Iceland's financial avalanche turns on bankers

Source:   The Australian Business with The WSJ

Title:  Iceland's financial avalanche turns on bankers
By:   by Iain Dey


NIKULAS Einarsson rubs his hands over a brazier outside Iceland's modest parliament building.


Two years ago, the electrician was always busy, thanks to the construction boom in the capital, Reykjavik. Iceland's spectacular financial collapse means he now works only one day a week.

Although he is part of a group that congregates daily to hurl abuse at passing ministers, they are not the ones he really blames for the disaster.

"The first people we have to look at are our bankers, and the people who owned our banks," he says.



There are calls for bankers to be locked up around the world.

In Iceland, which suffered the biggest banking collapse of all, one that nearly bankrupted the country and led to public protests, it may well happen.

Those in the frame are the same people who transformed the tiny country into a hub for jet-setting high finance.

Tycoons such as Jon Asgeir Johannesson and Bjorgolfur Thor Bjorgolfsson, working with the banks Kaupthing, Landsbanki and Glitnir, cut a swath through Europe in a five-year buying spree.

They made London their base for an international deal bonanza, buying up household names on a mountain of debt. When the credit bubble burst, so did theirs -- and Iceland's.

Now it's payback time.

Allegations of market manipulation and fraud have been levelled against big-name bankers and entrepreneurs.

A special prosecutor appointed to investigate the claims has launched more than 50 cases.

His team has raided scores of houses and offices, including those of accounting giants KPMG and Price Waterhouse Coopers.

Sigurdur Einarsson -- the former executive chairman of Kaupthing who lives in London's Chelsea and bankrolled the entrepreneur Robert Tchenguiz and property developers the Candy brothers -- has already been made a formal suspect in one of the investigations.

The investigators' net has indeed extended to Britain.

Kevin Stanford, the retail entrepreneur who built up the Karen Millen and All Saints chains, has been caught on the fringes of the inquiry, along with Moises and Mendi Gertner, the property and mining entrepreneurs, and even a member of Qatar's royal family.

The Serious Fraud Office has a list of suspects.

"There's a lot of anxiety as to why nobody has been arrested but there are dozens and dozens of cases now being investigated," says Icelandic Finance Minister Steingrimur Sigfusson. "Some of those guys are already suspected of criminal activity."

Gylfi Magnusson, a former university professor parachuted into government as Minister of Business and Economics, believes that Iceland had "the world's worst bankers".

He says: "They managed to take a banking system and first let it grow to 10 times its size, then let it collapse -- all over a period of six years. It's a monumental achievement, in one sense.

"Other bankers all over the world are being scolded, but I don't think anyone comes close to these people."

Arrmann Thorvaldsson was one of those bankers. He was chief executive of Kaupthing Singer & Friedlander, the London arm of Iceland's biggest bank, when it was placed into administration in September last year.

Before that, he ran its investment banking business, devising some of the extraordinary debt structures that allowed a nation of 300,000 people to become international business pioneers.

He has just published a book, Frozen Assets, recounting his journey from a small house on the wrong side of the tracks in Reykjavik to drinking champagne on yachts with Joe Lewis, the Cockney currency trading billionaire, and Sir Tom Hunter, the Scottish tycoon.

In 2007, one-third of the members of The Sunday Times Rich List were Thorvaldsson's clients, he boasts.

He took celebrity chef Gordon Ramsay on fishing trips to Iceland, hung out at the Monaco Grand Prix with Mike Ashley, the owner of Newcastle United, and was invited to parties at Sir Elton John's house, where he mingled with Sir Michael Caine, Elle Macpherson, Sting and Ivanka Trump.

In 2006, Thorvaldsson threw a party at the Natural History Museum, hiring Tom Jones as the entertainment -- drunken renditions of Delilah were Thorvaldsson's party piece.

He and the senior management at Kaupthing were clearly good friends to have. A leaked copy of the bank's loan documents from September 2008 -- immediately before its collapse -- reveals how good.

A few Kaupthing customers received huge loans, often with little or no collateral and deferred interest payments.

Robert Tchenguiz borrowed pound stg. 1.25 billion from the bank to fund his stakes in J Sainsbury, the supermarket chain, and Mitchells & Butlers, the pubs group. At that time, the loan-to-value across the portfolio of loans was a whopping 98.7 per cent, according to the leaked file.

The security was shares in other Tchenguiz investment vehicles, including a holding company that held his stake in Somerfield, the supermarket group.

Tchenguiz was also one of the biggest shareholders in Exista, an Icelandic investment firm that was the biggest shareholder in Kaupthing.

