Wednesday, March 17, 2010

Iceland’s Second Largest Bank Defrauded British and Dutch Investors of $5.4 Billion

Iceland has been plunged into further economic and political crisis after President Grimsson postponed signing a reimbursement legislation, which approved a governmental promise to reimburse approximately 3.9 billion Euros to the United Kingdom and the Netherlands. The legislation was in essence a political “apology” on the part of the Icelandic Government after the failure of Iceland's second largest bank, Landsbanki, filed for bankruptcy in October 2008. Landsbanki is the parent company of Icesave, an on-line banking institution, which is alleged to have defrauded British and Dutch depositors of approximately $5.4 billion.

In Fall 2008, Iceland’s economy went into a meltdown when three of its largest banks including Landsbanki failed. The failure resulted in the International Monetary Fund suspending financial assistance to Iceland, and jeopardized Iceland’s efforts to join the European Union. Allegations of fraud and misrepresentation were launched against Iceland. The United Kingdom and the Netherlands remain at a political and financial impasse with Iceland. Dutch regulators, in particular central bank president, Nout Wellink, has accused Iceland of providing false assurances regarding the financial health of Iceland’s banks and Iceland’s natural resources as indicia of Iceland’s abundance and “richness" in natural resources to collateralize the strength of Iceland's banking institutions-- “[G]eysers, fish, everything was put on the table.” The United Kingdom has accused Iceland of “lying” to British government officials. The British and Dutch Governments have reimbursed depositors who lost money when Icesave's parent Landsbanki filed for bankruptcy. But both governments have put tremendous pressure on Iceland to reimburse the money. A spokesman for the United Kingdom Treasury stated that the United Kingdom was "obviously very disappointed" by the President Grissom’s postponement to authorize the reimbursement legislation.

Originally, the Icelandic Government agreed to reimburse the British and Dutch Governments. However, the good people of Iceland were outraged that the Icelandic financial elite had defrauded foreign investors, and yet no one was prosecuted in Iceland. As further insult, the good people of Iceland who had absolutely nothing to do with the banking fraud would be required to reimburse the loss, which would be approximately 12,000 Euros or approximately $17,000 per Icelander. In a surprising turn of events, a recent referendum determined that the good people of Iceland by a 93% margin refused to confirm the reimbursement legislation. The referendum is in direct opposition to the legislation adopted a few months earlier in which the Icelandic Government agreed to reimburse the British and Dutch Governments for the misconduct of Iceland’s private banking institution. Landsbanki is not a public bank, but rather it is an elite private bank that has been owned by certain wealthy Icelandic banking families for generations. President Grimsson in an interesting political pledge of allegiance has refused to veto the referendum, and has sided with the good people of Iceland. In a recent address President Grimsson stated, "[I]t is the cornerstone of the constitutional structure of the Republic of Iceland that the people are the supreme judge of the validity of the law. It is...the responsibility of the president to ensure that the nation exercises this right."

Iceland is a very small country. Its total population is approximately 317,000, which is approximately the equivalent of the number of party-goers in South Beach, FL on any given weekend. To be fair to the good people of Iceland, they raise an interesting point, which is simply-- why should the British and Dutch Governments force the Icelandic people to underwrite the full burden of the losses suffered by British and Dutch depositors? Where were the British and Dutch banking regulators? Why did they not “regulate” Landsbanki, and ensure that it was a viable banking institution? More importantly, why doesn’t the fraud claim against Landsbanki terminate with Landsbanki’s bankruptcy? Why should approximately $5.4 billion loss be the burden of the Icelandic people to reimburse foreign investors?

The good people of Iceland’s position that reimbursement be shared on theory of shared-responsibility, is a valid one. The Icelandic people should not be the only ones held responsible for the losses of British and Dutch investors especially when British officials relied on misleading reports prepared by British academics, in particular Professor Richard Portes, President of the Royal Economic Society of Britain, which commended the "successful and resilient" banks of Iceland. Portes praised Iceland in the report stating that Iceland’s financial system was based on "an exceptionally healthy institutional framework. The banks have been highly entrepreneurial without taking unsupportable risks. Good supervision and regulation have contributed to that, using EU legislation." The findings in the report have turned out to be inaccurate. The good people of Iceland argue that Portes’ misleading report led to lax supervision and a "failure to regulate" Landsbanki by the British Government, the Dutch Government, and the European Union. Furthermore, this "failure to regulate” was the proximate cause of the British and Dutch depositors victimization by Landsbanki. The reality is that the British and Dutch depositors, in good faith, trusted the misguided judgment of British economist, and the lax supervision of British and Dutch regulators to their detriment.

