BRINGING DOWN THE BANKING SYSTEM This page intentionally left blank Bringing Down the Banking System Lessons from Iceland Gudrun Johnsen BRINGING DOWN THE BANKING SYSTEM Copyright © Gudrun Johnsen, 2014 Softcover reprint of the hardcover 1st edition 2014 978-1-137-35819-6 All rights reserved Grateful acknowledgment is made for the permissions to reprint the following previously published images: (1) Figure (10.2) and Front Cover—Cross-ownership of firms with more than 500 million ISK in assets (Icel Eignatengsl fyrirtỉkja m yfir 500 milljónir króna í eignir), SIC report, Appendix 2, Figure 6, (2) Figure 10.3—Cross-ownership of firms with more than 500 million ISK in assets, 10% minimum cross-ownership (Icel Eignatengsl fyrirtækja með yfir 500 milljónir í eignir, 10% lámarks eignatengsl), SIC report, Appendix 2, Figure 7, (3) Figure 10.4—Related parties with Baugur Group hf as the main party (Icel Húpur tengdra aila ỵegar Baugur Group hf er aðalaðili), SIC report, Appendix 2, Figure 15, (4) Figure 11.6—Total Lending to Baugur Group and related parties as percentage of capital base shown as a function of 2007 year-end minimum shareholding (Icel Hlutfall heildarútlána Baugur Group og tendra aðila sem hlutfall af eiginfjárgrunni og sem fall af lágmarkseignarhlut við áramótin 2007/2008), SIC report, Appendix 2, Figure 30, previously published in Bjarnadottir and Hansen, 2010, “Investigation into the cross ownership and bank credit to related parties,” SIC Report, Volume (Title in Icelandic: Rannsókn krosseignartengslum og útlánum bankanna til tengdra aðila), Special Investigation Commission, Reykavik All quotations and illustrations from the Special Investigation Commission fall under the public domain and are not protected by copyrights First published in 2014 by PALGRAVE MACMILLAN® in the United States—a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-47105-8 ISBN 978-1-137-34735-0 (eBook) DOI 10.1057/9781137347350 Library of Congress Cataloging-in-Publication Data Johnsen, Gudrun Bringing down the banking system : lessons from Iceland / Gudrun Johnsen pages cm Bank failures—Iceland—History—21st century Banks and banking— Corrupt practices—Iceland—History—21st century Bank management— Iceland—History—21st century I Title HG3154.J66 2013 332.1094912—dc23 A catalogue record of the book is available from the British Library Design by Newgen Knowledge Works (P) Ltd., Chennai, India First edition: January 2014 10 2013025082 To my mother Stefania Valdis Stefansdottir for her everlasting help, support, and encouragement and to my kindred spirit, husband, and editor in chief, Thorarinn R Einarsson This page intentionally left blank Contents List of Figures ix List of Tables xiii Acknowledgments xv List of Characters xvii Timeline of Relevant Events xxi Part I From Prosperity to Panic Chapter Illusion of Prosperity Chapter Collapse 13 Chapter Panic 19 Chapter Investigation 47 Part II How Did the Bankers Do It? Chapter Financial Liberalization 59 Chapter Funding the Banks 75 Chapter The Geyser Crisis 83 viii CONT ENT S Chapter Love Letters to the Rescue 91 Chapter Playing Tricks on the European Central Bank 97 Part III Why Did the Bankers Do It? Chapter 10 The Web of Ownership 109 Chapter 11 Tunneling Money through Related-Party Lending 119 Chapter 12 Market Manipulation and Falsification of Equity 137 Chapter 13 Wages of Failure 153 Part IV Why Didn’t Anybody Stop the Bankers? Chapter 14 Funded by the Ill-Informed 169 Chapter 15 A Debt-Free State; Isolated and without Credit 179 Chapter 16 Putting a Poodle on Watch 189 Chapter 17 What Have We Learned? 