Sigrún Davíðsdóttir's Icelog

The house searches and the people arrested today throw some light on what exactly the SFO is investigating. First, the names. Seven people have been arrested in London, two in Iceland. Two of the UK names are still unknown.

The first names to come out this morning were the Tchenguiz brothers, Robert and his older brother Vincent. Then there were Sigurdur Einarsson Kaupthing’s chairman of the board and Armann Thorvaldsson manager of Kaupthing’s UK operation, Kaupthing Singer & Friedlander and the author of ‘Frozen Assets,’ his version of the albeit brief Kaupthing saga and his part in it. As far as I’m aware, Thorvaldsson hasn’t been questioned in the Icelandic investigation of the Office of the Special Prosecutor.

Names of three other Icelanders, arrested today, have only been reported by the Icelandic media but not yet confirmed. Gudni Adalsteinsson was Kaupthing’s chief treasurer. The interesting thing is that Adalsteinsson recently got a job with the FSA. (I wonder what the job interview centered on.) Bjarki Diego was head of loans, based in Reykjavik. Diego is now a partner of BBA/Legal, Iceland. According to an Icelog source, BBA Legal represents a small group of depositors in KSF in the Isle of Man in a court case in Iceland, concerning the matter of the parental guarantee that was in place by Kaupthing hf, the mother company, to Kaupthing Isle of Man. Kaupthing is now contesting this guarantee, hence the court case.*

The last name to appear today is Gudmundur Thor Gunnarsson, responsible for the relations to some of the big clients. He was in charge of the bank’s relations to favoured clients such as Jon Asgeir Johannesson, owner of the now bankrupt Baugur, and Robert Tchenguiz. Interestingly, Gunnarsson was among the best-paid employees at Kaupthing though his title didn’t indicate any senior position. Gunnarsson has an office in Iceland and has been advising clients on investment and financing, in connection with Consolium Luxembourg, run by Kaupthing’s CEO Hreidar Mar Sigurdsson and other Kaupthing top managers. Diego and Gunnarsson were arrested in Iceland.

Bjarki Diego has lately been embroiled in litigation with Arion, the resurrected Kaupthing, regarding staff loans to buy shares in Kaupthing. Around 180 employees had these loans that were presented as an incentive scheme but can also be seen as the bank’s way of allocating and controlling shares. If these names are all correct two of the people arrested in London are still unknown.

These names indicate that at the heart of the SFO investigation into Kaupthing is the bank’s connection, loans and favours to the Tchenguiz brother. The question is who the two unknown names are, if they are other Kaupthing employees or if they are some of the big clients and shareholders. According the to SIC report, the investment vehicle Oscatello got an overdraft loan that in spring of 2008 amounted to £600m. This wasn’t a lump sum but started as a loan of £371m in December 2007. In January 2008 the amount was increased to £401m, in March to £514m and finally it reached £600m end of May, indicating the growing need as all other financing dried up. The loan was to be repaid as a bullet loan, interest and all, in December 2010.

The loan was used to fend off margin calls from Dawnay Day, Morgan Stanley and, believe it or not, a margin call from Kaupthing Singer & Friedlander – not an uncommon feature in the Wonderland of Icelandic banking that a bank would lend to meet a margin call.

The details of this loan were laid bare in a court case in Iceland last year. Twelve offshore companies were connected to the loan – my sources tell me that the Tchenguiz have a predilection for offshore structures that even among London specialists on complicated structures are thought to be quite complicated. These offshore companies appear in connection to the collaterals and were moved around as the original loan agreement was changed. Nothing was ever paid and as Oscatello was taken over by the Kaupthing ResCom the loan amounted to £644m.

This loan is only one example of the business relations that made Robert Tchenguiz the biggest borrower in Iceland, all of it from Kaupthing. At the collapse of Kaupthing Tchenguiz debt amounted to €2.2bn.

It’s intriguing to see that, although the Tchenguiz brothers have, since shortly after the collapse of the banks, seen themselves as victims of Kaupthing shenanigans – i.a. market manipulation that the OSP is investigating – the SFO seems to beg to differ. The fact that the Tchenguiz brothers were both visited at 5.30am and arrested indicates that they are not only witnesses.

Other aspects of Kaupthing’s UK operations concern Deutsche Bank. Some of the things that Kaupthing did it wouldn’t have been able to do except for the strong relationship with DB. I.a. Kaupthing paid millions of pounds for loan facilities that were too expensive to make use of but helped the bank show strong equity. However, the apparently strong equity of the summer of 2008 had evaporated like snow on warm lava in early October that year.

Very recently, I was told that the SFO was conducting their investigation with strong force. Having 135 policemen carrying out house searches isn’t an everyday event for the SFO. But who will be charged and when remains to be seen.

*In an earlier version, I had presented this case wrongly. – The two missing names are here.

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