In September 2010, a narrow majority in the Icelandic Parliament decided to impeach Geir H. Haarde, Iceland’s prime minister (2006-2009) and Leader of the centre-right Independence Party, for negligence in the period leading up to the 2008 bank collapse. It was decided, also by small majorities, not to impeach three other former leading government ministers although a left-wing majority in a special parliamentary review committee had recommended it.
In April 2012, the Impeachment Court passed its judgement on the six charges against Haarde. It had already dismissed two charges, unanimously acquitted him of three charges, but then a majority of nine judges found him guilty of one charge: not having held cabinet meetings about the impending bank collapse as required by the Icelandic Constitution; a minority of six, including two Supreme Court judges, also wanted to acquit him on this count.
The whole process was quite controversial in Iceland, not least because most people thought that Geir H. Haarde himself should not be the only Icelandic politician in office before the bank collapse to be held responsible.
In a new book, Landsdomsmalid: Stjornmalarefjar og lagaklaekir (The Impeachment Case: Political Machinations and Legal Manoeuvres), RNH Academic Director Hannes H. Gissurarson, who recently retired as professor of politics at the University of Iceland, argues that the whole process was unjust and that Haarde’s conviction on a fairly trivial charge was legally groundless.
It was not negligence by government ministers which turned a foreseeable bank crisis in Iceland into a bank collapse, Gissurarson argues. It was a series of events which together formed a ‘black swan,’ a sudden, unexpected incident which could only be foreseen by the knowledge gained by its very passing.
In his book, Gissurarson outlines 12 events that combined together to bring about the collapse, including the refusal of the U.S. Federal Reserve to offer to the Central Bank of Iceland the same dollar swap deals that it made with the three Scandinavian central banks and the refusal of the British government to offer to the two British banks owned by Icelanders the same liquidity provisions it made available to all other British banks. Gissurarson also points out that three judges on the Impeachment Court—all of whom voted for conviction on the cabinet meeting charge—had themselves lost a lot of money in the bank collapse, and therefore could be seen as holding a possible grudge against former Prime Minister Haarde who had refused to bail out the banks.
In this three-part series, Hannes Gissurarson presents his arguments that the impeachment was a scandalous travesty of justice.
PART I
The Icelandic Bank Collapse
At the beginning of the 21st century, the Icelandic economy was flourishing as a result of comprehensive economic reforms: 1) Taxes were cut which stimulated economic growth; 2) Government enterprises were privatised which made them more productive; 3) Government funds which had mostly subsidised loss-making activities were wound up; 4) Pension funds were greatly strengthened; 5) Iceland joined the European Economic Area (EEA), gaining access to the internal European market; and 6) Public debt was greatly reduced while inflation fell.
The three major banks, one privatised in 1990 and two in 2003, received favourable credit ratings based on the good reputation Iceland had established, while low interest rates in international markets also encouraged borrowing. In 2003-2007 the banks rapidly expanded, becoming 7-8 times bigger than Iceland’s GDP, gross domestic product. Their size clearly exceeded the capacity of the Central Bank of Iceland (CBI), and the Icelandic Treasury to provide them with liquidity in the case of a credit crunch. Such a credit crunch indeed began in August 2007, turning into a major international crisis with the failure of Bear Stearns in March 2008 and Lehman Brothers in September 2008. Traditional sources of funding on financial markets dried up.
The Icelandic banks partly financed themselves by collecting bank deposits abroad, as they could do in EEA member states, and partly by borrowing against collateral from the European Central Bank (ECB). Both kinds of activities were regarded with scepticism and even hostility by European central bankers. In late 2007, the CBI became concerned about the liquidity of the banks. It tried repeatedly to enter into currency swap arrangements with other central banks, only obtaining such agreements with the three Scandinavian central banks in May 2008. The ECB, the Bank of England and the U.S. Fed (Federal Reserve System) all refused any such deals with the CBI.
When the U.S. Fed announced on 24 September 2008, in the midst of the crisis, dollar swap deals with the three Scandinavian central banks, conspicuously leaving out Iceland, a run on the Icelandic banks started. Depositors and other creditors claimed back their money. The government’s attempt on 28 September to recapitalise Glitnir, one of the three major banks, did not restore confidence. Subsequently, the Icelandic government proposed on 6 October the so-called Emergency Act under which the IFSA, Icelandic Financial Supervisory Authority, was allowed to take over failing banks whereas depositors, foreign as well as domestic, gained priority over other creditors to any assets of fallen banks. In the crisis, the British government provided generous liquidity to all British banks except the two British banks owned by Icelanders, KSF and Heritable. When the British government closed down KSF on 8 October, its parent company Kaupthing, Iceland’s largest bank, collapsed, the last of the three major banks to do so. The British government also froze all assets of Landsbanki which had operated a deposit-collecting branch in London, and of the CBI and the IFSA, under an anti-terrorism law. For a while, Landsbanki could be seen on a list of terrorist organisations published at the British Treasury website, alongside Al-Qaida and the Taliban. The only countries which came to the assistance of Iceland in those dire circumstances, without any strings attached, were the Faroe Islands and Poland.