195 Notes 199 References 227 Index 233 Figures 4.1 6.1 6.2 7.1 7.2 7.3 7.4 7.5 8.1 8.2 9.1 9.2 9.3 9.4 10.1 10.2 10.3 10.4 11.1 Aggregate assets of the three banks Deposits as share of banks’ total funding Banks’ bond issues CDS spreads of the Icelandic banks 2006–2008 Bank deposits on consolidated basis Icesave deposits in Landsbanki’s branches abroad Edge deposits in Kaupthing’s subsidiaries abroad Collateralized lending from central banks Collateralized lending of the Central Bank of Iceland Icebank’s collateral pledged into the Central Bank of Iceland Collateralized lending of the ECB to Kaupthing, Glitnir, and Landsbanki Icelandic bank bonds as collateral with the ECB Collateralized lending of the European Central Bank (ECB) Collateralized lending of the Banque Centrale du Luxembourg (BCL) Example of cross-ownership structure of Icelandic fi rms in 2008 Cross-ownership structure of 1,307 fi rms in Iceland with balance sheet larger than USD million (500 million ISK) in 2008 Cross-ownership structure of 453 fi rms in Iceland with balance sheet larger than USD million (500 million ISK) in 2008 Cross-ownership structure of Baugur Group and related parties (184 fi rms) Total lending by the three banks to Baugur Group and related parties 56 76 79 86 88 88 89 89 92 94 98 98 99 100 113 114 115 116 121 REFERENC ES 229 Fjarsysla Rikisins (e Government Accounting Office), 2011, Annual Report 2011—Annual Financial Statement of Government Entities Icelandic State Annual Report Iceland: Ministry of Finance Flannery, Mark, 2009, Iceland’s Failed Banks: A Post-Mortem , SIC Report, Vol (Reykjavik: Special Investigation Commission), Appendix Fostel, Ana, and John Geanakoplos, 2008, “Leverage Cycles and the Anxious Economy,” American Economic Review, 98, no 4: 1211–1244 Geanakopolos, John, 1997, “Promises, Promises.” In, The Economy as an Evolving Complex System, II, edited by W B Arthur, S Durlauf and D Lane, 285–320 Reading, MA: Addison-Wesley Geanakoplolos, John, 2010, “The Leverage Cycle.” In D Acemoglu, K Rogoff and M Woodford, eds., NBER Macroeconomic Annual 2009 24: 1– 65, University of Chicago Press, 2010 Glitnir Bank, 2009, “Statement from the Resolution Committee of Glitnir hf.,” Glitnir Bank, Online Edition, December 11 Glover, John, 2007, “Moody’s Blasted for Giving Icelandic Banks Top Rating,” Bloomberg, Online Edition, February 26 Gourinchas, Pierre-Olivier, Rodrigo Valdes, and Oscar Landerretche, 2001, “Lending Booms: Latin America and the World,” Economía 1, no 2: 47–99 Haarde, H Geir, 2008, “Address by the Prime Minister due to Unusual Conditions in Financial Markets,” Prime Minister’s Office, Online Edition, October 6, Reykjavik Harré, Nick, Susan Foster, and Maree O’Neill, 2005, “Self-enhancement, Crash-risk Optimism and the Impact of Safety Advertisements on Young Drivers,” British Journal of Psychology 96, no 2: 215–230 Harris, Bob, 2009, “A Startling Revelation: What Did the IMF and Central Banks Know—and Didn’t Tell Us,” Weblog about the Trade Union Advisory Committee meeting at the OECD in May, 2009 http://fundingeducation blogspot.com/2009_05_01_archive.html (accessed May 29, 2013) Hilbers, Paul, Inci Otker-Robe, Ceyla Pazarbasioglu, and Gudrun Johnsen, 2005, Assessing and Managing Rapid Credit Growth and the Role of Supervisory and Prudential Policies Working Paper 05/151 Washington, DC: International Monetary Fund (IMF) House of Commons, Treasury Committee, 2009, Banking Crisis: The Impact of the Failure of the Icelandic Banks, Fifth Report of Sessions 2008–09, House of Commons London: Stationary Office Limited, http://www.hm-treasury gov.uk/8659.htm Icelandic National Audit Office, 2012, Fyrirgreiðsla ríkisins við fjármálafyrirt ỉki og stofnanir í kjưlfar bankahrunsins [e Government Lending to Financial Institutions and Agencies in the Wake of the Banking Collapse] Report to the Parliament, Reykjavik: Icelandic National Audit Office International Monetary Fund (IMF), 2010, Iceland: Staff Report for Second Review Under Stand-By Arrangement and Request for Extension of the 230 REFERENC ES Arrangement, Rephasing of Access and Establishment of Performance Criteria Staff Report Washington, DC: International Monetary Fund Jensen, Michael C., and William H Meckling, 1976, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics 3, no Jensen, Michael C., Kevin J Murphy, and Eric G Wruck, 2004, Remuneration: Where We’ve Been, How We Got to Here, What Are the Problems, and How to Fix Them Harvard NOM Working Paper No 04–28; 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Journal of Finance 59: 1619–1649 Peng, Lin, and Ailsa Röell, 2008, “Executive Pay and Shareholder Litigation,” Review of Finance 12, no 1: 141–184 Schaffer, S., 1998, “Winners Curse in Banking.