The Icelandic nation reeled with indignation and fury last week whennews broke that two of its disgraced banking moguls had requested thatabout half of an ISK 6 billion [USD 47 million] loan be written off bynow-nationalized bank Kaupthing.
The moguls in question are father-son team Bjorgolfur Gudmundsson andBjorgolfur Thor Bjorgolfsson, who in 2003 swept in to acquire acontrolling stake in Icelandic bank Landsbanki, which was in theprocess of being privatized at the time. The "two Bjorgolfurs," asthey're frequently referred to in Iceland, had made their money inRussia over the previous decade. Prior to that, however, BjorgolfurSr. had been convicted of bookkeeping offences in one of Iceland'slargest corruption scandals and received a conditional 12-monthsentence. His return to Iceland at the time was therefore seen as atriumph - a sort of redemption.
The privatization process itself was riddled with corruptionallegations. The government had decided to privatize two of Iceland'slargest commercial banks - the century-old Landsbanki, a bankinginstitution as solid and reputable as they come, and Bunadarbanki (nowcalled Kaupthing). The privatization was undertaken on very clearterms: distributed ownership, so that no one large investor could havetoo much control. After all, the move was designed to be a step upfrom the status quo, in which the state (read: the political sector)had for years had undue power to decide who should receive favor fromthe banks, and who should not.
Before the privatization of the two banks was completed, however,there was an uproar in the privatization committee. The head of thecommittee abruptly resigned, stating that the terms of theprivatization had been grossly violated and that the leaders of thetwo coalition parties in government were intervening excessively inits execution. He famously remarked that never in his life had heencountered working practices of the sort that were being employed inthe privatization process and he refused to be a part of it.
A short while later, Landsbanki and Bunadarbanki were both sold. Acontrolling share in the former was sold to the holding companySamson, owned by the two Bjorgolfurs plus a business partner, who werefavored by the Independence Party (IP). A deal was allegedly struckbetween the Bjorgolfurs and the IP that the former would installhigh-ranking party members as bank executives and continue to grantfavors to IP members and their supporters. This was followed by theswift appointment of the IP's executive secretary as vice-chairman ofthe Landsbanki board, alongside Bjorgolfur Gudmundsson as chairman.
Bunadarbanki (now Kaupthing) was subsequently sold in large part tobrothers Agust and Lydur Gudmundsson, who were favored by theProgressive Party -- the party that made up the other half of thecoalition.
In a classic case of incestuous nepotism - so prevalent in theIcelandic commercial sector of the past several years - Bunadarbankiloaned Samson some ISK 6 billion to acquire the share in Landsbanki.This is the very same loan that the two Bjorgolfurs have now requestedbe written off by half.
Of course, as those who have been following the sorry demise ofIceland's banking system will know, Landsbanki was driven into theground by its owners and management in the years following theprivatization. Today, six years later, the Icelandic nation presidesover the charred remains of a bank that previously had a spotlessreputation and endless goodwill. As if that were not enough, the debtsincurred by Landsbanki -- partly acquired on the strength ofLandsbanki's stellar reputation -- are too colossal for a normal personto comprehend. This was the bank that launched the ill-fated Icesaveonline savings accounts in the UK and Netherlands, which are alreadythe cause of heavy social dissent in Iceland and look set to drive thenation into severe hardship and poverty in coming years. To add insultto injury, it has been revealed that the banker who headed the loansdepartment at Bunadarbanki and was instrumental in approving the loanto Samson, one Sigurjon Th. Arnason, was subsequently made CEO ofLandsbanki and became the mastermind behind the Icesave accounts.
And now, Bjorgolfur Gudmundsson and son Bjorgolfur Thor Bjorgolfsson(who was pictured a few short weeks ago hob-knobbing on a yacht inCannes) would like the loan they took to finance the bank they ruinedto be written off by the Icelandic people, who are already saddledwith debts amounting to billions of US dollars as a result of theirmismanagement. Not only that, it has transpired that the meredividends that the pair received in the six years they ownedLandsbanki were higher than the amount that they would now like tohave written off. Meanwhile, in the six years that they owned the bankthey went on to purchase a private jet, a UK soccer team, and a sundryof other toys and businesses - yet they did not see reason to pay uptheir loan.
Predictably, there was a public roar of indignation in Iceland whennews of the proposed loan write-off surfaced. So great was the furythat Kaupthing bank saw reason to break the bank secrecy code and toissue a statement - saying that no - and repeating NO - decision hadyet been made on whether the loan would or would not be written off.(In the initial news item it was reported that the proposal by theBjorgolfurs to pay off only half their debt was being considered"viable" within the bank). This came in the wake of news thatKaupthing employees - including Kaupthing's CEO and his wife - hadbeen the target of threats after the news broke.
Even Iceland's Finance Minister Steingrimur J. Sigfusson was quoted inone of the main daily papers as saying that, as a regular citizen ofthis country, he felt that this debt was "the last thing under thesun" that should be written off (but emphasized that, "in his role asminister", he could not comment on the situation). The paper alsospoke to Gylfi Magnusson, Minister of Banking Affairs, who claimed hehad "choked" when he read the news, and said that he would - like mostIcelanders - find such a write-off "a hard thing to swallow".
Possibly the understatement of the year. Others have warned that, ifthe loan is written off, massive civil unrest is imminent and, at thevery least, people will, en masse, stop their own loan payments to thebanks. Personally I think it would be the spark that could set off anexplosion of anger in this country, similar to the Rodney King rulingthat sparked the LA riots back in 1992. Kaupthing is totally playingwith fire.