Narvik - The Tip of the Iceberg - Wednesday, 14 May, 2008
The small Norwegian seaport of Narvik is a far, far cry from
the troubled housing markets in the US - or the these, days similarly
stretched mortgage belts of Sydney and Melbourne. Until recently, the
good folk of Narvik would probably have never even heard the term
'subprime loan', let alone fall victim to the hucksters flogging them
to unsuspecting borrowers around the world. But now they certainly have
- not as aspiring home-owners with unaffordable mortgages, but the
entire town via its Council's naive financial risk-taking.
The Norwegians call this stunning, fjord-lacerated coastline Nordland.
A couple of months back in this land of the midnight sun we would have
had only a few hours of light a day to enjoy this truly stunning
wilderness. 120km above the Arctic Circle and a 2.5-hour flight from
the capital, Oslo, is the small town of Narvik. The out-of-the-way
seaport of just 18,000 is anything but an international financial hub.
Not exactly Wall Street. But recently, Narvik has taken one hell of a
financial hit.
To put it bluntly, the town of Narvik has been duped to the tune of
tens of millions of US dollars in risky investments, ultimately leading
to sub-prime loans. The local council has, if you like, been sold a
loan lemon by an Oslo-based brokerage firm called Terra Securities.
Terra Securities in turn is owned by 78 different banks, not just from
here in Norway, but including some of the biggest hitters on Wall
Street, like Citigroup.
This proverbial speck on the Arctic map has turned out to be a classic
example of just how far the tentacles of the international sub-prime
debacle have spread. In short, Narvik suddenly found itself caught in a
daisy chain of deceit and debt that's left its public services and
utilities – its schools, nursing homes, cultural
institutions, its tourist industry – all struggling.
GARY MALOY, TEACHER: 'Shocked' is a good word, 'anger' is
another. It's unbelievable that something like this could happen to a
community like Narvik.
Gary Maloy is a junior high school teacher, an American married to a
Norwegian. He's lived here in the village of Bjerkvik, outside Narvik,
for 16 years.
GEORGE NEGUS: It's not just one area of the community being
affected, it could affect everybody.
GARY MALOY: Everything.
GEORGE NEGUS: Directly or indirectly.
GARY MALOY: From the youngest to the oldest and everything in
between. From the schools to senior care, the sports facility, schools,
all aspects of the community can be torn down.
GEORGE NEGUS: Are you hearing people talking of leaving?
GARY MALOY: Not publicly, but it has to be It's crossed my
mind.
Before we even left Australia to come here, the Mayor of
Narvik, Karen Kuvaas, told us not to contact her. She voted for the
shonky Terra Securities deal, but told us she was fed up with the
scandal and wanted to move on. If only. So we contacted her political
opponent instead. Torgeir Traedal is the leader of the opposition in
the Narvik Council.
GEORGE NEGUS: Will the town ever be the same again?
TORGEIR TRAEDAL: Yes. We have lost at least 200 millions. 200
million Norwegian krone?
GEORGE NEGUS: Norwegian krone, which is about US $35 million?
TORGEIR TRAEDAL: Yes. We have a yearly budget of 900 millions
and we have lost 200 millions. So we have lost..
GEORGE NEGUS: A quarter of your budget?
Surprisingly, Torgeir Traedal also voted to invest a huge chunk of the
town's budget with the big money boys in Oslo, with their Wall Street
connections.
GEORGE NEGUS: Councillor, you're a fireman as well as a councillor.
Well, you've got a big fire on your hands here at the moment.
TORGEIR TRAEDAL: Yes, the fire is out of control. Yes.
GEORGE NEGUS: Out of control? How did it get out of control?
You were
on the committee that voted for this deal.
TORGEIR TRAEDAL: To us we were going into the Norwegian
federal
companies.
GEORGE NEGUS: So you thought all the investment money was just
going
into Norway? Not New York, or other parts of the world, or with a group
as large as Citibank anywhere in the world? Who do you blame for this?
TORGEIR TRAEDAL: I'm blaming the Mayor because the Mayor have
signed
documents that take us out cross border. They didn't say that. We say
that we should go in Norwegian federal companies with 100% security.
GEORGE NEGUS: So you weren't given the full facts?
TORGEIR TRAEDAL: No, because they hold back the facts.
What we wanted to ask the Mayor was why the Council thought
they could
risk the town's welfare and budget on a crazy money deal. Well, as
close as we can get to an explanation for that is what you can see and
hear right now – melting snow and running water. They were
making heaps out of hydro-power, which they apparently used as
collateral for large speculative loans. Maybe they thought getting
involved in the dicey money market, raising money that way, was
politically much safer than raising taxes. Boom, boom.
But the prospectus in Norwegian sold to Narvik's council contained a
hidden bomb. The brokers from Terra Securities somehow forgot to
translate the all-important paragraphs that told just how risky their
leap into the murky world of sub-prime investments actually was.
TORGEIR TRAEDAL: The administration said there's no risk, we
have
everything under control. Terra has kept this money because we have the
bank guarantee from the Norwegian state and we have also a document
from the communal department in Norway, from the government, that this
was also legal. But afterwards the document is not correct.
GEORGE NEGUS: So you thought though, you could cover any risk?