“ Journal of Financial Intermediation, Vol 7, No 4: pp 359–392 Sedlabanki Islands (Central Bank of Iceland)—Exchange Rate, 2007–2008 Sedlabanki Islands (Central Bank of Iceland)—Exchange Rate, 2008 Shakespeare, William, 1600, Merchant of Venice, printed in London by I E for Thomas Heyes http://shakespeare.mit.edu/merchant/full.html (accessed June 1, 2013) Special Investigation Commission (SIC), 2008, Background and Causes of the Collapse of the Icelandic Banks in 2008 and Related Events , Vol Report of the Special Investigation Commission (SIC) Reykjavik: Special Investigation Commission Special Investigation Commission (SIC), 2008, Background and Causes of the Collapse of the Icelandic Banks in 2008 and Related Events, Vol Report of the Special Investigation Commission (SIC) Reykjavik: Special Investigation Commission Special Investigation Commission (SIC), 2008, Background and Causes of the Collapse of the Icelandic Banks in 2008 and Related Events, Vol Report of the Special Investigation Commission (SIC) Reykjavik: Special Investigation Commission Special Investigation Commission (SIC), 2008, Background and Causes of the Collapse of the Icelandic Banks in 2008 and Related Events , Vol Report of the Special Investigation Commission (SIC), Reykjavik: Special Investigation Commission Special Investigation Commission (SIC), 2008, Background and Causes of the Collapse of the Icelandic Banks in 2008 and Related Events , Vol Report of the Special Investigation Commission (SIC) Reykjavik: Special Investigation Commission Special Investigation Commission (SIC), 2008, Background and Causes of the Collapse of the Icelandic Banks in 2008 and Related Events , Vol Report of the Special Investigation Commission (SIC) Reykjavik: Special Investigation Commission Special Investigation Commission (SIC), 2008, Background and Causes of the Collapse of the Icelandic Banks in 2008 and Related Events , Vol Report of the Special Investigation Commission (SIC) Reykjavik: Special Investigation Commission Special Investigation Commission (SIC), 2008, Background and Causes of the Collapse of the Icelandic Banks in 2008 and Related Events , Vol Report of the Special Investigation Commission (SIC) Reykjavik: Special Investigation Commission 232 REFERENC ES Special Investigation Commission (SIC), 2008, Background and Causes of the Collapse of the Icelandic Banks in 2008 and Related Events, Vol Report of the Special Investigation Commission (SIC) Reykjavik: Special Investigation Commission Special Investigation Commission (SIC), 2010, Report of the Special Investigation Commission on the Collapse of the Banks in 2008 Press Conference Presentation, Special Investigation Commission Statistics Iceland—Labor Market Statistics: Activity Rate, 2002–2007 Statistics Iceland—Main Economic Variables for the Public Sector 1980–2011 Statistics Iceland, 2008, Gross Domestic Product 2007, Statistical Series— National Accounts, Statistics Iceland, Reykjavik Stephen, John Akers, 2010, Notice: 1179911 (Issue: 59511)—Oscatello Investments Limited, The London Gazette, Online Edition, London, August Sverrisdottir, Valgerdur, 2006, Luncheon, Icelandic-American Chamber of Commerce, New York, Ministry for Foreign Affairs, Online Edition, September 27 Talley, Eric, and Gudrun Johnsen, 2005, Corporate Governance, Executive Compensation and Securities Litigation CLEO and Law & Economics Research Paper Series, University of Southern California Law School, Los Angeles Thomas, Richard, 2006, Icelandic Banks–Not What You Are Thinking, European Credit Research Report, Merrill Lynch London, UK Thorisson, Hermann Mar, and Ingi Sturla Thorisson, 2006, Á lit uppgjöri (e Analysis of Quarterly Results)—Glitnir Bank, Investment Research Report, Landsbanki, Reykjavik U.K Parliament, 2008, No 2668—Banks and Banking—The Landsbanki Freezing Order 2008, Statutory Instrument, U.K Parliament Valgreen, Carsten, Lars Christensen, Peter Possing Andersen, and Rene Kallestrup, 2006, Iceland: Geyser Crisis, Economic Research Report, Danske Bank, Copenhagen, Denmark Viðskiptablaðið, 2008, Glitnir opnar fyrir viðskipti með sjóði ný [e Glitnir Reopens for Trading in Funds), Viðskiptablið, Online