Iceland bank ‘Black Report’
The English version of the Black Report on the Iceland bank failures was released today. It has it all – regulatory capture, oblivious politicians, shadow banking, loans to shareholders to buy shares and more. (ht Steinn) Here is the website with the English version. … One of the key problems identified in the report is “weak equity”. Although some of these arrangement were complicated, basically the bank would loan money to an owner who would buy shares in the bank — and use those shares as collateral for the loan. This boosted the apparent capital, and allowed the bank to lend more money. Amazing.
The largest owners of all the big banks had abnormally easy access to credit at the banks they owned, apparently in their capacity as owners. … The banks had invested their funds in their own shares. Share capital, financed by the company itself, is not the protection against loss it is intended to be. Here this is referred to as “weak equity”. Weak equity in the three banks amounted to about ISK 300 billion by mid year 2008. At the same time, the capital base of the banks was about ISK 1,186 billion in total. Weak equity, therefore, represented more than 25% of the banks’ capital base. If only the core component of the capital base is examined, i.e. shareholders’ equity, according to the annual accounts, less intangible assets, the weak equity of the three banks amounted to more than 50% of the core component in mid year 2008.
Geesh – that reminds me of Enron. Here is the executive summary for a quick read.
