Iceland’s Lost Billionaires Unmourned as Riches Draw Ire; “Greed can’t again lead the way,” said Prime Minister Johanna Sigurdardottir. “We’ve taken that route before with terrible consequences for this nation and its people.”

Iceland’s Lost Billionaires Unmourned as Riches Draw Ire

Iceland, a country with a $13 billion economy, had six dollar billionaires before the financial crisis struck in 2008. Now it has none.

Five of the men — including former West Ham soccer team owner Bjorgolfur Gudmundsson and Baugur Group hf founder Jon Asgeir Johannesson — have lost all, or most of, their fortunes after building empires on loans from banks that used the island’s investment bubble to stretch their assets to 10 times the size of gross domestic product.

At least three of Iceland’s ex-billionaires are, or have been, the subject of financial misconduct probes. Johannesson, who once flew around in a pin-striped private jet and owned luxury apartments in New York and London, received a suspended one-year jail sentence in February for violations including accounting fraud. He and Gudmundsson, who filed for bankruptcy in 2009, personified the boom-to-bust cycle that dragged Iceland away from fishing and tourism and turned it into a center for high finance.

“Greed can’t again lead the way,” said Prime Minister Johanna Sigurdardottir, 70, whose Social Democrat-led government took over from the coalition that led Iceland into the crisis just over four years ago. “We’ve taken that route before with terrible consequences for this nation and its people.”

Debt Bubble

After gaining fame for its debt bubble and the havoc that ensued when it burst, Iceland now is purging itself of the values that brought it to the brink of ruin. The only country to take a former prime minister to court for failing to prevent the crisis has since forced banks to forgive foreign-currency mortgage debt. And in a move to prevent speculation, the Interior Ministry this year proposed limiting land ownership by offshore investors after repeatedly rejecting approaches by Chinese billionaire Huang Nubo.

Iceland’s collapse — which sent average disposable incomes plunging 20 percent between 2008 and 2010 after the banks defaulted on $85 billion — even prompted the pro-deregulation Independence Party to pledge its commitment to welfare over investor rights.

Sigurdardottir, whose coalition faces elections in April, says the result is greater economic stability. Her party’s goal is to continue “shielding those groups in society that need it most,” she said in an interview.

IMF Program

The island, which exited an International Monetary Fund-led bailout in August 2011, now is growing faster than most of Europe. Gross domestic product will expand 2.3 percent this year, while the 17-nation euro area will contract 0.2 percent, the Washington-based fund estimates.

As for the former billionaires, their pre-crisis rise and post-crisis fall is an apt analogy for Iceland’s coming of age, according to Stefan Olafsson, a professor of sociology at the University of Iceland.

He’s studied the effect that Iceland’s economic boom had on the nation’s attitudes toward wealth. One year before everything collapsed, Icelanders bought more Range Rovers than the citizens of Denmark and Sweden combined. Now, Olafsson says his countrymen are wary of extravagance.

Before the crisis, billionaires “were the personification of what people believed in: materialism,” he said in an interview. “Since the collapse, their image has been tarnished, and what they were considered to be a symbol of — successful business and financial genius — is no longer valued.”

Accounting Fraud

That means the risks the former billionaires took to achieve their status probably won’t be repeated, Olafsson said.

Seventy-two-year-old Gudmundsson, who was sentenced to 12 months in jail in 1991 for accounting fraud at failed shipping company Hafskip, bounced back from that setback to make millions producing soda pop in Russia.

He and his son, Bjorgolfur Thor Bjorgolfsson, moved to St. Petersburg in 1993, securing a production deal with PepsiCo Inc. (PEP) a few years later. The soda company he started was bought by Pepsi, giving Gudmundsson the funds to start producing beer in Russia. That business was bought by Heineken N.V. (HEIA) in 2002 for $400 million.

Gudmundsson then returned to Iceland and partnered with Magnus Thorsteinsson to buy a 45.8 percent stake in Landsbanki Islands hf, the island’s largest lender at the time.

In 2003, Gudmundsson was ranked Iceland’s fifth most- trusted business person by newspaper Frettabladid. The most trusted was Johannes Jonsson, the father of Baugur co-founder Johannesson, who ranked second.

