Sigrún Davíðsdóttir's Icelog

Over the last few days, Icelandic business people have aired their worries over the prospect of living with capital restrictions for other four years. It is safe to say that many business leaders in Iceland are decidedly unhappy at the prospect of possibly four more years of capital restrictions since it keeps the Icelandic economy in an unnatural state and creates barriers for companies to operate and grow.

It was rather unfortunate that at the beginning of the year, it seemed, judging by some utterances from Mar Gudmundsson Governor of the Central Bank of Iceland, that the end to capital restrictions might be in sight. The new report from the CBI doesn’t indicate the contrary.

The criticism aired over the last few days shows that some in the Icelandic business community think that CBI overestimates the risk of the destabilising effect resulting from abolishing the restrictions. Their feeling is that a currency flight wouldn’t be of any great danger since the underlying factors in the economy are sound, such as trade balance, well financed banking sector and already a historically weak krona.

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According to a press release from the SFO there have been house searches in Luxembourg today, on request from both the Serious Fraud Office and the Office of the Special Prosecutor in Iceland. The operation has involved 70 investigator, from the Luxembourg Police, SFO and the OSP.

The searches per se are interesting – and also the fact that this is a joint operation, involving the three countries. It remains to be seen if the Luxembourg authorities will now be opening up an investigation of its own. However, this doesn’t mean that the investigations in Iceland and the UK are being merged. It’s still separate investigations but forces are combined when practical.

It seems that the SFO is conducting house searches at Consolium, where some ex-Kaupthing managers run a consultancy. On the Consolium team there are the following: Hreidar Mar Sigurdsson, Ingolfur Helgason, Steingrimur Karason, Gudmundur Thor Gunnarsson (arrested in Iceland in connection to the SFO searches recently) and Kristinn Eiriksson.  The OSP is focusing further on Skuli Thorvaldsson and searched Banque Havilland.

In february last year the OSP did house searches in Luxembourg in an operation that was, at the time, one of the largest of its kind in Luxembourg. Some 19 parties did at the time protest the handing over of the documents and it took the OSP the best part of a year to get the documents, after the 19 took their case to an appeal court. However, since then the rules in Luxembourg have been changed and it’s no longer possible to appeal. It means that this time the process to get the documents could take no more than a few months, not a year like last time.

Update: here is how the Guardian reported on the searches.

Further update: the searches were at two homes and three work places. The homes were those of Hreidar Mar Sigurdsson ex-CEO of Kaupthing and Magnus Gudmundsson manager of Kaupthing Luxembourg. The three work places were Havilland, Consolium and the third place, so far unidentified.

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Last week, the Icelandic Supreme Court ruled on a market manipulation case. The ruling regards six trades in January and February 2008, ISK5m each time. With their action, the two affected the bond price of Exista at the end of these six days. The pattern was that the two men would put in an offer right at the end of the day, causing the bonds to go up in price.

It was the Icelandic Stock Exchange that draw Kaupthing’s attention to these trades. Following the bank’s own investigation, FME, Icelandic Financial Services Authority, asked for further information in March 2008. Thordarson and Agnarsson were suspended and the bank said it was taking the investigation very seriously.

It has then taken all this time for the case to reach the Supreme Court. The judge reprimanded the prosecutor for the very long time it had taken to get the case through court. The Supreme Court reduced the sentences but they are still severe: six months in prison.

The question hanging in the air is why these two men should take it up on their own accord to trade so as to affect the price. Exista was Kaupthing’s largest shareholder, owning about 40% in the bank. Because of the heavy lending from Kaupthing to Exista and related parties Exista’s well being was paramount to Kaupthing’s financial health. It would make sense for the bank to be interested in keeping up Exista’s share price. But the interest of the two traders isn’t at all clear. The question is if there was a limit that the bank wanted to stick to and the traders knew of or were told to aim for. However, nothing in that direction transpired during the hearings.