Shared responsibility to reimburse defrauded depositors is not an unreasonable request. Perhaps what is needed is an acknowledgement on the part of the British, Dutch, and Icelandic officials that more should have been done across the board to regulate Landsbanki, and what is need now is shared responsibility. Reimbursement should be a shard responsibility. Punitive measures should not be taken to force reimbursement measures on a single group of people who had nothing to do with the fraud. It was a shared mistake; an error of judgment on many levels. As such, the burden of reimbursement should be shared. Regulators, whether British, Dutch, Icelandic, European or American should do the job that they have been entrusted by the people to do—“regulate the banking industry.” That is all that we ask.

13 comments:

  1. The notion that financial regulators "should do the job that they have been entrusted by the people to do" holds true in all capitalist markets across the world. Regulators are empowered to keep vigilant watch over the markets in order to identify illegal or potentially disastrous economic practices. All to often, however, these regulators fail to complete this task. No one is perfect; and no one can possibly be held to catch absolutely every illegal action that occurs in a market. However, it seems that governments are willing to give regulators a pass when they make mistakes. Over time, this practice has led to failing markets and shifting blame. Instead of passing the burden for institutional failures, more stringent standards of accountability should be imposed on regulators and regulatory institutions.

    ReplyDelete
  2. With about 93% of the voters in Iceland rejecting the $5.3 billion plan to repay Britain and the Netherlands, the Dutch and the British have to realize the proposed terms and conditions for repayment weren’t flexible or reasonable enough. If the referendum was approved, ordinary Icelanders would have shouldered a financial albatross. According to a USA Today article published last week, it would have mandated Icelanders paying approximately $135 monthly for eight years, which roughly amounts to a quarter of an average four-member family’s salary. President Grimsson’s refusal to sign the reimbursement legislation seems appropriate, but Iceland needs the IMF’s $4.6 billion loan and its application to join the European Union is jeopardized if this dispute isn’t resolved quickly.

    ReplyDelete
  3. Tiffany Smith

    It seems rather ironic to me that it was the wealthy bank that did the defrauding.
    "Landsbanki is not a public bank, but rather it is an elite private bank that has been owned by certain wealthy Icelandic banking families for generations." It should be noted that I am being somewhat sarcastic. It is very unfortunate that I have grown to somehow expect the elect persons in society to engage in this type of behavior and then to top it off, have the government bail them out with the middle class's money. Fortunately, their President has refused the bill. I also agree that a shared responsibility would be the best route, but how likely would that be? More likely that it begins as such then ends with the people paying in full…From my understanding, this sort of began with one of the bank's officers placing bank funds into his personal account "with an attempt to save the bank's money." I have yet to figure that part out. But if so, I agree with Huggins, in that the "proposed terms and conditions for repayment weren’t flexible or reasonable enough." Why would they have citizens repay for someone else's fraudulent behavior…But if I am misunderstanding, please advise.

    ReplyDelete
  4. Iceland should pay the money. If they have lax regulation and allow people to be defrauded, it should trace back to the government. The U.S. had to bailout the banks so Iceland should bailout its own banks.

    ReplyDelete
  5. While I agree that the Iceland government should reimburse the British and Dutch governments for the losses sustained, I do not think the people of Iceland should bear the burden of the loss either. I agree that shared responsibility is important however, I question how the economists involved are to be held accountable. Should the British or Dutch government impose criminal liability fines and penalties against the error of the economist? Furthermore, has the economist been defrauded by skewed numbers of the “richness” of Iceland natural resources and financial stability?
    Whatever the solution is the people of Iceland should not bear the loss and responsibility should be shared among all parties involved. But, as the Iceland government seems to be demonstrating, regardless of who may or may not be responsible issues of accountability remain.

    ReplyDelete
  6. Somewhere around the turn of the millennium, Iceland decided to shift its economy from fishing to finances, turning itself into an overleveraged off-shore bank haven. Caught in the financial crisis, the house of cards came crashing down, taking their investors with it. One of the amazing things about this last set of events is how all over the world it reveals the shell game of finances for what it's worth -- the "wizard of Oz" in Emerald City is really the quack doctor from Kansas, operating levers behind a thin curtain of illusion. Do you re-start the engines? Do you build something new? A lot of inertia pushes against the emergence of a new system. Imagine Wall Street going from finances to fishing. What does a non-speculative, service-driven yet productive economy look like?

    Here is a report on an interesting proposal that may take off in Iceland, as a reaction to the crisis and the corruption it has uncovered: the decision to become an anti-secrecy jurisdiction. Read more at the Tax Justice Network blog site:

    ReplyDelete
  7. Professor, here is a copy of my third blog post, on March 29, 2010 - your entry on Iceland.

