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The biggest bank robbery in Iceland’s history?

“Another day, another scandal,” someone wrote in the comments the other day – and ain’t it the truth. A day hardly passes around here with some dirty deed being dredged up from the cesspool that is Iceland’s economic collapse.

Today’s scandal is brought to you by an establishment close to the Nicelandic heart – the formidable Baugur Group, a company previously too cool for school, which presided over the minions in this land like overlords, chewed them up and spat them out … in fact, if I strain my ears I do believe I hear a movement in the distance, The Movement of Nicelandic Minions Screwed Over by Baugur Group … it’s large and it’s loud. And it takes a strange kind of pleasure in watching its former ringleader teeter and fall. – But I digress.

The scandal begins with an establishment known as The Hafnarfjörður Savings Bank, a financial institution established over a century ago to serve businesses and residents of Hafnarfjörður [a small municipality south of Reykjavík that is now part of the Greater Reykjavík Area]. It fulfilled its role with dignity and grace for many decades and over time it grew in size, stature and goodwill.  Its own equity position was strong and no excessive risks were taken in its operations. It was essentially governed by the residents of Hafnarfjörður through 47 representatives, called stofnfjáreigendur, or initial capital holders. These individuals could not become initial capital holders of their own accord and the capital they contributed was nominal – around ISK 150,000 [approx. USD 1,300 / EUR 1,041] per share. The remainder [and majority] of the bank’s equity was provided by the town treasury. For their nominal contribution, they received a dividend of around 10 percent per year, which in those [happy, carefree] days was considered highly acceptable.

The stofnfjáreigendur represented the residents of Hafnarfjörður in that they nominated three out of five individuals to sit on the bank’s board. The other two board members were nominated by the town council. Legislation concerning savings banks was changed in 2002 and one of the amendments was that the original shares could actually be sold to a third party. Suddenly the people who had contributed their nominal fee of ISK 150,000 held shares with a substantially higher price tag. Then, in 2005 there was a complete turnaround when five stofnfjáreigendur ran against the existing board, and were voted in. On the new board were primarily friends and family of one Matthías A. Mathiesen, a former MP for the Independence Party and – as it happens – father of Árni Mathiesen, who was Minister of Finance last October when the banks collapsed [and indeed was in office until the government collapsed in January].

Cut to 2006, when a certain company known as A Holding, which was registered in Switzerland and controlled from Luxembourg, had its eye on the Hafnarfjörður Savings Bank. A Holding coveted those stofnfjár shares. An individual named Páll Pálsson, who had become chairman of the bank’s board in the 2005 coup, whispered to the stofnfjáreigendur that a company – A Holding – was willing to pay them ISK 25 million [USD 219,000 / EUR 173,000] for their original ISK 150K share. Not a bad profit.

A Holding, a.k.a. Baugur Group, thus managed to buy up the majority of those shares at ISK 25 million a pop. They then turned around and sold those same shares to “related parties” [related through cross-investments I presume] for ISK 45 million. Predictably the original stofnfjáreigendur are now pissed as hell and are suing the attorney recruited to work for A Holding for fraud, as he misrepresented to them the real value of their shares. When questioned by police, the attorney refused to reveal the real owners of A Holding – it has since transpired that A Holding is owned by Baugur Group and is represented by Stefán H. Hilmarsson, Baugur Group’s CFO.

The main purpose of A Holding – aka Baugur – appears to have been to gain hold of the Hafnarfjörður Savings Bank, since plans were already underway to merge it with another savings bank – Sparisjóður Vélstjóra, or the Machinists’ Savings Bank  [originally founded by machinists who worked on ships]. That merger went through in December 2006 and increased the value of the two banks exponentially in the merged company, which was given the name Byr. Incidentally, those plans were – as yet – completely under wraps, so there was clearly some underhanded trading going on – I presume that is the basis of the aforementioned lawsuit, although based on the info I’ve seen that’s not completely clear.

A year later, or in December 2007, the owners of Byr decided to increase the bank’s initial equity by ISK 26.2 billion. Those who already owned shares in the bank –  the stofnfjáreigendur – were invited to increase their investment, and the increase was financed through loans from Glitnir bank – which in turn was largely owned by Baugur.