There are some interesting aspects to this ruling. It regards market manipulation, allegedly widely practiced in all the banks. This case was, compared to what might come, a fairly small matter, only regarding six trades – and yet it carries a prison sentence of six months, non probational, plus fines. The Supreme Court did shorten the prison sentence from eight months to six but even with a 20% reduction it’s still a noticeable verdict.

This case, arising before the collapse of the banks in October 2008, was run by the police, not the Office of the Special Prosecutor. The OSP can, under certain circumstances, secure reduced sentence to people who cooperate with the OSP. It would be interesting to know if this fairly serious verdict for a relatively minor offense, compared to other cases that might be under investigation, will make some of those with a good insight into the operations of the three collapsed banks more willing to inform the OSP.

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This morning, there was the most harrowing report on the BBC radio4 Today programme on the situation in Belarusse. The playwright Sir Tom Stoppard (his Coast of Utopia, a 3 part play on Russian revolutionaries of the 19th century is one of my most memorable theatre experiences) spoke of the situation in Belarus: people disappearing in a gruesome way and political prisoners in a place only two hours from London, in Europe where dictatorships have been consigned to history except in this one  in Europe; an iron fist in an iron glove. Not enough pressure from the governments of Europe etc.

Well, just a few days ago I looked at the website of Banque Havilland, formerly Kaupthing Luxembourg but bought by the Rowland family, one of the biggest donators of the Conservative party. There isn’t much life on the site. When I last looked, last autumn, there was only this one press release, from September 2009, when Prince Andrew was present at the formal opening of the bank.

Now there is a new press release, from November 2010, about the bank’s latest, or rather its only initiative since it opened: an investment fund in Belarus. In collaboration with the Russian Sberbank Group, Havilland is opening ‘the first Belarusian foreign direct investment fund.’

Everyone ever connected to Libya is now trying hard brush over former relationship with Libya and Muammar Gaddafi – and interestingly, Kaupthing got pretty close to Gaddafi’s investment vehicles. But it’s still fine to be an investor in Belarus.

*Interestingly, the press release on the Belarus fund has been removed from the Havilland website, as can be seen if you click on the link above. More on the investment fund here.

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Four more years – that’s the perspective on capital restrictions in Iceland. Today, the Icelandic Central Bank published its long awaited report on capital restrictions in Iceland. In tune with the general tendency for a positive spin on things the title is ‘Capital account liberalisation strategy.’ The Icelandic title is less sophisticated and more down-to-earth; literally translated it’s ‘A plan to abolish currency restrictions.’ An upcoming bill in Althingi will allow the CBI to extend the capital restrictions for four years.

For those of us who breathlessly follow the Icelandic economy this report has been long awaited. It was due on March 11 but was delayed because, according to Governor of the CBI Mar Gudmundsson, it was cooked up by many cooks who all wanter to add their touch. The new report discusses previous strategy, the various conditions needed for lifting capital controls and sets out a plan for easing the country out of the restrictions into the real world.

The first two steps regard the offshore krona, now estimated to be ISK400-500bn, a quarter of the estimated 2011 GDP of Iceland. In phase I, CBI will offer currency to those who hold offshore krona, through an auction process. In phase II, CBI, then the happy owner of  possibly 400-500bn of OS krona, will auction the OS krona to owners of foreign currency who are interested in longterm investment in Icelandic state bonds or in Icelandic companies. In addition, owners of OS krona will be offered to bring their OS krona to Iceland for the same kind of investment though under some restrictions: the OS krona amount can only amount to half the investment and the investment be kept in Iceland for a certain amount of time. – The use of OS krona in new investment in Iceland has been an issue lately. It’s been forbidden but there have been rumours that some investors have been trying to smuggle their cheap OS krona into investments in Iceland.

In phase III, those who hold OS krona but have neither participated in the auctions nor used it for investment in Iceland will be offered to exit by changing their holdings into longterm state bond in foreign currency or by paying an exit fee.

Obviously, the ultimate goal is to strengthen and stabilise the economy but how the measures will pan out is still unclear. The underlying problem with the OS krona is the divergence between the onshore and the offshore rate. It’s i.a. unclear how free the auctions will be, i.e. if the CBI will try to control the exchange rate in some way.

