Sigrún Davíðsdóttir's Icelog

Tonight, Ruv, the Icelandic State Broadcaster, will air a 30 mins. long interview I recently did with Alistair Darling Labour’s Chancellor of the Exchequer 2007-2010. In the interview Darling covers the events around the fall of the Icelandic banks in October 2008, the lack of trust the Chancellor had in the Icelandic government and their officials because they, as Mr Darling says, didn’t seem to be upfront about the problems Iceland was facing at the time. He also points out the failure of the UK regulators to spot the problems within the Icelandic banks operating in the UK.

There will be a link to the interview on Icelog after it’s been aired. For those who want to watch it tonight it’s scheduled at 22.15 GMT. The title is ‘Blekkingar og fáfræði,’ (E. Illusions and ignorance).

It’s interesting to keep in mind that according to the SIC report Mervyn King governor of the Bank of England offered the Icelandic Central Bank assistance in spring 2008 but his Icelandic counterpart didn’t respond to the offer. The Nordic Central Banks offered Iceland a loan in summer of 2008 against a promise to tackle certain things regarding the economy. No measures were taken to meet these promises. – The Labour government believed in light touch regulation. One of the side effects was too little attention to rogue lending by the Icelandic banks in the UK.

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According to special prosecutor Olafur Hauksson, interviewed on Ruv, Icelandic State Broadcaster, this morning the year 2014 is the year that the special prosecutor has set himself to be finished with the investigation rising from the collapse of the Icelandic banks. That is a looong time – but on the other hand the level of complications that the banks and their favoured clients had built developed is also very high. The twelve offshore companies connected to the Oscatello company is a case in point.

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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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The fact that the Tchenguiz brothers were arrested today in connection to the SFO investigation into Kaupthing has secured the attention in the UK media. I’ve done several interviews with various BBC channels today and appeared on Channel 4 news tonight.

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According to a press release this morning, the SFO has conducted house searches in London and Essex this morning re the Kaupthing investigation. Seven people, aged between 42-54, have been arrested and brought in for questioning. I’m told that two of these people are Vincent and Robert Tchenguiz. Their homes and offices were searched this morning.

Who the other five are is still unclear. Two of Kaupthing’s managers are living in London, that’s Sigurdur Einarsson and Armann Thorvaldsson but it’s unknown if they are among the group arrested this morning. In Iceland, two men, aged 42 and 43, have been arrested, had their houses searched, and have been brought in for questioning.

It’s now been confirmed that Sigurdur Einarsson and Armann Thorvaldsson are among those arrested. – Further, Gudni Adalsteinsson chief treasurer and Bjarki Diego have also been arrested. Interestingly, Adalsteinsson is, since a few months, working for the UK Financial Services Authorities.

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Sparisjodur Keflavikur, SpKef, is one of the many Icelandic ‘Sparkassen’ that have had huge problems following the bank collapse in October 2008. The Icelandic ‘Sparkassen’ were entwined in the financial acrobatics of the banks and their major shareholders – so far, an unwritten chapter in the Icelandic financial collapse. The last move is that this morning Landsbanki, owned by the Icelandic state, has taken over SpKef.

There is now a growing demand that Althingi commands a thorough investigation of the ‘Sparkassen.’ An Althingi bill on this matter is stuck in a committee. Rumours say that there might be some MPs unwilling to have this part of the financial system scrutinised. Be that as it may, people will want to know why Sparisjodur Myrasyslu, a tiny financial institution based in Borgarnes ca 100 km from Reykjavik, collapsed with a debt of ca ISK25bn, now ca €155m after tangoing with the mighty banking powers in Reykjavik. Or how business men related to Baugur and FL Group practically came to manipulate Byr, another ‘Sparkasse,’ as they became major shareholders in Glitnir. Dealings related to Byr have been sent to the Office of the Special Prosecutor who has already charged some ex-managers of Byr on one account.

