Sigrún Davíðsdóttir's Icelog

Over several years, Barclays provided wrong numbers to rig Libor and Euribor rate. It didn’t do it alone, we are just waiting for other banks to be named. The banks didn’t do this to lose money. On the contrary, they ultimately profited from the rigging. It means that the profit obtained over years have been based on wrongdoing.

The corrosive damage of fraud is that results, obtained by fraudulent methods, turns into a benchmark. In comparison, results, obtained in an honest way, looks very poor. It’s well known among those who fight organised crime that this skewed comparison is one of the lasting damages caused by fraud.

Bankers, willing to improve their results by fraudulent methods, have shown themselves immune to the thought that getting results in an illegal way is in any way wrong. A CEO who hasn’t been able to incorporate in the company culture the simple difference between right and wrong shouldn’t be leading a company.

It may be difficult to calculate the numbers, how much the results – and ultimately the profit – have been influenced by the rate-rigging but this activity was carried out to mislead. If this isn’t market manipulation then I don’t know what would be. Market manipulation is a seriously criminal offense. Something for the SFO to investigate – and with the investigations already done, they wouldn’t need to start from scratch.

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After much talk about a multi-countries investigation into LIBOR rigging, authorities in the US and the UK have fined Barclays for  “attempted manipulation of and false reporting of LIBOR and Euribor Benchmark rates,” in total $360m and £59.5m – the biggest FSA fine ever. In perspective, this isn’t much more than a cup of coffee for ordinary mortals. This lenience – no criminal charges and only minor personal consequences for Barclays managers – is the death knell for free competition.

“I am sorry that some people acted in a manner not consistent with our culture and values,” said Barclays CEO Bob Diamond, in reaction to the fine. No Mr Diamond, this isn’t “some people” – the bank’s email system is flowing with emails from traders who saw nothing wrong with this, for many years. Diamond and three senior managers have agreed to waive potential bonus for this year “to reflect our collective responsibility as leaders”. – Why don’t they pay back their bonuses for the years that this was going on? A year’s bonus for alleged rigging for 5-6 years – and that’s only the time investigated.

For all those who believe in free markets and competiton this is a sad day. It is impossible to have a free market, when those at the heart of that market don’t know any other game than to rig it. Today, they have found out  that they can just pay their way out of an investigation. Why was this matter being investigated? To put an end to this odious and market-destructive practice? Or to collect a bit of money for the authorities?

This practice, in addition to widespread interest rate rigging by banks lending to US public authorities, shows a horrible malaise at the heart of the market. It is devastating if the authorities fining Barclays think this is enough to cure the malaise. How ironic, that bankers, happy to talk about free markets on festive occasions, have shown themselves to be no better than the Mafiosi who shun free competition whenever they can.

The LIBOR manipulation and the rate rigging show that big banks have long ago lost sight of “let the best ideas win.” Their way is the way of dirty dealing. And this way of thinking is what Europe and the US are drowning themselves in debt to save. Yes, this is a sad day for those who believe that growth and wellbeing spring from free competition to stimulate ideas and new solutions to old problems.

*Here are the statements from the relevant authorities, from the UK FSA, the US CFTC and DoJ.

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In a statement out today, following the FSA final notice, ending its investigation on Kaupthing Singer & Friedlander,  action is taken against the Kaupthing managers:

Following the conclusion of the investigation, Sigurdur Einarsson the former non-executive Chairman of KSFL, Hreidar Mar Sigurdsson former non-executive Director of KSFL and Armann Thorvaldsson the former CEO of KSFL have provided undertakings to the FSA that they will not perform any significant influence functions requiring the approval of the FSA at any UK authorised firms for a period of five years from 8 October 2008, the date KSFL was placed into administration. The FSA has not made any findings of regulatory breach against them and they have not made any admissions.

Einarsson was the chairman of Kaupthing and Sigurdsson the bank’s CEO. Einarsson still lives in London where he has lived since ca 2005. Interestingly, Sigurdsson moved from Iceland to Luxembourg after the collapse of Kaupthing. The FSA statement means that in 16 months the Kaupthing managers could again be working in the UK financial sector. They would however need to reapply for the proper license.

More on the FSA final notice re KSF here.

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Three and a half year after the demise of Kaupthing Singer & Friedlander, the Financial Services Authority, FSA, has come to the conclusion that KSF breached liquidity rules. It has served the bank, now in liquidation, a so-called final notice.