In the short term, the outcome of the Icesave referendum April 9 will have an impact on how speedily the strategy can be executed. If the Icesave agreement is rejected the execution of phase I and II will no doubt be delayed as a ‘no’ might cause great uncertainty in terms of Iceland’s legal status regarding the Icesave debt and other issues arising from the collapse of the banks in October 2008.

The biggest owners of foreign capital in Iceland are the pension funds. At a press conference today, Gudmundsson emphasised that the pension funds’ foreign capital will not be affected by the first easing. Their capital will be fenced in at home, leading some to believe that the funds, willingly or not, will bear some of the burden that the capital restrictions create.

Alexander Macgregor Bruce-Brand, an expert in the field with experience from South Africa and elsewhere, has worked on the new strategy. It remains to be seen how the strategy will be viewed by those part of the Icelandic business community worst hit by the restrictions. Though four more years of restrictions seems a long period of an anormal situation, the plan sets out a clear vision of how things will be done. So at least there is clarity – and clarity might cement some much needed trust in the CBI and Icelandic authorities. And that’s ultimately a positive thing.

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The nature of investigations by Serious Fraud Office is that the matters investigated remain a secret until charges are brought. With Kaupthing it’s clear that Kaupthing Edge, the Kaupthing deposits in the UK, triggered the investigation. The money was, to a large extent, sent to Iceland where it was lent out on favourable terms to a chosen group of clients and used to finance a staggering amount of Kaupthing’s own shares. It could of course be argued that the clients were so enthusiastic about Kaupthing that they wanted to have a share, literally, in its success. However, it looks more like an organised share parking on behalf of the bank, often on terms almost too good to be true. The Icelandic Office of the Special Prosecutor is i.a. investigating Kaupthing for alleged market manipulation.

There are strict rules in the UK regarding loans from a subsidiary to a parent company. According to the Special Investigation Committee’s report, the FSA made frantic attempts towards the end for Kaupthing Singer & Friedlander to claim money back from Iceland. The managers of KSF had meetings with the FSA, promised the earth but delivered no money back (which is one of the reasons why the FSA closed Kaupthing down in the UK, as explained by Alistair Darling in a recent interview.)

The loans used were liquidity swaps. Just before the collapse of Kaupthing the swaps amounted to £1bn but it turned out the swaps weren’t all that liquid: KSF could in reality only, at most, get £300-400m, according to KSF director Armann Thorvaldsson’s report to the SIC.*

The SFO might want to know what happened to the deposits gathered in the UK. But since it arrested the bank’s biggest client Robert Tchenguiz, and his brother Vincent also a client but a lot less visible one, it must have its eyes on something else. In an earlier Icelog I pointed out that the SFO allegedly was interested in a loan to Oscatello, belonging to Robert, where Vincent has assets at stake as a collateral.

The SFO angle isn’t yet clear but since it’s turned towards the brothers, two employees of Robert’s company R20 as well as Kaupthing managers such as Thorvaldsson and chairman Sigurdur Einarsson, it might be that SFO views the brothers as ‘shadow directors,’ i.e. apparently unconnected to Kaupthing but making decisions that the board then acted on. Aaron Brown, one of the two R20 employees arrested, is at the heart of Robert’s operations and had close connections with Kaupthing. Gudmundur Thor Gunnarsson, arrested in Iceland and an earlier Kaupthing employee liaised closely with R20 and its owner.

Vincent was never much seen around Kaupthing but Robert was. I have heard from more than one source that Robert was in and out of Kaupthing all the time, as if he owned the bank. In Independent on Sunday, an entrepreneur in Cannes, asked on Thursday about Robert Tchenguiz state of affairs following the SFO raids quoted Shakespeare’s Hamlet which explains Robert’s situation perfectly: “As Polonius warned, neither a borrower nor a lender be, and it looks like Robert was both, to himself.”