Four months later, the bank paid dividends to its shareholders – the stofnfjáreigendur – worth ISK 13.5 billion.

As most people know, dividends are not paid out unless a company turns a profit. Revenues from Byr’s operations n 2007 were ISK 7.9 billion, so the dividends paid out were ISK 5.6 billion higher than the revenues. And those extra dividends … came from where? From a so-called varasjóður – or “rainy day fund” – that the original savings banks had prudently and carefully maintained throughout the years and which was never considered to be the property of the stofnfjáreigendur. Until A Holding and Baugur Group came along, that is.

So Baugur Group lay like a shark in wait, to gobble up the Hafnarfjörður Savings Bank at a price gained through carefully-orchestrated deception, then moved in to plunder its coffers at the first available opportunity. This while they were purposely deceiving Glitnir customers in order to get them to deposit their money in the infamous Fund 9 – another sophisticated form of pillaging. In other words, they were sucking the banks dry to fund their “raid of the British high street”* and their outrageously decadent lifestyles.

Meanwhile, when the Icelandic state moved in to nationalize Glitnir last October, Jón Ásgeir Jóhannesson, owner of Baugur Group, had the gall to call it “the biggest bank robbery in Icelandic history“. I’ll saynomore.

QUICKIE WEATHER REPORT
Because it’s way past my bedtime. It’s still relatively mild and today it was calm and damp, although free of precipitation here in the capital. Currently 2°C [36F], sunrise was at 8:59 am, sunset at 6:24 pm.

[Big nod to today’s Morgunblaðið and also this blog for providing the info for this post.]

* I wonder: does this make the residents of Hafnarfjörður the rightful owners of Karen Millen, Oasis, House of Fraser, Iceland, et al?

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  • Lissa February 23, 2009, 2:57 am

    They were just carrying Capitalism to its logical extreme!

  • Andrew February 23, 2009, 3:59 am

    I still don’t understand why nobody has been prosecuted!!??

  • Flygill February 23, 2009, 5:19 am

    I’m not sure you can say that the original Hafnarfjörður Bank holders were defrauded, since they made a substantial profit. The real “victim” here was Glitnir (i.e. Glitnir shareholders), which was essentially looted for ISK 13.5 billion by Baugur. The stofnfjáreigendur still technically owe Glitnir for their portion of the ISK 26.2 billion. But since Baugur is essentially bankrupt, those loans are uncollectible and the money has disappeared out the back door and probably flown off to the Caymans.

  • Roy February 23, 2009, 7:55 am

    Bring me a rope……

  • Dave Hambidge February 23, 2009, 8:53 am

    I wondered if this might amuse you (!)

    http://news.bbc.co.uk/1/hi/uk/7905172.stm

    dave

  • Flygill February 23, 2009, 9:13 am

    Sorry to dwell on the details – it looks like Byr was not actually defrauded and if anything, they were enriched by the transaction. Byr was infused with 26.2 billion ISK (in return for which the stofnfjáreigendur got more shares, ie a larger share of the company) , and paid out 13 billion, leaving a profit of 13 billion. So I’m not sure you can say the varasjóður – reserve money – was looted. Maybe I am missing something here.
    This was really a case of the bank owners stealing from their own bank, Glitnir, by taking money from a bank they only partially owned and putting it into a bank they fully owned (Byr).
    Legal? Perhaps. Moral? I ask you.

  • Lino February 23, 2009, 11:44 am

    “I’m not sure you can say that the original Hafnarfjörður Bank holders were defrauded, since they made a substantial profit”

    absolutely, I agree: they sold for 25 million and were happy to do that, why are they complaining? It was up to them to correctly evaluate the “value” (there is only ONE objective value and that’s the transaction value, other than that the rest is pure “estimation” ) of their share, if they did not, their fault: when they sued the original shareholders, either were in bad faith or revealed that they were complete idiots.

    As for “appropriation” of savings, if the savings were “protected” by bank statutory or regulatory rules (nature/type of investments) at the time of the (mis)appropriation and used as superdividends, then it could be argued that it was illegal perhaps , however if such “savings assault” took place after the bank changed rules/nature due to fusion/resructuring, then it could be PERFECTLY LEGAL: I’m not saying that it make moral or economic sense, just that law could allow that.
    You should read in the fine print of company statutes and regulatory text (if any)

  • alda February 23, 2009, 12:32 pm

    Thanks, everyone!

