Privatization of banks draws heavy fire

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Privatization of banks draws heavy fire

Since Saturday, Fréttablaðið, Iceland's most widely read daily, has published a series of articles describing the privatization of the former state owned banks Búnaðarbanki, now part of Kaupthing Bank, and Landsbanki. Reporter Sigríður Dögg Auðunsdóttir wrote the four main articles.

In what follows, we outline some of the relevant events and the coverage to date.

- In the spring of 2002, the Icelandic government’s Executive Committee on Privatization was planning to continue to sell in lumps the Republic of Iceland’s majority stake in Landsbanki. Búnaðarbanki, also still majority owned by the government, was scheduled to follow Landsbanki on the same track.

- Twenty per cent of Landsbanki was sold directly to the public on the Icelandic Stock Exchange, ICEX, on June 14, 2002. The offering, expected to last a month, was completed in 15 minutes and left slightly less than 50 per cent of the bank in the hands of the government. No single investor was permitted to buy more than four per cent. Thirty per cent of Landsbanki had already been placed in a similar way in 1998 and 1999.

- Twenty eight per cent of Búnaðarbanki had also already been sold in the same fashion, and through two acquisitions the government had given up another 17 per cent, reducing its stake to 55 per cent by June 2002.

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- Swedish bank SE-Banken had approached the government in 1998 and made clear its interest in a controlling stake in Landsbanki but was turned away. According to Fréttablaðið, the Executive Committee on Privatization has also maintained that the entire holding of the Icelandic government in both Landsbanki and Búnaðarbanki could have been sold in 1999 in the public market in Iceland. An attempt to find foreign buyers of a controlling stake in Landsbanki in late 2001 with the assistance of HSBC failed because of “adverse market conditions.” One condition for the sale was that it would lead to more competitive and more liquid financial markets in Iceland.

- Chairman of the Independence Party Davíð Oddsson, who by 2002 had served eleven years as prime minister, had stated that the state-owned banks should be sold to a diverse base of shareholders and they should be neutral in their dealings. In an interview in 1998, just after his government had brushed off SE-Banken, he said, "Conditions in Iceland are such that it is unhealthy if too much power gathers in too few hands."

- A few weeks after the successful sale of Landsbanki shares on June 14, the leaders of the coalition parties, Davíð Oddsson and the then foreign minister and chairman of the Progressive Party, Halldór Ásgrímsson, intervened in the privatization process and decided to put controlling stakes in both Landsbanki and Búnaðarbanki up for sale, effectively taking control of the process out of the hands of the Executive Committee on Privatization.

- Finance minister Geir Haarde (Independence Party) and minister of industry and trade Valgerður Sverrisdóttir (Progressive Party) served together with Davíð Oddsson and Halldór Ásgrímsson on an ad-hoc ministerial committee for privatization and helped them influence the privatization process.

- According to Fréttablaðið, the intervention of the ministers was prompted by an expression of interest in a controlling stake in Búnaðarbanki by Björgólfur Guðmundsson, a long-time member of the Independence Party, and his son, Bjórgólfur Thor Björgólfsson, majority owners of the investment company Samson.

- On July 10, 2002, the ministers placed an ad in the name of the Executive Committee on Privatization soliciting bids for "at least 25 per cent share of Landsbanki and/or Búnaðarbanki". The ad was intended to allow business interests linked to the Progressive Party to gain a seat at the table in addition to Samson. The ad was only run in Iceland, not internationally.

- After five parties filed for entry to buy controlling stakes in the two banks, two politically undesirable entries were disqualified and three final candidates were selected: the so-called S-Group, formed by Ólafur Ólafsson chairman of Samskip and his associates, and investment company Kaldbakur, both affiliated with the Progressive Party; and the investment company Samson.

- The price of the shares on offer was not discussed until late in the stage of the selection process, well after the final three candidates had been selected.

- According to Fréttablaðið, the S-Group and Kaldbakur were steered to buy Búnaðarbanki; Samson was steered to buy Landsbanki.

- Halldór Ásgrímsson and Valgerður Sverrisdóttir tried unsuccessfully to broker a deal between Kaldbakur and the S-Group and convince them to work together to buy Búnaðarbanki instead of Landsbanki. The S-Group bid higher than Kaldbakur for Búnaðarbanki and paid ISK 11.9 billion (USD 140 million at the time) for a 45.8 per cent stake out of the roughly 55% then remaining in the hands of the government.

