Sigrún Davíðsdóttir's Icelog

Last year, Alisher Usmanov, who Kaupthing was prepared to shower with money in Sept. 2008 just days before the bank collapsed, was buying shares in Facebook. One of his companies, DST, now owns 10% in the most famous social network site in the world. Considering his past, his large stake has caused some worries. Here is an interesting article, from last summer, about Usmanov and his Facebook ownership.

And here is an article on Usmanov but mainly on the Russian investor Yuri Milner, who runs the tech investment fund DST where Usmanov is the major investor.

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One of the characteristics of banking the Icelandic way is large exposures to very few, related individuals and companies that through a badly structured incentive system was very tempting for the managers. Added to this were close personal relations between all involved. It meant, i.a. that no margin calls were made or if they were made the were met with new loans. Also, when foreign banks started to make margin calls in the winter of 2007-08 on the big Icelandic borrowers the Icelandic banks bailed them out thus yet increasing the exposures that were already close to or actually breaching the legal limits.

Recently I wrote on Kaupthing’s large exposures. An Icelog reader, Sidney Carton has just commented on this log and the Icelandic way of banking, drawing on his experience from the Thai banking crisis in the late ’90. Some very interesting points here so I thought I would draw attention to it (italics are mine):

“I was intimately involved with the operation and regulation of financial intermediaries in the US, both domestic and foreign institutions with US offices, and thus became familiar with the downfall of the Thai Banks back in the late ’90s. Approximately one-third of the banks, by number, not size, were closed, and it was then discovered in several cases, more than or nearly half of the bank loans outstanding had been made to ‘insiders,’ such as directors, officers, major shareholders and their relatives, associates, and affiliates. When I first read of your banking systems failures, my experience led me to assume Iceland had no more idea what its bankers were doing than Thailand did, and eventually Iceland would discover the human temptation to lend to yourself, family, and friends, is better than lending to enemies, and strangers, when, of the course, the reverse is true. A bank won’t collect a delinquent loan from the ‘insiders,’ but will find a way to stretch the rules etc. I also could not understand why Iceland saw fit to not impose limitations on the volume of bank loans made, since there is only so much borrowing capacity that a nation has, and it is the borrowing capacity of a nation that impacts Sovereign Credit, which stands behind the collective credit of its banks. Thailand swallowed the bitter terms of the IMF, and has recovered. I note too the double standard the world banking community operates on. Small nations are dealt with forcefully, and direct, while large nations are given all administrative forbearance to conceal the true facts concerning its income and assets. In the US, if you are not too big, for example, you are shut down. Keep up the good work Iceland.”

Icelanders did indeed have little idea what its banks were up to – but we now know. Afterwards, it’s clear that the regulators not only didn’t have a clue about the banks’ operations but they weren’t too versed either in what it means to regulate banks.

Re Carton’s point on small vs large nations I have often thought what i.a. Deutsche Bank was up to re Iceland but it certainly isn’t easy to gauge any insight into the big banks. It’s clear the the UK FSA wasn’t much better than its Icelandic counterpart but for some reason I can’t detect much drive here in the UK to understand what went on. People seem very keen on moving on. The fact that the UK government put billions to resurrect its banks, no questions asked, speaks volumes. The present government, however much it talks about banks and bonuses, hasn’t shown any wish to scrutinise the banks here that took the blank cheque from the taxpayers.

When Barclay’s Bob Diamond was questioned (do take the time to watch, most informative!) by British MPs John Mann asked Diamond if he was grateful to the British taxpayers for the money pumped into the system (Barclays didn’t take direct state money but has none the less benefited from quantitative easing, i.e. more money in circulation). Afterwards, Mann said that the question had been mischievous, he wanted to put a question to the media-trained CEO that could rattle him. Mann certainly succeeded. Though asked repeatedly, Diamond couldn’t bring himself to say he was grateful to the taxpayer. That’s probably a mutual feeling but the taxpayers haven’t been informed about what exactly went on in the UK banks that would have gone bust if it hadn’t been for the taxpayers. In Iceland, people do at least know quite a bit about the workings of the Icelandic banks before the collapse of October 2008.

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The Supreme Court in Luxembourg has now ruled that the documents from Kaupthing Luxembourg, demanded by the Office of the Special Prosecutor in Iceland after house searches in Luxembourg in February last year, can be handed over to the OSP. The documents, mostly found at Banque Havilland that in summer 2009 took over the operation of Kaupthing, are thought to be related to loans, accounts and transactions connected to Kaupthings’ major clients, owners and the bank’s senior management.

