Reykjavík Grapevine - 08.10.2010, Page 29

On June 6, The Organization for Eco-
nomic Co-operation and Development
(OECD) publishes its Economic Outlook
report for all 30 member countries, spe-
cifically pointing out that Iceland’s banks
may have grown too large to be bailed out
if that becomes necessary.
fRéTTABLAðIð fORGETS TO MEN-
TION THE OECd’S fORECAST
Fréttablaðið prints two articles on the
OECD report, but fails to communicate
any warnings about the banks. In fact,
in the first one, “Dark forecast surprises
Minister,” Fréttablaðið simply reports
what certain people think about the fore-
cast rather than any information con-
tained in the actual forecast.
The article begins by quoting Minis-
ter of Business Affairs Björgvin G. Sig-
urðsson, who says: “The negative forecast
is unexpected. It’s possible to make vari-
ous assumptions, but the current situa-
tion does not warrant such a serious fore-
cast...”
The fact is people often scan headlines
and read the beginning of articles, which
is why the most important information
should appear upfront. In this case, the
headline and introduction are actually
slightly misleading because the article
goes on to quote an economist from ASÍ
and the director of SA-Confederation of
Employers, who are NOT surprised by
the forecast. Furthermore, the article
concludes with a quote from Director of
Samtök Atvinnulífsins (“The Confedera-
tion of Employers”) Vilhjálmur Egilsson
who says, “there is a lot of uncertainty
in all of these forecasts.” In other words,
the message is that one shouldn’t put too
much weight on the report because fore-
casts aren’t reliable.
Although these words all came from
various experts, the story is constructed
in a way that invalidates the forecast.
Most importantly, however, the reader
has no idea what these men are reacting
to, unless they subscribe to OECD re-
ports (unlikely). There is no mention of
the OECD’s concerns about the enormity
of the banks, the absence of a lender of
last resort and its recommendation to in-
crease supervision.
Oops.
fRéTTABLAðIð SAyS BAd NEWS
dOESN’T APPLy TO ICELANd
The second article Fréttablaðið prints
about the OECD forecast is: “Forecasts
worse than last year,” which focuses on
the general outlook for OECD countries.
In summing up the report, the article
states, “Those countries with highly lev-
eraged financial companies will be worse
off, Britain is specifically mentioned,
but the report states that Iceland should
be stable. The United States is also men-
tioned as the report states, for lowering
the average OECD economic growth fig-
ures.” Talk about selective reporting.
Fréttablaðið makes absolutely no
mention of Iceland’s banks. Instead, the
article gives the reader the impression
that Iceland is better off than Britain and
the United States, despite the fact that
Iceland had its own highly leveraged fi-
nancial companies to be worried about,
which the OECD specifically pointed out
in their report.
Thus, these two Fréttablaðið articles
fail to convey the OECD’s warning of the
impending events that took place four
months later. Of course the OECD did
not predict the crash itself in the report,
but the concerning recipe of enormous
banks with no possible lender of last re-
sort should have at least been reported.
MORGuNBLAðIð BuRIES THE
NEGATIVE fORECAST
On June 5, Morgunblaðið covers the
OECD forecast in “Negative OECD Eco-
nomic Forecast.” The article appears in
the corner of the business page, occupy-
ing a space smaller than a deck of cards.
It relays the OECD’s recommendation:
“In light of uncertainty in the world econ-
omy, it would be a good idea to increase
reserves of foreign currency and bank au-
diting.” It also mentions Iceland’s sharp
decline in economic growth, a decline in
private consumption and an increase in
unemployment.
However, it does not elaborate on the
OECD’s specific concern about Iceland’s
banks, namely their gargantuan size that
precludes sufficient help from Iceland’s
reserves in the case of a crisis. Further-
more, when examined in the context of
the entire newspaper that day, the nega-
tive news is dwarfed by two full-page ar-
ticles carrying contradictory messages:
“No crisis in auditing” and “Have faith in
the Icelandic market.”
NO CRISIS IN AudITING?
In the first article, “No crisis in auditing,”
President of Deloitte Ralph Adams, who
“has closely followed Icelandic business,”
defends the Icelandic economy and the
banks. After having recently opened a
Deloitte branch in Iceland, Adams states,
“…it is important to note that there is nei-
ther a financial crisis nor a crisis in audit-
ing” and goes on to explain the current
situation in terms of a psychological fear
and a crisis in trust whose origins we will
wonder about in a few years to come.
In regards to the banks Ralph states:
“The British media have been critical
of the Icelandic economy lately. Iceland-
ers have called the criticism unfair and
sometimes unfounded.” In the banks’
defence, he says, “They are fishing in the
same waters. When a small player does
well and grows faster than a big player,
the media will naturally talk about it...”
