Landsbanki

"Extracting myself from my misplaced investments in Icelandic banks was much more difficult. I knew that I could not sell the 40 per cent stake in Landsbanki or the 38 per cent holding in Straumur, the Icelandic investment bank of which I was chairman. I held both stakes jointly with my father but realised that they were simply too large a piece of the financial infrastructure for them to be allowed to be sold without a great deal of time-consuming regulatory scrutiny. And I had grave concerns about the strength of the krona, the management of the Central Bank and Iceland’s financial system. I kept thinking of what had happened in Russia ten years earlier. The Icelandic krona was being artificially strengthened by the government, which was offering foreign investors krona-denominated bonds at excessive rates of interest."

"I still ask myself time and again why I did the Landsbanki deal in 2002, choosing to become the biggest investor in Iceland’s banking system. The answer, I suppose, is ambition or weakness in the form of a need for recognition in my home country. Ego certainly played a large part. However, hubris started creeping in, slowly but surely in the following years."

"Let’s do the math, as Americans say. In 2005, Forbes calculated I was worth $1.4 billion, making me Iceland’s first billionaire. By the peak of the boom, midway through 2007, this had increased to $4 billion, with roughly one-third of my wealth in Actavis, another third in Landsbanki, Iceland’s second-biggest bank which was privatised in 2002, and the remainder in other ventures. But by the end of 2009, following the government’s seizure of Landsbanki and the fall in Actavis’s valuation, this had fallen to about $40 million. So if people asked how I was doing, I replied that I still had 1 per cent of my net worth."

"Another reason I didn’t walk away was that I knew I would be criticised for such an action in Iceland and did not want to deal with the consequences of that. I feared the criticism that would ensue and the rumours that would be spread which would hurt me, not only in Iceland but abroad. People would say that we didn’t really have the money, that the sale of Bravo to Heineken hadn’t been the great deal it truly was, and so on. But my father was confident that it would all end well. I said to him: ‘Why are you so confident? I have a very bad feeling about this.’ But he just replied, in the most typical Icelandic way: ‘*Thetta reddast*,’ meaning that it would all work out fine somehow in the end. It did not help that the media were concentrating on the personalities rather than the privatisation. The story became about my father redeeming himself by becoming Landsbanki chairman and a major shareholder. It was a great story about a once-famous Icelandic family making a grand return, but the attention that we received made me uneasy. On the day the deal was completed I was weary and apprehensive. ‘Be careful with all the publicity,’ I said to my father. ‘Good publicity is often followed by bad. Something could go spectacularly wrong and this is a small society. People patting you on the back now will be the same ones who spit at your back later.’"

"In 1998, the Swedish Enskilda Bank showed interest in buying a third of Landsbanki, but the talks fell through. Later that year the government decided to publicly sell off a 15 per cent stake in each bank. The demand for shares was enormous and it was clear that the state could have sold its entire stake had it wanted to. In 2001, parliament permitted the sale of the rest of the state’s shares in Landsbanki and Bunadarbanki on the basis that the state should not be doing business that the private sector was capable of doing. In its efforts to sell its shares in Landsbanki, the government enlisted HSBC to find buyers abroad. For the time being, no attempt was made to sell Bunadarbanki."

"I still ask myself time and again why I did the Landsbanki deal in 2002, choosing to become the biggest investor in Iceland’s banking system. The answer, I suppose, is ambition or weakness in the form of a need for recognition in my home country. Ego certainly played a large part. However, hubris started creeping in, slowly but surely in the following years. What is beyond doubt is that I allowed myself to be seduced. I had $100 million from my first major business success burning a hole in my pocket and bankers ringing every day asking if I would like them to manage my money. I could have just put it all in a bank but I went a step further."

"It was a busy time for me: within a month of bidding for Landsbanki, I also engineered the Pharmaco–Delta pharmaceuticals merger, creating the company that would later become Actavis. Now, at the age of 35, I had most of my assets in the country, controlling with my father two of its biggest companies."

"That is not altogether unreasonable: Landsbanki, Kaupthing and Glitnir rank in the world’s top ten biggest banking bankruptcies, and when combined as one big Icelandic banking collapse would rank as the third-largest corporate collapse in history. Foreign banking institutions alone were said to have lost €30 billion in the crisis. And, at the time of the 2008 crash, I reckon I was the largest personal investor in Iceland’s economy. In hindsight, I should have never put so much money at risk in Iceland."

