Sigrún Davíðsdóttir's Icelog

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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