The house searches in Luxembourg by the local police are one of the most extensive searches ever done in Luxembourg. Afterwards, the rumour was that the OSP had found documents far beyond what they had hoped for and had their eyes on a lot more than they had originally in mind. The process has been a lengthy one. First, a judge had to review the documents to see if the search warrant applied to them. That took until autumn, as far as I understand. Then it turned out that parties, to whom the documents related, could try to veto the handing over of the documents.

The result was that Banque Havilland, that had earlier said they would try to be as accommodating to the OSP as possible, together the 19 parties (no names have been mentioned but I would be very interested in see a list of these 19 names) asked that the documents shouldn’t be released. Interestingly, Banque Havilland said after the searches that they would cooperate fully with the OSP. The fact that Havilland took a lead in attempting to hinder the OSP to get the documents tells another story. The attempted veto had to go through a county judge, that ruled in favour of the OSP. That ruling was appealed. Today, Banque Havilland and the 19 lost the appeal. Now, the OSP will get the coveted documents in the coming days.

What might the Kaupthing documents contain? Already, the 25.9. 2008 loan overview from Kaupthing, leaked on Wikileaks in summer of 2009, showed that loans to parties with bad credit ratings, against no or insufficient guarantees and collaterals, almost all went through Kaupthing Luxembourg. The report of the Althingi Special Investigative Committee confirmed this.

It seems clear that the most opaque dealings of Kaupthing were dealt with in Luxembourg. Someone familiar with Kaupthing’s operations recently told me that Kaupthing can’t be fully understood without a full insight into the bank’s Luxembourg operations. That’s what the OSP surely knew when the Luxembourg house searches were done last year.  It now remains to be seen if some of the senior management of the bank, some of whom were held in custody last year for questioning, will be questioned again in the light of a fuller picture emerging.

For Luxembourg itself, the High Court ruling is of major importance. Lately, I’ve heard that some individuals in Luxembourg are scrutinising certain individuals and companies in order to bring into the open certain allegedly questionable or even criminal activities in the financial sector. It’s now clear that banks can’t hide behind the Luxembourg bank secrecy anymore. Nor should they. Innumerable banks and financial institutions have for decades used Luxembourg to run offshore operations at the centre of Europe. When I was in Luxembourg early last summer I met many locals who weren’t at all happy with the fact that their country had become a synonyme of a place to do dirty deals. The ruling today shows that when a case is supported by sound reasons the Luxembourg High Court agrees.

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After the Icelandic Supreme Court declared the election to the Constitutional Assembly invalid, the Icelandic government is now mulling over its next step. The ruling was based on the fact that the fundamental criteria of elections hadn’t been met: not enough secrecy and the candidates weren’t allowed to follow the counting of the votes. This doesn’t seem to have had any influence on the results but it’s enough that the criteria wasn’t met.

The Althingi committee that supervised the election has claimed that since Althing had passed a special law on the CA the normal criteria for elections didn’t have to be fulfilled as long at the election itself had been duly carried out. The Supreme Court begged to differ.

There is now an almighty political row going on regarding whose blame and whose fault it was. PM Johanna Sigurdardottir, whose appearance in Althingi is ofter rather dull, showed a raging spirit yesterday, accusing the Independence Party to gloat because they were opposed to the idea of a CA that could show that the country really wanted a national ownership of natural resources.

A friend of mine pointed out that if she really wanted to connect with the mood of the people she should put a one-off levy on high earners to pay for a new round of election. That would really give her her earlier standing as Saint Johanna – though it wouldn’t appease her opponents. However, as the editorial in Frettabladid points out,it’s time that the dilettantism in Icelandic politics ends. Adding to that, it’s difficult to see this last course of events as anything but a gigantic blunder and embarrassing mistake.

But where is Icesave now? Althingi now has Icesave on its programme. The new Icesave agreement is being debated there, so far only in a committee. Earlier this week, the committee said it needed more time, which might surprise some since it’s been on the agenda for a looong time. This new upheaval might slow down the course of Icesave or it might be an all time attention diverter. Be that as it may but it seems that Icesave is no longer the hot topic in Icelandic politics but a rather tepid one. Recent poll shows that half of the voters think that the government should solve the issue and the pay what there has to be paid to the UK and the Dutch.