    Somewhere around the turn of the millennium, Iceland decided to shift its economy from fishing to finances, turning itself into an overleveraged off-shore bank haven. Caught in the financial crisis, the house of cards came crashing down, taking their investors with it. One of the amazing things about this last set of events is how all over the world it reveals the shell game of finances for what it's worth -- the "wizard of Oz" in Emerald City is really the quack doctor from Kansas, operating levers behind a thin curtain of illusion. Now what? Do you re-start the engines? Do you build something new? A lot of inertia pushes against the emergence of a new system. Imagine Wall Street going from finances to fishing. What does a non-speculative, service-driven yet productive economy look like?

    Here is a report on an interesting proposal that may take off in Iceland, as a reaction to the crisis and the corruption it has uncovered: the decision to become an anti-secrecy jurisdiction. Read more at the Tax Justice Network blog site:

    ReplyDelete
  8. I think it's awesome that the people of Iceland stood up the Central Bank.

    What happened in Iceland is th endgame for ALL central banks. The fiat system created by these central banks is nothing more than a pyramid scheme, designed to collapse at some point, and the people who always come out on top are the very rich.

    They have the entire world brainwashed into thinking that a gold standard can't make it in today's world, and that the elite private bankers are the only ones sophisticate enough to control the economy. Not only that, but the world is also brainwashed into thinking that if we let elected officials interfere with what these bankers do with the money supply, then they cannot effectively do their job correctly.

    I must say it must be quite the setup to have so much money that you are above the government and above the law, and to have everybody actually believe that this is the only way it can work.

    This argument is laughable. Central Banks, such as the one in Iceland, and the Federal Reserve are not a modern creation, but were one of the great fears of our founding fathers.

    The fact is, Central Banks have been in a power struggle (that they eventually won), since the founding of our country.

    Thomas Jefferson warned of the dangers of a Central Bank when he said the threat of putting the money supply in the hands of a few is greater than any standing army (because they create a system of perpetual debt).

    Make no mistake, these bankers are a powerful bunch.

    It is recognized that Andrew Jackson, who ended th 2nd Central Bank, was nearly assassinated by those in the Central Banks.

    What isn't widely known (which is a tribute to their power), is that in 1933, elite bankers got so cocky with their power, that they nearly attempted a cou on FDR in the White House. http://en.wikipedia.org/wiki/Business_Plot

    This may just be coincidence, but the JFK strongly opposed the national bank and was killed. Ronald Raegan publicly wanted to get rid of it, and there was an assassination attempt on his life.

    This isn't a Democrat vs. Republican issue. The only way to get rid of these thugs at the top are for the people to speak out against them (peacefully), as the Iceland folks did.

    STU Steve Newbold

    ReplyDelete
  9. Jamil Davis

    The people of Iceland have every right to stand and defend themselves against a banking system that has little respect for regulations. I find it amazing that not only do these central banks get away with these fradulent activities but that the governments has continued to cover for them time and time again.
    Also, why are the people of Iceland responsible for the rich getting richer. Both the British and Dutch regulatory boards had more than ample time and energy to analyze their reports and discover the discrepancies. They too should be held to a duty of care to continuously monitor and investigate their investment dollar. Even though I do believe that the British and Dutch government are entitled to some portion of the $5.4 billion debt, they should be able to sit back and take a blind eye to what has happened and plead ignorance.

    ReplyDelete
  10. 18 months later and I'm still waiting for my money. I invested 10 years of blood and sweat into these private banks. Milenium BCP in Portugal guaranteed the investments into bonds. When the banks in Iceland crashed, Milenium BCP in Portugal said that Iceland banks provided the guarantees! Never trust any bank or banker, they are all liers and only care for their salaries, bonuses and commisions.

    ReplyDelete
  11. My wife and I lost our life savings in a subsidiary of of Landsbanki called Landsbanki Luxembourg S.A. The Luxembourg authorities did not nothing to help us get our money back. The same lack of regulators operated in Luxembourg a so-called "Financial Centre of Excellence". At lease the UK & The Netherlands took a stand to help their investors. Luxembourg did nothing and has done nothing since. Never invest in Luxembourg your money is not safe and the authorities do not give a damn. They (Luxembourg) have turned a blind eye.

    ReplyDelete
  12. The people of Iceland enjoyed a decade of living one of the highest standards of living in the world at my cost. My sweat and blood for 10 years. Yes - the Iceland taxpayer should pay even be it over ten or twenty years. Banks like RBS, Lehman, Kaupthing and Landsbanki produce "guaranteed" paper bonds, we pay with hard cash and then loose everything.
    Millenium BCP in Portugal sell "guaranteed" bonds from these banks and then assume NO reponsibility.

    ReplyDelete
  13. NEVER NEVER invest in Luxembourg. It passed a law in 2005 which gives unprecedented power to Banks and makes Bank loan contracts UNATTAKABLE, even in the case if bank fraud and criminal malpractice.
    BEWARE of Luxembourg!

    ReplyDelete