Chapter 20.3 describes the course of events of the fateful days from when the state’s bid for a 75% share in Glitnir was made public and until the Emergency Act was adopted, with a special emphasis on the authorities’ relief preparations.
The Government of Iceland held a meeting on the morning of Tuesday 30 September, 2008. Governor Oddsson entered the meeting after it had begun and stated that the authorities’ announcement regarding the gov- ernment’s proposed involvement in Glitnir had not had the desired effect. During the meeting, Governor Oddsson also made some comments, which did not sit well with some of the ministers, regarding an all party govern- ment. Towards the end of the Government meeting, Governor Oddsson stated that, in the CBI, a task force had been assembled. Besides the CBI’s specialists, the group was composed of Mr. Halldór S. Magnússon, a former bank employee, Mr. Karl Axelsson, Advocate to the Supreme Court, and Mr. Ragnar Önundarson, a business graduate. The permanent secretaries of the Prime Minister’s Office, the Ministry of Finance, and the Ministry of Business Affairs also worked with the group, along with Mr. Rúnar Guðmundsson, Head of Insurance Market at the FME. In its work, the group reviewed vari- ous ideas and ways of reacting to the grave situation that had arisen. One of those ideas was to examine whether claims to bankruptcy estates because of deposits could be turned into priority claims. At the same time, interna- tional media attention turned increasingly towards Iceland and the situation of Icelandic financial institutions deteriorated quickly. During that week, a
working party of the CBI met almost every day to discuss how to react to liquidity problems. Those were the so-called situation assessment meetings.
The Government of Iceland held a meeting on the morning of Friday 3 October 2008. According to the minutes, Minister of Industry Skarphéðinsson stated that comments made by Governor Oddsson regarding an all party gov- ernment at the previous Government meeting were inappropriate towards the Government and that it would be prudent for Governor Oddsson to step down. The minutes also reveal that Minister of Business Affairs Sigurðsson formally objected that he, as the minister responsible for banking affairs, was not consulted in the so-called Glitnir affair. It can only be concluded that at this point the cooperation between the government parties was suffering from severe weaknesses. In the opinion of the SIC, these weaknesses had an adverse effect on the cooperation of the government during these critical times.
The CBI’s task force continued working until noon on Friday 3 October, 2008. After that, the permanent secretaries were left with the „product“ of the work as Mr. Ragnar Önundarson put it in his hearing before the SIC.108
The group’s proposals are discussed in more detail in Chapter 20.3.3. Great amounts of cash had been withdrawn from the banks in Iceland during the whole week and one could safely talk of a run on the banks. By end of the day on Friday, cash withdrawals from banks in Iceland amounted to ISK 5.5 billion, compared to an average Friday withdrawal of ISK 200 million at the time. The consultative group met for the last time in the afternoon of 3 October, 2008. The draft minutes quote the chairman of the group as saying that at the beginning of the week, people were hoping to keep three banks, but now there were doubts as to whether they could keep one. The meeting ended with the chairman saying that there would be a meeting with ministers during the weekend.
That same day, a great shock hit Glitnir and Landsbanki when the European Central Bank issued a substantial margin call in the evening of that day. This will be discussed further in the chapter below on the collapse of Landsbanki.
During the weekend of 4-5 October 2008, a special group of experts was working under the prime minister. The prelude to the group being formed was that the economists Mr. Friðrik Már Baldursson and Mr. Jón Steinsson, on their own accord, offered the prime minister their assistance in dealing with the threats facing the country. The group also included Mr. Bogi Nils Bogason, accountant, Mr. Jón Þór Sturluson and Mr. Tryggvi Þór Herbertsson. In the opinion of the SIC, Icelandic authorities were severely lacking in lead- ership and focus at that time. In this context, it should also be mentioned that when the group of experts began working, its members began by heading off to Reykjavík University where they intended to print out the annual reports and interim reports of the banks. This was the third group in a short period tasked with contingency preparations. It is incomprehensible that the group was not furnished with other data that had been prepared, e.g. by the gov- ernment’s consultative group and the CBI’s task force. Finally, no economist with expert knowledge of bank operations or other experts with knowledge or experience in the operations of commercial banks or a lawyer specialising 108. Statement of Mr. Ragnar Önundarson before the SIC on 22 April, 2009, pp. 5-6.
in the field of insolvency law was appointed to the group. Considering the aforementioned, it can only be said that the authorities’ work on contingency preparations during these decisive moments was unacceptable and did not in any way correspond to the manner in which nations with developed financial markets and governance organise their working methods in general.
At a meeting in the government guest house on Saturday 4 October 2008, Governor Oddsson described to the ministers his telephone conversation with Mervyn King, Governor of the Bank of England. The phone call had been recorded and Governor Oddsson had with him a transcript of the con- versation. This is discussed in more detail in Chapter 20.3.8.
Over the weekend of 4-5 October, work continued on contingency preparations in the CBI. Experts from the bank worked, i.a., with an expert sent to the country by the Bank of England.
This same weekend, the public awaited news on the developments. The media kept a near constant presence outside the government guest house where the prime minister and other ministers were at work. Constant meet- ings were held, with bankers, pension funds, social partners or other authori- ties, cf. i.a. discussions in Chapter 20.3.9.
