The parliamentary Special Investigation Commission report of 2010 recommended prosecution of some senior politicians for their role in the crisis. A special committee of the parliament decided in September 2010 to push forward a case against four government ministers named in the report. Later that month, the full Alþingi (parliament) decided to charge only Geir Haarde, the prime minister during the 2008 financial collapse. This kicked off a process called Landsdómur: Iceland convened a special national court for the first time in its history. This particular constitutional remedy had never been used. The prosecutor for the parliament led off his 2011 indictment of Geir Haarde with “intentional delinquency or sensational negligence in his official duties as prime minister”.115
The former top politician was found guilty on one of the charges against him in April 2012.116 He was found “grossly negligent” (af stórfelldu gáleysi) in failing to address the problems that Icelandic banks were facing or their potential consequences for Iceland’s economy at his cabinet meetings, thereby keeping other ministers in the dark.117 In this, he is the only Icelander in history to be convicted of a high crime by this special national court.118 He was, however, not sentenced to any prison time or other sanctions on the grounds that he was (1) 61 years old, and (2) had no previous criminal record. Subsequently, he was appointed Ambassador to the United States, arguably the most prestigious Icelandic ambassadorship among one of only a handful of foreign missions maintained by the Land.
After public unrest and endless public demonstrations (‘the pots and pans revolution’) in winter 2008–09,119 Iceland finally had new elections, resulting in a new government: a coalition between center-left and green parties to replace the big two—Sjálfstæðisflokkur or Independence (fishermen) and Framsóknarflokkur or Progressive (farmers)—that had dominated Icelandic politics for decades. In early 2009 the Office of the Special Prosecutor was established to coincide with the intensification of investigations into the collapse of the banks at FME. But by the end of 2011, FME was winding down the investigation teams, despite a huge backlog of open cases.
The years 2009–13 were very difficult for the Icelandic public. Much of daily life became a struggle. People lost most or all of the equity they had in their homes. Their salaries barely covered basic necessities. Only the social safety net kept daily life from complete collapse.
The big two parties successfully tarred the new coalition government as responsible for the poor economic conditions in the country, conditions they themselves had created in the botched privatization of the banks, followed by the cheerleading and zero-regulation policies of the boom years that allowed the banks to grow quickly into criminal enterprises.
In the 2013 elections, these political parties got back into power, promising a return to the good times of 2007. The big accomplishment of this new government was large write-downs on high-value home mortgages, to benefit the wealthy voters who had put them back in power.
In December of 2015, this government closed down the office of the special prosecutor, but created a new district prosecutor to take over all the open cases—with a fraction of the headcount and budget. That year, a record number of Icelanders with college degrees moved away from the country. There was nowhere to work and nowhere to live: few good jobs to match education levels. With a university education, one could expect to take home only around $2,650 per month. And the post-crisis tourist boom had converted whole neighborhoods to Airbnbs, pushing families into desolate and undesirable exurbs. Even now, families who manage to purchase a home with a mortgage cannot get ahead, as the monthly inflation adjustment robs them of the equity they work so hard to establish.
In this context, the Panama Papers hit the presses in April 2016. It turned out that the head of each of the big two political parties was hiding both offshore wealth and onshore conflicts of interest from the Icelandic public.
Most egregiously, Sigmundur Davíð, the then-prime minister and head of the Progressive Party, had an offshore firm called Wintris Inc. It was stuffed with tens of millions of euros worth of assets held by Credit Suisse, money that came from his wife’s sale of the valuable Toyota franchise in Iceland. As prime minister, Sigmundur Davíð was negotiating with the creditors of the collapsed banks for final resolution of their bankrupt estates. However, hidden in his own firm offshore were €3.6m in claims on those same banks. The prime minister himself was personally a large creditor to the failed banks—so was he negotiating on behalf of the Icelandic public or his own wallet?
