The official inquiry into the failure of Iceland's banking system yesterday accused the government and regulators of "extreme negligence" in the run-up to the devastating financial crisis of 2008 that continues to shake the country. The investigation by the independent "truth commission" was ordered shortly after Iceland's three major banks – Kaupthing, Landsbanki and Glitnir – went bust and devastated her once booming financial sector, sending the Icelandic króna plunging and leaving the island nation with a huge bill for compensating depositors – including thousands of British savers, as well as charities and local councils – which remains the subject of controversy.
The 2,000-page report by the Special Investigation Commission (SIC) was highly critical of state institutions and named several individuals, including the former prime minister, Geir Haarde, the ex-finance minister, Arni Mathiessen, and the former banking minister, Björgvin Sigurosson. David Oddsson, another former prime minister who was head of Iceland's central bank at the time of the economic implosion, was also sharply criticised for his role in the crisis, as were his fellow bank directors and the former head of the country's financial supervisory authority.
Pall Hreinsson, a supreme court judge appointed to head the (SIC), said that in the spring of 2008, Mr Oddsson and Mr Haarde hid information from relevant ministers about Iceland's looming financial crisis. "In April 2008, there were at least five meetings between the prime minister, the minister of finance and the foreign minister and directors of the central bank on the banks' situation and the situation of the economy," Mr Hreinsson added.
The financial regulator was said to have been "understaffed" and lacking experience, while failing to enforce the legal provisions at its disposal. The Central Bank of Iceland's foreign currency reserve was found to be catastrophically low – the short-term liabilities of Iceland's economy grew to 16 times its foreign currency reserve, which "reduced the credibility of the financial system".
The report was also sharply critical of the management and ownership of the three banks, all of which had been nationalised and split into new "good banks" and "bad banks" containing all the liabilities.
"The SIC is of the opinion that the owners of all three big banks had an abnormally easy access to loans in these banks, apparently in their capacity as owners," the report said. "The largest exposures of Glitnir, Kaupthing Bank and Landsbanki were the banks' principal owners. This raises questions as to whether the lending is done at arm's length."
The loans, advanced with little collateral, were often used by the owners – who became known as the "Viking Raiders" – to buy shares in the banks and related companies, inflating the price of the securities.
"The operations of the banks were in many ways characterised by their maximising the benefit of majority shareholders, who held the reins in the banks, rather than by running reliable banks with the interests of all shareholders in mind and to show due responsibility towards creditors," the commission said.
It went on: "In late 2007 and in 2008, the banks began to experience funding problems. It seems that the boundaries between the interests of the banks and the interests of the shareholders were often blurry, and the banks put more emphasis on backing up their owners than can be considered acceptable. Examination of the investments made by money market funds operated by the management companies of the three banks reveals that their prime investments included securities and deposits connected the bank's largest owners. These investment decisions cannot have been determined by coincidence alone."
As for the "raiders", the major shareholder of Glitnir Bank, Jón Ásgeir Jóhannesson, is still chairman of Iceland Foods and a director of House of Fraser. Björgólfur Thor Björgólfsson and his son, Björgólfur Gudmundsson, were the largest owners of Landsbanki and Icesave, and have offices in Park Lane, Mayfair. Kaupthing's biggest shareholders were London-based brothers Agust and Lydur Gudmundsson, who are also the biggest shareholders in the food group Bakkavör's, which employs more than 2,500 in the UK. They have defended their conduct but a summary of the SIC report has been handed to Iceland's special prosecutor. It now begs one question: why did British officials, including the Financial Services Authority, allow these banks to build such large businesses here?
Learning lessons: Is Britain interested?
The damning verdict of Iceland's so-called "truth commission" into its banking system is set to add to calls for a similar inquiry in Britain.
Even though the state injected an estimated £1.2 trillion into Britain's financial system, including the nationalisation of two banks (Bradford & Bingley and Northern Rock) and part-nationalisation of two others (Royal Bank of Scotland and Lloyds Banking Group), there has been nothing like the Icelandic report in the UK. Analysing what went wrong, and the roles played by the Government, the Financial Services Authority and the Bank of England, has largely been left to the institutions themselves or the Commons' Treasury Select Committee.
And while the latter has conducted lengthy hearings, it remains the case that British select committees do not have the clout of, say, US congressional committees. Despite the select committee's best intentions, membership is still in the gift of party whips and it cannot be considered truly independent in the way the Icelandic Commission or its US equivalents have proved themselves to be.
President Obama has, for example, created the Financial Crisis Inquiry Commission, charged with grilling hundreds of people from the investment community, large banks, the US mortgage industry, government agencies and academia. Then there was the devastating 2,200-page report into the collapse of the 158-year-old Lehman Brothers by US legal examiner Anton Valukas, which pulled no punches and embarrassed prestigious names on both sides of the Atlantic. There appears to be a desire to learn lessons across the Atlantic – and in the middle of the pond – that is lacking here.Reuse content