Icelandic Banks: Sold to Party Friends

There has been a lot of talk lately about the privatization of the Icelandic banks at the dawn of the century. It is said that the buyers did not have any experience in the banking business, and that better offers from more experienced candidates were turned down. This leads us to wonder: will there finally be a public investigation about the responsibility of politicians in the crash of the banking system, or will this scandal just be swept under the rug once more, as per usual?

In the years 2002 and 2003, under the PM reign of Davíð Oddson, two Icelandic banks were privatized. The first was Landsbanki, the second Búnaðarbanki, a relatively small “farmer’s bank.” Since the government was especially interested in acquiring foreign capital, the banks were to be sold off to foreign investors with experience in the banking sector and in possession of foreign assets. Consequently, the amount of the purchase price was crucial. But it all ended quite differently: Icelandic investors with no experience in the banking sector bought the banks. Landsbanki was sold to a group of investors forming the Samson Holding ehf, which didn’t even bid the highest purchase price. But the leader of the group, Björgólfur Guðmundsson, was not only a member of the Independence Party, just like Davið Oddson and Geir Haarde, the latter being the Minister of Finance at that time, but obviously also had strong ties to the Party leadership. In contrast, Búnaðarbanki – being the “farmers’ bank” – was almost inevitably tied to the Progressive Party, which traditionally represents farmers’ interests and was hence sold to an assembly of Icelandic investors who were close to the party: the so-called S-Group.

An inexperienced and convicted buyer
In 2002, the government created a governmental privatization committee that had the task of finding potential foreign buyers. In June of that year, however, politicians became actively involved in the privatization process. Davíð Oddsson came together with then-Ministers Geir Haarde (Independence Party – Finance), Halldór Ásgrímsson (Progressive Party – Foreign Affairs) and Valgerður Sverrisdóttir (P – Business Affairs) in an ad-hoc meeting to discuss the privatization process without notifying the governmental privatization committee.

Subsequently, the bidding was only advertised in Iceland, and not in any foreign countries. Samson Holding ehf. put in a bid together with two other investor groups and bought Landsbanki. Their bid was not the highest offered, and they even received a nine million-Euro discount on the original sales-price. Moreover, the three owners of S experienced in the banking business. Björgólfur Guðmundsson founded the Samson Holding ehf. together with his son Björgólfur Björgófsson – once one of the supposedly most handsome billionaires in the world – and a common business partner. The three investors made their fortune with the Bravo-brewery in Russia, which they sold for about 400 Million USD to Heineken in the Netherlands. Guðmundsson was also the owner of an Icelandic shipping company, which went bankrupt in the 1980s. He was charged with fraud and defalcation, amongst others, and sentenced to 12 months suspended sentence.
Former journalist Sigríður Dögg Auðunsdóttir, who worked on an extensive coverage on the privatization process for Iceland’s free newspaper Fréttablaðið some years back, learned from a source involved in the privatization process that Davíð Oddsson received a phone call from his party-colleague Guðmundsson just prior to the ad-hoc- meeting. In this call, Guðmundsson told Oddsson that he was very interested in buying a bank. Consequently, says Auðunsdóttir, the original criteria for selling the banks was adjusted to the offer made by Samson, so that Samson could buy the bank. Instead of selling Landsbanki to experienced foreign investors, or the highest bidder, Davíð Oddsson praised Guðmundsson’s “vision” for the bank and pointed out that Samson Holding (at least) possessed foreign currency.

Búnaðarbanki and the Progressive Party
Búnaðarbanki was sold to the so-called S-group. This group of investors was close to the Progressive Party and consisted of several companies: Egla ehf., two insurance companies and one pension fund. Originally, Guðmundsson declared interest in buying Búnaðarbanki, but Oddsson and the Minister of Foreign Affairs, Ásgrimsson, had allegedly agreed that Landsbanki would be sold to businessmen close to the Independence Party and Búnaðarbanki to investors close to the Progressive Party. In Auðunsdóttir’s opinion, the S-group was meant to buy Búnaðarbanki from the start, whereas Samson Holding was chosen to get Landsbanki. She claims knowledge that all parties of the privatization were in constant talks throughout the process and that the ministers were directly involved with the parties bidding for both banks. Oddsson thus explained to Guðmundsson that he would not get to buy Búnaðarbanki, just Landsbanki. The bidders were convinced and the deals were closed. Like the owners of Samson Holding, the members of the S-group had no experience in the banking sector. Moreover, they received a 75 to 100 million Euro loan from Landsbanki just before the government sold the bank, which means that Búnaðarbanki amson Holding were neither foreign investors nor were they was actually bought with a governmental loan.
This of course means that any of us could have bought it, given we had some friends in the government. Seriously.