The ‘Sparkassen’ were a parallel system to the banks but where the banks worked with bigger businesses and those who were famous for investing abroad, the ‘Sparkassen’ reveal a much more sordid story of local financial fiefdoms and local politicians. Another Icelandic financial saga waiting to be told.

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When I published the names of those who tried to block the handing over of the Kaupthing Luxembourg documents to the Office of the Special Prosecutor I didn’t know who Einar Bjarni Sigurdsson was. Now I do, thanks to an attentive Icelog reader. Sigurdsson was Head of Private Banking at Kaupthing Luxembourg and was one of the first Kaupthing settlers in Luxembourg. Unlike many of the Icelanders at Kaupthing Luxembourg, he left the bank almost immediately after the collapse and set up the asset management company Arena along with some ex-Landsbanki employees. I mentioned that according to Icelandic media he is related to Egill Agustsson. In addition, he worked for Agustsson before joining Kaupthing.

Arena Wealth Management has a website with nothing on it but the name of the company and contact details, no names of those who run it or what they do. Apparently, they expect business through word of mouth, not through their website. It was set up as a Luxembourg company in December 2008.

Talking to someone well acquainted with Kaupthing recently, he mentioned that in order to describe the Kaupthing operation it was best to think of a bank within a bank: that there had been a closely knit inner circle in the bank, ca eight managers, who did indeed operate like a loose cannon on their own. Now that’s a thought.

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This morning, Mar Gudmundsson governor of the Central Bank of Iceland met with three Althingi committees to answer questions on the economic outlook. Here are some points from the meeting:*

–        Due to the Icelandic state’s obligations there will be an outflow of currency in the foreseeable future. Consequently, the state will have to look abroad for funding, the sooner the better. Most likely, there will be a bond issue abroad later this year. The relatively low CDS improves the outlook of refinancing

–        The influence of Icesave on a bond issue is undeniable. If the latest Icesave agreement will be rejected in the coming referendum on April 9^th there might be less luck in seeking refinancing

–        A ‘no’ in the Icesave referendum will delay any easing of the currency restrictions

–        The first step in easing the currency restrictions will most likely be to open doors in Iceland to the off shore kronas

–        The currency restrictions can’t be lifted until it’s clear that Iceland can refinance itself abroad. As long as the currency restrictions are in place, the CBI has to buy currency abroad, instead of borrowing, resulting in a lower exchange rate and higher prices on imported goods.

The CBI recently published a report on Icelandic debt, ‘What does Iceland owe?’ So far, there is only an Icelandic version and an English summary but an English version is due. The main results are:

“The article peers through the maelstrom caused by the collapse of the financial system, causing the outcome of assets and liabilities according to official standards to give a misleading view of the debt position that will be the strongest determinant of Iceland’s welfare in coming years. In the report, the authors estimate the likely outcome of asset and liabilities values that will emerge when the dust settles. This can be called Iceland’s “latent” debt position, but the term “underlying” debt position has also been used. Although there is still considerable uncertainty about the findings, it seems certain that, when the estates of the failed financial institutions have been settled and other factors that skew the overall picture have been accounted for, it will be revealed that Iceland’s net international investment position has not been lower in decades. Net public sector debt, on the other hand, will be considerably higher. The report also estimates the country’s hidden current account balance, which (for the same reasons) is much more positive than official figures indicate, in part because accrued interest on the estates of the failed banks will never be paid.”

According to the CBI the outlook is good, Iceland isn’t as heavily indebted as some other countries etc.: 70% of GDP. If the debt related to Actavis are taken out, the debt is 50-55%. In a comment from an economist he added: ‘What’s the difference between the Irish and the Icelanders? Icelanders are good at pretending to be broke.’

However, this isn’t beyond dispute. Some economists I’ve talked doubt the CBI’s conclusion, pointing out that there has often been a tendency to overestimates in Icelandic figures. Qui vivra verra.

*I didn’t follow the broadcast of the meeting but have based this on news in the Icelandic media.

