Reykjavík Grapevine - 08.04.2011, Side 8
8
The Reykjavík Grapevine
Issue 4 — 2011 Whaddaya think? Should we stop running stuff about the economic col-
lapse? Should we focus more on other stuff? Like sports or something? Do
let us know if you do, Grapevine is your magazine after all.
Economics | Bubbly!
In 2007, just as the housing bubble was
about to burst, Newsweek senior editor
Daniel Gross published a book called
‘Pop! Why Bubbles Are Great For The
Economy’. In it, he sought to correct
what he considered to be a dangerous
misunderstanding by proving that as-
set bubbles were not at all dangerous.
They were in fact just the opposite. As
the title suggests, he believed bubbles
were “great”.
According to Daniel, capitalism
needs bubbles to survive and function—
it is through bubbles, he argued, that
capitalism rapidly transforms econo-
mies during periods of “major tech-
nological or commercial innovation”.
Bubbles are simply an expression of
the Schumpeterian “creative destruc-
tion” that propels growth in a capitalist
economy.
Of course, the global financial bub-
ble popped soon after, and the taxpay-
ers were left to bail out all the clever
innovators.
THE CORPORATE VIKINGS
Following the spectacular collapse of
the Icelandic financial miracle, which
turned out to be one giant bubble, it
is doubtful if many Icelanders would
agree with Daniel’s characterisation
of bubbles as “great”. However, most
Icelanders would agree that the bubble
was created by innovation—innovative
accounting, that is. As it turns out, Dan-
iel Gross overlooks the fact that among
the types of “innovation” that flourish
during bubbles are creative accounting
and fraud. As John Kenneth Galbraith
noted in his study of the roaring ‘20s
and the 1929 stock market crash, bub-
bles provide ideal conditions for fraud
and embezzlement. Charles Kindle-
berger in his classic history of financial
crises, ‘Manias, Panics and Crashes’,
goes one step further and argues that
embezzlement, bubbles and swindles
are inseparable.
In his account, John Kenneth Gal-
braith focuses on the “get rich quick”
atmosphere that dominates during
bubbles: people are willing to look the
other way, so long as the good times
keep rolling and the numbers on the
stock ticker head ever upward. The ex-
pectation of ever-higher stock prices
can also stimulate fraud in a different
way. Arthur Levitt, former head of the
American Securities and Exchanges
Commission, has argued that account-
ing fraud during the internet bubble of
the 1990s was caused by the emphasis
on short-term gains in stock prices by a
market dominated by day traders. Ar-
thur, as well as Galbraith, Kindleberger
and other scholars of financial bubbles,
recognise that bubbles breed fraud.
When everyone seems to be getting
rich quickly, unscrupulous business-
men [and –women. For brevity’s sake
we will stick to ‘businessmen’ through-
out] resort to cooking the books in or-
der to meet the market’s expectations—
and in the uncritical atmosphere of easy
riches, investors fail to look more close-
ly, ignoring doubts and even red flags,
fearing they might miss out on the next
big thing.
THE SILENCING OF CRITICS
However, the Icelandic example shows
us that there are other ways in which
bubbles breed fraud. History has shown
that every bubble is accompanied by its
own ‘New Era’ philosophy, a belief that
traditional rules no longer apply. These
philosophies or religions usually come
complete with their lists of proof that
provide those who want to believe in
constantly rising markets with evidence
and justification for their faith.
In Iceland, this “New Era” philoso-
phy was best articulated by free mar-
ket fundamentalists, including Hannes
Hólmsteinn Gissurarson and his dis-
ciples, who argued Iceland could be-
come the richest country in the world
by slashing taxes and regulations and
by becoming a “global financial centre”.
This new era philosophy then merged
with a chauvinistic nationalism, ideas
about the inherent superiority of Ice-
landers and Icelandic businessmen, al-
lowing bubble promoters to blast critics
for not “getting it”, for lacking faith in
both Iceland and the free market.
It is impossible to explain what ap-
pears to have been widespread Enron
scale accounting fraud, systematic
market manipulation, insider trading,
self dealing and other financial malfea-
sance that characterised the Icelandic
market, without reference to this will-
ingness to silence critics. When all is
said and done, it was the celebration
of investment bankers and oligarchs
by politicians, the fawning profiles of
financiers and corporate raiders in the
daily press along and the utterly uncriti-
cal celebration of “the market” as infal-
lible, which was the real problem and
the root cause of the bubble, and much
of the wreckage it left in its wake.
