Banks in ruins and the IMF called to the rescue: In 2008, Iceland’s worst financial crisis erupted, triggered by the collapse of three big banks.
In this weekly series, RTL Today dives into a Luxembourgish crime case. Some are solved, others continue to baffle investigators until this day. This week's story is a little different, but still involves the Grand Duchy - and crime. Find previous stories in our history section.
The Icelandic banks Kaupthing, Landsbanki and Glitnir - which all together totalled more than 10 times the GDP of the little volcanic island - also had big branches in the Grand Duchy.
The trio were pushing loans aggressively with attractive interest rates, both at home and abroad. Tens of thousands of customers indebted themselves up to their ears to treat themselves to a spacious new home or luxury car. But when in September 2008 US investment bank Lehman Brothers filed for bankruptcy, the global credit market froze up.
For Iceland's three biggest banks, which had funded their breakneck international expansion with astronomical loans and which now had no access to refinancing, it was a disaster. Customers were faced with losing their homes, employees, including in Luxembourg, were let go with salaries unpaid - all while big bankers took in big million-euro bonuses shortly before the entire infrastructure collapsed.
"There is a very real danger... that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy," then prime minister Geir Haarde warned at the time.
The Icelandic currency lost more than half its value in just a few months and inflation rose to 18 percent. In the years that followed, the country recovered. But the scars remain, including those of the customers and employees in Luxembourg who feel they were played with.
Setting up shop in Luxembourg
Up until the 1990s, Icelanders were mostly known as pilots flying on Icelandic airlines to and from Luxembourg.
Coupled with the economic boom around the turn of the century, and Luxembourg as a strategic banking hub in continental Europe, Icelandic banks flocked to the Grand Duchy to set up branches of their business. And business was booming.
The big success of these banks was selling a financial product called Equity Release.
An example: imagine owning a house valued at €1 million. Bankers would approach homeowners with a deal: why not turn the value of your four walls into cash? In return for a guarantee on the house, the individual receives a maximum 30% in cash, and 70% to be used as investment, with hopefully larger returns for the bank.
With triple A ratings and a strong brand as branches in Luxembourg, customers were convinced signing up to Equity Release would not come with any serious risks. But in practice, things looked rather different.
Lavish lifestyles despite collapse
The credit market sped downhill like a train without brakes until, ultimately, it derailed. Up until police raided the banks’ offices, these companies were cherishing their flourishing business: company trips involved chartering private jets to fly families to Lake Garda or Berlin, office parties were thrown, and bankers were receiving million-euro bonuses - all just months before the banks collapsed.
As Iceland teetered on the verge of bankruptcy, the government introduced capital controls, urgently took control of the three banks, and put in a call to the International Monetary Fund (IMF).
Iceland became the first Western country to receive a bailout from the IMF since Britain in 1976, securing a $2.1 billion package in October 2008.
Meanwhile, in Reykjavik, the so-called Pots and Pans Revolution saw thousands of demonstrators noisily bang their kitchen utensils in a central square, angrily calling on the centre-right government to resign. Police responded with tear gas.
A quarter of Icelanders lost their savings, and the country saw its biggest wave of emigration since the end of the 20th century.
The business model that does not work
Claude Schettgen, a financial expert, explains: “There’s not a lot of money to be made from banking. Only with credits, but the quality of the credits can only decline. Over 10-15 years, this became a credit bubble.”
So was the CSSF, the banking regulator, paying enough attention? Since the scandal, rules and regulations have been tightened, but these financial products and their dangers had not been scrutinised, it admitted.
The Landsbanki was placed under compulsory state administration. In Luxembourg, the future of 240 employees was on the line. An anonymous employee said that they remembered the boss calling all employees together on the workfloor. The boss said: “The business model has not worked, and the bank has collapsed.” Personnel had to remain in their seats as police and banking authorities raided the office.
In 2008 Luxembourg ordered the liquidation of Landsbanki. Kaupthing was restructured and sold, while Glitner repaid its debt and was restructured too.
Yvette Hamilius was charged with the liquidation process. In 2018, the liquidator managed to recuperate €2.2 billion for creditors out of a total of €2.5 billion. Despite this, the liquidator has been targeted by numerous attacks, especially on social media, shamed for apparently defending the Luxembourg financial centre more than the victims, something she staunchly denied.
A number of debtors had protested repaying sums to Hamilius, as they claimed they had been duped into ill-advised financial decisions. Among them was French artist Enrico Macias.
The artist had been seeking a €5 million loan to renovate his St Tropez villa in 2007 and was pointed towards the Landsbanki bank in May 2007. The bank proposed a significantly higher sum to Macias, provided he invested in speculative products. Ultimately, he received a €35 million loan, corresponding to his villa's value.
The singer received a direct transaction of €9 million and the remaining €26 million were invested in three separate life insurances. The judges of the Luxembourgish court of appeal accepted the bank's demand to have the money recuperated.
His is just one of many stories of customers who feel like they are not seen as victim's of the bank's scheme. Today, a group called Landsbanki Victims are continuing to seek justice for those affected.