Edition, September 30 Vísir, 2008, Símarnir raglóandi hjá Glitni í morgun (e The Phones Glowing Red at Glitnir This Morning), Vísir, Online Edition, September 30, Reykjavik Index Adam Smith, 153 Admati, 119, 214 administrative law, 52 AIG, 19 Alistair Darling Darling, 32, 40, 41, 42, 44 Althingi Icelandic Parliament, 41, 45, 47, 48, 55, 56, 61, 144, 192, 224, 225, 226 Althingi’s Ombudsman, 47 Ambassador, 40, 41 annual reports, 33, 161, 171 Anti-terrorism, Crime and Security Act Terrorist Law, 44 Antonio, 131 Armann Thorvaldsson Thorvaldsson, 30 Arni Huldar Sveinbjornsson, 39 Arni Mathiesen Mathiesen, 21, 23, 35, 37, 44 Arni Tomasson Tomasson, 28 Arnor Sighvatsson Sighvatsson, 41 Askar Capital, 26 Asset Liability Committee (ALCO), 29 asset-backed securities, 22, 80, 105 ABSs, 22, 80, 105 ATMs, 45 Austurvollur, 45, 47 Avens, 105 Axel Gislason, 60 bailout, 45 balance sheet, 16, 53, 54, 75, 80, 84, 90, 91, 92, 109, 112, 114, 115, 122, 123, 157, 161, 184, 186, 193, 198 Baldur Gudlaugsson Gudlaugsson, 23, 25, 29, 31, 38, 40 Baldvinsson, 20, 21, 22, 25, 26, 27 Bank of England, 23, 32, 179, 181, 182, 183, 223 Bank of International Settlements (BIS), 181 Bank Recapitalization Fund, 43 banker’s guarantee, 159, 160, 161 Banking Special Provisions, 175 Banking supervisors, 197, 198 bankruptcy, 3, 16, 18, 19, 30, 53, 95, 127, 141, 150, 159, 160, 173 Banque centrale du Luxembourg (BCL), 99, 100 Barclays, 39, 163 base salary, 155, 156 Basel, 103, 184, 185 Baugur Group, 73, 113, 116, 117, 120, 121, 122, 123, 124, 126, 156 Bayerische Landesbank, 20, 70 BBC, 44 BCL, 99, 100, 102, 103, 104 Belgium, 87 Betula, 105 bilateral communications, 40 234 INDEX Bjarni Armannsson Armannsson, 154, 155, 156, 157, 165, 166 Bjorgolfur Gudmundsson, 63, 72, 126, 161 Bjorgolfur Thor Bjorgolfsson Bjorgolfsson, 23, 35, 42, 63, 126, 128, 159, 161 Bjorgvin Sigurdsson, 21, 22, 24, 25, 37 Sigurdsson, 27 Blomaval, 24 Bloomberg, 41 BN Bank, 77 Board of Directors Board, 21, 25, 26, 27, 45, 128, 155, 157 Board of Governors, 21, 22, 23, 24, 32, 33, 41, 42, 63, 93, 173 Bolli Bollason Bollason, 23, 25, 38, 40 bond bond issue, 19, 33, 76, 79, 80, 81, 95, 100, 101, 106, 169, 174 bondholders, 41, 119 Bonus schemes bonus plan, 154 bonuses bonus pay, 8, 54, 119, 154, 155, 156, 165 bounded rationality, 198 Bravo, 71 Britain, 51, 87, 124, 150, 170 British terrorist law, 174 British Virgin Islands, 158 BTC, 127 Bulgarian Telecommunications Company, 127 bullet loan, 72, 134 Bunadarbanki, 59, 61, 62, 63, 64, 68, 69, 70, 71, 72, 73, 75, 157 Búsáhaldabyltingin, 47 BVI, 158 CAD ratio capital adequacy, 151, 152 capital base, 128, 141, 150 capital controls, capital requirements, 152 catching-up process, CDS, 30, 76, 77, 78, 80, 81, 84, 85, 86, 87, 94, 101, 130, 174, 179, 183 CDS premium, 76, 77, 78, 80, 81 CDS spreads, 84, 85, 86, 87, 101, 130, 180 Center for Ethics Studies, 55 Center for Gender Equality, 55 Central Bank, 10, 14, 16, 20, 21, 22, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 41, 42, 45, 46, 59, 53, 54, 83, 87, 88, 91, 92, 94, 95, 96, 97, 131, 170, 182, 185, 186, 191, 192, 195 Central Bank of Iceland (CBI), 9, 20, 23, 43, 44, 71, 77, 80, 81, 83, 92, 93, 101, 102, 103, 104, 106, 132, 134, 151, 170, 171, 173, 174, 176, 179, 180, 181, 182, 183, 185, 186, 187, 191, 192 Chamber of Commerce, 86, 87 Chancellor Darling, 32, 41, 42 Chancellor of the Exchequer, 32 Chief Economist, 27, 41, 195 Chief Justice of Landsdomur, 39 Chinese walls, 49 Coat of arms, 15 cobweb, 4, 110, 112, 120 Cod Wars, 87, 174 cognitive biases, 198 collateral requirements, 7, 131, 191 Collateralized lending, 81, 92, 95, 97, 101, 104, 191 Columbia University, 30, 86 Commission de Surveillance du Secteur Financier, 111 Committee on Privatization (CoP), 60, 62, 63, 64, 67, 68, 69, 70, 71 concentration of credit, 120 conflict of interest, 51 INDEX contagion, 14, 29, 123, 171, 182 co-operative bank, 93 Coordination Group, 29, 30, 31, 33, 53 correlation, 6, 119, 172, 197, 198 counterparty risk, 95, 104 covenants, 28, 33, 174, 175, 177 credit rapid growth of, 5, 6, 9, 10, 11, 55, 77, 78, 80, 84, 104, 109, 112, 137, 170, 196 credit boom, 5, 6, 9, 13, 14, 131 Credit Committee, 72, 113 credit