Sigrún Davíðsdóttir's Icelog

Oct. 2008: the colossal collapse of common sense

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‘How could the banks that all appeared in good shape in summer 2008 suddenly all be gone by the first week of October?’ asked a big client of one of the Icelandic banks when I spoke to him last autumn. With greater insight into how the three banks operated it’s becoming less and less surprising that the collapsed – but what exactly happened in autumn 2008? Weirdly enough, neither the Icelandic nor the British side of the story has been clarified. But it’s possible to piece together some known facts.

The three main Icelandic banks, Glitnir, Kaupthing and Landsbanki all operated in the UK. The FSA had little interest in Glitnir since it operated only as an investment bank whereas Landsbanki and Kaupthing offered private depositors high interest savings accounts. Landsbanki opened its IceSave accounts in 2006 to secure funding: the Icelandic banks had experienced a glitch in wholesale funding after negative reports from financial analysts (and if only the financial analysts had stuck with their criticism instead of accepting the banks’ window dressing things would have been different but that’s another story…)

Landsbanki’s CEO called IceSave ‘pure brilliance’ (‘tær snilld’), a phrase now as famous in Iceland as the most famous citations from the Sagas. Kaupthing Edge opened in the UK as late as Februar 2008. That summer, British ministers assured Parliament that the fast-growing deposits in Icelandic banks in the UK were under control. The FSA seemed to agree that the savings accounts were indeed brilliant. Yet, it paid Kaupthing ARROW visits in July August and September. Most likely, the same was done at Landsbanki. The financial tremors after the Lehman collapse, causing private individuals and companies to withdraw money and show other signs of panic, drained both Kaupthing and Landsbanki of liquidity.

After business hours Fri. Oct. 3 the FSA ordered Kaupthing Singer & Friedlander and Heritable Bank, Landsbanki’s subsidiary to place all new deposits from Oct. 2 with the Bank of England. The FSA was clearly getting worried: after all, 170,000 clients had put £2.6bn in Kaupthing Edge and 300,000 clients had put £4bn in Icesave. Kaupthing complied, Heritable didn’t. The following Monday the FSA asked Heritable to sign over money held with Barclays and HSBC.

In Iceland things were also moving fast. Though it should have been clear how intertwined the fates of the country’s three banks were, it was strongly believed at the time that Kaupthing, the biggest, would survive – it procured a €500m (£463m) loan from the Icelandic Central Bank on October 6, the day that the prime minister addressed the nation live on TV, ending with ‘God bless Iceland’. – Here the intriguing point is whether the ICB was at the time informed of the Oct. 3 FSA action against Kaupthing directing all new deposits to the BoE. (I’ve asked around, my feeling is that Kaupthing didn’t mention this but I could be wrong).

Tuesday Oct 7 the Treasury transferred Heritable’s deposits to the Dutch bank ING. The €500m ICB loan to Kaupthing didn’t solve the Kaupthing’s liquidity problems in the UK and by Wednesday Kaupthing Edge was also transferred to ING – and that was the end of Kaupthing.

There are several intriguing questions that the UK Treasury has never answered: why did it transfer the deposits from the Icelandic banks to a Dutch bank – that needed to be saved by the Dutch government only a few days later? Most likely ING was yet another threat to the volatile UK financial sector, it got financial help for sorting out the Icelandic problem and was momentarily strengthened – until the Dutch government bailed it out only days later. By using ING the Treasury cleverly solved two problems with one action.

But the UK Treasury wasn’t fininshed with Iceland: although defaulted in Iceland the Treasury put out a freezing order on Landsbanki by using the Anti-Terrorism, Crime and Security Act 2001. The Treasury believed that “action to the detriment of the UK’s economy (or part of it) has been or is likely to be taken by certain persons who are the government of or resident of a country or territory outside the UK”.

This Delphic utterance meant that suddenly the Anti-Terrorism Act defined Iceland as a whole with serious effect for the country’s companies and individuals. It took weeks for the Treasury to define its target, Landsbanki, more accurately. The Treasury has never clarified why this nuclear option was necessary. What dreadful deeds did the Treasury so fear that only the Anti-Terrorism Act would do? Or was this only an unfortunate sign of nerves?

A puzzling note: although Icelandic politicians have complained – and are still complaining – about this act, neither the Icelandic government nor single politicians have at any time done anything at all to seek clarification as to why the Treasury chose this way. Hopefully, this will be one of the things clarified in the ‘Truth Commission’ report but why we have to wait so long is a complete mystery to me.

Kaupthing’s resolution committee last year asked for a judicial review on the legitimacy of the UK Treasury transferring Kaupthing Edge. The UK High Court decided in favour of the Treasury but the case threw light on events leading up the the action. However, the much more serious action against Landsbanki hasn’t been tested in court and consequently the events surrounding Landsbanki are a lot less clear.

There was, and still is, strong resentment in Iceland against the UK for actions leading to the collapse of the banks – there has always been a strong tendency in Iceland to blame all foreigners for all evil. However, with more insight into the banks’ operations it’s become clear that the banks were already doomed, not only because of the UK actions or by circumstances in international banks. They were doomed because within them there had already been a colossal collapse of common sense.

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Written by Sigrún Davídsdóttir

February 15th, 2010 at 8:02 pm

Posted in Iceland

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