Today I thought I would launch a small „what would you have done if you were Central Bank Governor“-quiz. Before I start I want to thank Hannes Hólmsteinn Gissuararson, an Icelandic professor in political science. He reviewed my book in an Icelandic newspaper, Morgunbladid, November 30th. In his review he provided quite some important information, not previously in the public domain, on a meeting held at the home of my predecessor, the then Governor, Sunday March 26, 2006. The meeting, to clarify, was held about two and a half years before the collapse of all the three giant Icelandic banks. The three Icelandic banks had in the years before the meeting, from 2003 to 2005, almost tripled their lending as share of Iceland´s GDP. Importantly the lending was almost entirely financed by market borrowing from non-Icelandic markets, with a significant part being short term-financing. But, in March 2006 the CEOs of the three banks were worried. They were concerned about whether they could finance themselves over the next weeks(!) They had talked to the then Icelandic Prime Minister Halldór Ásgrímsson. He had then called the then Governor at his summerhouse. The Prime Minister asked the Governor to meet the bank CEOs, Hannes writes. They met at the Governor´s home late night the following Sunday: the Governor, Halldór J. Kristjánsson of Landsbanki and Bjarni Ármannson of Glitnir. Hreidar Má Sigurdsson in Kaupthing joined by phone, as he was on the way to the US. Hannes, he proudly claims, has received first hand information about the meeting from all the attendees. Styrmir Gunnarsson describes the meeting in his book, „The siege“; The bank CEOs feared that the day after, March 27, their market loans would either be terminated or not renewed and the banks would collapse immediately. The result of the meeting was to do nothing before Monday morning, and to address the problem then if it turned up. On the Monday nothing happened.

Hannes writes in a paper from 2018; „…While the bankers fully expected that other banks would follow the example of Danske Bank and cancel credit lines to Iceland, to their great relief nothing of that sort happened when the markets opened Monday 27 March.“ And here comes the question to reflect on; What would you have done thereafter if you had been Governor, or – even more important – one of the bank CEOs? Would you have worked to shrink the banks and get their funding in good order, or would you hav pushed for further growth? In his review Hannes makes the comment that I apparently weren´t in the meeting in March 2006. And for sure, I weren´t there. If I had been there, surely I would have acted as you would have done. In Iceland, in contrast, the banks continued to grow their borrowing and lending, with the latter increasing about 40 bn euro from 2006 to 2007. And, what more, already from 2006 onward a significant part was financed with money from the European and the Icelandic Central Banks. Hence, those two sources funded an ever increased part of the continued growth! And, yes, in October 2008 it all crashed, as described in my book. In the book I describe the March 26th meeting as the defining moment for Iceland. All shouldn´t have left the meeting only saying „let´s see if the banks crash tomorrow, Monday, March 27th 2006“. A big thanks goes to Hannes for, through his Black Saturday written witness testimony, reproving such details on the context, venue and attendees in the meeting. Finally, after all these years.

Ég svara 4. desember:

The three banks actually did a lot in response to the 2006 Easter Crisis, as this has been called. They extended their loan lines, and reduced their cross-ownership structures which had worried foreign creditors and investors. But you are asking a good question: What would you as CBI governor have done after March 2006?

1) You would have warned the political leaders. This the Central Bank governors did in no uncertain terms and several times, although this caused a clash between David Oddsson and Thorgerdur K. Gunnarsdottir at a meeting in late 2007, and some clashes with Ingibjorg S. Gisladottir in 2008 (where Ingibjorg wrote down in her notes that the warnings were a “one man’s ranting’ and recommended as late as 4 September 2008 publicly that the banks would continue deposit collection abroad).

2) You would have suggested to the banks ways of downsizing. This the governors did, such as Glitnir selling its solid bank in Norway, Kaupthing moving its headquarters abroad and Landsbanki transferring Icesave accounts from a branch to a subsidiary. But the governors did not have any power to enforce such suggestions. As Kaarlo Jännari (fmr. head of the Finnish Financial Supervisory Agency) points out in his very perceptive report on the bank collapse, in the Nordic countries there is a strong tradition of legality (logmaetisregla in Icelandic), whereby you do not overstep your clearly defined legal authority.

