Inquiry puts bank leaders in firing line

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 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, sending the Icelandic krona plunging and leaving it with a huge bill for compensating depositors - including thousands of British savers, as well as charities and local councils.

The 2000-page report by the Special Investigation Commission 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, Bjrgvin 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, 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 Oddsson and Haarde hid information from 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," Hreinsson said.

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."

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..." the commission said.

The report added: "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."

The major shareholder of Glitnir Bank, Jon sgeir Johannesson, is still chairman of Iceland Foods and a director of House of Fraser.

Bjrgolfur Thor BjrgUofsson and his son, Bjrgolfur Gudmundsson, were the largest owners of Landsbanki and Icesave, and have offices in Mayfair, London.

Kaupthing's biggest shareholders were London-based brothers Agust and Lydur Gudmundsson, who are also the biggest shareholders in the food group Bakkavr's.

They have defended their conduct but a summary of the SIC report has been handed to Iceland's special prosecutor.

- INDEPENDENT