Fury in Iceland as Disgraced Banking Moguls Request Loan Write-off

The Icelandic nation reeled with indignation and fury last week when
news broke that two of its disgraced banking moguls had requested that
about half of an ISK 6 billion [USD 47 million] loan be written off by
now-nationalized bank Kaupthing.

The moguls in question are father-son team Bjorgolfur Gudmundsson and
Bjorgolfur Thor Bjorgolfsson, who in 2003 swept in to acquire a
controlling stake in Icelandic bank Landsbanki, which was in the
process of being privatized at the time. The "two Bjorgolfurs," as
they're frequently referred to in Iceland, had made their money in
Russia over the previous decade. Prior to that, however, Bjorgolfur
Sr. had been convicted of bookkeeping offences in one of Iceland's
largest corruption scandals and received a conditional 12-month
sentence. His return to Iceland at the time was therefore seen as a
triumph - a sort of redemption.

The privatization process itself was riddled with corruption
allegations. The government had decided to privatize two of Iceland's
largest commercial banks - the century-old Landsbanki, a banking
institution as solid and reputable as they come, and Bunadarbanki (now
called Kaupthing). The privatization was undertaken on very clear
terms: distributed ownership, so that no one large investor could have
too much control. After all, the move was designed to be a step up
from the status quo, in which the state (read: the political sector)
had for years had undue power to decide who should receive favor from
the 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 the
committee abruptly resigned, stating that the terms of the
privatization had been grossly violated and that the leaders of the
two coalition parties in government were intervening excessively in
its execution. He famously remarked that never in his life had he
encountered working practices of the sort that were being employed in
the privatization process and he refused to be a part of it.

A short while later, Landsbanki and Bunadarbanki were both sold. A
controlling share in the former was sold to the holding company
Samson, owned by the two Bjorgolfurs plus a business partner, who were
favored by the Independence Party (IP). A deal was allegedly struck
between the Bjorgolfurs and the IP that the former would install
high-ranking party members as bank executives and continue to grant
favors to IP members and their supporters. This was followed by the
swift appointment of the IP's executive secretary as vice-chairman of
the Landsbanki board, alongside Bjorgolfur Gudmundsson as chairman.

Bunadarbanki (now Kaupthing) was subsequently sold in large part to
brothers Agust and Lydur Gudmundsson, who were favored by the
Progressive Party -- the party that made up the other half of the

In a classic case of incestuous nepotism - so prevalent in the
Icelandic commercial sector of the past several years - Bunadarbanki
loaned Samson some ISK 6 billion to acquire the share in Landsbanki.
This is the very same loan that the two Bjorgolfurs have now requested
be written off by half.

Of course, as those who have been following the sorry demise of
Iceland's banking system will know, Landsbanki was driven into the
ground by its owners and management in the years following the
privatization. Today, six years later, the Icelandic nation presides
over the charred remains of a bank that previously had a spotless
reputation and endless goodwill. As if that were not enough, the debts
incurred by Landsbanki -- partly acquired on the strength of
Landsbanki's stellar reputation -- are too colossal for a normal person
to comprehend. This was the bank that launched the ill-fated Icesave
online savings accounts
in the UK and Netherlands, which are already
the cause of heavy social dissent in Iceland and look set to drive the
nation into severe hardship and poverty in coming years. To add insult
to injury, it has been revealed that the banker who headed the loans
department at Bunadarbanki and was instrumental in approving the loan
to Samson, one Sigurjon Th. Arnason, was subsequently made CEO of
Landsbanki 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 in
) would like the loan they took to finance the bank they ruined
to be written off by the Icelandic people, who are already saddled
with debts amounting to billions of US dollars as a result of their
mismanagement. Not only that, it has transpired that the mere
dividends that the pair received in the six years they owned
Landsbanki were higher than the amount that they would now like to
have written off. Meanwhile, in the six years that they owned the bank
they went on to purchase a private jet, a UK soccer team, and a sundry
of other toys and businesses - yet they did not see reason to pay up
their loan.

Predictably, there was a public roar of indignation in Iceland when
news of the proposed loan write-off surfaced. So great was the fury
that Kaupthing bank saw reason to break the bank secrecy code and to
issue a statement - saying that no - and repeating NO - decision had
yet 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 the
Bjorgolfurs to pay off only half their debt was being considered
"viable" within the bank). This came in the wake of news that
Kaupthing employees - including Kaupthing's CEO and his wife - had
been the target of threats after the news broke.

Even Iceland's Finance Minister Steingrimur J. Sigfusson was quoted in
one of the main daily papers as saying that, as a regular citizen of
this country, he felt that this debt was "the last thing under the
sun" that should be written off (but emphasized that, "in his role as
minister", he could not comment on the situation). The paper also
spoke to Gylfi Magnusson, Minister of Banking Affairs, who claimed he
had "choked" when he read the news, and said that he would - like most
Icelanders - find such a write-off "a hard thing to swallow".

Possibly the understatement of the year. Others have warned that, if
the loan is written off, massive civil unrest is imminent and, at the
very least, people will, en masse, stop their own loan payments to the
banks. Personally I think it would be the spark that could set off an
explosion of anger in this country, similar to the Rodney King ruling
that sparked the LA riots back in 1992. Kaupthing is totally playing
with fire.