    I’m not sure about the premises for the lawsuit of the Hafnarfjörður stofnfjáreigendur, but I suspect it has something to do with insider information – i.e. those who coveted their shares already knew about the merger of the two banks and that their value would therefore increase vastly. I confess, though, that the Morgunblaðið article was rather vague on that point. And just to be clear – I have very little sympathy with those stofnfjáreigendur.

    On another note, it is interesting to view the different responses on the legal vs. immoral aspects.

  • SnoDad February 23, 2009, 1:03 pm
  • tj3 February 23, 2009, 2:55 pm

    The Hafnarfjörður Savings Bank as it was in earlier times was a normal bank, a financial institution of utility.

    I have never heard of it (The Hafnarfjörður Savings Bank) before today, not here in Florida USA. The story I just read above in this post was familiar none the less, as Florida banks and financial institutions also used to be normal utilities, a safe way to deposit and gain a tiny bit on these deposits.

    A group of outsiders and local schemers decided that “normal” utility banking was not profitable enough, not sexy enough and started to play around with the cash and took away the normalcy from finance.

    Though the name of the bank is different here and the schemers names are different here the result is the same. I have learned so much from reading Iceland’s stories to shed light on our situation in Florida.

    At the other end of all the policy and details there are only people.

    They exhibit personal traits that are timeless. It is the stuff of Shakespeare and Ibsen, you know…. pride, avarice and self serving deceit disguised. In the end also it serves no one really, not even the schemers who get away with their gains, which is their loss of another sort.

    As Alda mentioned there are both legal and moral responses to consider and therefore personal ones for the parties involved.

    Also unfortunately for us the public there are moral and legal issues. These public issues hinge on tolerating such behavior before an emergency.

    We trusted more than we should have people wearing suits as seeming normal when it was only a costume.

  • Elín February 23, 2009, 7:41 pm

    I just slipped into a kreppa-coma

  • Flygill February 23, 2009, 9:31 pm

    Yes, it’s really too much, all this kreppa-news. Each day another another scandal or outrage, each more shocking than the last.
    If you don’t talk about it then people accuse you of being ignorant or not caring, but if you obsess on it and read all the newspapers and blogs then you’ll drive yourself crazy. If you look at at Silfur-Egill, well, he’s so overloaded-with-information and angry that it looks like all the blood vessels in his face are going to explode soon. Since when did Icelanders lose the right to talk about stupid stuff of no concern in the larger scheme of things? Will Chelsea overtake Manchester United? Isn’t that very bizarre, the mother of octuplets with an Angelina Jolie fetish? Or what about the Oscars, didn’t they give the Best Picture Award to yet another mediocre film that no one will remember in five years?
    Maybe people should wear little signs around their necks, saying “Yes, I am well-aware of all the problems here and in the rest of the world, but, honestly, I am tired of hearing about, so just tell me something interesting or funny that won’t make me more depressed than I already am. Thank you.”

  • alda February 23, 2009, 9:34 pm

    Thanks, Flygill. I think you’ve just given me an idea for another T-shirt. 🙂

    Totally agree about the kreppa coma. How about a post about cream puff day?

  • Dankoozy February 23, 2009, 11:06 pm

    ok this is too complicated for me

  • maja February 23, 2009, 11:50 pm

    Crikey moses is all I can say. Nice analogy from tj3.

  • colin buchanan February 24, 2009, 9:05 am

    Maybe Gerry Adam’s speech in Dublin on Saturday will restore some of your fervour:

    http://inthesenewtimes.com/2009/02/23/full-text-of-gerry-adams-speech/

  • Blank Xavier February 24, 2009, 9:09 am

    > Its own equity position was strong and no excessive risks were taken in its operations.

    No opportunities to make good money which were missed due to excessive caution, etc? isn’t excessive caution as bad as excessive risk? because it deprives the people who have invested of money just as surely.

    > It was essentially governed by the residents of Hafnarfjörður through 47 representatives,
    > called stofnfjáreigendur, or initial capital holders.