In a Kaupthing credit risk report from 31.08.08 the loans to Robert Tchenguiz had blown the legal limit of 25% of the bank’s equity – his loans amounted to ISK235bn, now ca 1.2bn, or 26,2% of the bank’s equity. This didn’t dampen Kaupthing’s will to lend him yet more. At the board’s credit committee meeting 24.9.08 the committee agreed a loan of £5m to the Tchenguiz Discretionary Trust. This loan wasn’t a part of the Oscatello structure but had collaterals in Montzando Ltd and Santora Investment Ltd holding shares in Phase Eight and House of Fraser where another big borrower in Kaupthing, Baugur, was the majority shareholder. An interesting connection since Kaupthing’s favoured clients were inclined to be attracted by the same companies.

TDT was requesting these 5m to settle a margin call from KSF – in other words, KSF was lending TDT to meet KSF’s own margin call. This may seem weird but in the Wonderland of Icelandic banks this was common when the banks’ major shareholders and favoured clients were fighting margin calls.

Next day, the board seems to have gone through the bank’s largest exposure, the overview was leaked on Wikileaks in summer of 2009. According to that overview, Robert Tchenguiz wasn’t mentioned but two companies related to him were mentioned, holding loans of €250m, only a fifth of the debt mentioned in the credit report a few weeks earlier.

On the Kaupthing loan overview from Sept. 2008 the bank’s exposure to Vincent Tchenguiz is €208m, against two companies, Pennyrock Ltd and Elsina Ltd. The credit rating for both these companies is –BBB. These companies are connected to his real estate and ground rent emporium, the biggest of its kind in the UK.

Today, companies connected to Peverel, the holding company for Vincent Tchenguiz ground rent emporium, have gone into administration, as Bank of America Meryll Lynch demanded a loan of £125m repaid. Vincent Tchenguiz blames the bank’s demand on the SFO raid.

Be that as it may but BoA Merryl Lynch might also have taken a look at the collateral structure and wondered about its worth. In some of the Icelandic company structures there were real assets at the bottom of the structure. On top of these companies there were layers of other companies, also with loans but with only a slight downturn of value the equity of these companies could easily evaporate and the collaterals turn out to be worth not very much.

Following the SFO raids and arrests last week there has been a flurry of articles in the UK media on the Tchenguiz brothers and Kaupthing. The FT put the news on its Thursday front page. However, this weekend there was an article where the Tchenguiz brothers were allowed to vent their anger without the slightest attempt by the paper to indicate that this was a knee jerk reaction. As Eva Joly has so often pointed out in the Icelandic media the spin machines go into overdrive at the moment the authorities question the millionaires. They always claim that an action against them is a conspiracy to hit their business interests. Then there are legal threats. All of these standard reactions were paraded in the FT article. How disappointing that this otherwise so outstanding newspaper should let itself be used in such a transparent PR exercise.

The Tchenguiz brothers claim that they were mislead by Kaupthing but they aren’t suing its directors. In the Sunday Times the fashion tycoon Kevin Stanford claimed that the bank had lent him money to buy its shares, misleading him as to the bank’s dire problems. He alleges that the UK deposits were swapped for troubled loans held by Kaupthing Iceland, propping up the share price. This is abundantly clear from the SIC report and will not surprise any Icelander. However, Stanford doesn’t mention that according to the SIC report he himself was involved in deals, financed by Kaupthing, to influence Kaupthing’s credit default swaps. Further, Stanford claims that the bank used the deposits to lend so that some of the senior Kaupthing executives could sell of their own share holdings. – If this is correct it’s of great interest since the executives have always maintained they didn’t sell their shares. It is however clear, that the top executives can afford to hire the most expensive lawyers both in Iceland and the UK for their defense.

Whether and if something is criminal at the heart of Kaupthing’s operation, justifying the SFO raids last week, will only come to light when and if charges are brought. But it’s clear that the Tchenguiz brothers haven’t only constructed one of the most complicated offshore structures known in this country but they have also distributed debt high and low in these structures. According to Simon Appel partner at Peverel’s administrator Zolfo Cooper “…the business itself was profitable at an operating level, the level of debt in the holdings companies was unsustainable.”