A good example of how this works
is the case of FL Group. In 2004, a for-
mer DeCode executive named Hannes
Smárason gained control of the airline
Icelandair with the help of Baugur and
Jón Ásgeir Jóhannesson. Icelandair
was at that time one of the most solid
companies in Iceland, and one of few
airlines in the world that was consis-
tently profitable. Hannes set about to
transform the company, changing its
name to FL Group to reflect his ambi-
tious global plans. These plans turned
out to be a classic corporate raid, as
Hannes sold all hard assets out of the
company, leaving only cash and equity
in other companies, which was then
leveraged in order to turn FL Group into
an “investment company”. Of course
the main investments were in the finan-
cial sector—primarily in Glitnir (which
was turned into a personal ATM for Jón
Ásgeir and associates at a later stage in
the game). The markets celebrated and
the stock price of FL Group rose more
than 50% in six months.
But while the business strategy of
Hannes Smárason found favour with
the stock market, several members
of the board of directors, as well as
the CEO of the company, realised that
something was wrong. Within the span
of six months in 2005, the majority of
the board and the CEO of the company
resigned without any official explana-
tion. Hannes brushed these resigna-
tions off as the stock market gave him
a vote of confidence and the price of
FL Group stock continued to rise. The
media saw no reason to make a fuss,
and at the end of 2006 Hannes was
voted “businessman of the year” by
the most widely read business weekly,
Fréttablaðið’s The Market (it might bear
noting that Fréttablaðið is owned by the
aforementioned Jón Ásgeir Jóhannes-
son). By then, FL Group’s stock value
had more than doubled since Hannes
assumed the reins.
Needless to say, FL Group was
among the first firms to declare bank-
ruptcy in 2008, its shareholders losing
all their paper gains. Several questions
remain unanswered about large trans-
fers from FL Group to offshore banking
accounts, and Hannes Smárason has
been sued by the resolution committee
of bankrupt bank Glitnir for his role, and
the role of FL Group, in the looting the
bank.
There had been plenty of red flags—
red flags that are not only visible with
the benefit of hindsight, but should
have been noticed by anyone paying
attention at the time. Had the country
not been caught up in bubble fever it
is highly unlikely that Hannes Smárason
would have been treated as some busi-
ness genius, and more likely that some-
one would have noticed that there was
reason to ask questions.
And who knows what red flags
might have been noticed had the media
and the public been more alert, and had
they been more critical of the business
elites? One can only wonder whether
scoundrels like Hannes might have
been stopped earlier had investors, the
media and the general public not been
blinded by their faith in the “Icelandic
economic miracle”.
CONCLUDING REMARKS
As we shift through the wreckage
caused by the great debt bubble of the
past years, the question arises of how
best to avoid another bubble and inevi-
table crash. Understandably, commen-
tators have focused on strengthening
financial regulation, closing offshore
tax havens and regulatory loopholes.
Reversing the trend toward increas-
ing deregulation is important and nec-
essary, but it is unclear if this would be
enough if we fail to reassess our view
of “the market” and its ability to cor-
rectly judge risk and apportion capital
to worthy businesses. One would have
thought that the hyping of financiers
and internet wunderkinds and biotech
researchers turned tycoons in the dot-
com bubble would have forced some
kind of soul-searching and a more criti-
cal attitude to the wisdom of the stock
market. Instead, we plunged headfirst
into a new bubble. If we want to avoid
yet another one, we must adopt a more
critical attitude to the market.
Renewing regulation of financial
markets is also bound to run into op-
position when the memory of the crash
fades, unless we can abandon the mis-
conception that the market is somehow
infallible, always right, and that corpo-
rations and business tycoons are the
best guardians of the public interest.
This is not to say that we should
assume that all financial markets are
just glorified casinos, and investment
bankers all crooks who are out to de-
fraud society. Rather, I argue that we
need to keep in mind that the market
is not some infallible judge of the inher-
ent value of all things, and that when it
comes to “price discovery” it can on oc-
casion err quite spectacularly, and that
we need to be aware that businessmen
and large financial corporations only
look out for their own interest, and that
there is no reason to assume that these
interests correspond to the interests of
society at large. And that businessmen,
like other people, are a diverse lot, and
that some of them might be misrepre-
senting themselves.