    I doubt it. 47 people is too large to govern anything. There will have been a core of those people who made the real decisions. How were these people chosen – both the 47 and the people who really made the decisions? could they be replaced if they were incompetent or corrupt?

    > These individuals could not become initial capital holders of their own accord and the
    > capital they contributed was nominal – around ISK 150,000 [approx. USD 1,300 / EUR 1,
    > 041] per share.

    So why was that done? if they had such a tiny stake in the company, what difference did it make to anything? I get the impression they had one share each, is that correct? and these were all the shares? this seems very strange. The actual value of the company seems to be far higher than the value of the issued shares, yet those shares apparently control the company? if that is so (I expect it is not, for I must be missing something) isn’t that asking to be taken over?

    > The remainder [and majority] of the bank’s equity was provided by the town treasury. For
    > their nominal contribution, they received a dividend of around 10 percent per year, which in > those [happy, carefree] days was considered highly acceptable.

    The hell!?

    What is Government doing getting into the banking sector with tax money it’s taken from private individuals? why stop there? why not have the Government make food, too, and cars? and you know what that really means? it means private individuals working, but not receiving their full pay, because some of it is taken by the local Government as tax, and those people who make up the local Government then starting businesses with that money.

    This is profoundly unfree. That money belongs to the people who earned it. If they want to get together and start businesses, *they can*. Other people – be they Government or anyone else – have absolutely no business *taking* that money and then doing things with it.

    Furthermore, Government run business is inexorably and unavoidably bad business. It always gets bailed out by tax money, it always becomes politically manipulated (loans to best friends, political interests, for the football stadium of your local team, using the profits to open the new branch in a particular neighbourhood just before an election, etc, etc, ad infinitum, you know about this stuff as well as I do!) and these businesses are all making it harder for private individuals to start their own

    > The stofnfjáreigendur represented the residents of Hafnarfjörður in that they nominated
    > three out of five individuals to sit on the bank’s board. The other two board members were
    > nominated by the town council.

    However, in practise, since the town council control the town treasury and they provided all the money, the town council basically controlled the bank. The money always wins.

    > Legislation concerning savings banks was changed in 2002

    How and by who?

    > and one of the amendments was that the original shares could actually be sold to a third
    > party.

    Now this is very interesting. So it seems in the original arrangement, the single share held by each representative *could not be sold*. This has the effect of making the bank permanently owned by the representatives. Well, that may be good or bad, and it certainly is bad that the town council decided to use tax money to start a bank.

    BUT – and this is crucial – contracts which are voluntary and well-informed must be honoured, always. The town council made a contract (I don’t mean a legal contract necessarily, although it was I think in this case; I use the word in its widest sense) with the representatives.

    NO OUTSIDE PARTY HAS ANY RIGHT WHATSOEVER TO INTERVENE IN THAT CONTRACT. Doing so is *profoundly* unfree. It means Party A makes a deal with Party B, where both choose to make that deal and both know exactly what is involved – and then Party C comes along, entirely unrelated to Party A and B, and changes the contract. *It is wrong*.

    And of course here I get the feeling it happened because the central Government shafted the local Government. Whereas before, local Government was shafting the people, by taking their money and going into business with it. I’m sensing a theme here.

    > Suddenly the people who had contributed their nominal fee of ISK 150,000 held shares
    > with a substantially higher price tag.

    Naturally. Before they were an artifical value which meant nothing – it was just an arbitrary price for buying a share. They never represented the actual value of the bank. Now, all of a sudden, they do – those 47 shares each representing 1/47th the value of the bank.

    Now, remember, this bank was created with money taken from people by tax. And now that money has in effect been *given* to these 47 people, since they each own 1/47th of the value of the bank.

    When examining failures, there is a strong tendancy in humans to find the *first* place where something could have been done differently and proclaim that *this* is where it went wrong.

    This is incorrect. The correct method is to trace the chain of events as *far back as possible*,to find the *first* event which went wrong.

    Here, the first event is the use of tax money to create the bank. If that money had remained with the people who earned it, some of them, if a bank was really needed, would, sooner or later, have made a bank. It would have been privately owned and so none of this terrible mess would have happened.