In other words, he discounts the criti-
cism. It’s envy.
Lastly, on financial auditing, which
should seemingly be the most remark-
able part of the article given the headline,
“No crisis in auditing,” Adams expresses
the importance of transparency. But, it’s
not why you’d think. He says it is a good
remedy to the negative reports in the for-
eign media.
So, in this article, an authority fig-
ure who “has closely followed Icelandic
business,” addresses and explains away
all of the OECD’s concerns. First, he ad-
dresses the economic downswing—not a
real financial crisis. Then, he addresses
the concerns over the size of the banks—
envy of success, and finally, he addresses
the need for greater oversight—greater
transparency needed to appease the for-
eign media.
IMPORTANT LOOkING MEN BELIEVE
IN THE ICELANdIC MARkET!
The second article, “Have faith in the Ice-
landic market,” further makes little of the
OECD warning which, remember, occu-
pies a space smaller than a deck of cards
some pages back. Accompanying the ar-
ticle is a large attention-grabbing photo
of three important professional look-
ing men. The caption reads, “Iceland’s
friends: Venky Vishwanathan, Jan Ols-
son, and Hakan Wohlin from Deutsche
Bank say Icelandic companies will come
out strong from the downswing.”
Without going further into the con-
tent, Morgunblaðið’s decision to give this
article a full page with a big attention-
drawing photo is in itself a form of edito-
rialising—it shouts: these are important
people with important opinions and they
believe in the Icelandic economy.
The article begins with these “high-
level” bankers discounting the opin-
ions of people who have been negatively
discussing the Icelandic economy and
financial ventures because they “don’t
understand the situation in Iceland.” The
fact that critics don’t understand the Ice-
landic economy is also restated in the ar-
ticle three times—perhaps for emphasis.
Jan Olsson is quoted saying, “Deutsche
Bank has great trust in the Icelandic
economy and government…The Icelandic
banking system has expanded rapidly in
the last years but the Icelandic economy
is well run.” Jan also explains away the
criticism Iceland had been facing, say-
ing, in times of difficulty it’s not surpris-
ing that people point fingers, and it’s not
surprising that people have been talking
about the banks, even if what they say is
untrue.
So, after reading Morgunblaðið on
June 5, 2008, one is left with the impres-
sion that Iceland’s economy and banks
are fine, despite the small blurb about
the OECD’s forecast. That’s either some
seriously good PR from the banks or an
especially convenient coincidence.
During the majority of June and July,
Morgunblaðið and Fréttablaðið ran sto-
ries about the króna reaching an all time
low as well as the rising inflation figures
and predictions from the Central Bank
that their target inflation rate would be
reached. Yet, there was little discussion
in either paper regarding the status of the
banks and the absence of a lender of last
resort if the banks were to default, until
Merrill Lynch published a report on July
24.
fRéTTABLAðIð SAyS THE GOVERN-
MENT IS ‘SuRPRISEd’
Covering the report, Fréttablaðið prints
a front-page article on July 26, “Inter-
vention necessary,” which continues on
page 12, “Wishful thinking and pious
words aren’t enough.” The article begins
by reporting that Richard Thomas from
Merrill Lynch believes government inter-
vention is necessary in today’s economic
situation and questions whether Iceland
is not in a similar situation to the US and
Britain.
This is of course followed by a quote
from Minister of Education Þorgerður
Katrín Gunnarsdóttir who says, “Such
a comment speaks for itself,” and ques-
tions Richard Thomas’ motives.
Furthermore, Fréttablaðið reports
that Minister of Business Affairs
Björgvin G. Sigurðsson is astonished at
Richard Thomas’ criticism, and claims
the government and financial sectors
work well together (note the irony here!
In the Special Investigative Committee’s
investigation into Minister negligence,
it turns out Björgvin was actually never
invited to any financial meetings before
the crash. Yet, here he claims the govern-
ment and financial sectors work well to-
gether).
The article continues on page 12,
mentioning Richard Thomas’ rule of
thumb: “As the CDS of a company trades
north of +1,000bps, the market is stating
that it expects a default. Both Kaupthing
and Glitnir are currently trading in that
area.”
This is good and well, except Frét-
tablaðið then adds, “Thomas says the
actual state of the banks are fine,” rather
than “It is time to consider whether or not
we will see a default from these banks,”
which is what actually came next in Rich-
ard Thomas’ report.
MORGuNBLAðIð HAS NO COM-
MENT
Morgunblaðið did not have much to say
about this one.
Despite countless warnings about the
bank’s size, the Financial Supervisory
Authority (FME) conducted a Stress Test
on August 14 to see whether the banks
were in a position to take on considerable
financial shocks and the banks pass with
f lying colours.