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It’s now clear who, apart from Banque Havilland, tried to hinder the Office of the Special Prosecutor in Iceland to get access to the documents from Kaupthing Luxembourg, now the Rowland family’s Banque Havilland that bought Kaupthing’s Luxembourg subsidiary. Earlier, when I inquired at the courts in Luxembourg I was told that only those connected to the case could get the verdict. Now, Vidskiptabladid Iceland, has obtained a copy of the verdict.

Unsurprisingly, both Kaupthing’s CEO and chairman of the board, Hreidar Mar Sigurdsson and Sigurdur Einarsson, tried to hinder the OSP to get the documents obtained via house searches a year ago. Another paper, DV, wrote today the the OSP had been very successful in finding documents at the home of Magnus Gudmundsson, who was Kaupthing Luxembourg manager and stayed on at Havilland. Some of the documents were in Gudmundsson’s car. (If you ever drive in an ex-Kaupthing manager’s car look around and try to get a peep into the booth.) Gudmundsson however is not on the OSP ‘opposition team.’

Others in this team are Olafur Olafsson,* the second largest shareholder in Kaupthing and four companies owned by him: Sable Air APS Denmark and three BVI companies, Marine Choice Ltd, Fort Shannon Ltd and Fordace Ltd. In addition there are Skuli Thorvaldsson, Egill Agustsson and his business partner Einar Bjarni Sigurdsson, living in Denmark.

This is quite an intriguing circle of business men. All these people, apart from Einar Bjarni, are names that are already connected to alleged market manipulation and other manipulation by Kaupthing. It’s save to conclude that this is a group of men who formed a close network at the core of deals that the OSP is investigating.

Olafsson was connected to the al-Thani deal: a sheikh from the Qatar ruling family bought 5% in Kaupthing in a highly publicised deal in early September 2008. But instead of the deal showing the sheikh’s believe in Kaupthing it apparently showed that the bank was unable to sell any shares except by offering ‘risk-free’ loans (the risk was all on the bank, making these deals look like a breach of fiduciary duty on behalf of the bank’s management). The sheikh also got a loan of $50m towards future profits. Needless to say there were no future profits only imminent losses. Olafsson got the sheikh another Kaupthing loan to buy shares in Alfesca, where Olafsson is a major shareholder, also a highly publicised deal that then came to nothing. – Olafsson still holds his interests in Alfesca where the chairman is Arni Tomasson chairman of the Glitnir’s ResCom. Olafsson, who earlier lived in London, now lives in Switzerland.

Skuli Thorvaldsson had an interesting relationship with Kaupthing. He has been living in Luxembourg for decades and wasn’t known for being fabulously wealthy. His branch has been property investment. His connection with Kaupthing first became clear when the loan overview from Sept. 08 was leaked on Wikileaks. The SIC made it known that Thorvaldsson was Kaupthing’s biggest debtor in Luxembourg, pretty staggering considering his apparently low key property business. His loans with Kaupthing peaked at €200m just before the collapse of the banks. Thorvaldsson was also involved in Kaupthing plots to lower its CDS: the bank lent Thorvaldsson huge sums through a web of companies enabling Thorvaldsson to buy CDS and affect the bank’s CDS spread. An audacious attempts that Deutsche Bank was involved in – Kaupthing managers claim the idea came from DB but DB claims it, unaware of the aim, only advised these structures. Kevin Stanford and Olafsson were also involved in these CDS acrobatics – and yes, DB’s role is, ahem, interesting.

Agustsson’s business partner is otherwise unknown but Agustsson is connected to companies that were close to Kaupthing and their habit of lending to companies, most noticeably a company called Desulo that has featured in an earlier Icelog on the deals Agustsson and others from the OSP ‘opposition’ were engaged in.

Unsurprisingly, it turns out that those who tried to hinder the OSP to obtain the documents are all, except Banque Havilland, part of Kaupthing’s inner circle, connected to deals and companies that the OSP is investigating.

*4.3.’08: Olafsson has issued a statement saying that he didn’t oppose the handing over of documents to the OSP but that he opposed that documents unrelated to issues being investigated should be handed over.

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