"I refuse to be classed alongside such operators. I have lived abroad for 26 years, more than half my life. I don’t have Icelandic funds to invest abroad. I earned my capital abroad and made the mistake of ploughing much of it back into Iceland. Others started businesses in Iceland and leveraged their local assets to acquire businesses abroad. I did things the other way around, bringing money into the country. When I sold my companies in Russia, Bulgaria and the Czech Republic, I was paid in cash, not in paper, and that cash paid for Actavis and was pumped into Iceland’s financial system. I did not sell a single share in Landsbanki, Actavis or Straumur, the investment bank of which I was chairman."

"Extracting myself from my misplaced investments in Icelandic banks was much more difficult. I knew that I could not sell the 40 per cent stake in Landsbanki or the 38 per cent holding in Straumur, the Icelandic investment bank of which I was chairman. I held both stakes jointly with my father but realised that they were simply too large a piece of the financial infrastructure for them to be allowed to be sold without a great deal of time-consuming regulatory scrutiny. And I had grave concerns about the strength of the krona, the management of the Central Bank and Iceland’s financial system. I kept thinking of what had happened in Russia ten years earlier. The Icelandic krona was being artificially strengthened by the government, which was offering foreign investors krona-denominated bonds at excessive rates of interest. As the coupon on the bonds went from 10 per cent to 12 per cent then 14 per cent and 16 per cent, my forebodings grew. More and more it seemed like Russia all over again, with a government boosting interest rates to get cash so it could fund itself; and the krona exchange rate was just as artificial as that of the rouble in 1998. But this time it was happening in my own country where I was heavily exposed to the economy. I needed an exit plan."

"My role is to be a catalyst for change and a kind of midwife. Companies are born and I pass them on to their ultimate parents, be they other individual investors or the stock exchange. My plan was to take Landsbanki, make it international and then sell it. We ran out of time."

"It is easy to say with hindsight, of course, but to a degree I did see the same thing happening at Landsbanki. I couldn’t pinpoint one thing. But I was sceptical of the relationship with Baugur, to which it was lending way too much money. Baugur was effectively bankrupt by the end of 2007 and I had been saying for a long time that it was just taking too much risk. It kept buying up assets on UK high streets for a full price but never sold a single one. It was always buying, and then someone in the group would form a daughter group so that assets were often being passed on within the group for a higher price, creating virtual profit. There were a lot of what I would call ‘virtual transactions’. When I made this argument, people inside Landsbanki always said it was just rivalry between me and Baugur’s chairman, Jon Asgeir Johannesson. It wasn’t, but it took a long time for Baugur to unravel and for others to realise the truth. Johannesson was seen almost as a pied piper to Reykjavik’s financial community. Bankers and investors seemed to follow him everywhere and of course the fees were lucrative. I said to one of his bankers: ‘He pays you a lot of fees. He’s never going to try to push down the fees because he’s not interested. He’s just trying to borrow to the limit and then he’s going to say: “I’m too big to fail.”’"

"I needed to put more money into the business, by far one of the biggest companies in Iceland, so that it wouldn’t be taken over by Deutsche Bank. We had assets enough, and were working on selling them, but for the time being we had liquidity problems, so I borrowed €150 million from Landsbanki in March 2008 to rescue Actavis and fund salaries. This is what I was most criticised for in Iceland after the crash. ‘How could you borrow this in September 2008?’ my detractors cried. But I had started the process in March, borrowing in monthly instalments, with the last and largest payment coming in September. I gave a personal guarantee against the borrowings and, most importantly, that guarantee involved me pledging my holdings in Play, the Polish telecoms company, which was my most valuable and debt-free asset. Even so, the loan proved insufficient to get Actavis back on track and we were still busy scuttling around when the financial crash struck."

"How much did I have to liquidate? Almost everything. All the assets in publicly quoted shares went, and my investment in Landsbanki went from being worth €1.7 billion at the beginning of the year to €600 million by 4 pm on Friday 3 October before ultimately falling to zero on the Monday, the following business day. Straumur survived but had to write down its assets by 50 per cent; its shares then plummeted, trading at less than a third of book value. It’s amazing that so much value could be lost over a single weekend, and now of course the sceptics say: ‘Did you ever make all that money? Was it ever there?’ or: ‘How could you lose it so fast?’ But it just went, destroyed by the international financial bomb that had hit Iceland. As with the blast effect of any bomb, the damage spreads ever further from the initial point of impact to reach buildings on the periphery so that they eventually collapse or become so unsafe that they have to be pulled down."