Early on Sunday 5 October, the prime minister’s group of experts pre- sented the results of its work to the ministers at the government guest house. The group’s proposals were presented in a document called ‘an Emergency plan for the Icelandic banking system’. The document, which is described further in Chapter 20.3.7, discusses how the Icelandic banking system has become too big and how a banking system of a manageable size could be cre- ated if the banks were headed for insolvency. In a hearing before the SIC, Mr. Jón Steinsson described how he felt that the group was not well received by the ministers after the presentation.109
On that same day, the Ministry of Business Affairs wrote a letter to Mr. Clive Maxwell, an employee of HM Treasury, referring to discussions between the Ministry of Business Affairs and Maxwell during the weekend. The letter, signed by Ms. Jónína S. Lárusdóttir, states that if need be, the Icelandic government will support the Depositors’ and Investors’ Guarantee Fund in raising the necessary funds so that the Fund can meet its minimum obligations in the event of a default of Landsbanki and its London branch. In the hearing, Mr. Sigurðsson declared that the letter had in fact been written in the government guest house. The wording of the letter had been chosen very carefully and Prime Minister Haarde, Finance Minister Mathiesen, Minister of Industry Skarphéðinsson and Minister for Business Sigurðsson himself had been involved in its composition along with permanent secre- taries and Mr. Jón Sigurðsson, Chairman of the Board of the FME.110 This
is discussed in more detail in Chapter 17.17.5. In the opinion of the SIC, it is evident that different opinions were held within the administration with regard to the possible obligations of the government in the event that the Depositors’ and Investors’ Guarantee Fund could not meet its obligations. Although the sources described in Chapter 17.12 do not provide decisive or complete answers to issues concerning that matter, the SIC believes that it would have been important for the Icelandic authorities, in the events lead- 109. Statement of Mr. Jón Steinsson before the SIC on 26 August 2009, pp. 37-38.
ing to the collapse of the banks, especially following the inquiries by foreign authorities at the end of July and beginning of August 2008, to prepare a review of what data was available on the interpretations of the obligations of the EEA member states in the event that a compensation scheme created under the EU directive on deposit guarantee schemes could not meet its payment obligations. Such a review could have shed a clearer light on the different views that were included in the available sources and held within the Icelandic administration, on the government’s obligations in this matter. It was also important that those ministers and others within the administra- tion that were involved in decision making and communicating with foreign governments on the matter could have a clear picture of the legal issues put to the test by this, and could have considered them in their decisions and their replies to questions and demands by foreign governments.
On the evening of Sunday 5 October, Mr. Gordon Brown telephoned Prime Minister Haarde. An e-mail sent by Mr. Haarde to the SIC on 17 March, 2009, states that Mr. Brown’s purpose was twofold. On the one hand, he suggested that Iceland seek assistance from the IMF and offered to talk to the managing director of the IMF on the issue. On the other hand, Mr. Brown stated that the British authorities believed that Kaupthing Singer & Friedlander (KSF) had violated UK law and transferred £1.6 million from the country. Discussions on KSF are described in more detail below.
At approximately 22:00 that night, i.e. 5 October 2008, the Government of Iceland held a meeting. At that meeting, the prime minister’s proposal for a declaration regarding the deposit guarantees was put forth and adopted. This is discussed in more detail in Chapter 17. The possibility of a loan from the IMF was also discussed at the meeting. Mr. Ingimundur Friðriksson, Governor of the CBI, appeared before the meeting and explained the process behind such borrowing.
That same night, the European Central Bank withdrew the margin calls it had issued on Glitnir and Landsbanki on Friday 3 October, 2008.
On Sunday 5 October, 2008, experts from J.P. Morgan arrived in the country in order to provide the CBI with expert advice. As it happened, they met with ministers from the Icelandic government at 2 a.m. on Monday morning. That meeting seems to mark a certain watershed regarding the min- isters’ view of the state of the Icelandic banking system, cf. further discus- sions in Chapter 20.3.11. The experts from J.P. Morgan advised that Althingi would pass, as soon as possible, special authorisations for the administration to react to the impending problems in the banking system.
In a vote that took place between 23:18 and 23:19 on Monday 6 October, 2008, Althingi passed Act No. 125/2008 on the Authority for Treasury Disbursements due to Unusual Financial Market Circumstances, etc., which is commonly known as the Emergency Act. The prime minister had submit- ted the bill earlier in the day after addressing the nation in a live TV broadcast on the Icelandic National Broadcasting Service (RUV). A draft bill for the emergency law had been ready in part for some time, but most of the bill was prepared during the weekend of 4-5 October and on the eve of Monday 6 October, 2008, by employees of the Ministry of Business Affairs and the FME with the aid of a lawyer. A detailed discussion on this is in Chapter 20.3.12. Chapter 19 discusses the proposals made a few years earlier on legislative changes in these matters which the IMF considered to be necessary as well as
the group that later became the consultative group of the Icelandic authori- ties. In the opinion of the SIC, it is a matter of criticism that the Icelandic authorities did not complete work on the draft bill much sooner.
The SIC believes that the Icelandic authorities were especially ill prepared to deal with a financial crisis when it struck Iceland in the autumn of 2008. A listing of some of the main reasons for this can be found in Chapter 20.3.13. It is very important in this context that the consultative group had not been successful in creating a contingency plan. This meant that sufficient thought had not been given to various factors which would inevitably be put to the test in the event of a major financial crisis in Iceland, neither by the consulta- tive group nor within other authorities. As an example, it is not apparent that any numerical assessment had been made, during the term of the consultative group, as to the amount of funds the Icelandic state and the CBI would need to have at their disposal in order to support the Icelandic banking system if statements by the ministers were to be heeded. The same applies to the cal- culations of possible expenses that might fall on Icelandic society in the event of a major financial shock.
The SIC is of the opinion that work on contingency preparations for the state was far from being organised or thorough. However, it should be noted that the SIC does not find it possible to claim that the Icelandic banks could have been saved from collapse even if work on contingency preparations in the year 2008 had been more thorough. On the other hand, thorough preparations would have contributed to lessening the damage caused by the collapse of the banks. The Icelandic government would then also have been able to form policies sooner on many of the issues that needed to be decided on and would thus have been better equipped to react and reply to questions from foreign governments and those with claims against the Icelandic banks.