Two Interpretations of the Icelandic Bank Collapse

REVIEW two interpretations of the icelandic bank collapse hannes h. gissurarson School of Social Sciences, University of Iceland, Reykjavík 101, Iceland E-mail: [email protected] advance online publication, 26 June 2015; doi: 10.1057/eps.2015.36 Books reviewed: Bringing Down the Banking System. Lessons from Iceland Guðrún Johnsen (ed.) (Basingstoke: Palgrave Macmillan, 2014), 242 pp., ISBN: 978-1137358196 Iceland and the International Financial Crisis: Boom, Bust and Recovery Eiríkur Bergmann (ed.) (Basingstoke: Palgrave Macmillan, 2014), 211 pp., ISBN: 978-1137331991 T he collapse of the whole Icelandic banking sector in the autumn of 2008 certainly did not go unnoticed abroad. In the following years, several books were published about it in English. Moreover, a Special Investigation Commission, the SIC, was appointed by the Icelandic Parliament immediately after the collapse, delivering its massive report in the spring of 2010, in seven volumes and 2400 pages. The SIC was composed of a Supreme Court Judge, the Ombudsman of the Icelandic Parliament and an Icelandic economist teaching finance at Yale University. In 2014, two further books were published about the Icelandic bank collapse, Bringing Down the Banking System by Guðrún Johnsen, Assistant Professor of Finance at the University of Iceland, and Iceland and the International Financial Crisis by Eiríkur Bergmann, Professor of Politics at Bifrost College in Iceland. Guðrún Johnsen served as a senior economist on the SIC staff in 2009–2010. Her book relies heavily on the SIC Report, as the many references to it show. Although Johnsen is not as cautious in choosing her words as the SIC was, she shares its main conclusions: that it was the rapid and reckless credit expansion of the Icelandic banks which made them unusually vulnerable, leading to their collapse in the 2008 financial crisis, and that the authorities, leading government ministers, the Central Bank of Iceland, CBI, and the Icelandic Financial Supervisory Authority, IFSA, acted irresponsibly in not stopping this expansion. Indeed, after the publication of the SIC report, and in response to it, former Prime Minister Geir Haarde was indicted by a narrow majority european political science: 2015 (1 – 5) & 2015 European Consortium for Political Research. 1680-4333/15 www.palgrave-journals.com/eps 1 in Parliament, on the basis of an old law on ministerial responsibility. A specially summoned State Court (Landsdómur) acquitted him unanimously on all major charges, however. Johnsen’s book is at its strongest in its description of the recklessness of the Icelandic financiers before the collapse. She convincingly demonstrates, as did the SIC in its report, that before the collapse certain Icelandic businessmen had spun an intricate web of companies around their activities, obscuring real ownership and thus evading accountability. The Icelandic banks seemed to have limitless credit abroad, whereas those businessmen seemed to have limitless credit in the banks. For example, Baugur Group, led by Jón Ásgeir Jóhannesson, had more than a 20 per cent stake in at least seventy-five companies. As Johnsen says (120): ‘Baugur Group and related parties were by far the biggest customers of all three Icelandic banks in the run-up to the collapse. By the end of 2007, they had borrowed 5.7 billion euros, or more than half of the combined equity base of the three banks.’ She adds (124–5): ‘Loaded with borrowed money from the three Icelandic banks, Baugur Group engaged in leveraged buys and buyouts of Britain’s most famous retail companies, including the House of Fraser, Goldsmiths, Hamley’s [sic], Debenhams, Wittard of Chelsea, Karen Miller, and French Connection, to name a few’. However, Johnsen does not answer two questions that immediately spring to mind: How could the banks obtain all this credit abroad? And how could Jóhannesson’s Baugur Group obtain all this credit from the banks? Johnsen hints, but only barely, at a plausible answer to the first question: as a result of sound fiscal and monetary policies in the 1990s and early 2000s, Iceland enjoyed a good reputation that translated into positive credit ratings for the Icelandic banks. They did not grow on their own, but because they 2 european political science: 2015 found customers. But Johnsen does not answer the second question. To do so, it is necessary to observe that Jóhannesson of the Baugur Group was no ordinary businessman. Not only did he control some of the biggest companies in Iceland, but he was also a media mogul (by Icelandic standards), owning a newspaper that was distributed free of charge to every Icelandic household, and one of the two television stations in the country, and several magazines. It is fair to say that he was the most influential individual in Iceland in 2004–2008. Few risked challenging him, while everything he touched seemed to turn into gold. In 2004–2008, there was a Klondyke mentality in Iceland to which Jóhannesson and his business partners contributed a lot. Moreover, if people come to Johnsen’s book for a dependable summary of the SIC findings, they will be disappointed. There are several errors and inaccuracies in it, not found in the SIC Report itself. While some are trivial, the devil is in the detail, as Johnsen herself says. For example, she mixes up dates (21, 47, 169) and persons’ positions (40). She is even wrong about a 2007 article of hers where she convincingly argued that Iceland’s good credits ratings might be a curse rather than a blessing: It was not published in Viðskiptablaðið on 7 March, as she says (207), but on 8 March. Other inaccuracies in Johnsen’s book may be more substantial. She writes about the privatisation of Landsbanki (67): ‘In a report issued by the Icelandic State Auditor’s office in October 2002, the auditors concluded that the Committee on Privatisation (CoP) had modified the evaluation process after receiving bids, and had failed to select the best offer.’ The reference given is the SIC Report (2010: I, 266). But there is nothing there indicating that the Icelandic National Audit Office (as the official name is in English) was of the opinion ascribed to it by Johnsen. There is only a quote there two interpretations of the icelandic bank collapse with these allegations, taken directly from the 2002 report by the National Audit Office. The quote is an expression of the personal opinion of a former member of the CoP who had criticised the process and testified to the National Audit Office. The conclusion of the National Audit Office itself was (NAO, 2002: 30, my translation) ‘that the decision that the best option was to enter into direct negotiations with Samson [the eventual major buyer of shares in Landsbanki] was made on convincing grounds and that it was reasonable given the premises and goals behind the choice’. It would be tedious and take too long, but many other examples of misleading or erroneous statements in Johnsen’s book could be mentioned, for example in her account (72) of loans to Samson and (128–131) of dealings between Kaupthing Bank and Robert Tchenguiz. The writing is also erratic: words are repeated, or appear totally out of context, or are left out (see, for example, 90, 93–4, 117, 128, 134, 141, 142, 145, 150, 154, 166, 157 and 217). Obviously, Johnsen’s work would have needed much more editing. It is indeed more of a rough draft of a book than a book completed. The other author, Professor Eirikur Bergmann, is a respected commentator on current affairs in Iceland, never towing a party line, but sympathetic to the Social Democrats and vocally supporting Iceland’s possible membership of the European Union (having even worked for a while as the Icelandic press officer for the EU). He offers an interesting perspective on the Icelandic bank collapse. His thesis is, briefly, that the political discourse in Iceland, and hence the range of political choices, are constrained or conditioned by Iceland’s post-colonial national identity, which includes both a strong emphasis on formal sovereignty and an even stronger desire to be recognised as an equal partner or player in the community of nations, and in the international markets. It is a paradoxical position of a deep suspicion of foreigners coupled with an even deeper need for their approval, developed by a tiny nation, long poor and isolated. Bergmann uses his thesis to explain why Iceland was not a member of the European Union in 2008, which would, in his view, possibly have saved it from collapse: as a member, it would not have been left to fend out for itself. Bergmann also uses his thesis to explain both the lack of resistance, in Iceland, to the reckless financiers borrowing money to expand abroad and then the fierce opposition, in 2010–2011, to the so-called Icesave deals that Iceland made with the British and Dutch governments (reimbursing those governments for their outlays in connection with inadequately insured deposits in an Icelandic bank). The lack of resistance to the financiers was, Bergmann submits, because they were celebrated as heirs of the ancient Icelandic Vikings, which played, according to myths construed in the nineteenth-century fight for Iceland’s independence from Denmark, a heroic role. The ‘new vikings’ were seen as recreating or bringing back Iceland’s Golden Age, in 930–1262, when it was an independent commonwealth, and proud of itself. The fierce opposition to the Icesave deals was, also, partly because the myths of the fight for independence included an explanation why the Golden Age ended: it was because it was betrayed by hirelings of the Norwegian king, after which the dark ages descended upon Iceland, with poverty and isolation. The government negotiating the Icesave deals was widely seen not perhaps as a bunch of hirelings, but certainly as being far too compliant to foreigners. While many of Bergmann’s observations about the Icelandic national identity are true and insightful, one wonders whether they are as relevant to the Icelandic bank collapse as he suggests. Did the nineteenth-century construction of an Icelandic national identity really make a difference as to whether the hannes h. gissurarson european political science: 2015 3 Icelandic banking sector would collapse in 2008 or not? In retrospect, it is clear that these were international problems. Danske Bank in Denmark, the Royal Bank of Scotland, ING in the Netherlands and the UBS in Switzerland would all have collapsed if they had not been saved by taxpayers’ money. One could tell similar stories about the business practices of some of those banks (Sandø and Svaneborg, 2013; Brummer, 2014) as Guðrún Johnsen, and to a lesser extent Eiríkur Bergmann, do about the Icelandic banks in their books. The crucial difference was, however, that these banks had access to liquidity denied to their Icelandic counterparts, both