"After the collapse of Northern Rock in August 2007 and subsequent concerns about other UK-based banks, what I had seen as a secure deposit base and a strength began to weaken. After the collapse of Lehman Brothers a year later, UK investors began a general run on bank deposits which was to pose jurisdictional questions in previously uncharted waters. Icesave became a problem because its UK deposits were held by a UK branch of Landsbanki, rather than by Heritable, which was a British bank wholly owned by Landsbanki. In hindsight, this was a major mistake by the management. I have to admit that, right up to the weekend of the collapse, I was unaware of such technicalities. It only started to dawn on me that this could be a difficulty when I spoke to the prime minister on 2 October. I can see it clearly now. Iceland is not a member of the EU, but an Icelandic bank had opened a branch in the UK, under EU regulation, and accepted deposits. So there was a jurisdictional issue – an issue that came to the fore over the weekend of 4–5 October 2008, as Iceland’s financial crisis unfolded."

"The main strand of the claim that made up this issue was that an enormous sum invested by UK and Dutch savers would now have to be paid back by the Icelandic taxpayer. It was an incendiary idea, which, by virtue of being repeated, became an accepted truth. In fact, for the Icelandic taxpayer to have to foot the bill, Landsbanki’s assets would have had to have been worthless or to have fallen at least 50 per cent. Neither was ever the case. Landsbanki did not go bankrupt because it had lost its assets. It had simply not been able to change Icelandic krona for foreign currency. It was a liquidity crisis, rather than any fraud or malfeasance, that forced it to stop. Furthermore, no one had previously suggested that the Icelandic state was responsible for debts of a commercial enterprise, so it was extraordinary to do so now. The problem was some ambiguity over the responsibilities in such situations of EFTA countries (Iceland, Norway and Switzerland) vis-à-vis EU member states."

"At that time, one of the main criteria analysts used when looking at a bank was how much of its asset base was funded by deposits. This became even more important after the collapse of the UK’s Northern Rock in August 2007, so Landsbanki put more emphasis on getting deposits. As Iceland’s population was not big enough to raise the deposits it needed, Icesave increasingly fulfilled this need. At the time this was seen as a highly prudent strategy. A deposits-to-assets ratio of anything above 50 per cent was considered good and Landsbanki’s ratio in 2008 was 60 per cent. This wasn’t a surprise. Landsbanki had deliberately targeted the UK savings market with highly competitive interest rates and £5 billion of deposits flooded in, mostly between January 2007 and October 2008. From a shareholder point of view, I saw this as de-risking the business, using money from small depositors to pay off the international bond markets so that we were less exposed to market volatility."

"As for me, I had invested my own capital in Landsbanki and had only myself to blame for my own losses, but being held responsible for the collapse of an entire economy was something I found hard to swallow. It was the worst of times for me – and really quite frightening. Icesave and Landsbanki were toxic, and anyone connected with them, from employees to advisers, was almost a social pariah. I was beset by depression over it all. In the media I was asked if I was going to pick up the bill myself, and it was suggested that it was ‘prudent for me not be out and about in Iceland these days’. I was as afraid and angry as anyone there, but nobody was interested in listening when I came out publicly and said that I was certain that Landsbanki’s estate would totally cover its Icesave exposure and that it would never be a cost to anyone outside. I was desperate to get the position clarified, but the confusion seemed to drag on for ever. To many Icelanders, I was instrumental in bringing about Iceland’s sorry state; I was a troublemaker who had no right to be heard."

"Let’s do the math, as Americans say. In 2005, *Forbes* calculated I was worth $1.4 billion, making me Iceland’s first billionaire. By the peak of the boom, midway through 2007, this had increased to $4 billion, with roughly one third of my wealth in Actavis, another third in Landsbanki, Iceland’s second-biggest bank which was privatised in 2002, and the remainder in other ventures. But by the end of 2009, following the government’s seizure of Landsbanki and the fall in Actavis’s valuation, this had fallen to about $40 million. So if people asked how I was doing, I replied that I still had 1 per cent of my net worth."