When building from the ruins of capitalism can we please make sure the shenanigans at the Icelandic banks do not repeat themselves?
Kaupthing let its key staff borrow money to buy shares in the bank. The amounts were astronomical, at one point the staff was supposed to own almost 10% of the bank. The trouble was that those shareholders then benefitted from the dividends paid out every year but when the stock price eventually evaporated in the bank’s collapse they were relieved of the loans. In effect those stockholders were granted risk-free, preferential treatment.
To make matters more ridiculous the key staff was not allowed to sell its shares at a critical point in the beginning of 2008. Vilhjalmur Bjarnason, of the University of Iceland calls this a classical case of how to cheat other shareholders and manipulate the market.
Related posts:
Vilhjalm A.
2 years ago
I don’t understand exactly why the insiders would take these kulu-loans to buy stock. Why would anyone borrow (real) money to buy company stock company that they probably knew would only decrease in value? Didn’t they know (especially people at the top like Krj. Arason) that the banks were already in trouble in early 2006?
Dividends are a small benefit (at t.d. 1-3% a year) but not enough to make the risk worthwhile.
Also, they may have expected that the loans would be written off, or that all of Iceland would implode, but again that is not a rational expectation (at the time the loans were taken).
It is possible that they thought that the loans were un-indexed, or that the stock itself was the only collateral for the loans. In either case the insiders might not lose anything.
I suspect that the top insiders were using other methods to take advantage of the loans, such as dealing in options (selling calls or buying puts against their stock) or hedging (eg short-selling in a separate account). Companies like JP Morgan, Morgan Stanley etc often make such arrangements for executive insiders who have a lot of stock that they can’t sell without violating insider trading rules — these brokers find other ways to make profit from the stock.
So perhaps far away, in some distant area of the world, there is money sitting in some secret bank accounts gained from short-selling their own company stock.
Just a guess.
Dadi
2 years ago
Good guess Vilhjalm.
I think this also has to do with heard-mentality. All of the bank’s top management had those loans, and it seemed like they were made out to be a part of their pay-packet.
So it seemed like if you didn’t have one of those loans, you weren’t a part of the group, and you know what happens to those who don’t dance along.