Sunday, December 30, 2012

Icelandic bankers jailed for pre-crisis activities

The Irish Independent reports that two Icelandic bankers have been sentenced to jail for their conduct leading up to the financial crisis.

Please note that this is two more bankers than the US has sent to jail for their pre-crisis conduct.

The reason that Iceland has been able to prosecute bankers for their pre-crisis behavior is that Iceland adopted the Swedish Model for handling a bank solvency led financial crisis.  Under this model, banks and bankers are not protected but instead banks are required to recognize upfront the losses on the excess debt in the financial system and bankers are held accountable for their conduct.

In the US, policy makers chose and continue to choose to pursue the Japanese Model for handling a bank solvency led financial crisis.  Under this model, bank book capital levels and bankers are protected at all costs.  Not only are the losses on and off the bank balance sheet socialized, but the bankers continue to draw bonuses.

Under the Japanese Model, bankers are protected from being accountable for their pre-crisis conduct while at the same time taxpayers and the real economy have to bear the burden of this conduct.
Two of Iceland's most senior former bankers have been jailed for making reckless business loans, following investigations stemming from the collapse of the country's banks in 2008. 
Larus Welding, the former chief executive officer of failed Icelandic bank Glitnir, and Gudmundur Hjaltason, a former director at the bank, have each been sentenced to nine months in jail for fraud, a court ruled. 
They were sentenced by the Reykjavik District Court after the two men were indicted a year ago on charges that they had "misused their position and grossly endangered the bank's funds" by lending €102m to a company called Milestone ehf without guarantees or collateral, the prosecutor said. At the time Milestone was a shareholder in the bank.

They are the first bankers from Iceland's three largest lenders to be sentenced to jail for activities linked to the country's financial and economic collapse in 2008.... 

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