Sigrún Davíðsdóttir's Icelog

The CBI loan to Kaupthing October 6, 2008 (updated)

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One of the more incomprehensible events in the Icelandic collapse saga is the loan of €500m issued on October 6 2008 by the Central Bank of Iceland to Kaupthing. The burning question is why this loan was issued.

The collateral was the Danish bank, FIH, which CBI became the unhappy owner of after Kaupthing failed. The whole FIH saga is a sorry saga in itself – the CBI sale of FIH has incurred huge losses for the CBI, €180-423m. It’s also unclear how much of the loss stems from the CBI’s bad handling of the sale.

But back to the 500m loan. It indicates that the CBI thought Kaupthing had a greater chance for survival than Glitnir and Landsbanki, which is why the CBI issued the loan. This was a fairly widely held public belief these days. But the CBI should have known better – on Friday October 3, the Bank of England had already taken measures to close down Kaupthing by taking over all deposits coming into the bank from that day. This clearly spelled the end for the bank. Didn’t the CBI know about the UK measures? Or didn’t it care?

By Monday October 6 it was clear that the banks had no chance of survival – the politicians and others had come to terms with the facts over the weekend – and that’s what PM Geir Haarde told the stunned nation in a televised speech at 4pm that Monday. It was also abundantly clear that one big risk factor was the banks’ inter-connectedness.

After the loan came to the light it was for quite a while unclear where the money went. The SIC report from April 2012 indicates that €200m were used to guarantee Kaupthing Sweden, where the Government stepped in for the bank (I actually thought the Swedish Government stepped in, making the Icelandic guarantee superfluous but perhaps I misunderstood something?). The rest? Apparently, it was divided between various other operations, in Luxembourg, Norway and Finland.

But here is another mystery, as far as I can see. Within Kaupthing’s management it was clear that the KSF operation in the UK was a central place in the Kaupthing universe. A failed KSF would cause cross-defaults, leading to the collapse of the Kaupthing Group. As far as I know, Kaupthing got this CBI loan for saving KSF – but none of the money went to the UK.

At the trial over Geir Haarde, the ex-PM was asked what happened to the money. He said it went to a different place than Kaupthing had indicated. Unfortunately, this wasn’t pursued by the prosecutor.

But most terribly regrettably, David Oddsson former Governor of the CBI wasn’t asked at the trial why the CBI issued this loan to Kaupthing, ia if those responsible at the CBI knew that the UK action against Kaupthing had already started, what Kaupthing’s motivation was for receiving the loan and if the CBI did anything to guarantee that the loan was used for its stated purpose.

This perhaps isn’t a big issue – but it’s one of the few completely murky events of these fateful days in early October 2008. Well, there is of course the offer of a Russian loan.

*In May 2010, Vidskiptabladid (in Icelandic) wrote that on Oct. 6 2008 Kaupthing lent ISK28bn to Lindsor, a BVI company that figured in other Kaupthing transactions. The CBI loan to Kaupthing that day amounted to ca ISK80bn. The Lindsor loan was apparently used to buy bonds from Kaupthing Luxembourg and other securities from Skuli Thorvaldsson and the bank’s key managers.

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Written by Sigrún Davídsdóttir

March 8th, 2012 at 5:35 am

Posted in Iceland

2 Responses to 'The CBI loan to Kaupthing October 6, 2008 (updated)'

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  1. I don’t expect the important questions to be asked, and I don’t expect anybody to be held accountable.
    I wouldn’t even be surprised if the prosecutor had been threatened.
    If I were a prosecutor or a judge in a country with only 300,000 inhabitants, I wouldn’t want to see my uncle or cousin in jail either…
    The trial is a farce.


    9 Mar 12 at 4:51 am

  2. Sigrún,
    It appears that you have forgotten that the depositor guarantee fund system for international Icelandic banks (the system the failure of which would seem to be what triggered the ESA to file suit against Iceland in EFTA Court if the emphasis of the complaint was not centered on the depositor guarantee funds of Britain and Holland not having been paid on the terms they demanded) was set up to be funded by the banks. This is the most usual way those funds are financed: They are private insuring funds, funded by private investment funds, usually seeded with a 1% of liability levy paid by all members.

    With Glitnir down, and so not a potential contributor, and Landsbanki down, with depositors, so not only not a contributor, but a liability, only Kaupthing was potentially left to stand as the guarantor to the Landsbanki depositors (KSF, being a British bank, was guaranteed by the British fund, which is funded by BofE, others contributing). Britain was clearly, by 6 October 2008, earlier to jaundiced observers (which Icelanders appeared to not be–the SIC report conveys their incredulity that “friendly” Britain would attack them, violating EEC rules, etc.) attacking all of the Icelandic banks, including Kaupthing (supposedly doing everything the right way,according to the FSA’s blah-blah). Britain, in accord with its plan, was, and had been attempting to prevent money going out from Britain and to lure money in, e.g., increasing requirements to cover against margin in case of depositor demand. From the time Britain offered rescue for British banks, but ignored KSF’s request to be included, it was clear to even the naíve that KSF was going to be made to fail.

    Iceland’s only hope to save its depositor guarantee fund’s ability to guarantee was to prevent the British destruction of KSF from taking the rest of Kaupthing down. To do this required showing support for Kaupthing, by providing it money to cover at least some of the calls the destruction of KSF would trigger. Seeing Kaupthing being supported would then,, hopefully, move others with calls to hold their calls, to let Kaupthing recover its footing.

    It should have worked, but for two things. One was the paralysis after the implosion of Lehman, which made everyone wary of any other institution’s financial condition (exposure to Lehman). The other was the CBI’s own doing: Its sitting dumb, doing absolutely nothing, saying absolutely nothing, offering absolutely nothing and even refusing to respond to Glitnir when Glitnir’s loan rollover was killed by the Lehman shock. Glitnir being just let die by the CBI, with the CBI not even offering verbal support, was an error. It damaged the CBI. For that damage the CBI’s show of support to Kaupthing was not effective, or even as effective as it might have been in view of other circumstances. The gesture was doomed to failure, though it ought have been able to save Kaupthing in normal course, so it could continue without KSF.

    Without Kaupthing the TIF was helpless and the best that could be done was what was done, that Britain and Holland then tried to take advantage of, were stymied by the people of Iceland, and are now trying to have the ESA help them get back on track to take advantage of.

    Lest any misunderstand, this is not in defense of Kaupthing, it is observation by interested spectators from the sidelines. Their wonder, through to the end, was how the Icelandic bankers, including the CBI, could be as naíve as they were, to not recognize Britain was intentionally destroying them, and had been since February, at least, and how the Icelandic bankers, including Óddsson, could still, in October 2008, seem to be thinking Britain was Iceland’s friend, and the FSA regulators were not trying to kill them. The answer was, of course, that the Icelanders had not been long enough out in the wild, in the real market world.


    11 Mar 12 at 1:25 am

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