default swap, 94 credit default swaps (CDS), 30, 130, 174, 179 Credit Guarantee Scheme, 43 credit rating, 8, 27, 28, 29, 33, 75, 78, 80, 82, 84, 95, 163, 179 Credit Suisse, 105 CreditSights, 85 cross-funding, 150 cross-ownership, 52, 53, 110, 114, 115, 116, 171, 196 current account balance, 11 cycles economic cycles, 11 Daily Telegraph, 171 Danske Bank, 78, 84 Darling, 40, 41 data warehouse, 49, 53, 110, 173, 189 David Oddsson Oddsson, 14, 20, 61, 77, 83, 101, 103, 173, 179, 181, 183, 185 Dawnay Day, 128 Debenhams, 124 debt repatriation, 150 debt restructuring, 122 delinquent payments, 134, 135, 189 Denmark, 87, 126, 169, 183, 185 deposit holders, 14, 23, 34, 39, 41, 42, 119, 173, 174, 197 deposit insurance, 14, 23, 34, 39, 41, 42, 119, 173, 174, 197 235 Deposit Insurance Fund, 42, 173, 175 Depositors’ and Investors’ Guarantee Fund, 29 depository institution, 93 deposits deposit holders, 14, 23, 34, 39, 41, 42, 119, 173, 174, 197 derivatives, 54 Deutsche Bank, 29, 42, 101 directive European Union Directive, 42 Directives European Directives, 52, 170 discount window, 91 Diversification, 120 diversification, 95, 111, 112 dividend, 4, 54, 126, 166 dividends, 71, 126, 127, 141, 196, 197 due diligence, 61, 66, 69, 95 DZ Bank, 28 Early Warning System, 10 ECB, 97, 99, 100, 101, 102, 103, 104, 105, 106, 174, 181, 182, 183 European Central Bank, 35, 37, 97, 101, 170, 181 economics, 30, 32, 52, 53, 86, 131, 198 Edward Williams Williams, 67, 71 EFTA court, 174 Egla Egla holding company, 72 Eimskip, 127 Einar Sveinsson Sveinsson, 155 Eirikur Gudnason Gudnason, 20, 194 Elin Sigfusdottir, 72 emergency Emergency Law, 36, 38, 39, 40, 41, 43 national emergency, 15 236 INDEX emerging market, 82, 182 EMTN, 75, 76, 77, 78, 81, 82, 175 engineering, 52 Enron, 53 enterprise registry, 53, 54, 112, 113 equity, 7, 19, 21, 23, 28, 33, 34, 35, 45, 69, 71, 72, 93, 112, 117, 119, 120, 123, 126, 128, 134, 137, 141, 145, 150, 151, 152, 154, 155, 156, 157, 158, 160, 161, 162, 163, 183, 191, 195, 197, 198 shareholder’s equity, 75 equity ratio requirements, 7, 134, 160, 161, 183, 197 Eric Talley, 53, 151 Ethics report, 55 EURIBOR, 80 European Economic Area, 42, 44 European Medium Term Note, 75 eurosystem, 104 EVA-Bonus Scheme Economic Value Added, 154 evergreening, executive compensation compensation, 9, 54, 154, 155, 156, 157, 164, 165, 166, 173, 174, 175 Exista, 113, 127, 128, 138 FBA, 8, 60, 61, 65, 73, 75, 154 Federal Reserve, 120, 131, 183 FIH, 40, 77 financial crisis crisis, 9, 13, 15, 16, 18, 48, 50, 83, 88, 99 financial instability, 11, 191 financial oversight, 50, 56, 189, 192 Financial Services Compensation Scheme (FSCS), 174 Financial stability instruments, Financial Stability Forum, 10 financial supervision, 46, 170, 172, 190, 192, 197 Finland, 87, 169 Finnur Ingolfsson, 61, 117 fire insurance, 94 Fitch Ratings, 78, 84 FL, 73, 121, 126, 138, 156, 171 FL Group, 73, 121, 126, 138, 156 FME Financial Supervisory Authority of Iceland, 10, 21, 22, 24, 25, 26, 28, 29, 31, 33, 34, 37, 38, 39, 42, 43, 45, 49, 53, 83, 84, 95, 101, 102, 103, 105, 134, 135, 177, 189, 190, 191, 192, 194, 195 foreign exchange market, 52 Francesco Papadia Papadia, 181 Frank Bisdorff Bisdorff, 103 fraud, 6, 48, 146 Frederick Mishkin Mishkin, 86, 87 French Connection, 124, 126 Fridrik Mar Baldursson Baldursson, 30, 34, 36 FSA Financial Services Authority, 23, 30, 31, 32, 37, 39, 42, 43, 169, 170, 172, 173, 174, 176 FSB Financial Stability Board, 10 FX reserves, 106 Gary Weiss Weiss, 38 Gaumur, 122 Geanakoplos John Geanakoplos, 131, 144, 197 Geir H Haarde Haarde, 14, 21, 186, 187, 193 General Counsel, 24 Germany, 20, 70, 71, 87, 169 Gervimaður útlönd, 126 Geyser Crisis, 83, 84, 86, 92 Geysir, 87 Glitnir, 93 INDEX Glitnir Bank, 14, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 33, 34, 35, 36, 41, 43, 47, 53, 56, 60, 73, 75, 76, 77, 78, 81, 82, 92, 93, 94, 100, 101, 102, 106, 111, 113, 120, 121, 122, 123, 128, 133, 134, 138, 144, 146, 148, 150, 152, 154, 155, 156, 157, 159, 163, 164, 165, 169, 174 Gnupur Gnupur Investment Company, 81 golden parachute, 166 Goldsmiths, 124 Gordon Brown Brown, 36, 37, 44 government bailout, Governor, 14, 20, 21, 22, 23, 25, 