German private bank incognito for Kaupþing
Since the key to the purchase of Búnaðarbanki was foreign capital, the S-group went searching for a foreign investor. According to Auðundsdóttir, this – at that time secret – investor was won over only shortly before the deal was closed. After the purchase was sealed, the identity of the investor was revealed to be the German private bank Hauck & Aufhäuser. Interestingly, this small and traditional retail bank sold off its shares in Búnaðarbanki only 13 months after the acquirement. In contrast, the purchase agreement stated that no shares in Búnaðarbanki could be sold before 21 months after the date of the agreement. The buyer was Iceland’s youngest bank. Since Kaupþing operated solely as an investment bank at that time, it was highly interested to acquire Búnaðarbanki to expand the operations. But the Ministry of Business Affairs, under Sverrisdóttir, did not allow a merger because it would have led to a restraint in competition. Right after Búnaðarbanki was sold to the S-group close to Sverrisdóttir’s Progressive Party, the merger was approved.

Financial expert and lector at the University of Iceland, Vilhjálmur Bjarnason, examined the balance sheet of Hauck & Aufhäuser. He surmised that the German private bank never really acquired Búnaðarbanki and that the purchase was a pure undercover deal for Kaupþing. “Hauck & Aufhäuser is a very small bank, which was simply not able to handle the purchase of 30 Million Euro shares in Búnaðarbanki and to integrate the bank into its system,” he says, assuming that the merger of the two banks was already a closed deal before the actual privatization of Búnaðarbanki. Moreover, the merger did not appear on the balance sheet of Hauck & Aufhäuser in the year 2003. On inquiry, KPMG Germany simply announced “that in 2004 Hauck & Aufhäuser had the relevant assets in the accounts of the bank, not in the investment-portfolio,” says Bjarnason. “This statement was more than unclear. It also referred to the wrong year, which in my opinion means that it is not true.”

“Extraordinary practices”
After a dispute with the ministers over the criteria for the sale, Steingrímur Ari Arason resigned as a member of the governmental privatization committee. He stated that “prospective buyers were turned away in spite of their better offers,” and that he had never experienced such “extraordinary practices.” Arason was replaced with a member of the Independence Party. An investigation of his allegations did not take place. It became clear that the governmental privatization committee did not perform its task to survey the privatization process. Auðunsdóttir confirms that “no one in the governmental privatization committee was independent. Everyone was appointed by the Ministers they were supposed to watch over”, she says.

No investigation
When Auðunsdóttir’s article was published in 2005, rumours of corruption spread for the first time. Oddsson and Haarde were not available for comments at that time. Neither was Sverrisdóttir; she referred to a statement on her website. Ásgrímsson was faced with the allegation of a conflict of interests, since he was not only a member of the privatization committee but also the owner of a company with ties to the S-group. When the call for public investigation became louder, the Icelandic Accounting Office investigated the matter and concluded that there was no interest of conflict whatsoever. Ásgrímsson stated that his feelings were hurt by the allegations and, apart from Jóhanna Sigurðardóttir, the former chairman of the Alliance Party, not a single party expressed doubts regarding the General Accounting Office´s expertise in matters like these. No further investigations were undertaken. Again.

Oddsson in denial of mistakes
At the Independence Party’s party conference in March of this year, Haarde was the first of the politicians involved to acknowledge mistakes in the privatization process. He apologized for the u-turn in the government’s plans from selling the banks to many foreign investors to just a few, local ones. In contrast, Davíð Oddsson did not admit any mistakes, even though he was also responsible for the undeniably fatal interest policy in Iceland as the chairman of the Icelandic Central Bank. When Jóhanna Sigurðardóttir, as this winter’s temporary minority government Prime Minister, asked him to resign from his post, he refused to do so and declined any responsibility or complicity in the privatization of the banks and collapse of the financial system. After the government passed a law that forced Oddsson out of office, he compared his dismissal to the crucifixion of Jesus Christ. Seriously.