- An identical controlling stake in Landsbanki of 45.8 per cent was sold to Samson for ISK 12.3 billion (USD 145 million at the time) in spite of Samson offering the lowest price for Landsbanki of the three final bidders. Samson later received an additional discount of ISK 700 million.

- Halldór Ásgrímsson threatened to derail the privatization process unless Landsbanki divested itself of insurance company VÍS. His former colleague, ex-minister of trade and industry Finnur Ingólfsson now runs VÍS. Halldór Ásgrímsson's brother sits on the board of directors of VÍS representing Skinney-Þinganes of which he and Halldór Ásgrímsson are both shareholders.

- Shortly after assuming power and becoming prime minister in 1991, Davíð Oddsson nominated one of his closest collaborators and chief executive of the Independence Party, Kjartan Gunnarsson, to serve on the board of directors of Landsbanki. Kjartan Gunnarsson remained a non-executive director of the bank throughout the privatization process. Through a holding company, Kjartan Gunnarsson now owns 1 per cent of Landsbanki, making him the 16th largest shareholder; he still sits on the board.

- One member of the Executive Committee on Privatization, Steingrímur Ari Arason, an economist and a member of the Independence Party, resigned in the middle of the privatization process saying “prospective buyers were turned away in spite of their better offers” and "he’d never seen such extraordinary practices" during his tenure on the Committee. He was replaced by an Independence Party member and permanent secretary of the ministry of finance, Baldur Guðlaugsson.

The sale of the controlling 45.8 per cent stakes in the two banks was concluded by end January 2003.  In both cases, the government’s shares were sold at close to market price without the hefty premium controlling stakes usually command. The S-Group received an eleven month extension to pay for 4.8 out of the 11.9 billion króna purchase price for the government’s shares in Búnaðarbanki; Samson received a one year extension to pay 3.4 out of 12.3 billion for the shares in Landsbanki.

 

In spite of not having paid in full, both buyers immediately assumed control of their respective controlling stakes and proceeded to elect new directors and take control over the operations of the banks.

Búnaðarbanki was acquired by Kaupthing Bank in May 2003 in an all-share transaction a few months after the controlling stake was bought by the S-Group. Today, the shares of the merged bank trade at almost five times the closing price of Kaupthing Bank after the acquisition.

Landsbanki trades on the Icelandic stock exchange at more than four times the price Samson paid for its shares.

On Sunday, an editorial of Fréttablaðið detailed how repeated requests for information from ministers and the Executive Committee on Privatization have been ignored or refused during its investigation of this story.

Fréttablaðið reported on Monday that Davíð Oddsson was at his summerhouse and could not be reached for comment. Halldór Ásgrímsson was also "in the countryside" and could not be reached for comment either. Geir Haarde was in town but could nevertheless not be reached. Valgerður Sverrisdóttir referred reporters to a statement on her website.

 

(Both Davíð Oddsson and Halldór Ásgrímsson have made themselves available to the daily Morgunblaðið to discuss Sunday’s results of the French referendum on the EU constitution. They are quoted, quite prominently, on the front page today, Tuesday.)

Ingibjörg Sólrún Gísladóttir, chairman of the Social Democratic Alliance, said Sunday on Iceland State Radio, RÚV, that the rules concerning the privatization had been "grossly violated". She said the way the banks were sold reminded her of privatizations in the former communist countries of Eastern Europe.

Also on RÚV Sunday, Steingrímur J. Sigfússon, chairman of the Left-Greens, demanded a public inquiry into the privatization of the banks. He claimed that the Executive Committee on Privatization had been "humiliated" by the interference of the ministers.

As yet, there is little discussion in public what effect, if any, these revelations will have on the currently on-going privatization of Iceland Telco, Síminn (see Iceland Review – Daily News, May 26). The privatization of Síminn, scheduled to be completed in July, has been heavily criticized for lack of transparency and because of the widely held perception that the current government has already determined the outcome and assigned the 98 per cent stake it holds on behalf of the citizens of the Republic of Iceland to insiders linked to the ruling Independence and Progressive parties. 

The last in a series of four articles appears in Fréttablaðið today, Tuesday. Iceland Review’s Daily News will update readers on that article and on other aspects of this unfolding story at a later date.