Iceland: what ugly secrets are waiting to be exposed in the meltdown?
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The leak of Kaupthing's loan book revealed unusual lending practices
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Eva Joly, a fraud expert, believes her investigation will be the biggest in history of a banking collapse
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Bjorgolfur Gudmundsson (pictured centre) owned a 45pc stake in Landisbanki and at one point owned West Ham
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Jon Asgeur Johannesson and related business associates had control of Glitnir
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Demonstrators outside the Icelandic Parliament building. Ordinary citizens have been hit hard by the economy's collapse
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The sharp drop in the Icelandic kronur has proved helpful to the economy
For months rumours of share-ramping, market manipulation, excessive loans to their owners and unusual transfers off-shore have been
circling Kaupthing, Glitnir and Landsbanki, whose failure last October left 300,000 British customers unable to access their money.
It has now become clear that this was no ordinary crash. Iceland's special investigation into "suspicions of criminal activity" at the three banks is likely to stretch from Reykjavik to London, Luxembourg and the British Virgin Islands.
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Eva Joly, the French-Norwegian MEP and fraud expert hired by Iceland and now working with the Serious Fraud Office, now believes it will be "the largest investigation in history of an economic and banking bank collapse".
Many of the banks' secrets are likely to be inextricably bound up with corporate Britain and the success of these investigations in tracing and recovering assets is likely to affect every UK household.
Local authorities lost £1bn – or 5pc of all the money from council tax – in the over-leveraged institutions, leaving many facing the prospect of drastic cuts in services or steep hikes next year as they wait for the proceeds of the banks' administration to dribble through.
Although the Treasury can barely afford the UK's own bailout, it was forced to pay out £7.5bn to British savers who had internet accounts with Landsbanki's Icesave and Kaupthing's Edge with the uncertain prospect of getting the money back.
It now looks like Icelandic MPs will agree to pay £2.3bn to the Treasury to reimburse British savers up to the value of 20,887 euros (£18,054).
Not only did local authorities, charities and savers have billions tied up in its bank accounts, but a number of the City's wealthiest investors, from Robert Tchenguiz and the Candy Brothers to Kevin Stanford and Simon Halabi received hefty corporate loans from these insititutions.
But among the worst affected by the crisis are 10,000 savers with £840m tied up in Kaupthing in the Isle of Man and 2,000 savers with £117m in Landsbanki in Guernsey. All lost their entire savings with no compensation. Many are still waiting in line with a queue of commercial creditors.
When the banks were put into administration last October, experts believed that Iceland's banks had simply fallen prey to the global credit crisis.
But Dr Jon Danielsson, an Icelander who teaches economics at the London School of Economics, believes that while the timing of the crash was dictated by the global banking crisis, the scandal is unique among European financial institutions.
He believes the root of Iceland's problems that have now decimated its economy appear to have started when the government decided to privatise the banks in the early 1990s.
"Iceland got its regulations from the EU, which was basically sound," he says. "But the government had no understanding of the dangers of banks or how to supervise them. They got into the hands of people who took risks to the highest possible degree."
Kaupthing fell into the clutches of the Gudmundsson brothers, Ágúst and Lydur, who made their fortunes building up the Bakkavor food manufacturing empire, which supplies hundreds of supermarkets in the UK. Their investment vehicle, Exista, owned 23pc of the bank, counting Robert Tchenguiz, the London property entrepreneur as a board member.
Kaupthing's loan book, which was leaked on to the internet last week, shows that around one third, or €6bn (£5.1bn), of its €16bn corporate loan book was going to a small elite of men connected to the bank's owners and management.
Several investigations into Kaupthing centre on share ramping, where the bank would allegedly give loans with no interest or security in order to buy shares in that same bank – boosting the share price.
One particularly murky incident revolves around the acquisition of a 5pc stake in Kaupthing by a company called QFinance linked to Mohammed bin Khalifa Al-Thani, the Sheikh of Qatar. Several weeks before the banks collapsed, a press release stated that the transaction showed that "Kaupthing's position is strong and we believe in the bank's strategy and management."
Only after the bank collapsed several weeks later did it emerge that the Qatari investor "bought" the stake using a loan from Kaupthing itself and a holding company associated with one of its employees. The bank appears, in effect, to have been purchasing its own shares, which does not seem to be uncommon; investigators are also looking at a similar purchase of a 2.5pc stake in Kaupthing by London-based property entrepreneurs Moises and Mendi Gertner.
Officials have also questioned why loans to senior Kaupthing employees to buy shares in the bank were allegedly written off days before the collapse.
Companies connected to Exista, the Gudmundsson brothers' opaque investment vehicle that owned their stake in Kaupthing, received €1.86bn in loans. Their close business associate, Mr Tchenguiz, appears to have personally borrowed €1.74bn in loans to fund his private investments - from stakes in Sainsburys to Mitchells & Butlers. Mr Tchenguiz is now being sued by Kaupthing's administration committee for the return of £643m.
Kevin Stanford, co-founder of the Karen Millen retail chain and one of Britain's wealthiest retailers, also got €519m in loans and was Kaupthing's fourth biggest shareholder. His company's purchase of credit default swaps in the bank is also under scrutiny, though there is no suggestion of wrongdoing his or his companies' part.
According to the leaked document, many of these loans carried little or no security and were listed as belonging to Kaupthing's "exception list" – seemingly those who received banking services on favourable terms.
The loan books of Landsbanki and Glitnir remain in the hands of their administration committees – to the frustration of many Icelanders who fear they may yield equally unusual surprises.