Golden Years

These were the golden years, culminating in 2005, when Gudmundsson received Iceland’s Knight’s Cross Order of the Falcon from President Olafur R. Grimsson for his contribution to society.

The next year, Gudmundsson spent 85 million pounds ($128 million) on an 83 percent stake in West Ham, and in March 2008, newspaper Morgunbladid estimated his personal fortune at $1.1 billion. Seven months later, his investment in Landsbanki soured as the lender collapsed. The credit event triggered a claims dispute from depositors based in the U.K. and Netherlands with savings in the bank’s high-yielding Internet accounts.

When global financial markets froze at the end of that year and Iceland’s banks were shut out of funding markets, everything came tumbling down.

Gudmundsson, then chairman at Landsbanki, told a Reykjavik court his assets had plunged the equivalent of $1.1 billion in value. His $759 million personal bankruptcy plea in 2009 was the biggest in the nation’s history, according to Iceland’s Legal Gazette.

Retail ‘Kingdom’

In an interview outside his house in Reykjavik, Gudmundsson ascribed his sudden accumulation of wealth before the crisis to “a certain situation in the economy” at the time. He declined to elaborate.

Johannesson, who in a March 2012 interview revealed plans to build what he described as a new retail “kingdom” in the U.K., was sued by the caretakers of failed Glitnir Bank hf, the lender that financed most of his ventures. His personal fortune — which peaked at $1.6 billion in 2007, according to Frettabladid, which he owned at the time — had dwindled to about $2 million, he said last year.

Johannesson, now 45, started his career more than two decades ago, opening a chain of Bonus supermarkets in Iceland in 1989 with his father. By borrowing against equity in his existing business, Johannesson financed purchases of U.K. brands, including toy store Hamleys Plc and department store House of Fraser Ltd. Both have since been sold off to cover debts.

‘Past Mistakes’

Johannesson, in the March 2012 interview, said his biggest mistake was to continue expanding after buying Big Food Group Ltd. in December 2004 for 326 million pounds. Last month, Iceland’s Supreme Court found Johannesson guilty of nine violations, including tax fraud. On top of a prison term, he was fined 62 million kronur ($497,000). The 12-month sentence was suspended for two years, meaning he can avoid going to jail if he doesn’t break the law during that period.

Johannesson, who didn’t return repeated calls seeking comment, said in the March 2012 interview that dwelling on “past mistakes forever” means “you’ll lose your creativity.”

According to another former billionaire, foreign investors will return to Iceland only if the nation can show it has learned from its past mistakes.

“There are a lot of diligent people in Iceland that are making good money,” said Karl Emil Wernersson in a phone interview. His fortune peaked at $1 billion in 2007, using the exchange rate at the time and based on figures provided by Frettabladid. “But if companies in the domestic-goods and services industries are to prosper, we need to increase investments in Iceland. That won’t happen until international investors stop being afraid to put their money in the country.”

Lost Fortune

Wernersson lost much of his fortune when his investment company, Milestone ehf, failed in 2009. Since its bankruptcy, lawyers working to claw back 9 billion kronur in assets needed to repay creditors have filed eight lawsuits. Six of those affect Wernersson, according to Grimur Sigurdsson, a lawyer representing Milestone’s estate.

Two other former billionaires — brothers Lydur and Agust Gudmundsson — lost much of their wealth when their investment company Exista hf failed in 2008. Lydur Gudmundsson was indicted in September last year for fraudulently registering a capital injection into Exista in an effort to inflate his stake and retain control. Both brothers are now residents of the U.K.

Past Era

The only Icelandic billionaire to keep the title through the crisis has left the island. Bjorgolfur Gudmundsson’s son and partner in Russia, Bjorgolfsson, who also resides in the U.K., was worth $5.1 billion as of May 2007, according to broadcaster Stod 2. Two years later, his wealth had slipped to $1 billion. Bjorgolfsson, who is rarely seen in Iceland these days, declined to be interviewed.

Wernersson predicts Iceland will never again become a breeding ground for billionaires — and that’s not bad thing, he said.

“Although this era won’t return, there will still be growth in the Icelandic economy,” he said. “This time around, it’s more likely that it will be reasonable and moderate, which should be a positive thing for everybody.”

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik at valdimarsson@bloomberg.net

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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