Words
Magnús Sveinn Helgason
Photo
Julia Staples
Pop Goes The Bubble!
...and the weasels run off with the money
“It is impossible to explain what appears to have been widespread Enron scale
accounting fraud, systematic market manipulation, insider trading, self dealing
and other financial malfeasance that characterised the Icelandic market,
without reference to this willingness to silence critics”
Icesave: It’s like a slow waltz
with the devil. By the time you
read this, you may have al-
ready cast your vote; but the
dance is still not over. Not by a long shot.
A faint crack of light has appeared
at the end of the Kaupþing tunnel. Last
month the two brothers Tchenguiz—
famed property moguls and former al-
lies of Jón Ásgeir Jóhannesson’s Baugur
empire—were arrested under suspicion
of fraud by the UK’s Serious Fraud Office
(SFO). They were released shortly there-
after without charges, but tragically man-
aged to miss their annual yacht party in
Cannes. In a surge of Tchenguiz-articles
this last month, the Daily Mail said of the
two brothers: “With a £4bn fortune to play
with, they lived the playboy lifestyle, with
beautiful women on their arms, and cham-
pagne flowing,” and featured a delightful
photo of Vincent Tchenguiz cuddling su-
permodel Caprice. Severely distressed
by their arrest, the two brothers quickly
initiated proceedings to obtain a court
ruling against Kaupþing, which as noted
in the Financial Times, “will allow them to
pursue claims of more than £1bn against
the Icelandic bank in the UK.” A couple of
weeks after the brothers’ arrest, the Lux-
embourg police raided Kaupþing’s former
premises in Luxembourg at the request of
British and Icelandic officials. According
to a report in the Wall Street Journal, over
70 investigators from Iceland, the UK and
Luxembourg were involved in the raid.
Landsbanki and its former owners
are also under increased scrutiny. The
Telegraph recently pointed out that “…
the failed Icelandic bank, illegally trans-
ferred millions of pounds of British sav-
ers’ money to related party institutions in
the hours before it collapsed.” And, the
great majority of these funds were trans-
ferred to institutions owned or controlled
by Björgólfur Thor Björgólfsson and his
father. One loan of £45m to Björgólfur
Thor’s company, Straumur, was even
made after Landsbanki had closed down,
on October 6.
Can anyone in the world explain why
Björgólfur Thor sits cosy in the UK—still
one of the wealthiest men in the world
with assets over $1bn—while the Icelan-
dic taxpayer goes to the polls to decide
whether his nation should be footing the
Icesave bill? In an interview with The Tele-
graph, Björgólfur Thor’s spokesman said,
“[he] was never a director at Landsbanki
and therefore had no part in any decision
about transfer of funds.”
Yeah, pull another.
Last month, The Guardian ran with
an article entitled ‘How Icelandic bank’s
clients filled Tory coffers’, showing that
over £900,000 was handed over to Brit-
ain’s Conservative Party in recent years.
“Those who donate more than £50,000 in
a single year can get access to…meetings
with the Tory party leader.” Kaupþing lu-
minaries included, Vincent, Robert, and
sister Lisa Tchenguiz, who, along with
Lisa’s estranged husband Vivan Imerman,
collectively donated close to £500.000.
The Guardian also noted that prior to
Kaupþing’s failure, the total value of loans
to Tchenguiz companies exceeded 40% of
the banks actual equity base. In light of
the recent SFO investigation, the Conser-
vative party is “seriously” reconsidering
some of its donations.
In the last week of March, Baldur
Héðinsson, an Icelandic intern at Planet
Money (a US-based podcast run by NPR
covering the global economic crisis)
posted an online survey inviting individu-
als from all over the world vote whether
he should vote ‘yes’ or ‘no’ on the Icesave
referendum. The survey ran for one week
(March 24-March 31) and a resound-
ing 75% (3,485 people) voted against
Icelanders paying for Icesave. Baldur, it
seems, has solved his voting dilemma.
Frosti Sigurjónsson said in an inter-
view with The Guardian, just a few days
ago: “The risk of accepting the current
Icesave agreement [which involves an
exposure to currency market movements
and bankruptcy recoveries] is much
greater than taking this matter to court,
which is our civil right.”
I wonder if Björgólfur Thor will be vot-
ing ‘yes,’ or do you think he is more of a
believer in civil rights?
News | Iceland in the
International Eye: March
Tiptoe
Through The
Tulips
MARC VINCENz