The FSA finds that KSF had stated it had a £1bn it could draw on at short notice from the mother company. That proved not to be the case. This money wasn’t in hand at all and indeed not available:

“By 29 September 2008 KSFL should have realised that there was a risk that the £1bn value of the Liquidity Transformation Arrangement might not be recoverable in full on an overnight basis, or within 0-8 days.”

Under normal circumstances, KSF would have been fined – and probably fined heavily. But since the bank is in administration there is no functioning body to fine:

“KSFL’s financing arrangement with its parent was an important element of the firm’s survival in times of crisis and this failure alone would have led the FSA to impose a significant financial penalty were it not for the fact that KSFL is in administration.”

This adds a bit to the story of Kaupthing’s last days. KSF said it had £1bn – but it hadn’t. Was the money never there, ia was this just a statement on paper – or had the money gone somewhere else? Sadly, this FSA move leaves some unanswered questions.

The whole saga of Kaupthing’s inter-group transfers is of great interest, such as money going from Iceland to Luxembourg. And then the Kaupthing clients in Isle of Man, left high and dry, would no doubt like to know a bit more how their money was moved to Iceland and where it ended.

Right now, the two brothers, who were the largest owners of Exista, Kaupthing’s largest shareholder, Lydur and Agust Gudmundsson, have suddenly shown up in Iceland with coffers full of money. At least coffers with ISK20bn, £101m, with which they now want to buy back Bakkavor, the food processing company that they lost to creditors post-collapse. Apart from not having money at the time to hold on to Bakkavor they had personal loans for their houses with Kaupthing Luxembourg, now Banque Havilland.

The return of the Bakkavor brothers to the Icelandic business community will be a test case. Are the pension funds, who lost a great deal on bonds from the companies of the two brothers and other raiders, willing once again to do business with those who caused them and the whole nation, some severe harm?

It may come as a surprise that the brothers and other big debtors still have the money to do business. However, both the SIC report, court cases and other investigative material shows clearly that behind the favoured clients, who got loans against weak or no collateral, there was a clever machinery. Loans to buy shares were never paid. Instead, the dividend was for free use – and has no doubt been taken good care of – but the debt migrated to asset-poor companies, which then went bankrupt in due time.

This careful splitting-up of debt and asset isn’t an Icelandic invention but Icelandic bankers and their favoured clients mastered it to perfection. That’s why the post-collapse sequel is about the return of the raiders.

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Today, the Spanish Government formally asked for aid to recapitalise its banks – the word “bailout” isn’t mentioned but that’s what this aid is – and no numbers mentioned either. Even €100bn might only offer the briefest relief. Cyprus’ bid today for the same mostly goes unnoticed. Apparently Russia’s aid to the island isn’t enough. Will the EU keep on throwing good money after bad, without digging out the roots of corrupt banking practices?

Do you remember in 2008 when some British, Irish and American banks were below sea-level and people pointed at Spain and Spanish banks as the example to follow? Those were the days – days of Spanish clever accounting, not of their banks’ rude health. That’s a point made in a clear and insightful article, “The EU Smiled While Spanish Banks Cooked Their Books,” by Bloomberg’s Jonathan Weil.

At the core of the Spanish loan debacle are local banks, the cajas, heavily connected to the construction sector and local politicians, just like in Ireland. The Mahon report uncovers the unhealthy relationship in Ireland in the 80s and the 90s between these two elements: the building sector and politics. A relationship that has a lot to do with the escalating debt of the Irish financial sector, which the EU then forced the Irish state to shoulder. The cajas saga seems to mirror the Irish state of things completely, even down to brown envelopes.

Spain now needs billions to save its banks – €65-100bn, depending on the calculation – the official Spanish bid for a bailout today doesn’t come with a number. At the centre of this salvage project is Bankia – a bank created in 2010 out of several of the worst cajas, with – as is now turning out to be the classic way – far too little write-downs. As if pooling together the worst cases would create a bank in brilliant health.

In the best tradition of the marriage between finance and politics, the role of a chairman was given to a politician, Rodrigo Rato. Rato had an apparent merit, having been the director of the IMF 2004-2007. Why did he resign after only three years, before the end of his term? Apparently, he wanted more time with his family. Quite often, when people in power resign to be with their families, it’s because no one else wants them but dares not say it aloud. The Spanish press is overflowing with stories about corrupt lending to political pet projects like airports that have yet to see an airplane and exorbitant salaries of cajas managers.

There are also cajas in Iceland, small local saving banks, originally set up to serve individuals and small enterprises in the local community, based on small is beautiful in a closely-knit community where the directors are pillars of society. Last year, PriceWaterhouseCooper did a report on one of these local institutions in Iceland – the local saving society in the village of Keflavik, on the Reykjanes peninsula, right in the shadow of the now defunct US base. This report has now been leaked – and it provides a grotesquely clear image of small-town corruption with no small money.

