From the well-attended meeting. Photo: Arni Saeberg.
Six examples of unnecessary losses incurred by the fallen Icelandic banks were analysed in detail by Professor Hannes H. Gissurarson, in a lecture at the spring conference of the Institute of Business Studies at the University of Iceland 21 April 2015. Two of the examples—which Professor Gissurarson has discussed previously—are from Norway and Finland, where in the 2008 international financial crisis the central banks of those countries refused to provide subsidiaries of Glitnir Bank with liquidity, even though in both countries the companies were registered there, and paying taxes. This was different from the Swedish Central Bank which provided liquidity to Swedish companies owned by Icelandic banks. Professor Gissurarson estimated the loss from the subsequent forced assets sales in Norway and Finland to be about $460 million.
CBI Governor Mar Gudmundsson
Professor Gissurarson argued that something similar took place in Denmark two years later. In the beginning of the international financial crisis, the Danish Central Bank had provided liquidity and capital to the Danish FIH Bank, owned by Kaupthing, in the same way as to other Danish banks. FIH Bank had been used as collateral for an emergency loan which the Central Bank of Iceland, CBI, gave to Kaupthing in the beginning of the crisis. On the initiative of CBI governor David Oddsson, this was made into a comprehensive collateral, covering all potential debts by Kaupthing to the CBI. It had also been confirmed to the CBI by Danish authorities that FIH Bank was a sound collateral, with book equity of value double to the Kaupthing loan. The emergency loan was not paid back as a result of the fall of Kaupthing so the CBI gained control over the bank. However, in the autumn of 2010, the new CBI governor, Mar Gudmundsson, succumbed to pressure from Danish authorities and sold FIH Bank with only a part of the total price being paid out, whereas remaining payments would be linked to possible losses incurred by the bank in 2010–2014. In fact, the buyers were given almost unlimited discretion as to how to define losses in this period, with the result that the CBI will probably never see any of the remaining payments, even if the FIH Bank is now being dissolved, with a $860 million book equity of value which would be divided up between the buyers who would thus receive a hefty return on their investments. Professor Gissurarson criticized Governor Gudmundsson for not standing firm in 2010 against the Danish authorities and for not writing adequate safeguards into the contract with the buyers of FIH Bank. He estimated the potential loss from this to be about $460 million.
UK Prime Minister Brown
Professor Gissurarson then turned to the United Kingdom where the Labour government in early October 2008 introduced an enormous rescue package for the British banking sector at the same time as it closed down the two British banks owned by Icelandic banks, Heritable and KSF. In telephone conversations with their Icelandic colleagues prior to closing the two banks, British ministers had accused the banks of various illegalities. The British Labour government had even invoked an anti-terrorist law against various Icelandic institutions and companies, presenting them on the Treasury’s website on the same list as the Al-Qaida and Talibans. Now, however, the winding-up processes of the two banks were being completed, and it seemed clear that neither of them had really been bankrupt. The return rate to creditors was close to 100 per cent, even if enormous legal and auditing costs had been imposed on the estates. Nothing illegal had been discovered despite thorough investigations by British authorities, including the Financial Services Authority and the Serious Fraud Office. Professor Gissurarson estimated the unnecessary losses from these brutal acts by the British government to have been at least about $1.1 billion.
The total unnecessary loss in those six examples, brought about by the unhelpfulness of the Danish, Norwegian and Finnish central banks, by Icelandic foolishness in the case of FIH Bank, and by British brutality in the case of Heritable and KSF, amounted to $2 billion, according to Professor Gissurarson. His argument provoked much discussion. It made the front page of the leading daily Morgunbladid, and the government broadcasting service and two online magazines, Kjarninn and Stundin, reported it. Professor Gissurarson also wrote an online article for the business weekly Vidskiptabladid. Governor Mar Gudmundsson protested, in the case of FIH Bank, that the book equity of value was not a proper reference point in a crisis. Professor Gissurarson responded that he could agree with this, but that he had criticized the Governor for succumbing to pressure and for not safeguarding properly the interests of the CBI when FIH Bank was sold. Now the CBI would only see half the value of the 2008 emergency loan to Kaupthing, even if the collateral accepted back in 2008 had been perfectly sound and worth much more than the loan. Professor Gissurarson’s lecture formed a part of the joint research programme of RNH and AECR on “Europe, Iceland and the Future of Capitalism”.
