Business Minister: Iceland’s Banks Fabricated Money Skip to content

Business Minister: Iceland’s Banks Fabricated Money

Minister for Business Affairs Gylfi Magnússon states that Icelandic banks increased their equity with dubious accounting methods and that such fabricated money is one of the causes for the collapse of Iceland’s economy.

The headquarters of Glitnir in Reykjavík, one of the banks that were nationalized in October 2008. Copyright: Icelandic Photo Agency.

“I think it’s obvious that one of the things that occurred during the dance before the collapse is that people created equity by, for example, changing loan capital to equity,” Magnússon told reporters in a press conference yesterday, Fréttabladid reports.

“People granted loans for purchasing stocks and then created equity on paper by purchasing assets that were very unrealistically priced and recorded the difference as goodwill,” the minister explained.

MP for the Left-Greens Atli Gíslason told Fréttabladid yesterday that, according to his sources, the banks’ equity had been “fixed.” With increased goodwill, increased profits were recorded, which led to an opportunity for dividend payments.

Gíslason described such practice as “bubble profits” and “bubble dividends.” Magnússon agrees. People created funds on paper, which weren’t backed by any real money.

When asked whether the practices of Icelandic bankers might be likened to the business practices of the American energy company Enron, which went bankrupt in 2001, Magnússon said there were many similarities.

“Of course people were fooling themselves and partly others as well,” Magnússon stated, adding that some Icelandic financial companies are likely to undergo criminal investigations because of their practices.

However, it is not for him to decide, Magnússon emphasized, the appropriate institutions will decide how these cases will be investigated.

Magnússon said it is quite possible that goodwill continues to be overestimated in the records of financial companies that are still operating in Iceland. However, at the moment, it isn’t worth much.

Fréttabladid stated in its coverage of this story yesterday that the combined goodwill of Iceland’s largest banks, Glitnir, Kaupthing and Landsbanki, increased from less than ISK 19 billion (USD 165 million, EUR 123 million) in 2003 to ISK 123 billion (USD 1.1 billion, EUR 790 million) in 2007.

At the same time, the combined equity of the three banks increased from ISK 92 billion (USD 799 million, EUR 594 million) to ISK 714 billion (USD 6.2 billion, EUR 4.6 billion).

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