From Iceland — How Not To Sell A Bank

How Not To Sell A Bank

Published July 4, 2023

How Not To Sell A Bank
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Explaining the storm swirling around the sale of Íslandsbanki

The saga of Icelanders and banking is a tale that feels as old as time at this point. After taking over control of Íslandsbanki in the wake of the 2008 financial collapse, the Icelandic State Treasury began selling off its shares in the bank in 2021. That year, the state sold a 35% share in Íslandsbanki to private investors, with another 22.5% sold in March 2022. 

As turned out to be a surprise to absolutely nobody, the sale was rife with controversy and saw shares sold off at bargain basement prices to hand-picked investors.

What’s actually going on? Grapevine publisher Jón Trausti Sigurðarson engages in a Q & A with himself to make sense of it all.

Q: So tell me what‘s happening with this bank scandal I keep hearing about?

A: Oh, you mean that thing that has been the only thing on the Icelandic news in the past week? Íslandsbanki?

Q: What else?

A: Well, so back in 2008 the Icelandic Government took over then bankrupt Glitnir. You remember THE CRASH™?

Q: Yeah. Sort of. I’m still trying to forget that thing. It hurts to think about. But Glitnir, that isn‘t Íslandsbanki, is it? 

A: Not entirely. But it was first called Íslandsbanki, then rebranded itself as Glitnir in 2006. Then Glitnir went bust. So the state didn‘t really keep Glitnir bank; it went bankrupt and a new Íslandsbanki was formed on the remnants of the old one, rebranded with the old name.

Q: OK.

A. Anyway, That new Íslandsbanki was owned 100% by the state. During the summer of 2021, the state sold 35% of the bank. Then it sold 22.5% in March 2022. 

Q. Alright, so they sold the bank, got cash, everybody‘s happy, right?

A: Well. The first 35% of the government’s stake in the bank was sold in June 2021. Around 24.000 individuals and companies bought those shares, mostly domestic parties. This received quite a lot of criticism, because just a couple of months later those shares had increased in value by 56%, indicating that the government – read: the Icelandic people – got way too little cash for the shares. But nothing “illegal” was reported. 

Then, in March 2022, another 22.5% of the bank was put on the market, this time with the goal of selling iit to a more limited group of investors. That is, “professional investors”; pension funds and larger owners of capital. This is when problems started piling up.

Q. How so?

The word “corrupt” came up more and more as more information about the sale came to light – and details emerged slowly, because the sale was far from transparent.

A: First and foremost, the governmental body responsible for selling the bank, called Icelandic State Financial Investments sold the 22.5%, but somewhere, somehow it was decided to do so with a discount, so the shares were sold for 4.2% less than their market rate on the day of the sale. Subsequently, the bank’s shares, as most predicted, did nothing but increase in value, yet again. 

So once again the price was too low, prompting many to start tossing round the word “corrupt”. And that word only came up more and more as more information about the sale came to light – and details emerged slowly, because the sale was far from transparent. 

That’s when the public learned that some of the people that got to buy the shares were not, in fact, “professional investors,” but individuals with either political connections or connections to the bank itself. It was at this point we found out that the Finance Minister’s father had been one of those buyers, which just looks bad.

Q: Alright. The bank got sold at a discount to well connected people. That does look bad. And yet again, the taxpayers got screwed and all of this seems stupid or corrupt or both. But why is this sale back in the news now? 

A: That’s because the Icelandic Financial Authority just released its decision to fine Islandsbanki by 1.2 billion ISK because of the sale.

Q: Wait. Íslandsbanki? Why them? It was their shares that got sold for too little money, how is that their fault?

A: Well, funnily enough, the Bank Authority that should have been responsible for selling the state’s shares in Íslandsbanki didn’t actually know how to go about doing it, so they got Islandsbanki to conduct the sale themselves, with some specific conditions in place, like shares being sold only to “professional investors.”

Q: Get a bank to sell it self? Who comes up with this shit? 

