other details – for instance there’s been much debate as to whether it would have been right for the state to make that high a loan, as this is a very small economy, if they’d had another option, in fact. And yet people, experts included, have a hard time understanding that a bank with strong equity which was being managed well needed to be nationalized in this way – in the words of the Chairman simply “wiped out”. It seems incredibly harsh. Also, it is completely unclear how they came up with ISK 84 million equaling 75 percent. And the way it was handled throughout the weekend, as though all meetings were purposely being postponed until the very last minute when the pressure was on and nobody had any time to think, and the way only a few individuals seem to have been instrumental in the whole deal [for example, the Minister of Finance – who should oversee banking matters, was largely kept out of the it] … it smacks of something highly unpleasant.

In another interview yesterday, the Chairman of Baugur – Jón Ásgeir Jóhannesson – called this “the biggest bank robbery in Icelandic history”. He is convinced Oddsson seized the opportunity to throttle them and had warned the Chairman against going to meet with Oddsson, saying that it would be a feigðarför – literally “a deadly journey”. I have no idea how much credit to give to that, but I – like everyone else here – finds the entire business of how events unfolded very unsettling. In fact, if the “man in the street” survey conducted by the Icelandic National Broadcasting Service this evening is anything to go by, public sentiment is very leery of what went down with the Glitnir takeover.

Meanwhile, the shareholders meeting – which is scheduled for 11 October – still has to approve the takeover, and I suppose that, until then, Glitnir can technically still look for another option. Let us see what transpires.

WEATHER

This post has gone on far too long already, but let’s just say it has been utterly miserable today, northerly winds and freezing cold. Right now 2°C [36F], sunrise was at 7:37 am, sunset at 6:55 pm.

Comments

comments

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  • Stan October 2, 2008, 2:34 am

    Alda,
    Thank you so much for writing this article. You let the sun shine in. It is like a saga except in those days it would have been settled “by point and edge”. For some of us who have tried to do business with Iceland this kind of economic brutality is all too familiar. It’s too bad and it does not help the country.

  • Coffee Drinking Woman October 2, 2008, 3:19 am

    Wow. That’s quite the series of events there…

  • CarolQ October 2, 2008, 8:07 am

    Wow, bad as what we have here in the US with our banking/loan problems. I didn’t go to the other entries regarding the banking but I did find that you explained the situation quite well.

    P.S. Glad to see you are back from vacation. (Strictly a selfish remark, hope you are rested and refreshed.)

  • mary October 2, 2008, 9:44 am

    Good post, will read the links later.

  • sigga October 2, 2008, 10:26 am

    Brilliantly written Alda, this is such a murky affair and you have explained it really well. I hate the fact that I believe that a governor of the central bank can abuse his position and power like a bully in the school yard. It´s a sad sad day in Icelandic history, like Stan said it is almost like one of the Sagas.

  • Magnús October 2, 2008, 3:27 pm

    Hi Alda

    As much as I love your posts I must inject few comments / clarifications.

    The aformentioned pension bill. It was actually a joint bill, signed by all political parties in the parliament at the time, although Oddsson was the ,,instigator”. Also….he has not started collecting his pension although he could if he so wished.

    Also….the honorable chairman of the board. How honorable he is is very much a matter of opinion. I think he is generally regarded as one of the shrewdest, and thoughest, businessman in Iceland….and consequently, one of the richest.

    Also…the question which is at the heart of the matter is…should the Central Bank have loaned Glitnir Bank the money as they requested ?…or simply taken the bank over as they did ? It was these people’s appetite for risk, funded by loans, which has left Iceland and it’s citizens up to their eyeballs in debt and caused the economic “armageddon” we are currently experiencing. I say no….enough is enough already.

    Best regards,
    Magnús
    ps. I myself lost a few tens of thousand’s of kronors on the Glitnir downfall. My contribution to a healthier business environment 🙂

  • JoeInVegas October 2, 2008, 4:23 pm

    Thanks for the explination. It sounds like the banks there are as bad as the ones here, some people are just greedy inside.