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Earlier today, the Icelandic Supreme Court ruled that the election to the Icelandic constitutional assembly was invalid. The ruling came after a few of those who stood for election turned to the courts, believing that the election hadn’t followed the proper course.

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Landsbanki ex-CEO Sigurjon Arnason has been released from custody. The Office of the Special Prosecutor took Arnason into custody Jan. 13th while questioning was going on. The date for his release was set Jan. 25th but he has now been released as custody is no longer necessary.

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Here is a piece, appearing in the Daily Telegraph today, that I wrote with Telegraph journalist Rowena Mason on Kaupthing and Usmanov. As Icelog readers will know I had already written on Icelog about Usmanov and Kaupthing, see here and here.

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The house searches conducted today by the Office of the Special Prosecutor at Straumur, MP Bank, Landsbanki, Landsvaki (a money market fund owned by Landsbanki) and Central Bank of Iceland seem to be directed against two issues: the transactions of tens of billions of kronur from CBI to Landsbanki, at the behest of Landsbanki – and transactions in Landsvaki after the fund was closed down. All this seems to have been happening on or around October 6 2008, two days before Landsbanki was taken over by the FME, the Icelandic Financial Services Authority.

These transactions all seem to be related to repo transactions that all three banks, Kaupthing, Landsbanki and Glitnir, were involved in via smaller financial institutions. Landsbanki’s repo in question were done with Straumur and MP Bank. The OSP has indicated that the investigation, at least in part, focuses on whether Straumur and MP Bank were favoured over other creditors when it was clear that the bank was facing bankruptcy. Also, if money was being directed where it shouldn’t go.

Special prosecutor Olafur Hauksson said to the Icelandic media today that tens of billions of kronur had been moved from CBI to Landsbanki at the order of Jon Thorsteinn Oddleifsson who then worked at Landsbanki. There have long been rumours in Iceland that there were streams of money directed in unnormal directions during these fateful days in October 2008 but it’s never been clarified what actually happened. The OSP also seems to be wondering.

Four former Landsbanki employees were taken into custody today, Oddleifsson, Stefan H Stefansson who was chairman of Landsvaki and two others. All have been released tonight. Sigurjon Arnason, the bank’s CEO is still in custody and was being questioned today.

The fact that OSP staff entered the CBI with a search warrant underlines the gravity of the matter. Today, my sources couldn’t think of any Central Bank in any Western country that has been searched by a prosecutor. However, the bank underlines that none of its staff is being investigated for any misconduct.

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Today, the Office of the Special Prosecutor is conducting house searches at ALMC, previously Straumur Investment Bank and at a small private bank, MP Bank, with operations in the Baltics and Ukraine. Some OSP staff is holding a meeting at the Central Bank of Iceland but no documents have been seized.* One person has been arrested so far, Jon Thorsteinn Oddleifsson, previously a manager with Landsbanki.

It’s too early to say if these latest moves are connected to the Landsbanki investigation but that’s most likely. Straumur’s major shareholders were Bjorgolfur Gudmundsson and his son, Bjorgolfur Thor. In the report of the Althingi Special Investigative Commission there are many examples of Straumur’s intimate connection with Landsbanki, i.a. loans without collaterals going both ways. Straumur’s CEO William Fall was brought in by the major shareholders to add a more international dimension to Straumur, which also operated in London. Fall left Straumur shortly before it went bankrupt and is now on the RBS senior executive team as a global head of financial institutions group.

*After first mention of only a meeting with some CBI staff it’s now clear that the OSP has seized some documents at the CBI. The searches might be connected to the extensive use of so called ‘love letters’: the banks, in this case Landsbanki, issued bonds to smaller financial institutions that pledged them with the CB and passed the loans on to the three big banks. This was taking place towards the end when it proved increasingly difficult for the banks to find fundings outside of Iceland – depends on how it’s estimated but these dealings basically bankrupted the CBI.

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Today, Ivar Gudjonsson ex-manager of Landsbanki’s prop trading has been released from custody. He has been questioned regarding the Office of the Special Prosecutor’s investigation into Landsbanki. Gudjonsson’s custody was originally set to end Jan. 21. Landsbanki’s ex-CEO Sigurjon Arnason is still in custody, set to end Jan. 27 and today, he and his colleague Halldor Kristjansson are being questioned.

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