    > Then, in 2005 there was a complete turnaround when five stofnfjáreigendur ran against the
    > existing board, and were voted in.

    Voted in by whom? the representatives? if they were voted in, then they got in fair and square. People may have been stupid to vote for them, but that’s what freedom *is* – the freedom to make a choice, good or bad.

    > In 2006, a certain company known as A Holding, which was registered in Switzerland and
    > controlled from Luxembourg, had its eye on the Hafnarfjörður Savings Bank. A Holding
    > coveted those stofnfjár shares.

    What’s wrong with wanting to take over another company? you make an offer, the other party is *free* to accept or decline. That’s what freedom *is*.

    > An individual named Páll Pálsson, who had become chairman of the bank’s board in the
    > 2005 coup, whispered to the stofnfjáreigendur that a company – A Holding – was willing to
    > pay them ISK 25 million [USD 219,000 / EUR 173,000] for their original ISK 150K share.
    > Not a bad profit.

    So how did we get to this situation?

    1. money taken from people through tax – so the people who did the work which made the money which made the bank got *nothing* for their work
    2. creation of shares which don’t actually reflect the value of the bank – which is fine, as long as you assume no one else will interfere with your contracts
    3. central Government interfering in other peoples contracts

    > A Holding, a.k.a. Baugur Group, thus managed to buy up the majority of those shares at
    > ISK 25 million a pop. They then turned around and sold those same shares to “related
    > parties” [related through cross-investments I presume] for ISK 45 million.
    > Predictably the original stofnfjáreigendur are now pissed as hell and are suing the attorney
    > recruited to work for A Holding for fraud, as he misrepresented to them the real value of
    > their shares.

    I think they should hire a lawyer to sue themselves for being stupid. When there’s so much money at stake, why didn’t they get a proper valuation done?

    Anyways, I think the lot of them were profoundly unethical. They KNEW the original contract between the town and the representatives, they KNEW they were never meant to sell those shares.

    > The main purpose of A Holding – aka Baugur – appears to have been to gain hold of the
    > Hafnarfjörður Savings Bank, since plans were already underway to merge it with another
    > savings bank – Sparisjóður Vélstjóra, or the Machinists’ Savings Bank [originally founded
    > by machinists who worked on ships]. That merger went through in December 2006 and
    > increased the value of the two banks exponentially in the merged company, which was
    > given the name Byr.

    In and of itself, good. A great deal of wealth was created. The two banks together were worth much more than the two banks seperate; together they would produce more wealth per year than seperate. Putting them together is something any sensible person would do.

    > A year later, or in December 2007, the owners of Byr decided to increase the bank’s initial
    > equity by ISK 26.2 billion. Those who already owned shares in the bank – the
    > stofnfjáreigendur – were invited to increase their investment, and the increase was financed
    > through loans from Glitnir bank – which in turn was largely owned by Baugur.

    Nothing wrong with that. It’s money be shifted around inside a group, from one company to another.

    > Four months later, the bank paid dividends to its shareholders – the stofnfjáreigendur –
    > worth ISK 13.5 billion.

    > As most people know, dividends are not paid out unless a company turns a profit. Revenues > from Byr’s operations n 2007 were ISK 7.9 billion, so the dividends paid out were ISK 5.6
    > billion higher than the revenues. And those extra dividends … came from where? From a
    > so-called varasjóður – or “rainy day fund” – that the original savings banks had prudently
    > and carefully maintained throughout the years and which was never considered to be the
    > property of the stofnfjáreigendur. Until A Holding and Baugur Group came along, that is.

    It was wrong that the bank was made with tax money in the first place, because then stuff like this ends up being theft – the people who worked to make that tax money got NOTHING for their work.

    It’s wrong that central Government interfered in other peoples contracts.

    It’s wrong that the representatives sold their shares.

    But at this point that bank has been sold and it belongs, in toto, to Baugur. It’s *their* money. They can do what they like with it.

    > So Baugur Group lay like a shark in wait, to gobble up the Hafnarfjörður Savings Bank at a
    > price gained through carefully-orchestrated deception, then moved in to plunder its coffers
    > at the first available opportunity.