  • RK in Los Angeles October 2, 2008, 5:38 pm

    Brilliantly written Alda, thanks for clarifying. Its been hard to navigate and get the whole picture from distance only by reading the news online.

    Magnús: I’m a bit confused why its being set up in your comment as well as by the Central Bank as an either/or situation. Either we lend you the money or we buy your company. Couldn’t the Central Bank sufficed by turning down the loan? Isn’t it possible that Glitnir would have eventually found an alternate source or another way out in a matter of days?

  • alda October 2, 2008, 5:41 pm

    Thanks everyone, for your comments.

    Stan – you’ve mentioned this before – the difficulties of doing business with the Icelanders. And I agree – this cultural gap, the fact that Icelanders lack a certain finesse in dealing with foreigners, is very detrimental to our economy.

    Sigga – I couldn’t agree more with your assessment of DO.

    Magnús – Hi and welcome and thanks for the input. The pension bill … yes I know it was signed by all parties, but it was done in a rush as I recall, and DO was the one who proposed and pushed for it to go through. As for ÞMB’s honour … shrewd and tough is a given in a businessman of that caliber, but so far what I have seen I have found very trustworthy. He came into Glitnir and demanded that the highest wages be lowered, for one thing. I have no experience of the man myself, granted, but he is a childhood friend of EPI’s who has repeatedly spoken highly of his character. I base my assessment partly on that. As for the Glitnir loan vs. takeover, again – I think it is strange that different options were not explored. I’m not saying a loan would have been the right thing, particularly in view of the small size of our economy, but the way the entire thing played out seems very unsettling. Besides, all the banks took those risks, not just Glitnir — in fact from what I heard in the hot pot at Laugardalslaug right now (directly quoted from one of our top financial honchos who shall remain unnamed) Glitnir was the best-managed of them all and Landsbanki is now on the verge of collapse, having loaned to Hannes Smára, Eimskip, Stoðir et. al. Sel það ekki dýrara en ég keypti það. 🙂

  • Icelander October 2, 2008, 7:40 pm

    Actually, it wasnt a German bank, Glitnir had secured a loan from Lehman Brothers, or so they thought … they of course didn’t except Lehman Brothers to go belly up. Just a minor detail though 🙂

    More details, http://eyjan.is/blog/2008/09/29/addragandi-glitnis-yfirtokunnar/

  • maja October 3, 2008, 8:41 am

    Wow! That’s crazy! If you don’t mind I’d like to refer your post to Crikey.com because they kept mentioning the 75% takeover of Glitnir by the central bank. It’s really enlightening to hear all the story behind it.

  • alda October 3, 2008, 10:25 am

    maja – by all means!

  • Magnús October 3, 2008, 11:34 am

    Hi all again.

    One of the reason I visit this site is that Alda has so many international readers and it’s both fun and interesting to read their comments and take on things over here.

    Reading through my comment again I can see that some might think that I was bringing the chairman’s character into question. Sorry…that wasn’t my intention. I simply think that he is one of the toughest businessman around and people might do well by reviewing the story of him buying a certain yellow trawler from Ísafjörður. There is nothing wrong with being a tough businessman…in fact it’s probably in the job description.

    RK from LA. The Central Bank is a lender of last resort. Therefore I assume that all avenues were exhausted before Glitnir turned to the CB. Otherwise it would be a gross misuse of the CB as one politician in Iceland has pointed out. In fact, two lending lines that Glitnir had secured, vaporised when Lehman Brothers and Fortis bank went belly up. Therefore they couldn’t make payments on loans payable in October.

    And keeping in mind that the CB’s funds are in fact the taxpayers funds I am comfortable that taking over Glitnir Bank in this way was the best way to secure taxpayers interest. After all…it’s always possible to give Glitnir’s shareholders something back in the form of an option to buy back shares at a lower price than the marketprice at the time.

    And Alda. You probably shouldn’t sell it at a higher price than you bought it :-). Being a soon-to-be-an-ex-bank-employee myself (not Glitnir) I can safely say that this is not the general consenus within the banking community.

