After months of eager anticipation and numerous delays, the investigative committee created by Iceland's legislature to investigate the dramatic collapse of the country's financial institutions will release its report tomorrow. Amazingly, there have been no leaks of any of the reports 2,000 pages, so the report's contents will hit with full force.
Human nature being what it is, however, the individuals and organizations that are expected to be portrayed negatively in the report have started distancing themselves from responsibility. Davíð Oddsson, who was Iceland's Prime Minister when the banks were privatized and the Head of its Central Bank when the banks collapsed, has gone overseas, despite the fact that he is now the editor-in-chief of Iceland's leading newspaper. Presumably, his answers to the committee were similar to those given by for American Central Bank chairman Alan Greenspan in his testimony before Congress last week: "I was right 70 percent of the time, but I was wrong 30 percent of the time."
"The report will probably tell us what we already suspect and even know," Lára Hanna Einarsdóttir, one of the country's most prominent bloggers, said. "It will definitely add something in terms of factual knowledge, and it will probably tell us more about the part politicians played. The question about who the chief culprits are will not be directly answered; it will be interesting to see how different factions will interpret that part. Each group will try to protect "their men" and try to exaggerate the part of others."
Undoubtedly, mistakes were made. The sheer scope of Iceland's failure is indisputable proof of that. And yet, no one has accepted personal responsibility for any error in judgment or oversight. No criminal charges have been filed. No fines have been assessed.
Although it's highly unlikely that any revelations in the so-called "Black Report" will cause anyone to publicly repent and beg forgiveness, Iceland appears to be approaching a tipping point -- perhaps people who were "in the know" will finally start coming forward with personal information -- former Glitnir accountants, attorneys, employees - something that really hasn't happened. "I cannot describe how much I hope for that," said Einarsdóttir. "It is so sorely needed. There are so many people who know so many things but have not said a word. I often hear it said that these people are afraid - the "fear society" is still alive and well, you know. And people are afraid to lose [their livelihood], the risk is enormous, that is obvious."
The complexity and the scope of the fraud perpetrated are unprecedented, and Iceland's resources following the collapse in October 2008 were compromised, to say the least. The regulatory agencies had been overwhelmed by the rapid growth of Iceland's financial institutions, and experienced heavy turnover, as their employees left to work at the banks they had been charged with regulating. They were highly politicized and had no incentive to shut the light off while the party was going full bore.
As Gunnar Andersen, the current director of the Financial Supervisory Authority (FME), recently told me:
"It is clear now that the financial information presented in annual reports, in annual accounts, the yearly reports did not really reflect the true situation as we now know, with all the write-offs that the banks have gone through. ... [T]he banks were very large and had a lot of influence on society as a whole, and the FME was understaffed and had huge turnover, it was very difficult to regulate and to supervise and regulate those entities effectively -- because they grew so fast between 2000 and 2008 and the assets of the regulated entities in Iceland grew by 554% while the staff here only doubled -- we also lost a lot of people to the banks. The FME was a training ground for lawyers and others."
The tax and regulatory authorities have been reorganizated under the government that took power after the Pots-and-Pans revolution in January 2009. It has taken time to find unbiased individuals capable of untangling the webs woven by the scheme leaders, but they are getting up to speed and appear close to cracking down on the worst offenders.
Last week, the resolution committee of Glitnir -- one of the three banks that failed -- brought suit against the owners of the majority of the bank's stock--Jón Ásgeir Jóhannesson and Pálmi Haraldsson -- and four prominent bank executives -- three of whom are still employed there -- to recover ISK 6 billion they allegedly owe. The committee used the services of Kroll, an international fraud investigation company, to identify questionable arrangements and to hunt down purloined assets.
Ólafur Thór Hauksson, the special prosecutor appointed to investigate potential criminal activity in connection with the banks' collapse, had little experience in financial crime. With the help of internationlly-known white collar criminal prosecutor, Eva Joly, and their staff, Ólafur has been methodically examining the bank books and other relevant documents and started conducting raids in Iceland and abroad earlier this year. Although Ólafur and Eva have both warned the public that these things take time, it would be reasonable to assume that the first round of indictments are forthcoming.
Although many within Iceland do not believe that the Black Report will have any effect on the old Icelandic power structure, I believe that it will be an important brick in the wall of a new structure for governing Iceland. The gross abuses of the past decade were possible only because of a complete lack of transparency and oversight. Public disclosure of the incompence and fraud that led to the worst recession our country has known in recent times is necessary to ensure that in the future, bankers, businessmen, regulators, and politicians realize there are adverse personal consequences for their dishonest actions and lax oversight.
There is a human tendency to want to move on, to sweep unpleasant episodes under the rug and act like everything is hunky dory. We cannot allow this to happen this time. To learn from our mistakes, we must first understand exactly what those mistakes were and how they were permitted to happen. Only then can we set up institutions and legislation to preclude their recurrance and develop enforceable ethical principles to ensure that licensed professionals (lawyers, accountants, etc.) do not facilitate abusive practices.
It would be a pipedream to expect the worst offenders to come forth and assist us in this quest. Accordingly, we must, as a people, decide exactly what we want. The Þjóðfundur--or the "Anthill"--that met in November 2009 decided that integrity was the Iceland's single most important value. I can't imagine how we can develop a society based on that concept until the individuals that failed us man-up and accept responsibility for their actions. It may mean that some of them will go to prison; it may mean that they will lose their fortunes. There can be no responsibility without personal loss proportionate to their ill-begotten gains.
Andersen acknowledges that "we've had a lot of difficulties, but that doesn't relieve the FME of all responsibility because frankly, it should have dug deeper and much more critically." To this end, Andersen tells me that the FME has added a forensic accounting department, and is developing significant institutional expertise in analyzing financial reports. New legislation similar to that proposed in the United States have been proposed to limit the risk to which banks can subject themselves. It would give the FME wider authority, and introduce certain limitations and restrictions on some of the things that led to the crash, such as the banks taking loan shares of collateral for loans that were dispersed specifically for buying their shares in the same institutions. It would also impose stricter requirements on internal auditors and their qualifications and on the participation of the banks in corporate activities through ownership.
To his credit, Bjarni Benediktsson, the new leader of the Independence Party, which was in power during the entire period of lax regulatory oversight, has called off the dogs in his party and stated that they must take the Black Report extremely seriously and try to learn from its findings. However, his party has much to answer for and should not be allowed to resume its rule of Iceland with a simple apology, though that would be a good start. It and all other political parties must publicly repudiate the leaders who used their political power for personal gain, as well as those whose irresponsible oversight brought Iceland to the brink. They must provide a set of principles to guide Iceland to a fairer future.
As Andersen and others have acknowledged, Iceland's return to financial stability is not guaranteed. Factors outside of our control may keep us from ever regaining the level of prosperity we knew in 2007. However, it is within our power to ensure that our society regain some level of self-respect and of fairness. The Black Report will not, by itself, transform our political system. However, it is an important piece of the puzzle.
Warren Buffett once observed that "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." The reputation we had built over the centuries was destroyed by the irresponsible acts of a few individuals. Rebuilding it will be long, slow, but necessary, work.