Fury in Iceland as Disgraced Banking Moguls Request Loan Write-off

The Icelandic nation reeled with indignation and fury last week when news broke that two of its disgraced banking moguls had requested that about half of an ISK 6 billion [USD 47 million] loan be written off by now-nationalized bank Kaupthing.

The moguls in question are father-son team Bjorgolfur Gudmundsson and Bjorgolfur Thor Bjorgolfsson, who in 2003 swept in to acquire a controlling stake in Icelandic bank Landsbanki, which was in the process of being privatized at the time. The "two Bjorgolfurs," as they're frequently referred to in Iceland, had made their money in Russia over the previous decade. Prior to that, however, Bjorgolfur Sr. had been convicted of bookkeeping offences in one of Iceland's largest corruption scandals and received a conditional 12-month sentence. His return to Iceland at the time was therefore seen as a triumph - a sort of redemption.

The privatization process itself was riddled with corruption allegations. The government had decided to privatize two of Iceland's largest commercial banks - the century-old Landsbanki, a banking institution as solid and reputable as they come, and Bunadarbanki (now called Kaupthing). The privatization was undertaken on very clear terms: distributed ownership, so that no one large investor could have too much control. After all, the move was designed to be a step up from the status quo, in which the state (read: the political sector) had for years had undue power to decide who should receive favor from the banks, and who should not.

Before the privatization of the two banks was completed, however, there was an uproar in the privatization committee. The head of the committee abruptly resigned, stating that the terms of the privatization had been grossly violated and that the leaders of the two coalition parties in government were intervening excessively in its execution. He famously remarked that never in his life had he encountered working practices of the sort that were being employed in the privatization process and he refused to be a part of it.

A short while later, Landsbanki and Bunadarbanki were both sold. A controlling share in the former was sold to the holding company Samson, owned by the two Bjorgolfurs plus a business partner, who were favored by the Independence Party (IP). A deal was allegedly struck between the Bjorgolfurs and the IP that the former would install high-ranking party members as bank executives and continue to grant favors to IP members and their supporters. This was followed by the swift appointment of the IP's executive secretary as vice-chairman of the Landsbanki board, alongside Bjorgolfur Gudmundsson as chairman.

Bunadarbanki (now Kaupthing) was subsequently sold in large part to brothers Agust and Lydur Gudmundsson, who were favored by the Progressive Party -- the party that made up the other half of the coalition.

In a classic case of incestuous nepotism - so prevalent in the Icelandic commercial sector of the past several years - Bunadarbanki loaned Samson some ISK 6 billion to acquire the share in Landsbanki. This is the very same loan that the two Bjorgolfurs have now requested be written off by half.

Of course, as those who have been following the sorry demise of Iceland's banking system will know, Landsbanki was driven into the ground by its owners and management in the years following the privatization. Today, six years later, the Icelandic nation presides over the charred remains of a bank that previously had a spotless reputation and endless goodwill. As if that were not enough, the debts incurred by Landsbanki -- partly acquired on the strength of Landsbanki's stellar reputation -- are too colossal for a normal person to comprehend. This was the bank that launched the ill-fated Icesave online savings accounts in the UK and Netherlands, which are already the cause of heavy social dissent in Iceland and look set to drive the nation into severe hardship and poverty in coming years. To add insult to injury, it has been revealed that the banker who headed the loans department at Bunadarbanki and was instrumental in approving the loan to Samson, one Sigurjon Th. Arnason, was subsequently made CEO of Landsbanki and became the mastermind behind the Icesave accounts.

And now, Bjorgolfur Gudmundsson and son Bjorgolfur Thor Bjorgolfsson (who was pictured a few short weeks ago hob-knobbing on a yacht in Cannes) would like the loan they took to finance the bank they ruined to be written off by the Icelandic people, who are already saddled with debts amounting to billions of US dollars as a result of their mismanagement. Not only that, it has transpired that the mere dividends that the pair received in the six years they owned Landsbanki were higher than the amount that they would now like to have written off. Meanwhile, in the six years that they owned the bank they went on to purchase a private jet, a UK soccer team, and a sundry of other toys and businesses - yet they did not see reason to pay up their loan.

Predictably, there was a public roar of indignation in Iceland when news of the proposed loan write-off surfaced. So great was the fury that Kaupthing bank saw reason to break the bank secrecy code and to issue a statement - saying that no - and repeating NO - decision had yet been made on whether the loan would or would not be written off. (In the initial news item it was reported that the proposal by the Bjorgolfurs to pay off only half their debt was being considered "viable" within the bank). This came in the wake of news that Kaupthing employees - including Kaupthing's CEO and his wife - had been the target of threats after the news broke.

Even Iceland's Finance Minister Steingrimur J. Sigfusson was quoted in one of the main daily papers as saying that, as a regular citizen of this country, he felt that this debt was "the last thing under the sun" that should be written off (but emphasized that, "in his role as minister", he could not comment on the situation). The paper also spoke to Gylfi Magnusson, Minister of Banking Affairs, who claimed he had "choked" when he read the news, and said that he would - like most Icelanders - find such a write-off "a hard thing to swallow".

Possibly the understatement of the year. Others have warned that, if the loan is written off, massive civil unrest is imminent and, at the very least, people will, en masse, stop their own loan payments to the banks. Personally I think it would be the spark that could set off an explosion of anger in this country, similar to the Rodney King ruling that sparked the LA riots back in 1992. Kaupthing is totally playing with fire.