from governments of the countries where they were located and from the US Federal Reserve System. The Icelandic banks were certainly quite big in proportion to Iceland’s GDP. But so were the Scottish and Swiss banks. The Scottish banks survived because they had access to liquidity from the Bank of England; they were part of a larger community (Treasury, 2013). The Swiss banks survived because the US Federal Reserve System made an enormous dollar swap deal with the Swiss National Bank (GAO, 2011). It is noteworthy that in September 2008 the Federal Reserve System also made huge dollar swaps deal with the central banks of all three Scandinavian countries, while rejecting requests from the CBI for such a deal. Arguably, after this, the Icelandic banks were doomed: it became obvious to financial analysts that neither the CBI nor the Icelandic government could, on their own, provide sufficient liquidity to the banks. Bergmann would no doubt answer that this illustrated his point that Iceland needed to be a part of a bigger community, whereas opponents of Iceland’s membership of the EU would respond that the EU’s treatment of Ireland and Cyprus – two EU countries with big banking sectors like Iceland – did not do much to improve their long-term prospects, and that Switzerland was an 4 european political science: 2015 example of a country that received help in need, unlike Iceland, probably because Switzerland was systemically important. Bergmann’s book, written in plain prose, is quite readable, and the author goes out of his way to be fair and impartial. Occasionally he slips, though, as when he describes (39) how the Icelandic liberalconservative Independence Party went about ‘infiltrating’ the labour movement. There are some minor factual errors in the book, too (see, for example, 17, 26, 33, 103, 117 and 159). Some statements in Bergmann’s book may also merit critical comments. One example is when he says (31) that, in the twentieth century, an ‘Octopus’ consisting of fourteen families dominated many sectors of the Icelandic economy. But thereby hang some tales. The ‘fourteen families’ was a word originally invented by journalists in El Salvador to describe the biggest plantation owners in the country’s fourteen districts. In the late 1970s, an Icelandic politician started to use this as a general term for Iceland’s financial elite without providing further details. But, in the twentieth century, distribution of wealth and income was surely much more equal in Iceland than in El Salvador (as can be seen from data on the World Bank (2015) website). The ‘Octopus’ is of course an old catchphrase for capitalism. But more importantly, if lists of the ten biggest enterprises in Iceland in 1980 and 1990 are analysed, only one or two companies controlled by the group in question can be found there (Frjáls verslun, 1981, 1991). Most of the big companies in Iceland in the 1980s and 1990s were state enterprises, cooperative societies or marketing associations for the fisheries. Despite such criticisms, some of them relatively minor, Bergmann has written an important and scholarly book. While neither book adds much to the analysis or understanding of the Icelandic bank collapse, both depending very much on the narrative already offered in the 2010 SIC Report, Bergmann’s book is far two interpretations of the icelandic bank collapse more interesting and original. Both authors, Johnsen and Bergmann, seem, however, to be somewhat parochial, treating the collapse as a unique event in Icelandic history rather than as a part of an international financial crisis. References Brummer, A. (2014) Bad Banks: Greed, Incompetence and the Next Global Crisis, New York: Random House Business. Frjáls verslun. (1981) 100 stærstu fyrirtækin 1980 [The 100 biggest companies in Iceland 1980], 12–45. Vol. 40 (12). 1 December. Frjáls verslun. (1991) 100 stærstu [The One Hundred Biggest Ones], 36–145. Vol. 50, No. 9. 1 September. GAO. (2011) Report to Congressional Adressees. Federal Reserve System, Washington DC: Government Accountability Office. NAO. (2002) Ríkisendurskoðun [National Audit Office]. Greinargerð um útboð á fjórðungshluta ríkisins í Landsbanka Íslands hf. October [Report on the tender for a fourth of the shares in Landsbanki], http:// www.forsaetisraduneyti.is/media/Einkavaeding/einkavadingpdf.pdf, accessed 6 March 2015. Sandø, N. and Svaneborg, T. (2013) Andre folks penge. Historien om den danske finanskrise, København: Jyllandspostens Forlag. SIC. (2010) Rannsóknarnefnd Alþingis. Aðdragandi og orsakir falls íslensku bankanna 2008 og tengdir atburðir [Special Investigation Commission: The processes leading to the fall of the Icelandic banks in 2008]. Reykjavík: Alþingi [The Icelandic Parliament]. Partly available in English, http://www.rna.is/ eldri-nefndir/addragandi-og-orsakir-falls-islensku-bankanna-2008/skyrsla-nefndarinnar/english/, accessed 6 March 2015. Treasury. (2013) Scotland Analysis: Financial Services and Banking, London: HM Treasury. World Bank. (2015) Income share held by highest 10%, http://data.worldbank.org/indicator/SI. DST.10TH.10/countries, accessed 6 March 2015. About the Author Hannes H. Gissurarson is Professor of Politics at the University of Iceland. From 2001–2009, he served on the Board of Overseers of the Central Bank of Iceland. He has published many books, in Icelandic, Swedish and English, on various subjects. hannes h. gissurarson european political science: 2015 5