26, 27, 28, 31, 32, 33, 37, 41, 42, 49, 77, 83, 93, 101, 102, 103, 105, 173, 179, 180, 181, 183, 184, 185, 187, 191, 194 Governor Oddsson, 21, 23, 24, 25, 26, 27, 28, 31, 32, 33, 37, 41, 49, 78, 93, 102, 103 Governor of the Central Bank, 37, 194 Great Depression, 13 Greta Ingthorsdottir Ingthorsdottir, 40 Gudmundur Axel Hansen, 112 Gudmundur Hansen Hansen, 196 Gudni Adalsteinsson Adalsteinsson, 32 H&A, 70, 71 Haarde, 14, 15, 21, 22, 23, 24, 25, 26, 27, 30, 31, 32, 33, 36, 37, 38, 39, 40, 45, 47, 48, 61, 86, 87, 173, 186, 187 Hagar, 122, 123 Hagkaup, 113, 122 Halldor J Kristjansson Kristjansson, 24, 166 Hamley’s, 124 Hardarson, 25 237 Hauck & Aufhäuser Privatbankiers Hauck & Aufhäuser, 70 HBOS, 19 Hector Sants Sants, 39, 42, 43, 176 Heineken, 71 Hekla, 86 Hellwig, 119 Her Majesty’s Treasury, 175 Herbertsson, 22, 23, 24, 26, 34, 36 Heritable Bank, 35, 44, 172 High Court of Justice, 175 holding company, 25, 26, 60, 69, 72, 113, 120, 122, 130, 132, 133, 134, 137, 161, 196, 197 companies, 4, 110, 111 House of Fraser, 124 Hreidar Mar Sigurdsson, 22, 32, 39, 97, 146, 166, 176 HSBC, 62, 63, 64, 65, 66, 67, 68, 70, 71 human capital, 17 IAS International Accounting Standards, 160 Icebank, 93, 94, 95, 96 Icelandic Parliament Althingi, 47 Icelandic State Mortgage Fund (ISMF), 106 Icelandic Stock Exchange Stock Exchange, 62 Icelandic Treasury, 76 Icesave, 35, 78, 80, 87, 100, 169, 170, 171, 172, 173, 174, 175 IFRS International Financial Reporting Standards, 141, 160 IKEA, Illum-Bolighus, 126 IMD, 154 IMF International Monetary Fund, 4, 5, 7, 9, 10, 11, 34, 36, 37, 38, 45, 83, 181, 183, 186, 187 238 impunitists, 196 incentives incentive plan, 49, 52, 53, 117, 153, 154, 155, 157, 163, 196, 197, 198 income tax, 162 Independence Party, 48, 49, 59, 63 indictments, 146 inflation, 11, 51, 84, 134 ING Direct, 45 Ingibjorg Palmadottir Palmadottir, 126 Ingibjorg Solrun Gisladottir Gisladottir, 21, 173, 176 Ingimundur Fridriksson Fridriksson, 20, 37, 101, 103, 179, 180, 181 IPO initial public offering, 60 Iris Hreinsdottir, 39 Irish way, 29 Islandsbanki, 73, 193 Isle of Man, 169 iTraxx-Europe, 85 J.C Flowers, 42, 43 Jean-Claude Trichet Trichet, 101, 181, 182 Jensen, 153, 155 Johan Bergendahl Bergendahl, 38 Johanna Sigurdardottir Sigurdardottir, 25, 48 Johannes Baldursson, 20 John Gieve, 179 John Paul Getty, 54 Jökulhlaup, 86 Jon Asgeir Johannesson Johannesson, 28, 113, 126, 156 Jon Pain, 31, 42 Jon Sigurdsson, 37 Jon Sigurgeirsson Sigurgeirsson, 21, 22, 101 Jon Steinsson Steinsson, 30, 32, 33, 34, 36 INDEX Jon Thor Sturluson Sturluson, 22, 36 Jonas Fr Jonsson Jonsson, 21, 85, 101, 103, 105, 194 Jonina Larusdottir Larusdottir, 30, 38, 39 Jonsson, 21, 22, 29, 31, 32, 49, 85, 101, 102, 105 JP Morgan, 20, 35, 38, 39, 61, 78 Kaldbakur, 64, 65, 66, 67, 68, 69 Karen Millen, 124 Karl Axelsson, 28 Karl Wernerson Wernerson, 25 Kaupthing, 19, 21, 22, 23, 24, 26, 28, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 41, 42, 43, 44, 45, 47, 53, 56, 59, 72, 73, 75, 77, 79, 81, 82, 84, 85, 87, 92, 93, 97, 100, 101, 102, 111, 113, 121, 122, 126, 127, 128, 130, 133, 134, 138, 141, 142, 144, 145, 146, 148, 150, 152, 159, 162, 163, 164, 165, 169, 174, 175, 176 Kaupthing Edge, 28, 39, 42, 43, 45, 81, 169, 175, 176 Kaupthinking, 176 KB Banki, 73 Kimball Associates, 161 Kitchenware Revolution, 47 Kjalar, 128 KPMG, 111 Kristin Astgeirsdottir, 55 Kristjan Gunnar Valdimarsson Valdimarsson, 158 KSF Kaupthing Singer & Friedlander, 31, 32, 33, 39, 42, 43, 44, 175, 176, 177 Landsbanki, 19, 22, 23, 24, 26, 29, 30, 33, 34, 35, 36, 40, 41, 42, 44, 47, 53, 56, 59, 60, 61, 62, 63, 64, 66, 67, 71, 72, 73, 75, INDEX 76, 77, 78, 79, 80, 85, 86, 87, 88, 92, 93, 100, 101, 102, 104, 105, 106, 113, 114, 121, 126, 127, 133, 134, 135, 138, 144, 148, 150, 157, 158, 159, 160, 161, 162, 163, 164, 165, 169, 170, 171, 172, 173, 174, 175, 180, 192, 193 Landsdomur, 39, 187, 188 large exposures, 119, 121, 123, 124, 170 Lars Gustavsson, 61 LB Holding, 157 Lebanon, legal form, 192 Lehman, 19, 22, 53, 85, 99, 174 Lehman Brothers, 19, 22, 53, 85, 99 lender of last resort loan of last resort, 14, 21, 22, 23, 174, 175, 176 LFG, 60 liberalization financial liberalization, 59 LIBOR, 72, 