In 2008, when no one was lending and Kaupthing showered its chosen clients and major shareholders with money from its only source, UK depositors (and to a lesser degree depositors in other countries), it seemed like a salvation to have Kaupthing as a generous lender. But it was a doubtful blessing since the temptation was to borrow more instead of selling assets. The Icelandic banks’ goodwill to lend far beyond rhyme and reason has killed many of the companies of the Icelandic banks’ main clients. Vincent Tchenguiz wasn’t one of Kaupthing’s largest clients but the fate of Peverel indicates the same pattern of addiction to debt.

*An attentive reader pointed out to me that if the FSA can prove that KSF transferred money to Iceland in breach of UK law there could be a basis for a course of action to recover that money. The question is against whom the recovery would be pointed.

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Prince Andrew has a special talent for choosing friends. First there was the American millionaire Jeff Epstein, convicted for sexual relationships with under-age girls. Now it turns out, according the Telegraph, that David Rowland, owner of Banque Havilland earlier Kaupthing Luxembourg, has paid off debt of £85,000 for the prince’s ex-wife. Previously, prince Andrew had attended the opening of Banque Havilland, as seen on this photo from Havilland’s annual report 2009.

Rowland’s royal connection, in addition to his ties to the Conservative party is a further example of Rowland’s influence in high places although he, as quoted in the Telegraph article, has been accused of looting a company that he once bought in the US, Rowland denies this, and further has been called “shady” in Parliament.

As long as leaders of the political parties are so in awe of millionaires with shady money and shady money supports political parties it’s a struggle to investigate people and companies that get rich in an opaque way. Something that The Economist highlighted in a brilliant satire this week. As they point out, “respectability is on sale” – and the best market place is indeed London. The ties between prince Andrew, Rowland and the Conservative party, the debt and indebtedness involved, are a case in point.

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The 9th person arrested in the SFO investigation on Kaupthing and the Tchenguiz brothers is Aaron Brown, a trader and a close aid of Robert Tchenguiz and an employee of his investment vehicle R20. Aaron Brown is, according to Icelog sources, instrumental in Robert Tchenguiz businesses and usually among the first to show up in the morning at the Mayfair office. Brown isn’t a known name in the business pages but everyone familiar with R20 and Robert Tchenguiz businesses knows of Brown. Brown also had close connections to Kaupthing and Exista.

In addition to Brown Tim Smalley, another senior employee of R20, the Tchenguiz brothers,  Sigurdur Einarsson, Armann Thorvaldsson and Gudni Adalsteinsson were arrested in London on Wednesday. In Iceland, ex Kaupthing employees Bjarki Diego and Gudmunur Thor Gunnarsson were arrested. The investigation seem to have cost Adalsteinsson his job with the regulator, FSA. The FSA certainly didn’t do a brilliant job of regulating the Icelandic banks, was far too late in stopping them according to former Chancellor of the Exchequer Alistair Darling. The fact that Adalsteinsson was hired by the FSA raises further questions about the regulator’s mindset.

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Here is a link to the interview I did with Alistair Darling, aired on Ruv tonight. Here we hear for the first the view from the British side on the events in October 2008.

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Yesterday, the UK media made much of the fact that Vincent Tchenguiz was going to host a party tonight on his yacht Veni Vidi Vici in Cannes, on the occasion of a property conference there. The plans were up in the air when Tchenguiz was arrested and brought in for questioning with the Serious Fraud Office. But today the party is still on, Tchenguiz is off to Cannes now, sources close to Tchenguiz inform Icelog. Appropriate to the yacht’s name he will go and see – but who wins in the SFO investigation is still unclear.

For others, the questioning in Iceland is still going on, as it is here in London. As to possible charges, there might go weeks, months and years. However, SFO is now trying to be snappier and quicker so who knows.

According to the FT 11.3. the party went on – but without the host. Vincent Tchenguiz did indeed not leave London.

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