Readers of Icelog already know some of the answer to this question. Luxembourg is a gateway to the offshore world. The offshore world is a hide-away heaven for money that needs to be visible only to the owners and not to others. It’s a popular place for big corporations and wealthy individuals in search of good tax schemes and by shadowy elements who need to move money, quickly and efficiently, out of sight. It’s no coincidence that the Icelandic banks, allegedly, ran all their most dubious loan deals through Luxembourg. It’s also worth keeping in mind that all European – and many international – banks, which want to be something more than a little local bank, operate in Luxembourg.
An interesting view on Luxembourg – and Icelandic – operations can be gauged through the operations of Landsbanki Luxembourg. The bank’s equity release scheme leaves some questions to be answered, as pointed out earlier on Icelog. Also, how the bank bought Landsbanki and Kaupthing bonds as investment for clients in mid and late 2008, in some cases directly against written agreement with clients. (At this time, there were literally no buyers for bonds of these two banks. Landsbanki did at this time set up a company in the Netherlands, Avens BV, stuffed it with all sorts of Icelandic bonds and used it to repo with the European Central Bank, an interesting story in itself, with the aid of Crédit Suisse.)
In addition to the bank’s own operations, before the collapse, the actions of the administrator, Yvette Hamilius, have been brought into question.
The administrators of the Icelandic banks, in Iceland, have all scrutinised the banks’ operations prior to the collapse. This is always done in a bankrupt company. A bankruptcy is the outcome of a long process and an administrator always looks at all dealings some months prior to the bankruptcy to make sure that managers, owners or others haven’t made anything that could be seen as unfavourable to creditors.
All the administrators in Iceland have brought cases against managers – and in some cases against the large shareholders – for causing the creditors of the bank in question damages. Apart from that, there are the ongoing investigations of the Office of the Special Prosecutor in Iceland.
If the Landsbanki Luxembourg administrator has questioned any of the dealings in Landsbanki prior to its fall or brought any cases against the managers such moves have not been communicated. – Instead, the Luxembourg Prosecutor has issued a statement where he declares his support for the administrator’s actions. Just his statement makes one wonder what sort of a country Luxembourg is. Why isn’t the Luxembourg Prosecutor doing what is Icelandic colleague is doing, investigating banks, which have shown ample reasons for suspicion? Is that because Luxembourg bases its wealth on the flow-through of international funds and doesn’t want to do anything to disturb the smooth flow?
I have had the opportunity to look at, in detail, documents related to certain clients of Landsbanki Luxembourg. A perfectly normal part of the equity release contract is that if the value of the assets underlying the contract – in Landbanki case normally a property in France or Spain – falls below a certain limit, here 90%, the bank can call for cash or further valuables to cover itself.
A closer look at the realities in portfolios related to some clients Icelog has seen, indicates some rather remarkable movements. According to overviews, not only from one but several clients, the bank re-evaluated the portfolios just before its collapse – and miraculously the valuation turns out to be 89.9%. A tiny fall, allowing the bank to call in further payment.
At least in one case, an Icelog source who is familiar with the property in question is pretty sure the house is under-valued. One French real-estate agent who operates in the South of France, where some of these properties are, has commented on Icelog that she is unaware of any changes at the time the bank was claiming there was a falling value. – A banker, familiar with type of deals, says that the bank might have envisaged an imminent decline in its re-evaluation but there should have been some documentation to prove it. Otherwise, a bank can forecast whatever it wishes.
There are clients who are now just about to lose their houses to bailiffs because of this tiny fall. The administrator has offered them a deal, which means that they either pay – in cases that Icelog has seen they are supposed to pay much more than they took out of the scheme because they are deemed to be in default. The remarkable thing is that the administrator doesn’t seem to be paying any notice to these weird movements in valuation: if the valuation hadn’t fallen down below the 90% many of these borrowers wouldn’t have the bailiff at the door.
In the UK, equity release scheme don’t create havoc to lenders and make them lose their homes anymore – as was common some 20-30 years ago – because banks in the UK are bound by strict rules in this field. This doesn’t seem to be the case in France and Spain.
Now back to the original question: what sort of a country is Luxembourg? It seems to be ia a country where the State Prosecutor comes to the aid of an administrator who hasn’t provided lenders with numbers that make sense when their houses, the roof over the head, is being taken away from them. It’s not a country where banks are questioned. It’s also a country where bank clients are completely unprotected when a bank loses clients’ money by investing directly against written agreements. Why the Luxembourg regulator, the CSSF, hasn’t investigated the serious allegations of mismanagement of clients’ funds and breach of MiFID rules in Landsbanki indicates that the reputation of Luxembourg as a good country for banks means more than Luxembourg being a good country for bank clients.
These are not just theoretical issues. These issues mean that in France and Spain some real people of flesh and blood, mostly elderly people, are losing their houses after a harrowing fight against forces in Luxembourg that seem to protect banks and bankers, not ordinary people.
Follow me on Twitter for running updates.