76, 87, 101, 130, 164 liquidity foreign liquidity, 11, 15, 28, 29, 30, 31, 33, 35, 39, 41, 42, 43, 76, 77, 91, 92, 93, 95, 97, 104, 162, 170, 174, 175, 176, 181, 182, 183, 191, 195 Lloyds TSB, 19 Logadottir, 24, 25 London, 30, 35, 40, 44, 45, 60, 63, 67, 77, 78, 79, 83, 172, 180 London Gazette, 130 London Stock Exchange, 60 longer term refinancing, 92 looting, Louis Brandeis Brandeis, 196 Love Letters, 91, 93, 95, 97, 100, 101, 103, 104, 105 Luxembourg, 70, 97, 99, 100, 101, 102, 103, 111, 127, 128, 158, 165, 169 239 macroeconomic stability, 11 Magasin du Nord, 126 Magnus Gudmundsson, 165 Magnus Thorsteinsson, 63, 126 main refinance operations, 97 mandatory takeover, 67, 124, 161 Marcus Capital, 157 Margret Bjarnadottir Bjarnadottir, 112, 196 Mark Flannery, 52 market manipulation, 53, 146, 159 market risk, 52, 93, 95 Markus Sigurbjornsson, 39 Meckling, 153, 155 Merchant of Venice, 131 Merrill Lynch, 78, 84 Mersch, 102, 103, 104, 105 Mervyn King King, 179, 182, 183, 184 Michael Ridley Ridley, 38 Milestone, 25, 26 Minister for Foreign Affairs, 21, 24 Minister for Social Affairs, 25 Minister of Commerce, 21, 22, 24, 25, 27, 31, 36, 37, 38, 39, 61, 62, 63, 67, 70, 87, 117, 194 Minister of Finance, 21, 23, 24, 35, 37, 38, 40, 41, 42, 44, 45, 48, 51, 61, 193 Minister of Foreign Affairs, 173 Minister of Industry, 21, 24, 25, 31, 34, 36, 37, 38 Ministry of Commerce, 29, 30, 38, 39, 53, 60, 61, 63 Mishkin report, 86, 87 Mitchells & Butlers Ltd., 42 monetary policy, 131, 186, 195 money market, 28 monopoly, 93 Moody’s, 28, 30, 75, 79, 80, 85, 160, 179 Morgunbladid, 127 motivated reasoning, 50 motive for self-enhancement, 50 mutual funds, 52, 179 240 INDEX National Treasury, 16, 17, 78, 84 National University Hospital, 41 nationalization, 23 nationalized, 14, 26 natural resources, 17 negative pledge, 137 negligence, 48, 193 Netherlands The Netherlands, 23, 87, 150, 169 New York, 13, 18, 21, 22, 79, 183, 187, 209 New York City New York, 13, 18, 21, 22, 79, 183, 209 Nicolas Weber Weber, 103 non-performing-loans (NPL), 135, 190 Nordea, 19, 20 North Carolina, 13 Northern Rock, 171 Norway, 19, 20, 77, 87, 169, 183, 185 NYSE, 87 OECD, 10, 78, 84 offshore companies, 53, 158, 159 Olafur Olafsson Olafsson, 128 oligarchs, 196 Opposition Opposition in Parliament, 51 option grants, 55 options exercised options, 18, 22, 23, 26, 34, 35, 36, 54, 153, 157, 158, 159, 160, 161, 162, 164, 166 organic growth, 109 Ossur Skarphedinsson Skarphedinsson, 21 Ottar Gudjonsson, 60 over-the-counter (OTC), 142 Pall Hreinsson Hreinsson, 47 Palsson, 20, 22, 23, 27, 28, 29, 30, 77 Panama, 158 parliament, 17, 39, 41, 45, 47, 48, 51, 52, 56, 172 Paul Tucker, 183 Tucker, 181 pay-for-performance, payment systems, 23, 31 penal code, 146 Peng, 154 pension funds, 16, 30, 34, 43, 189 permanent secretary of Ministry of Finance, 23, 24, 25, 29, 30, 31, 38, 40, 61 personal guarantee, 163 personal liability, 21 Petur Snaeland Snaeland, 3, 4, 198 political science, 52 positive self-regard, 50 President of Iceland, 41 PriceWaterhouseCoopers (PWC), 111 primacy of claims, 41 Prime Minister, 14, 15, 18, 21, 22, 23, 24, 25, 26, 30, 31, 32, 33, 34, 36, 37, 38, 40, 44, 45, 47, 48, 61, 62, 63, 77, 86, 87, 93, 173, 186, 187, 193 Prime Ministry, 10, 22, 23, 24, 25, 29, 33, 34, 38, 40, 53, 83 privatization, 119 process, 6, 37, 59, 60, 61, 63, 67, 70, 93, 95, 109, 190, 193, 209 privatization of gains, 119 Progressive Party, 59, 63 proprietary trading, 142, 146 prop-traders proprietary trading, 142, 146 Proteus Global, 157 Proteus Holding, 161 provisioning dynamic, Prudential Policies, 7, 83 prudential policy instruments, Pseudo-person Abroad, 126 put option, 160, 162, 163 INDEX Ragnar Onundarson, 28 Raiffeisen-Boerenleenbank, 106 R AND, rates of return, 6, 119 Ravi, 42 Red Cross the Red Cross, 157 regulator, 135, 169, 170, 174, 175, 176, 177 regulatory gambling, repurchase agreements REPO, 29, 91, 92, 170 rescue package, 16, 90 reserve requirements, 7, 91, 191 resolution committee, 42, 43, 45, 175, 177 return on equity (ROE), 155, 156 Reuters, 171 Reykjavik University, 30, 33 Robert Tchenguiz Tchenguiz, 128 Roell, 154 Royal Bank of Scotland (RBS), 79 Russia, 41, 63, 71 RUV, 