MORGuNBLAðIð TAkES THEIR
WORd fOR IT
On August 15, Morgunblaðið reports,
“State of the banks is strong and they can
withstand significant shock.” The cover-
age is quite basic and matches the FME’s
press release very closely. In fact, the ar-
ticle includes a quote from Icelandic FME
director-general, Jónas Jónsson, which
was simply lifted from the press release,
although not sourced that way: “The re-
sults from the stress tests indicate that
the capital ratios of the banks are solid
and can withstand considerable financial
shocks.”
Morgunblaðið does not delve deeper
into the issue and fails to ask questions
of the FME, such as how the C- ranked
banks passed their stress tests despite re-
ceiving negative rating after negative rat-
ing from external rating agencies. They
simply take their word for it.
fRéTTABLAðIð ALSO TAkES THEIR
WORd fOR IT
Fréttablaðið reports, “Withstand FME
Test.” Although Fréttablaðið provides
coverage beyond the press release and
points out that the tests don’t apply to the
smaller banks, it does not question the
conclusions of the test. The FME, despite
being charged with the supervision of the
banks, may have decided that it was to the
benefit of the banks to boost trust and it
is not difficult to imagine their motiva-
tion for positive PR at the time. However,
a good watchdog tracing the scent from
one negative rating to another would defi-
nitely have done some barking here. But,
no questions were asked.
WHy dIdN’T THE WATCHdOG
BARk?
Less than two months after Iceland’s
three largest banks pass the FME stress
tests, in October 2008, the banks de-
faulted, the stock market crashed and
people lost a lot of money (and eventu-
ally cars and houses). After looking at
the evidence, there’s no question that
Morgunblaðið and Fréttablaðið missed
some blatant warnings about the banks,
their enormous size and the absence of a
lender of last resort. But, why?
Morgunblaðið journalist Bjarni Ólafs-
son, who wrote the June 5 article, “No cri-
sis in auditing,” says he can’t remember
how he came to write the story, but says
someone from one of Iceland’s banks
likely contacted the paper to suggest it.
In the SIC Report, Morgunblaðið editor
Styrmir Gunnarsson says Director of
Íslandsbanki bank, Birna Einarsdóttir,
called Morgunblaðið up and said, “You
are supposed to stand with us. You are
not supposed to criticise and comment
on the banks, you are supposed to stand
with us.”
Friðrik Þór Guðmundsson, who is
among the authors of the SIC Report’s
chapter on the media, says there are prob-
ably multiple reasons the media didn’t re-
port the warnings from external agencies
like the OECD. For one, he points out that
many journalists go on vacation over the
summer and thus issues related to the
banks and the economy are put on the
backburner. However, he thinks perhaps
the main reason is that people wanted to
believe everything was okay.
That’s no excuse. To borrow words
from Davíð Oddsson, of all people, “It’s
extremely important that the media ful-
fils its supervisory role, both attentively
and responsibly.” Woof!
June July October
Moody’s Annual Report
The OECd says banks
may be too large to
be bailed out
Icelandic Banks
Pass fME Stress Tests
CRASH!
2008
April August
Richard Thomas of Merrill Lynch
worries about banking defaults
June – The OECd says banks may be too large to be bailed out
July – Richard Thomas of Merrill Lynch worries about banking defaults
August – Icelandic Banks Pass fME Stress Tests
Merril Lynch, Icelandic Banks - distress and default
“On the micro level, we know that the banks would all be horrified at the sug-
gestions: they would point to their high levels of liquidity; the fact that they have
generally planned to pay all obligations a year out; and that they have other sources
for funding in addition to the Euromarkets. They have a good job to date…. How-
ever, at a macro level the extraordinary high level of indebtedness remains a policy
problem for the Icelandic authorities that is impossible to (continue to) ignore…”
OECd Report, June 1, 2008
“The country’s three largest banks have expanded aggressively offshore in recent
years, increasing their total assets from less than 100% of GDP in 2000 to nine
times that in 2007. Although these banks have little direct exposure to subprime
loans in the United States and have relatively high capital and liquidity rations,
concerns have grown about their lack of access to a credible lender of last resort
facility…”
fME Stress Tests, 2008
“The four largest commercial banks all pass the regular stress test of the Icelandic
Financial Supervisory Authority (FME)…The Director General of the FME, Mr.
Jónas Fr. Jónsson: ‘The results from the stress-test indicates that the capital ratios
of the banks are solid and can withstand considerable financial shocks. Sharehold-
ers and management of the banks need to focus on maintaining strong capital and
even increase it, as capital levels need constantly to be reviewed in light of different
risk factors in the operations of each company.’”