Landsbanki was controlled by the Björgólfur clan, who made their money from the sale of a Russian brewery to Heineken.
Björgólfur Gudmundsson had left Iceland after minor convictions for false bookkeeping and the collapse of his shipping empire, but returned a billionaire to take a 45pc stake in the bank. His son, known as Thor, created a pharmaceuticals empire netting him riches of more than $3bn (£1.7bn).
These were the men who owned the bank responsible for Icesave accounts, the high-interest internet operations that took billions in deposits from 300,000 UK savers.
Information from Landsbanki's reports suggest that companies connected to the bank's board of directors received at least €300m in loans. It is also known that Landsbanki lent the chairman's son Björgólfur Thor Björgólfsson's company Novator significant amounts, but later claimed that it did not need to be disclosed since he was not a "related party".
Björgólfur Gudmundsson, who was also the owner of West Ham FC, has now been declared bankrupt.
Meanwhile Glitnir, the smallest bank, fell under the control of Jón Ásgeir Jóhannesson and related business associates. He was the conquering Viking of the Baugur private equity house that took over a huge number of British high street shops from Hamleys to House of Fraser. Barred from being a director in Iceland for minor false accounting charges, he moved his headquarters to Britain. Glitnir, though lower profile in Britain, has not escaped public scrutiny. It is known to have lent connected people at least €200m in loans.
FL Group, the investment company that owned Mr Jóhannesson's stake in Glitnir, is now the subject of a major investigation by Iceland's economic crime police. Once powerful enough to own a major stake in American Airlines and threaten to take over Easyjet, the company's collapse in October with debts exceeding £1bn was the first domino to fall in the Icelandic banking crisis.
A house belonging to FL Group's chief executive, Hannes Smarason, was raided by police looking into the sales and re-sales of Sterling Airlines, a Danish carrier that failed last year. Sources in the Icelandic authorities said the investigation centred on a period when Sterling was sold three times in just over a year among a number of people closely linked to the listed company.
Mr Jóhannesson himself, having been cleared of 40 charges of fraud and embezzlement in 2008, is now awaiting trial for tax offences.
So how did no one manage to spot that these banks were making precarious loans to benefit a very small number of people?
One London-based analyst at a large investment bank who followed Kaupthing, Glitnir and Landsbanki for many years is unsurprised at the some of the revelations. It is the ratings agencies and financial supervisors who must take the blame for failing to spot some tell-tale signs that some unusual activity was occurring, he claims.
"If you took one careful look at the annual reports you could see that loans to related parties was extremely high," he says. "Any normal bank might give his chief executive a mortgage but running into billions is certainly unusual. But getting money on the international markets was cheap and there was no penalty for not being a proper bank – as I don't believe these were."
One headache that may have caused the regulators to back away was the banks' complex ownership structures involving a constantly shifting mess of investment vehicles and holding companies. All the banks appear to have sold and re-sold stakes, shifted around top management staff and lent each other's owners large amounts.
By Christmas 2007, a handful of analysts were beginning to suspect that something was up. It looked like the Icelandic banks were finding it even more difficult than most to raise money on the international markets, turning instead more European depositors to fund their loan operations. This gave birth to Landsbanki's Icesave and Kaupthing Edge.
Per Lofgrem, an analyst for Morgan Stanley, wrote at the time: "New funding has not come from traditional sources. The acquisitions of Derbyshire Building Society and Robeco [a Dutch bank] were made in order to get hold of their deposit bases. We also believe that the bank would have used better-known markets than Mexico to issue debt if more conventional markets were open."
Others warned investors strongly to stay away from them. Andreas Hakansson, an analyst for UBS in Sweden, repeatedly wrote client notes stressing that the complexity and vulnerability of the banks.
Kaupthing Edge started marketing to British savers in February 2008 and was fast building up a deposit base. And all, including Glitnir, had been recommended by advisors to local authorities as a good high-interest place to put their savings.
As Kaupthing, Landsbanki and Glitnir appeared to be on the brink of collapse in the autumn of last year, an army of spin doctors tried to persuade the UK that the banks were the target of a media conspiracy to discredit them.
By October, the money and time to fix problems had run out. The banks fell into administration one by one over the course of one week and Iceland's currency plunged.
Since then, Iceland has had an overwhelming battle to get its economy back on track that included a bail-out package led by the International Monetary Fund. It has not been helped by a political row with the UK over who is responsible for compensating Icesave depositors . Having agreed to pay Britain £2.3bn plus 5.5pc interest in compensation up to €20,887 for each Icesave account, the population is in revolt over the bill they have to pick up for the excesses of a few wealthy men.
So how are these investigations likely to end? One major issue faced by the investigators is the tightly-knit nature of the financial community, where family and friendship ties are everywhere.
KPMG in Iceland, which was meant to be conducting a forensic investigation into the collapse of Glitnir, had to resign when it emerged that its chief executive, Sigurdur Jónsson, was the father of the bank's biggest shareholder.
The government, anxious to clear the old guard from the new banks, ordered former employees off the administration committees. Glitnir and Kaupthing immediately re-hired them as consultants.
However, Ólafur Ísleifsson, a professor of business at the University of Reykjavik and former advisor to the IMF, believes the banks are already in recovery mode
"Some of the information that has already been revealed is quite shocking," he says. "But an important step consists of recent decisions that place the new banks on a secure financial footing.
Dr Danielsson disagrees, arguing that the financial system is still cripple by bad banks and a lack of trust in the authorities. "Things have not been able to progress and are getting worse," he says. "The government needs to act to try to find anyone who is guilty and punish those people. That is important for the country to heal."
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