27 Salvor Nordal Nordal, 55 Samherji, 68 Samson group Samson, 63, 64, 65, 66, 67, 71, 72, 161 Save&Save, 169 savings retirement savings, 4, 17, 28, 42, 93, 172 savings and loans association, 93 Savior of Iceland, 39 Scandinavia, 3, 90, 101, 179, 187 Scandinavian, 101, 102, 103, 185, 187, 188 securities registry, 54 securitized debt obligations, 54 self-lending, S-group, 64, 65, 66, 67, 68, 69, 70, 72, 73 Shakespeare, 131 241 Shylock, 131 Sigridur Benediktsdottir Benediktsdottir, 39, 47 Sigridur Logadottir Logadottir, 24, 25 Sigurdur Einarsson Einarsson, 32, 101, 102, 145, 146, 163, 165, 166 Sigurjon Arnason, 35, 70, 101, 102, 158, 162, 169, 173 Skandinaviska Enskilda Banken (SEB), 60 Skarphedinn Berg Steinarsson Steinarsson, 67, 71 Skarphedinsson, 21, 24, 25, 31, 34, 35, 36, 37, 38 social psychology, 52, 55, 154 social security number, 110 socialization of losses, 119 Société Générale SocGen, 69, 70 sociology, 52 Solon Sigurdsson, 72 Sovereignty, 185, 186 speaker of Parliament, 51 special high court Landsdomur, 187 Special Investigation Commission (SIC), 4, 13, 47, 56, 59, 65, 83, 93, 97, 109, 120, 137, 193, 195 Special Prosecutor, 49, 146 special purpose vehicles (SPV), 4, 53, 94, 105, 112, 122, 146, 157, 196 Standard & Poor’s, 27 State Auditor’s office, 67 State Budget, 19, 87 statistics, 8, 52, 190, 195, 198 Statistics Iceland, 195 Stefan Ingves Ingves, 183, 184 Stefan Svavarsson, 29, 35 Steingrimur Ari Arason Arason, 67 Steingrimur J Sigfusson Sigfusson, 51 242 INDEX Steinsson, 20, 23, 30, 31, 32, 36 stock market, 52, 53, 77, 141, 145, 154, 158 stock ownership, 55 Stodir, 24 Strata, 113 Straumur, 159, 161 Straumur-Burdaras Straumur, 23, 24 stress test, 95 structured products, 104, 105 Sturla Bodvarsson Bodvarsson, 51 Sturla Palsson Palsson, 20, 22, 23, 77, 83, 95, 101, 102, 103, 183 Sturla Sigurjonsson, 40 Subprime Crisis Subprime, 12 sub-prime loans, 15 Sumitomo Bank, 28 Svein Andresen, 10 swap, 97, 102, 105, 106, 130, 163, 170, 174, 176, 179, 181, 182, 183, 184, 185, 186, 187, 188 Sweden, 60, 87, 169, 183, 184, 185 Swedish way, 29 Switzerland, 70, 103, 154, 169 systemic risk, 23, 46, 53, 134 tax authorities, 54, 126 tax records, 53, 126 tax regime, 51 taxpayers, 16, 28, 96 The Sunday Times, 171 Thora M Hjaltested, 39 Thorarinn G Petursson Petursson, 41, 192 Thordur Fridjonsson, 61 Thorsteinn Mar Baldvinsson Baldvinsson, 20 Thorsteinsson, 20, 23, 27 Timothy Geithner Geithner, 183 too-big-to-fail, 80 too-big-to-save, 80 Toplux Holding, 113 TRS total return swap, 163, 164 Tryggvi Gunnarsson, 47 Tryggvi Palsson, 28, 29, 30, 31, 101 Tryggvi Thor Herbertsson Herbertsson, 22, 24, 26, 34, 36, 86 tunneling, 119, 120, 154, 196 tunnel money, Turner Review, 192 UK, 23, 32, 35, 36, 37, 40, 42, 43, 44, 78, 87, 169, 170, 171, 172, 174, 175, 176, 183 United Kingdom, 36 UK authorities, 32, 36, 44 UK Deposit Insurance, 172 UK government, 43, 44 unemployment, 51, 84, 195 univariate analysis, University of Iceland, 55 unsecured bonds, 93, 95 US military base military, USMTN, 78, 79, 81, 82 Valgerdur R Benediktsdottir, 39 Valgerdur Sverrisdottir Sverrisdottir, 63 Vidskiptabladid, 80, 171 Vilhelm Mar Thorsteinsson Thorsteinsson, 20 Vilhjalmur Arnason Arnason, 55 VIS, 60, 68 Vladimir Putin, 41 Wall Street, 77 Washington DC, 4, 37, 45 Washington Mutual, 38, 53 Welding, 20, 21, 22, 25, 35, 101, 102, 156 wholesale deposits, 77, 169, 173 INDEX William C Black Black, 117 withdrawals, 39, 81, 91 Wittard of Chelsea, 124 worst-case scenario, 6, 7, 10, 16 Yale University, 47, 131 Yves Mersch Mersch, 102, 103 zero coupons, 134, 135, 136 243 .. .BRINGING DOWN THE BANKING SYSTEM This page intentionally left blank Bringing Down the Banking System Lessons from Iceland Gudrun Johnsen BRINGING DOWN THE BANKING SYSTEM Copyright © Gudrun Johnsen, ... system : lessons from Iceland / Gudrun Johnsen pages cm Bank failures Iceland History—21st century Banks and banking Corrupt practices Iceland History—21st century Bank management— Iceland History—21st... case of the fallen systemically important Icelandic banks, creditors and the rest of society bore most of the risk In a remarkably short period of time after privatization, the Icelandic banking