3) You would have asked the Bank of England and the Swedish Central Bank for advice and reports. This the CBI governors did, Andrew Gracie coming in February, and experts from the Swedish Central Bank in April or May, writing reports, both about worst-case scenarios (Gracie thinking the banks might collapse in October) and about less ominous possible developments, the Swedish economists advising downsizing.

4) You would, as a responsible central banker, have provided the same liquidity assistance to the banks as they got elsewhere, placing no stricter rules on their bonds than banks did elsewhere. Remember that the banks had been rated by rating agencies and audited by accounting companies, and it was not for the CBI to go against such conclusions. The purpose of the ‘love letters’ was of course to keep the banks running in the perhaps vain hope that they might survive.

5) You would have tried to obtain liquidity abroad, especially in the US, as the Swedish, Norwegian and Danish banks eventually were forced to do. But the difference there was that the Scandinavian banks got a yes, and the Icelandic bank a no. If the reason for the no was the relative size of the Icelandic banking sector, then it should be pointed out that the Swiss banking sector, bigger than the Icelandic one relatively, got liquidity from the US Fed.

6) You would have criticised the abnormal situation in Iceland where the largest debtor of the banks and the main owner of one of them, retail mogul Jon Asgeir Johannesson, was also the owner of most of the private media in Iceland, creating a very strange, even bizarre, atmosphere and influencing public opinion. He and his clique was close to the Social Democrats, both in the elections of 2003 and 2007, and they used their power and wealth in the Independence Party Primaries before 2007 to campaign against the Minister of Justice, Bjorn Bjarnason, in retaliation for the police investigation of their activities. But instead, in preparation for your book you have mainly talked to Johannesson’s apologists, such as Professor Thorvaldur Gylfason, and the Social Democrats who fought fiercely against a bill introduced by Oddsson as Prime Minister in 2004 and aimed at limiting the control of any one business mogul over the media.

7) You would have prepared for the worst which was essentially that you would have to protect the signature of the sovereign, keep a payments system going and protect the interests of the depositors, whereas you would have given less priority to the interests of other creditors or to stockholders in the bank. In one place in your book you point out that David Oddsson had already relatively early, but very discreetly talked about that option. Quietly, the governors were preparing this, with a task force (Ragnar Onundarson and others) when nobody was listening.

So, the CBI did all what was in its powers. What it did not foresee was the different treatment between Iceland and the Scandinavian countries by the US Fed in the days leading up to the collapse, and the brutal treatment of the Icelandic banks by the Labour government in England, which felled the last bank surviving, Kaupthing, by closing down its subsidiary in England, KSF (which has since turned out to be quite solvent), and which invoked an anti-terrorist law against Iceland, unnecessarily as I show in my report.

Ég bæti við:

Then a different question would be what you would have done as a CEO of a bank or a leading politician or head of the Financial Supervisory Agency. They had much more statutory power to change the situation, the CEOs obviously running the banks, the politicians by law, and the head of the FSA with his regulatory power. I have already pointed out many mistakes the banks and the FSA made, and the politicians were of course constrained by the public opinion in Iceland, which came about (at least partly) by the total control of the retail mogul Johannesson, in connivance with the Social Democrats, over the media. The Social Democrats (and President Olafur R. Grimsson) were the loudest supporters of the banks, and Ingibjorg S. Gisladottir in her campaign before the 2003 parliamentary elections attacked David Oddsson, then Prime Minister, for being against Kaupthing on the one hand and the Jon Asgeir Johannesson clique (which acquired Glitnir) on the other hand. The Social Democrats chose to place themselves very close to the banks, especially Kaupthing and Johannesson’s bank Glitnir. It took a lot of effort to try and stop the Minister of Trade and Banking (a Social Democrat close to the aforementioned banks) from issuing a total government guarantee of the banks to the British authorities in early October 2008. I keep that document as well as many other revealing documents.