The methods aren’t new –it doesn’t come as any surprise that there were plenty of loans with no or weak collaterals – but the methods are really crude. The CEO lent and then wrote-off loans to his son, not to mention the bank’s staff, local politicians and entrepreneurs with the odd bank CEO among favoured borrowers. And as with the banks: what were the accountants doing?

Like in the cajas, this is the story of how the vision of community service turned to the vision of greedy self-service.

SpKef has now been thrown under the wings of the state-owned Landsbanki, as if Landsbanki were the best place to keep toxic waste, no questions asked. That said, the Office of the Special Prosecutor is no doubt looking at the SpKef operations. SpKef managers seem sitting ducks for a criminal case of breach of fiduciary duties, comparable to the Byr case. But so far, the Government isn’t asking any questions and yet it is putting ISK25bn, €197m, to fill the empty SpKef coffers in an unexplained bailout (and in Icelandic terms, the bailout amounts to the budget contribution to the University of Iceland for two years).

But how come that banks, costing governments in the UK, the US, in Ireland, Greece, Portugal, little Cyprus and now in Spain the earth and the sky aren’t being properly investigated? Is it too complicated? Of course it isn’t. It’s a question of picking and choosing the right topics – such as breach of fiduciary duty, possibly market manipulation and in the small local banks corrupt lending.

A recent court case, studied by Matt Taibbi in a Rolling Stones article, uncovers how major US banks, over a decade, have used tried and tested Mafia methods to rig bond auctions by public authorities, universities and other institutions. It’s an article that merits reading more than once just to fathom the banks’ dizzying arrogance and pure will to cheat. The defense argued ia that the rigged price was just as fair as any other price. Yes, why bother with free competition when only monopoly is deemed to assure the satisfying gains?

Banks in the US and the EU are all profiting from abnormally low interest rates though they aren’t lending. How ironic: it was the unwillingness to lend that triggered the credit crunch in 2007, thought at the time to be a tiny naughtiness by the banks. In the UK, the subsidy to banks has been estimated to amount to £220bn over the last few years. Now, this seems more like a good plan to get capital.

And in case you haven’t noticed: the banks are still not lending but hoarding money against the losses they seem to suspect are looming out there. Understandable, in the light of the latest, from the WSJ:

Regulators and investors are concerned that some European banks are artificially boosting a key measure of their financial health, a worry that is further eroding market confidence in the Continent’s banks.

Such concerns have been building up for more than a year. But they have intensified lately, with a parade of banks announcing that they intend to increase their capital ratios—a key gauge of their abilities to absorb future losses—partly by tinkering with the way they assess the riskiness of their assets. Spanish banks, including Banco Santander SA, are among those that have announced plans to boost their capital ratios …

Does it come as a surprise that in spite of repeated stress tests, the banks might actually not be showing their true colours? No, it doesn’t. In an unnamed central bank a stress test was recently being discussed. Some innocent soul asked why the test didn’t test more severe and realistic circumstances. There was a troubled silence before someone muttered: “Because then they would all fail.”

In Iceland – an interesting measure because of the thorough overview of the banks, the SIC report – it’s clear that bank auditors have questions to answer. Some will be answered in court: Glitnir and Landsbanki have sued their auditors, PwC, for misrepresenting the health of these banks. The rapid expansion of Kaupthing is worryingly similar to Santander’s growth.

Modern society undoubtedly needs banks – but we need banks that do not just serve themselves but society as a whole. We are still waiting and it’s costing us all a lot. It’s not just a euro crisis but a crisis of Western banking under the long, dark shadows of corrupt business practices.

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Scots against separation from the United Kingdom have launched a cross-party offensive against the surge for independence, driven by Alex Salmond and the Scottish National Party. One of those working against the SNP plan is Alistair Darling Labour’s former Chancellor of the Exchequer.

This morning, Darling presented his views on these matters on the BBC Today programme. In the end, Darling said Salmond had run out of ideas in terms of countries to compare an independent and thriving Scotland with. “You will find that Iceland and Ireland with which he used to compare us are now off the list,” said Darling.

Darling might have a case in Ireland but he doesn’t seem to have followed the trajectory of Iceland since the bank doomsday in October 2008, when then Chancellor Darling was quicker to react than Icelandic authorities and put Landsbanki and Kaupthing out of their misery. After much furore in Iceland, Icelanders have come to realise that the Icelandic banks didn’t fail because of Darling’s action driven by British and international envy over the banks’ brilliance. No, the Icelandic banks dug their own grave and are now under investigation in Iceland and the UK.