Similar deals with Baugur, Stanford, the Candys, property investor Simon Halabi and all of Iceland's top entrepreneurs are littered across the loan book, along with cash lent to Saudi princes to buy super-yachts.

It also points to dozens of instances where credit had been extended after deals ran into trouble.

Some sources suggest that the file, which was presented to the board, did not reveal the full extent of the problems. "I'm not sure the market ever had a true picture of the state of things at these banks," says one of Kaupthing's top customers.

"When someone asks if you want to borrow pound stg. 100m, you don't ask if that represents his entire capital base. Now it looks like some of these banks may have been technically insolvent for quite some time before they actually collapsed."

Last weekend, Iceland's financial regulator passed a file to the criminal prosecutor alleging that Kaupthing had been involved in widespread market manipulation of its share price.

Many of Kaupthing's biggest exposures were to companies created to buy shares -- and many appeared to use the cash to buy Kaupthing shares.

On September 25 last year, Sheikh Mohammed bin Khalifa al-Thani of Qatar bought a 5 per cent stake in Kaupthing. Einarsson, Kaupthing's chairman, hailed the Qatari investment as a sign of the bank's financial health.

What he failed to mention was that the stake had been financed by Kaupthing itself through loans to companies in the British Virgin Islands. Einarsson denies the charges of market manipulation. Stanford and his Icelandic business partner, Skuli Thorvaldsson, are alleged to have received a similar loan, which was used to buy Kaupthing shares; the Gertners likewise.

Stanford declined to comment on the allegations but said he had not been contacted by investigators.

A spokesman for the Gertners says: "There was an understanding that if these shares were taken up, the (buyer) would be in a beneficial position to secure funding from Kaupthing."

Kaupthing's directors also received big loans to buy the bank's shares.

Shortly before it collapsed, the Kaupthing board removed all personal liability on the loans. This was never disclosed to the market.

"A lot of people in Iceland think the special prosecutor is looking to see if any laws were broken that caused the crash," says Thorvaldsson.

"Most of the cases I have seen are probably where they are looking to see if laws were broken while people were trying to avoid the crash. None of these cases is the real reason why the banking system crashed. It's more looking at whether people made mistakes when they were trying to keep the system together."

Kaupthing was not the only bank trying to keep the system together.

Three days before Landsbanki was nationalised, a holding company controlled by Magnus Armann, a business partner of Baugur boss Johannesson, bought about pound stg. 25m of shares in the bank.

The money had been lent by Landsbanki and was secured on the shares themselves.

The special prosecutor is investigating the deal -- and who benefited.

Allegations of other share-loan schemes have emerged, involving Glitnir and FL Group, the company that used to own Icelandair and big stakes in Easyjet and American Airlines.

Many of these shares were then used as security on other loans around the world, according to investigators.

A number of strange deals are being investigated -- such as repeated transactions involving Sterling Airways, a Danish airline that saw its value spiral ever higher before it crashed. Sources close to the deal insist there was no wrongdoing. Questions are also being raised about the network of hundreds of offshore companies set up by Icelandic banks and their customers in Luxembourg, the British Virgin Islands, Gibraltar, Liechtenstein, Cyprus and Malta.

"Iceland is a tax haven anyway -- we hardly pay any corporation tax," says one Icelandic businessman.

"It's difficult to see why you would go to all that bother to avoid tax unless you also wanted to make it harder to know who owned what."

Investigators probing the Icelandic collapse are liaising with authorities all over the world to work out the elaborate network of cross-shareholdings and family relationships.

Already, there are clear connections between the people who ran the banks and the borrowers.

Details emerged last week of huge loans from Glitnir to Baugur's Johannesson and his associates, who took control of the bank in early 2007. Landsbanki itself was acquired through a leveraged share transaction, funded by Kaupthing.

Bjorgolfsson and his family, who owned West Ham Football Club, bought a controlling stake in Landsbanki after borrowing almost half the money -- which was never paid back.

Bjorgolfsson, 307th in Forbes magazine's list of international billionaires for 2008, offered to pay back half the money owed for the Landsbanki loan.

The government saw it as a slap in the face.

"This is probably the last loan under the sun that should be written off," says Finance Minister Sigfusson.

At the seafront hotdog stand in Reykjavik, business is booming. Devaluation of the kronur has led to a surge in tourists.

The collapse in the currency is bad news for Icelanders, though.

Almost everyone who borrowed did so in Swiss francs, Japanese yen or other low interest-rate currencies -- because bankers told them to.

Iceland's politicians all know they have but a short time to secure a big conviction or they will face riots -- as they did in September last year after the banks collapsed.

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