How to Beat the Banksters: Iceland paves the way how to deal with financial crises and financial fraudsters

How to Beat the Bankers: Iceland Paves the Way How to Deal with Financial Crises and Financial Fraudsters

One of the most noteworthy stories related to the world of finances is of course the bankruptcy of Iceland in the aftermath of the Global Financial Crisis of 2008 where the Icelandic authorities resorted to inflation-targeting to allow borrowing beyond what the economy’s gross domestic product (GDP) could pay for.

After the privatization of the banking sector completed in 2000, the economy was thrown into a tailspin when over a five year period, private bankers borrowed about 120 billion dollars. An economic bubble was created, which caused the house prices to double, and made a small percentage of Iceland's population rich enough to buy overseas investments, mansions, yachts, and private jets, while leaving an unpardonable debt for all the Icelanders.

In response to the failed banking system, on 9 October 2008 the Icelandic Financial Supervisory Authority took control of Kaupthing, the main bank in the country. Later on, the government officials were forced to resign, the old government was liquidated, and a new government was put in its place. By March 2010, Iceland's people voted to deny payment of the 3,500 million Euro debt created by the bankers, and about 200 high-level executives and bankers
responsible for the economic crisis in the country were either arrested or were facing criminal charges.

Reykjavík District Court sentenced former CEO of Glitnir Lárus Welding and the bank’s former company division manager Guðmundur Hjaltason to nine months in prison on Friday, December 30, 2012.

They happened to be the first high ranking bankers from Iceland's three largest lenders to be sentenced to jail for their activities linked to the country's financial and economic collapse in 2008.

The two former chief executives are indited for their roles in approving the €35m (€59 m at today’s exchange rate) loan just three months before the collapse of the bank.

The domestic parts of the country's three biggest banks were saved, while their international arms were liquidated.

Bondholders who had lent money to Iceland were "burned" with significant losses, but given control of the remains of the banks.

According to a wide range of reports dedicated to the intricacies of the financial crisis in Iceland, Glitnir was Iceland’s third-largest bank before its collapse in October 2008. The trial has marked the start of prosecutions brought in Iceland against bankers after the collapse of its three largest lenders ( Kaupthing, Glitnir, and Landsbanki) forced the Nordic island into an international bailout following their massive expansion leading up to the 2008 financial crisis.

Glitnir was the first of Iceland’s three major lenders to fail in October 2008. Together, Glitnir, Kaupthing Bank hf and Landsbanki Islands hf had balance sheets ten time the size of the island nation’s $13 billion economy.

Geir Haarde, the country's former prime minister, was found guilty of negligence leading up to the financial crisis but escaped jail.

Fortunately, some of the perpertrators of the Icelandic financial fraud did not come out to be so lucky.

Hreidar Mar Sigurdsson, the former chief executive of the largest Icelandic bank Kaupthing was arrested back in 2010.

That turned out to be the first high-profile arrest since the country's financial collapse in 2008.

Gudmundur Hjaltason, Glitnir’s former head of corporate finance, was found guilty in the case, in which prosecutors said they had in early 2008 approved a loan to a company that had a stake in the bank outside the usual decision-making process, eventually leading to a loss of about €54m.

Jón Ásgeir Jóhannesson, the former boss of the Icelandic investment company that owned stakes in Hamleys, House of Fraser, All Saints and frozen food chain Iceland had been charged with fraud and faced allegations in Reykjavik that
he exerted undue influence on Glitnir. Mr Johannesson’s influence on the UK high street resulted in him being named by trade magazine Retail Week in 2007 as the third most powerful retailer in Britain. Mr Johannesson’s investment
company, FL Group, was the largest shareholder in Glitnir.

Lárus Welding, the former CEO of Glitnir, was indicted alongside Mr Jóhannesson before Christmas in connection with another loan Glitnir made shortly before its demise. Mr Welding helped to negotiate Landsbanki's €90m takeover of Merrion Capital, the Irish stockbroker back in 2005, when he was Landsbanki's most senior London-based executive, according to sources in Dublin. Before he joined Glitnir in 2007, Mr Welding was a senior executive at Landsbanki, that owned Ireland's Merrion Capital from 2005 to 2008.

Halldor Kristjansson and Sigurjon Arnason, Landsbanki's former joint chief executives, have been quizzed by Icelandic prosecutors as part of investigations into the collapse of Landsbanki.

After Landsbanki had been swept up in the financial crisis of 2008 its failure affected hundreds of thousands of UK savers who had deposits with its internet banking subsidiary, Icesave. The Landsbanki winding-up board is taking legal action against not only PwC, the global accounting group, in Iceland but also PwC in the UK over the bank’s failure.

The collapse of Iceland’s banks led to a 10 per cent fall in economic growth, a big rise in unemployment and a halving in the value of its currency. But all the bankers and politicians put on trial so far have denied wrongdoing, claiming they were caught out by a global credit crunch.

So far, despite widespread popular anger in western countries at the behavior of banks leading up to the 2008 financial crisis, only low-level executives at big banks or top managers at small lenders have faced prosecution in countries such as the UK and US.

Perhaps the most high profile case in the US was the conviction in June 2011 of Lee Farkas, the chairman of Taylor, Bean & Whitaker, a relatively small mortgage lender in Florida.

Iceland has learned her lesson well, though. In February 2011, a new constitutional assembly settled in to rewrite the Iceland's constitution, aimed to avoid future possible entrapment by debt-based currency foreign loans.

According to the Paris-based Organization for Economic Cooperation and Development, Iceland now is slowly emerging from a deep recession following the collapse of its main banks. The economy stopped contracting by late 2010 and a consumption and business investment-led recovery was projected to gather momentum, lifting economic growth to 3 percent by 2012.