But that is the past. As a steady trickle of articles show, Iceland is now a favoured example of a country that took a huge hit as its three main banks failed, had its own currency to devalue, wiped out bad debt from the big banks by letting foreign creditors shoulder the losses and is now enjoying an enviable growth rate of 2-3% of GDP. (Here is an earlier Icelog, comparing Ireland and Iceland.)

Iceland isn’t a shining example in all respect but it’s done the national economy and the national psyche a lot of good to let failed banks expire instead of throwing good money at them to hide bad debt. Unfortunately, the UK Chancellor at the time didn’t use his influence to have the operations of banks needing public salvation thoroughly scrutinised – which is why the British know a whole lot less about the operations of the banks they are supporting than Icelanders do of their failed banks.

*Here is an interview with Darling on his dealings with the Icelanders in autumn 2008, excruciatingly unflattering for the Icelandic authorities at the time but largely supported by the SIC report.

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For those who hope that the authorities know what they are doing when it comes to investigating financial fraud it’s been an excruciating experience to follow the SFO investigation into the Tchenguiz brothers’ relationship with Kaupthing. Regarding Vincent, all went wrong at the SFO that could go wrong. The SFO must be reviewing it all in detail, ia how documents already with the SFO, showing that Vincent wasn’t fooling Kaupthing with his collaterals, came to be ignored by the SFO – Kaupthing did indeed know the bank couldn’t enforce the collateral to achieve the full value of the collateral on a short term basis.

It’s crystal clear that the SFO went about all this completely in the wrong way, in Vincent’s case. After much confusion the SFO is now satisfied there is nothing there to investigate. What remains is Robert’s relationship with Kaupthing, still under investigation. His loans went from just over a billion euros to €2.2bn in one year – the fatal year when no banks were lending, ie from end of 2007 until the collapse of the bank in Oct. 2008.

As to the Kaupthing managers, the question is why the bank was willing to lend Robert Tchenguiz, as so many of its main clients, against no or poor collaterals and, time and again, to expose the bank to excessive risk whereas the favoured clients were completely, or mostly, sheltered from any risk. Some would say that such lending is a breach of a manager’s duty, on behalf of a bank’s shareholders, to take into account the interest of the bank – and not just the interest of a few favoured clients, who in some cases also were among the bank’s shareholders.

These stories are all laid bare in the Icelandic SIC report, cases involving this type of lending are being pursued by the Office of the Special Prosecutor in Iceland (now with one case ended and two bankers sent to prison for 4 1/2) years. Not only Kaupthing but also Landsbanki operated in this way – both banks operated in the UK: these are not Icelandic stories, except that the banks were Icelandic – these are international stories.

And yet and yet, other countries such as the UK – not to mention Luxembourg where the core of the shadiest Icelandic operations were carried out – seem to be utterly complacent. That said, not much is being done to investigate lending by the three bust Irish banks and the Spanish cajas – but that’s another story for another day.

*See an earlier Icelog on the Tchenguiz judicial review, SFO, Kaupthing and Tchenguiz and here, for further logs on this topic.

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Reykjavik District Court acquittals last autumn in the Exeter case were a major blow to the Office of the Special Prosecutor. Thursday June 7 the High Court came to a radically different conclusion. Jon Thorsteinn Jonsson, ex-chairman of the board of Byr, a saving society and Byr’s CEO Ragnar Gudjonsson were sentenced to 4 1/2 years in prison, guilty of breach of fiduciary duty. The case of the third banker, CEO of MP Bank Styrmir Thor Bragason, was sent back to the District Court. Following this ruling, Byr must be considering if to sue these men for damages.

This ruling will have a major impact on other cases to come – it’s clear that there are other cases of breach of fiduciary duty in the Icelandic financial system before the collapse of the three major banks in autumn of 2008. This also means that the law related to this issue is robust enough for the court to rule on. And it means that there will be other bankers who now will be contemplating on earlier deeds and possible ramification.

It also shows the Icelandic authorities are serious about bringing cases related to the banks to court. And the latest ruling is a severe blow to the District Court. Interestingly, the District Court judge who acquitted the three bankers is the same who acquitted Jon Asgeir Johannesson and others in the Baugur case in 2005.

What was the Exeter case about? Read about it here, on the Exeter case as Icelandic banking in a nutshell, about bankers who abused their position to save themselves and their friends from losses  – and here, on the earlier ruling. And here is the High Court ruling, in Icelandic only.

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