    Anyway….bringing the Glitnir buyout plan into perspective. It’s size is about half the US bailout plan in terms of GDP of Iceland vs. the US. However, Glitnir is just one bank. The US bailout plan is meant to save the whole financial system over there.

    Finally…for all you international readers out there. Now would be the perfect time to visit Iceland. It will not be cheaper anytime in our lifetime. Bring lots of cash please 🙂 The weather is gorgeous at the moment as Alda will probably describe in a later post.

  • alda October 3, 2008, 12:24 pm

    I’ll second Magnús’s last remark.! 🙂

    As for the Central Bank and Glitnir’s approach of them … as the Chairman pointed out, he went initially to have a talk with them about the crisis the bank was facing at that moment and to see if anything could be done to help them out temporarily. As he expressed it, he did not go begging for a loan initially. However, it seemed to set in motion an unforeseen series of events. And that ‘gross misuse’ comment by our Minister of Finance I find absolutely inane. But not completely unexpected from that man (he completely creeps me out).

    As for what I heard in the hot pot, very glad you don’t agree. I’m sure we’re all praying for the rest of the banks to stay afloat.

  • spiderwire October 4, 2008, 12:42 am

    Good. I hope every bank on Earth fails. That’ll learn you all from suckling at the teat of a hegemonic capitalist cash cow.

  • Snorri October 4, 2008, 9:11 pm

    Too right spiderwire. Back to basics we must go. I find it simply idiotic that word of mouth and media coverage can bring the financial system to a standstill. People say communism doesn´t work. Well, Capitalism doesn´t work and for the same reasons. People are as greedy for money as they are greedy for power (in the case of communism). I look forward to a day when somebody can shrug off a comment about a corperations financial standing by showing a legible document showing how rich the company is and being able to actually say that they will be fine.

    Naive of me, I know. But I´m right nonetheless.

  • Paulg October 5, 2008, 10:28 pm

    Great article, good to get some background on these developments that just get simple headlines here in Ireland. I look forward to catching up on the rest of your posts.

  • Communism is great.... huh? October 6, 2008, 4:13 pm

    spiderwire, Snorri,

    What? Come again?

    This was such an interesting discussion, with thoughtful arguments on both sides… until … you … came along. What was that about capitalism failing and communism being the answer? WHERE did that come from? What confused chain of reasoning brought you there?

    Let’s compare the environment under Communism in normal times. This comes from somebody who’s actually lived in it, as opposed to read about it. Everybody has a low paying job; in fact everybody MUST have a job, lest they be imprisoned; travel outside the country is strictly prohibited; people that do flee the country have their families imprisoned, impoverished, and humiliated; basic food and clothing are scarce, long lines prevail everywhere (I remember my grandmother waking up at 6AM every day to go wait in line); there’s only one type of bread, shoes, notebook, car, etc.; all young people (<30 years old) live with their parents because they cannot afford their own place; most people have never seen chewing gum or bananas or oranges; there’s only one television station which is only on for 3 hours every day with the regular Communist propaganda; the State employs close to 5% (hundreds of thousands) of the population in its Secret Service (think Nineteen Eighty-Four); should I go on?

    Now contrast this to Capitalism in the times of crisis: unemployment is in the single digits; the poorest people in society are still better off than 90% of the rest of the world’s population; food and clothing are non-issues; there’s incredible variety and competition to provide basically any consumption good; freedom of speech prevails; property rights and personal rights are well enforced; anyone is free to travel about the world should they become dissatisfied with their society and country; lines are basically unheard of unless you are talking about dealing with the Government that is not much more efficient than your typical Communist Government; most young people are able to be independent and provide for themselves; your savings up to $250k are insured (in the US) – enough money to provide sustenance to your family for years (and the limit can easily be bypassed by depositing money with several unrelated institutions); etc etc

    So yes, you are naive, and you are wrong.

  • Neil October 9, 2008, 7:36 am

    Hey, the last communism comment really puts things in perspective…thanks for the reality check