A: Not only that, but Íslandsbanki got hundreds of millions of ISK from Icelandic State Financial Investments for managing the sale of themselves. We also found out that members of that authority had received gifts from Íslandsbanki before that deal was hatched. 

Q: Get out of town, man. This is some tragicomic shit. But alright, back to that fine of 1.2. billion ISK… 

In some cases, individuals were personally called by the bank to convince them to participate in the sale of the bank.

A: Yes. That whole thing hinges on the definition of “professional investors.” It refers to legal entities who have legal merits to conduct business in financial markets, along with larger companies, insurance companies, pension funds, municipalities and, in some cases, individuals whose main occupation is investment. It’s a term defined in more detail by law, but that’s the gist of it.

Q: Errr. Boring. Alright. So how did Íslandsbanki end up with a 1.2 billion ISK fine.

A: We’re getting there, soon. So Íslandsbanki, in selling itself, decided to not care too much about who qualifies as “professional investors” and thus allowed at least eight persons/legal entities that did not qualify, to purchase shares. In some cases, those individuals were personally called by the bank to convince them to participate in the sale. 

Some of these people were members of the bank’s own staff or spouses of staff (they didn’t need any convincing, of course). With regards to their staff, they failed to follow their own internal rules about conflict of interest, etc. 

Íslandsbanki then gave misleading information about these non-professional investors to Icelandic State Financial Investments. They also failed to follow legal requirements with regards to recording the interactions between the bank and potential investors and gave the potential investors misleading and sometimes inaccurate information. For this reason they were fined the aforementioned 1.2. billion ISK. It’s the highest fine ever to be levied against an Icelandic company.

Q; Shit. So the bank gets what they deserve. And its shareholders indirectly suffer the fine. Cool. But wait, tell me again, who owns Íslandsbanki?

A: Well, a bunch of companies, pension funds and individuals. But the biggest shareholder is the Icelandic State, with 42.5%.

Q: Ah, damn. So the taxpayers are on the hook?

A: Well. Technically of course the bank pays it, but as 42.5% of the bank is owned by the state, that portion ultimately is money that the Icelandic Treasury is not going to get through its ownership of the bank. And, of course, the Icelandic Treasury is the Icelandic public, so ultimately, they – we – are the butt of the joke in this entire mess. 

On the upside, the fine is payable directly into the state’s coffers, so it’s just like shifting money from the left pocket to the right.

Q: So, will anybody be held accountable for this mess?

A: In the past days most of the coalition ministers have expressed their desire to see Birna Einarsdóttir, the head of Íslandsbanki resign. She resisted until 4 a.m. on June 28 when Íslandsbanki distributed a press release stating that Einarsdóttir had decided to quit, depriving those same politicians of the pleasure of sacking her through the state’s stake in the bank. 

This will be treated as the end of the matter by the same coalition ministers, as the alternative could mean that some responsibility lies with the government and its ministers, and they aren’t interested in shouldering that blame.

The coalition government has gone to some lengths to do nothing in circumstances when they should have been doing something, all in the name of self-preservation.

Ultimately, Icelandic State Financial Investments apparatus and Minister of Finance Bjarni Benediktsson, at whose pleasure the Banking Authority operates, share the responsibility. However, forcing Bjarni to shoulder any responsibility would likely mean the end of the coalition government, and the coalition has gone to some lengths to do nothing in circumstances when they should have been doing something, all in the name of self-preservation.

So don’t hold your breath for any Icelandic politician to take responsibility for this.

Q: Is there anything we can learn from this situation?

A: That it’s hard to tell whether Icelandic scandals are the result of incompetence or corruption. Or both. 

The takeaway seems to be to never trust Icelandic banks. But we knew that already. Icelandic banks have had a very low trust rating among the Icelandic public since THE CRASH™, although to be fair, the Icelandic parliament’s rating hasn’t been that great either. Maybe the lesson we can draw from this is that next time we should try to sell our banks to people competent to run them and have banks sold by people competent enough to sell them.

Q: Who might that be?

A: I don’t know. But by now, I know who it shouldn’t be.

Q: Who shouldn’t it be?

A: Icelanders.

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