uti.is 20 Mar 2013: The Machinery of Kaupthing/Landsbanki Market Manipulation

As reported earlier on Icelog, the Office of Special Prosecutor has brought charges against managers of Kaupthing and Landsbanki for market manipulation. How did the two banks allegedly manipulate their share price? The SIC shows two basic methods. One was “orchestrated” trading, meaning that the banks themselves placed bids carefully planned in order to influence the price. The other was to lend companies linked to “friendly” and “understanding” clients to buy shares.
The “orchestrated” trading on the Icelandic Stock Exchange is amply documented in the SIC report where trades on single dates are traced in order to demonstrate a pattern, which pushed up the share price in the respective bank. These trades were usually placed just before the ISE’s closing time. On the whole, the banks were enormously large players on the ISE. The last few years before the collapse, trades placed by the banks amounted to 74-80% of all trades on the ISE. – Yes, Iceland is a small country.
The extensive lending to companies to buy the banks’ own shares was a striking feature of the Icelandic banking model. These companies used funds, borrowed from the respective banks to buy shares in these same banks. Some of these companies became infamous after the collapse because there was just something so seriously suspect with these high loans and the individuals who got them. Only with time – and especially with the SIC report – did the whole pattern behind these loans become apparent: this looked like a huge web of companies allegedly all used for one purpose: market manipulation.
This lending to buy shares is connected to another characteristic of the Icelandic banks: generally willingly lending against own shares, thereby cleverly converting the loan book… into equity. – Whenever I hear of banks lending against own shares I take that as a huge big warning sign of something fundamentally wrong in that bank.
The charges against Kaupthing and Landsbanki managers will now test previous suspicion. However, these cases are against the managers who allegedly organised the loans etc. None of the borrowers have yet been charged.
The interesting aspect is that as again the SIC report shows these two ways of influencing share price can be traced back well before the banks met criticism and exposing analysis abroad, i. This fact poses the question if market manipulation was part of the Icelandic banking model more or less from the beginning of their expansion, after the banking sector had been privatised in 2003.
Here are all the names of those charged:
From Landsbanki: CEO Sigurjon Arnason, Director of Corporate Accounts Elin Sigfusdottir, director of proprietary trading Ivar Guðjonsson, brokerage director Steinthor Gunnarsson and brokers Julius Steinar Hreidarsson and Sindri Sveinsson.
From Kaupthing: chairman of the board Sigurdur Einarsson, CEO Hreidar Mar Sigurdsson, director of Kaupthing Iceland Ingolfur Helgason, director of Kaupthing Luxembourg Magnus Gudmundsson, director of corporate banking Bjarki Diego, credit committee member and Kaupthing corporate employee Bjork Thorarinsdottir, director of prop trading Einar Palmi Sigmundsson and two private business brokers Birnir Saer Bjornsson and Petur Kristinn Gudmarsson.
*Intriguingly, I have heard that examples of this behaviour can be traced back before the privatisation. Landsbanki did set up offshore companies before its privatisation to hold shares in itself. The purpose was to use these shares as options for employees but then they were actually never used for that purpose. These structures were kept after the bank was sold and slowly filled with shares. In this way, these companies added to the power of the largest shareholder – Samson, owned by father and son – since the managers held the voting power, around 12% in the end.

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