Sigmundur was forced to step down after a humiliating interview by a Swedish journalist came to light. The journalist asked him about Wintris on camera; he stuttered and stammered, finally ripping off the mic and walking out of the room. Today he remains in parliament and head of his own breakaway party, the Middle Party.
The head of the second party in government—the most powerful political party in Icelandic history—was also named in the Panama Papers. Bjarni Benediktsson appears to have owned a Seychelles company called Falson & Co via bearer share certificates, and maintained power of attorney for the firm. He claimed that Falson was set up to invest in real estate in Dubai, but that the investments were sold at a loss.120 He received a cash payment out of the firm to a Swiss bank account. When questioned, he claimed he thought that his undeclared offshore firm was actually registered in Luxembourg, not the Seychelles. Bjarni took over as prime minister in 2016, with the resignation of Sigmundur Davíð. Bjarni denies wrongdoing in the Falson matter.121
As soon as I dug into it, I had wanted to further investigate the €500m emergency loan that Seðlabanki, the central bank of Iceland, made to Kaupþing on 6 October 2008. But my superiors at FME told me that it was not clear if the agency had any jurisdiction over the more prestigious and independent central bank of Iceland. (I argued unsuccessfully that it was worth a try: the central bank was after all a bank, and FME was the regulator of banks.122)
The former Prime Minister, Davíð Oddsson, the same one who oversaw the botched privatizations of the banks, had somewhat unbelievably become the loose-lipped central banker of Iceland, a post he served through the 2008 crisis. The central bank, under his control, pumped out a round sum of exactly €500m to Kaupþing just three days before its collapse. This was nearly all the foreign currency reserves of Iceland—the equivalent of the country placing all of its last chips on red only to watch the wheel come up black.
In exchange for all the cash, Kaupþing gave the central bank its equity shares in a Danish bank called FIH as collateral. It was likely forbidden under the charter of the Icelandic central bank to even receive an equity stake in another institution, but Davíð and his team took it on anyway. The Danish bank turned out to be mainly a vehicle for holding U.S. subprime mortgage junk, so it had little value. The central bank would have had no way to know this; they did not perform any due diligence on the Danish bank. They simply had no time.
How this sale was agreed and who approved the loan is still a mystery today. A November 2018 news article in Kjarninn states that there was never a loan application from Kaupþing, no approval by the board of the central bank for this loan, and no restrictions on how Kaupþing could use the funds.123
We can’t pin down exactly how Kaupþing made use of the Seðlabanki loan proceeds, because money is fungible and there was lots of it sloshing around in those final hours. The amount, €500m, is roughly the same amount that Kaupþing lost to Deutsche Bank in its failed attempt to manipulate its own credit spreads. Also, on the same day as the emergency loan was granted, Kaupþing granted €171m to Kaupþing Luxembourg in the Lindsor deal. That money was used to buy up worthless bonds, bailing out Marple, five employees in Luxembourg, and as well as the bank’s own trading desk. These parties had tried to personally profit on their inside knowledge of the Deutsche CLN deal, but failed. Now Icelandic central bank largesse helped to wallpaper over their bad actions.
Notes
116 upload.wikimedia.org/wikipedia/commons/a/a2/Dómur_Landsdóms_nr._3-2011.pdf, judgment in section XIII
117 He was found not guilty on the other charges against him: (i) not taking action in his capacity as Prime Minister to avert a national catastrophe, (ii) not conducting a risk analysis of the banking sector, (iii) not ensuring the 2006 Consultative Group on Financial Stability and Preparedness worked effectively, (iv) neglecting to actively reduce the size of the banking sector, and (v) not taking an active role in transfer of the Landsbanki Icesave accounts to a UK entity.
118 After his conviction, Geir submitted a claim to the European Court of Human Rights, which did not find in his favor. The decision is here: hudoc.echr.coe.int/eng?i=001-178700.
119 This populist revolt in a tiny country torn apart by political and financial corruption perhaps augured the rise of populism elsewhere in the West, during the decade to come.
122 FME and the central bank merged at the beginning of 2020.