    More like the local Government cruised along like a sperm whale, swallowing downs tons of tax money every second, then putting it into a bank and between local Govenment and central Government, totally messing it up.

  • Blank Xavier February 24, 2009, 9:14 am

    Lissa wrote:
    > They were just carrying Capitalism to its logical extreme!

    No. Capitalism means “private property rights”. That’s *all*. Nothing more, nothing less. Private property rights were compromised in the very beginning, when the town council took *tons* of money from everyone, by tax, and used it to start its own bank.

    That money should have stayed with the people who earned it, because it belonged to them. If there was a need for a bank, then sooner or later, some of them would have got together and made a bank.

    If we assume an ideal, whiter-than-white town council, then they started a bank because they wanted to help the local economy (of course, they did this by harming the local economy, though tax).

    If we assume a realistic town council, they started a bank because in the back of their minds, it meant *they*, the people on the council, would have a bank at their beck and call.

    Loans for friends, political allies, slush funds, opening a new branch in the right place just before an election, etc, etc, etc. You know as well as I do what people are like.

  • hildigunnur February 24, 2009, 9:28 am

    Ewww! What’s this horrid libertarian doing here spewing gall? We were FINE, until the likes of him started taking over. Not the richest-country-in-the-world (as if that was ever true, just fake).

  • Lino February 24, 2009, 9:37 am

    >In and of itself, good. A great deal of wealth was created. The two banks together were worth much more than the two banks seperate; together they would produce more wealth per year than seperate. Putting them together is something any sensible person would do.

    in the short term wealth is NEVER created: as for instant creation of wealth simply by merging, it’s just asset shuffling (and related liabilities do not disappear like that). What can happen is eventually wealth unlocking (that was already there, though inexpressed perhaps), but that is more than just cooking accounting books and related financial “wizardry” and drawing nice organization charts

    >No opportunities to make good money which were missed due to excessive caution, etc? isn’t excessive caution as bad as excessive risk? because it deprives the people who have invested of money just as surely

    I do not agree: it depends on the profile of investor you are and the kind of yield/risk/liquidity/diversification configuration you choose/afford, according as well to your (institutional) mission. It can make perfectly sense to choose not to take “missed opportunities”.

  • Ingibergur February 24, 2009, 6:43 pm

    A “respectable” representative of Althing repeaded uncountable number of times that the “stofnfé” i.e. saving bank capital were funds without a shepheard meaning that it was “up for grabs”.

  • alda February 24, 2009, 10:28 pm

    Dang!

    Care to mention names? Or at the very least some characterizing details?

  • Blank Xavier March 4, 2009, 12:19 am

    hildigunnur wrote:
    > Ewww! What’s this horrid libertarian doing here spewing gall? We
    > were FINE, until the likes of him started taking over.

    No. You were not. Iceland was desperately backwards and poor and the entire economy was regulated for the sake of the fishing industry. There was as a result a great deal of human suffering and a massive waste of lives, of potential, of dreams and hopes which could never be, not in that circumstance.

  • Blank Xavier March 4, 2009, 12:22 am

    Lino wrote:
    > in the short term wealth is NEVER created: as for instant creation of
    > wealth simply by merging, it’s just asset shuffling (and related
    > liabilities do not disappear like that).

    Yes. However, two entities together can have as a result of being merged a higher annual profit than they would have seperately. That improvement in profitability is the creation of wealth.

    [snip excessive caution]

    What you have said is correct. However in the original post, the context was that excessive caution was, without reason or justification, presented as the correct and best approach. It was this unthinking assumption that I questioned.

  • Blank Xavier March 4, 2009, 12:25 am

    Ingibergur wrote:
    > A “respectable” representative of Althing repeaded uncountable
    > number of times that the “stofnfé” i.e. saving bank capital were
    > funds without a shepheard meaning that it was “up for grabs”.

    Politicans are people. I think about 90% of people are corruptable. Put a person into a situation where there are incentives (financial and otherwise) upon them to behave in a way which although optimal for themselves is non-optimal for others (such as the State), then they will.

    This is why Governments are a bad idea. They cannot work, for their interests will in practise be against those of the State and People they are supposed to represent.

  • alda March 4, 2009, 10:28 am

    BX – perhaps you would like to start your own blog?

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