A Biased Commission
The 2008 bank collapse came as a major shock to the Icelanders, causing much anger. Prime Minister Geir H. Haarde immediately proposed an investigation into its causes, and the Special Investigation Commission (SIC) was appointed by the Speaker of Parliament, with three members: Supreme Court Judge Pall Hreinsson, Parliamentary Ombudsman Tryggvi Gunnarsson, and Dr. Sigridur Benediktsdottir who had three years earlier graduated in economics from Yale University and was now working there as an Assistant Professor. But Iceland is a small country, and all three members of the SIC had ties to the banking sector. For example, Hreinsson’s former wife had been a bank employee. Gunnarsson’s daughter-in-law had been the IFSA public relations officer, and his son lost his job at Landsbanki in the collapse. Gunnarsson also had in 2004 had a very public row with then Prime Minister David Oddsson, now one of the three CBI governors. And Benediktsdottir’s father had been the chief law officer of Landsbanki, and he had been summarily fired when the bank was privatised in 2003.
The clearest indication of bias, though, was an interview which Benediktsdottir gave in March 2009 to a Yale student magazine on the bank collapse:
I feel it is a result of extreme greed on the part of many and reckless complacency by the institutions that were in charge of regulating the industry and in charge of ensuring financial stability in the country.
Here she singled out two Icelandic institutions, the IFSA which was in charge of regulating the industry, and the CBI which was in charge of ensuring financial stability. Benediktsdottir was in other words announcing at the beginning of the investigation what the conclusions would be. When Hreinsson and Gunnarsson, both accomplished legal experts, were notified of this, they immediately asked Benediksdottir to withdraw from the SIC. She refused. The Speaker of Parliament instructed Hreinsson and Gunnarsson that they would themselves have to rule on Benediktsdottir’s competence. Under heavy political pressure and after a fierce media campaign in support of Benediktsdottir (mainly conducted by vehement critics of the CBI), finally they decided that she had not disqualified herself by her remarks since they were general in nature, not about specific institutions. This was implausible. It was obvious which institutions Benediktsdottir had in mind: the IFSA and the CBI. Thus, as one of the three members was beyond doubt not competent to serve on the SIC because of her bias, the whole SIC report was tainted. In particular, its assignment of responsibility to individuals and institutions for the bank collapse should be regarded with scepticism. Moreover, at the request of Hreinsson and Gunnarsson, the SIC was granted legal immunity which implied that its possible targets were deprived of their constitutionally guaranteed right to resolve disputes in fair hearings by independent and impartial tribunals.
A Flawed Investigation
The SIC delivered its report on 12 April 2010, five months behind schedule, at the staggering total cost of 4.9 million euros (at 2022 prices). It was very long, seven volumes, with two additional volumes of addenda, one of them only online. While it contained much information about the operations of the fallen banks, it was lightly edited and repetitive. The SIC did not hold its hearings in public, as would have been desirable. Instead, it selected out from individual testimonies several flippant comments and unsubstantiated allegations, quoting them almost gleefully on the margins of the report’s pages. It was apparent to many of the people testifying that the three SIC members approached the subject matter with preconceived opinions. CBI Governor David Oddsson was for example asked why it had not occurred to him to resign since he was one of the persons responsible for the bank collapse. It is true that the SIC was not expected to carry out a criminal investigation, but nevertheless it should have been expected to respect the right to a fair hearing, not least because of its wide powers and the serious consequences individuals might suffer if blamed by the SIC. There was a great imbalance between the powers and resources vested in the SIC on the one hand and those at the disposal of the individuals it was investigating on the other hand.
The SIC was operating in an abnormal situation, in the aftermath of a national shock where there was a strong demand for finding culprits on whom to blame the bank collapse. The SIC members also seemed to have quite elevated ideas about their own role and historical importance. In an interview, Hreinsson said that the SIC would bring worse news to the nation than any other commission in the past, and Gunnarsson said in a briefing to the press that he had almost cried when confronted with some of the information the SIC had gathered, while suggesting that the nation should take a leave for two days just to read the forthcoming report. In early February 2010 twelve individuals—four government ministers, the three CBI governors, the IFSA director, and four high officials—were notified that the SIC was considering accusing them of negligence in the period leading up to the bank collapse, but that they had the opportunity to respond to its allegations, as they all chose then did. They only had 10-11 days to respond, whereas the SIC had had thirteen months to investigate them. On the basis of the responses it received, the SIC removed some individuals from the group of people eventually accused of negligence while it withdrew some charges against those remaining in that group.
