Far from Thailand’s beaches one of the world’s largest collections of private jets stood waiting on the tarmac of Reykjavik’s Keflavík International Airport where the temperature hovered around minus fifteen degrees centigrade. The sleek jets were on standby, fuelled and ready for de-icing, all set to fly their newly rich owners from their desolate island planted in the middle of the North Atlantic between Norway and Greenland, to London, New York or any other city where Iceland’s elite had built their international network of business operations.
It was surprising, even astonishing, that such a small country, officially part of Europe, with a population of just three hundred thousand souls, was competing with the likes of Switzerland as a major offshore banking centre. In the UK, almost overnight, Icelandic companies had become familiar high street names. There was Baugur, an Icelandic investment group, owner of a long list of British shopping chains and businesses. Landsbanki, a banking group established in the City of London, owned the Internet savings bank IceSave, which held billions of pounds in small savers deposits.
The news that the rating agency Moody’s was threatening to downgrade the Iceland’s entire banking sector rattled investors. Standard & Poor’s warned that Kaupthing, Glitnir and Landsbanki were in trouble, even though Iceland’s government had vigorously rejected any risk of a Northern Rock style crisis with its banks.
It was a strange situation considering Iceland’s only real economic resource was fishing. What was even more difficult to understand was the country’s average per capita income stood at forty thousand dollars, one of the highest in the world, almost double that of a decade earlier.
A small clique of Icelandic entrepreneurs had made fortunes overnight in banking, buying and selling foreign businesses, and speculating on property in the UK and other European countries. The total assets of its banking sector had jumped to eight times the small country’s GDP by the end of 2006, a result of the hot money that had flowed into its banks attracted by their high interest rates.
Trouble first appeared at Gnupur, an investment firm that held a large stake in Kaupthing, when it ran into difficulties requiring urgent recapitalisation. However, Icelandic businesses were interlinked by a complex web of cross holdings that tied banks and major business enterprises together. If one got into difficulty it could provoked a chain reaction that would threaten the stability of the whole complex structure.
Kaupthing entangled Exista, an Icelandic insurance and investment group, in its web of misfortune. Exista was also a key shareholder in Kaupthing, which owned forty percent of Bakkavor and twenty percent of the Sampo Group, a Nordic insurance firm.
The incestuous affairs of the country’s banks were highlighted by the revelation of their links with Robert Tchenguiz, an Iranian born entrepreneur based in London, known for the lavish parties he threw on his yacht in Cannes and his affairs with a long list of beautiful women, including a former Wonderbra model. Tchenguiz, a director of Exista, owned five percent of the group with much of his funding coming from Kaupthing.
In a similar manner Thor Bjorgolfsson was chairman of Straumur, Iceland’s fourth-largest bank, and his father the chairman of Landsbanki. They also owned Samson Holding, which held thirty percent of Straumur and forty one percent of Landsbanki, whilst Landsbanki held almost five billion pounds of UK saver’s deposits.
The panic that ensued on the Icex stock exchange in Reykjavik caused a tremor of fear in London where politicians desperately tried to measure the effect an Icelandic failure would have on UK business and savings.
In the City of London the value of the Nassau Investment Fund plunged as rumours of a downgrade hit the market. The Irish Netherlands Bank had sizeable investments via its hedge fund manager Nassau Asset Management in commercial properties owned by the Icelandic investor Thor Jonsson. Confidence was severely shaken and investors were pulling their money out. The only solution was to pump in fresh capital and weather the storm, but capital from where?
Nassau Asset Management’s star fund, the Nassau Investment Fund, had more than six billion pounds in assets. Over its short six year existence it had boasted gains of almost eight percent annually and been quoted as one of the most solid investments in the City for middle sized retail investors. In 2006, Michael Fitzwilliams had triumphantly introduced the fund onto the London Stock Exchange, where eighty percent of European hedge funds were listed.
Though the fund itself was based in the Cayman Islands, Nassau Asset Management was an onshore business, as were many fund managers, enabling them to attract funds in financial centres such as the City, which after New York and Connecticut was the second largest centre for the management of hedge funds, and where an estimated three hundred billion dollars in such funds were managed.
Fitzwilliams’ had boasted his staff included the most valued specialists in the statistical analysis of financial data and the development of the kind of algorithmic models necessary for sophisticated trading. The team was led by Greg Schwarz, a brilliant mathematician, who had been poached from Lehman Brothers, for an astronomical salary, to develop the models for the statistical analysis needed in electronic intra-day trading.
‘Their salaries are out of this world,’ Fitzwilliams had told journalists from the City press, ‘more than five hundred thousand pounds a year,’ adding with a conspiring wink, ‘more than my own.’
A Tourist