TORGEIR TRAEDAL: Yes.
GEORGE NEGUS: And you were wrong.
TORGEIR TRAEDAL: We was really, really wrong.
Narvik is a strategic location with a proud but unfortunately
bloody
history. Ulf Torgensen, the director of Narvik's War Museum, told us
how Hitler himself had fancied Narvik's ice-free harbour as the spot to
build his naval machine. During the war there was a real stoush here
– in fact, one of the great naval battles. It left hundreds
of navy men dead and even today its fjords are still strewn with
destroyer wrecks.
GEORGE NEGUS: This is exactly the area we were just looking at in that
famous battle? This is the fjord here?
ULF TORGENSEN: This was around Narvik.
GEORGE NEGUS: This is Narvik over here. It's interesting,
because
somebody said recently Narvik has always been a target of opportunity,
if you like, for foreigners. In the Second World War it was the Germans
and now it's the money men in Wall Street. I mean, how ironic is that?
You find yourself at battle again?
ULF TORGENSEN: It's a new battle, to survive.
GEORGE NEGUS: It's something you would never of dreamed
happening?
ULF TORGENSEN: No, I couldn't dream about it. You know that
the stock
market could go up and down, but you are spending the money you have,
not the money you don't have.
Don't be shocked. We were, after all, in Norway. Up here
blokes talk
politics in the sauna rather than the pub. You're actually lucky our
camera wouldn't work in sauna temperatures! But afterwards, we did
catch up with Gary Maloy and a couple of distraught locals. The
schools, which need rehabilitation. Retiree Tore-Jan Nikolaisen and
local ambulance worker Jarle Rydningen.
JARLE RYDNINGEN, (Translation): For at least 10 to 20 years,
our
descendants will also be affected by the situation. Well,
let’s say ..they won’t have the same access to
schools for their descendants. It will have extended effects.. Nursing
homes, school books, swimming, gymnastics.
MAN (Translation): Are you thinking about people living here now?
JARLE RYDNINGEN, (Translation): Yes, those who are here now,
let’s look at my daughter, the children.. her children, our
grandchildren, do you understand?
TORE-JAN NIKOLAISEN (Translation): Well.. the power stations are the
inheritance of the people. They're built for local people. They're
traditionally owned by municipalities, but they're being merged. The
tragedy is those are the funds they've traded with. They've played with
those, and they've used future money. The income from the long-term is
gone.
Next morning, sauna-refreshed, over breakfast and before
leaving, we
read that Narvik was not the only Norwegian town belted by the creeping
credit scandal, in particular, by dodgy deals with Terra Securities.
This is, they're going to somehow have to recover the millions that
have been lost by the Terra scandal. In this neck of the Norwegian
woods they're known as the Terra Towns. Between them, they've lost the
equivalent of US $100 million. But any hope they might have had of
recouping their cheated investments disappeared when late last year
Terra Securities went bust. But the ongoing legal wrangle could drag on
for years.
In Oslo, we met with Eystein Kleven, the chief investigator for
Norway's financial regulator.
GEORGE NEGUS: So you've done what you could, where the broker is
concerned, but the problem still remains of about, what, eight
different municipalities in Norway now who are affected this way, like
Narvik? What advice can you or anyone else give them to recover from
this predicament they're in?
EYSTEIN KLEVEN, CHIEF INVESTIGATOR: Well, in the future they
should not
go into products like this, not buy products they don't understand.
That's the main experience from this case. And I think this case is so
big, so well known, that municipalities and other public institutions,
they have learned this from this case. But the investment firm violated
the law and the license was revoked.
GEORGE NEGUS: But that doesn't help the people of Narvik.
EYSTEIN KLEVEN: No, of course not, but there is nothing wrong
with the
law. For instance, theft is forbidden, as long is theft is being
punished, the law is functioning.
GEORGE NEGUS: Is that what you see it as, theft? That these
brokers
have in fact stolen from the people of Narvik? Is it that brutal?
EYSTEIN KLEVEN: No, they misled. It is not a theft. They
misled.
GEORGE NEGUS: Consciously?
EYSTEIN KLEVEN: We don't know how much the broker themself
really
understood these products. That's also a problem. We're not sure.
GEORGE NEGUS: I know the brokers don't like being called
financial
cowboys. But are they?
EYSTEIN KLEVEN: Well, some of them are, yes, some of them.
So, having come all this way, what had we proved? Well, as
we've heard,
the sub-prime loan crisis might have had its roots in US suburbia, but
somehow, it had worked its insidious way to this remote, unsuspecting
community. Narvik, if you like, was the tip of the international
sub-prime iceberg. Meanwhile, for the shell-shocked folk here, those
long, bright Arctic summer days are still a heck of a long way off.
JARLE RYDNINGEN, (Translation): It's normal to play with money
you can
afford to lose. The money played with here wasn't for losing. You can't
afford to lose it.
TORE-JAN NIKOLAISEN (Translation): How did they dare take such risks
with people's money? It was borrowed money! That is what makes it so
tragic.
GEORGE NEGUS: Beautiful location, pretty ugly story. Clearly,
the
subprime credit crisis knows no global boundaries. And, of course,
we're now hearing of councils in this country who've also made the same
stupid mistake.