A Tautological Explanation
The main explanation for the bank collapse provided by the SIC in its April 2010 report was that the Icelandic banks had grown too fast and become too big. But in fact, the large relative size of the banking sector was a necessary but insufficient condition for its collapse. The banking sectors in Scotland and Switzerland did not collapse despite the fact that they were bigger relatively than that of Iceland. Moreover, the biggest Scandinavian banks, such as Danske Bank, would have fallen if they had not received liquidity assistance from the U.S. Fed through dollar swap deals. The reason why the U.S. Fed made such deals with the Scandinavian central banks at the same time as it refused them to the CBI was presumably that Iceland was expendable: She had been of great strategic importance in the Cold War but was now considered of no importance. Moreover, at the same time as the UK Labour government bailed out all other British banks, it refused liquidity assistance to the two British banks owned by Icelandic banks, Heritable and KSF, and closed down Landsbanki’s London branch. Adding insult to injury, the UK government imposed an anti-terrorism law on Iceland, freezing all assets of Landsbanki as well as the CBI and IFSA in the UK. The alleged reason was a fear that the Landsbanki London branch would illegally move funds from Britain, like Lehman Brothers had done before its failure. But a Supervisory Notice from the British Financial Services Authority (FSA) to Landsbanki’s London branch on 3 October 2008, five days earlier, had made this impossible. Thus, this was an excuse, not a reason.
The real reason for this extraordinary treatment of an old ally—a peaceful small neighbour with no military—seems to be that Prime Minister Gordon Brown and Chancellor Alistair Darling both came from Scotland where they were challenged by Scottish Nationalists who spoke about the “Arc of prosperity” extending from Ireland through Iceland to Norway of which Scotland should be a part. Brown and Darling wanted to demonstrate to their voters the perils of independence, with Darling triumphantly pointing out that in the international financial crisis the “Arc of prosperity” had turned into an “Arc of insolvency.” The British government also wanted to force the Icelandic government to admit liability for deposits collected by Landsbanki’s London branch in so-called Icesave accounts. (If the deposits had been collected by a British subsidiary, the British deposit insurance scheme would have been liable if the bank’s assets would not have sufficed to compensate all depositors.) It is true, and convincingly demonstrated in the SIC report, that the Icelandic banks had been reckless. But so had banks elsewhere. Financial experts have since concluded that on average the assets of the Icelandic banks in 2008 were probably no better and no worse than assets of other banks. The two British banks closed down by the British government, Heritable and KSF, in the resolution process turned out to be solvent, unlike some of the banks bailed out by the British government, such as RBS.
Laws Applied Retroactively
The seven individuals ultimately accused of negligence by the SIC—three government ministers, the three CBI governors and the IFSA director—were not accused of negligence in the traditional sense of Icelandic law, but in the sense of the law on the SIC, passed at the end of 2008, after the bank collapse. There negligence was interpreted in a new and very wide sense, as for example not assessing information correctly, not responding adequately to it, and not taking the initiative in obtaining new information.
Prime Minister Geir H. Haarde was accused of not responding adequately to the information he received in early 2008 that the banks might fall, of not having commissioned an analysis on the financial risk from a possible bank collapse, of not having ensured that the operations of a working group on financial stability were effective, of not having taken steps to reduce the size of the banking sector, and of not having directed Landsbanki to transfer the Icesave accounts from its London branch to a British subsidiary, thus moving it out of Icelandic jurisdiction (and potential financial liability by the government). The other two government ministers, Finance Minister Arni M. Mathiesen and Business Affairs Minister Bjorgvin G. Sigurdsson, were accused of similar negligence in their responses to the impending crisis. The CBI governors were accused of having neglected in two major decisions—to refuse liquidity assistance to Landsbanki in August 2008 and to Glitnir in September 2008—to ask for more information about, and reviews and estimates of, the banks’ financial circumstances, and in the latter case formally to reject the request (in writing). The IFSA director was accused of general negligence in running his agency, especially of leniency to the banks.
These accusations, based on a retroactive application of the law on the SIC, not only went against the legal maxim Nullum crimen sine lege, no offence without law, but they were also quite unfair. In 2008, Haarde and the other government ministers were entrapped: if they did something about the banks, they might bring about their collapse. Banks operate on trust, and if the financial markets notice any signals that they might fall, they will. If the ministers did nothing, they might however be accused of negligence, as indeed they were. The only sensible strategy was to move carefully and try to maintain trust in the banks, for example by obtaining currency swap deals and credit abroad. This was precisely what Haarde and his fellow ministers did. The accusation against the three CBI governors that they had not produced sufficient paperwork in connection with their decisions about Landsbanki in August and about Glitnir in September was almost laughable, as government ministers and central bankers all around the world—Alistair Darling, Timothy Geithner, Hank Poulson, and others—were at the same time making similar decisions on the phone about much bigger transactions, with almost no paperwork.
The accusation against the IFSA director did not take into account that he was constrained by the Icelandic rule of strict legal authority. This constraint was duly noted in the fair and balanced report on the Icelandic bank collapse written for the International Monetary Fund (IMF) by Kaarlo Jännäri, former Director of the Finnish Financial Supervisory Authority. The SIC’s criticisms of the bankers were more plausible, as they clearly had acted recklessly and possibly in some cases criminally. The fact remains, however, that the SIC did not find any obvious violation of the law by the government ministers, the CBI governors, or the IFSA director, despite ample resources and a thorough investigation lasting 16 months. The mountains were in labour, and a ridiculous little mouse was born.
