Sigrún Davíðsdóttir's Icelog

Although plenty is known about the collapse of the three Icelandic banks, given the SIC report, there is still one major unknown chapter in this saga: a loan of €500m granted by the Central Bank of Iceland to Kaupthing on October 6 2008, due to be repaid four days later. It is clear that about half of this loan will never be repaid. Now a parliamentary committee is investigating the loan. The only documentation of the loan is a recording of the phone call between David Oddsson then governor of the CBI and prime minister Geir Hard but so far the CBI is not assisting.

At 4pm on October 6 2008 prime minister Geir Haarde addressed the stunned nation on all media channels ending his speech with ,,god bless Iceland” – an uncustomary ending in a country where god is seldom called upon in the political realm. Interestingly, Haarde did not say the banks were failing but he talked at length about the dire situation abroad, which now could also be felt in Iceland with its outsized banks compared to the country’s economy. In these tough times for banks in many countries, he said deposits in Iceland were safe and the government would in the coming days do its utmost to hinder chaos and confusion in case “the Icelandic banks become un-operational to some extent.” He also announced the emergency legislation, which was passed later that day.

But when did the prime minister and the government actually known that the end of the banks was nigh and unavoidable? In the SIC report Haarde, Ossur Skarphedinsson minister of foreign affairs, trade and banking minister Bjorgvin Sigurdsson and minister of finance Arni Mathiesen all recount they understood this around 2am on this fateful October 6 when the ministers met three bankers from JP Morgan, called to Iceland to advise the Central Bank of Iceland. At this late hour, the three foreigners explained in a few but clear and concise words that there really was nothing to be done – the three banks were beyond salvation.

“… this was a really weird moment,” said Sigurdsson in his statement to the SIC. “Suddenly this was clear like morning light. The man just drew it on the white-board. Just all of a sudden. This was a sort of moment of truth after this insane roller coster ride weekend, which was in hindsight perhaps more or less based on wishful thinking.” (SIC report, vol 7, p. 104; only in Icelandic). – That is what it felt like to realise that the Icelandic banking system was failing: a simple drawing on a white-board.

At this meeting, Haarde finally realised he would have to address the nation and pass the emergency legislation and that is what he sat in motion as the day dawned.

On October 27 2008 the CBI put out a press release saying that on October 6 it had, after conferring with the prime minster, issued a loan of €500m to Kaupthing in order for the bank to meet its obligations to UK authorities related to the bank’s UK subsidiary.

What is known about this loan is that there is no proper documentation in the CBI regarding it. The only tangible evidence of the loan having been issued is apparently a recording of a phone call between the then governor of the CBI David Oddsson and Haarde. Kaupthing held some sort of “receipts” (but nothing resembling a loan agreement or any other formal documentation) for this amount having been paid to the bank. The loan had maturity four days later – i.e. it was a bridge loan but yes, an awfully short bridge. The collateral was nothing less than Kaupthing’s Danish subsidiary FIH Bank, at the time reckoned to be worth €670m and the interest rates set at 9%.

That Monday in the late afternoon, the loan was paid from a CBI account abroad into Kaupthing’s account with Deutsche Bank in Frankfurt in three instalments, totalling €500m. If or how it left Deutsche is not known. The €500m might have been enough to salvage Kaupthing Singer & Friedlander – the preceding week the FSA had demanded that £400m be paid as a guarantee since money was flowing fast out of the bank – but the €500m never seemed to reach the UK authorities.

The loan was not repaid four days later. Eventually, the CBI sold the collateral but the sale only brought in around half of the loan and less, if interest rates are taken into account. Consequently, this undocumented loan has caused the Icelandic state a huge loss of about €250m.

All this is now known – but it is still unknown why CBI and the prime minister thought it was necessary, let alone a good idea, to issue a loan of ca 4% of the bank’s total foreign currency reserve to a bank, which by the time the loan was issued hardly seemed a going concern. When and why the Kaupthing managers secured this loan is not known. It is not clear why the CBI issued a loan without any proper documentation or why, if there was no time right on the Monday, this was not put in place in the following days. And if the CBI really intended the loan to shore up the Kaupthing UK operations why did the bank not pay the money directly to the UK authorities?

A year ago, an Icelandic parliamentary committee started enquiring about this loan, which had caused the state such a loss. When it transpired that the only documentation regarding the loan is to be found in the recording of the phone conversation of the CBI governor and the prime minister the committee asked for a transcript. So far, the CBI has procrastinated. Last week, when the committee was finally going to publish a report on its findings, obviously pointing out the CBI’s lack of answer, the CBI sent a letter to the committee saying it was considering its options. It hinted at the possibility of  inviting the committee to read the transcript but then backtracked and has since been quiet on the issue.

Thus stands this intriguing story, so far without an ending. The report by the parliamentary committee might now be published in the coming days but apparently without information from the transcript.

There is however no lack of rumours and guesses as to why this loan was issued and what it was bridging. The most persistent rumours regard Kaupthing’s alleged Russian clients but it should be stressed that nothing has ever surfaced to corroborate the rumours. There is however a Russian element in the collapse saga: on October 7, the prime minister announced Russia was lending Iceland €4bn to strengthen its foreign reserve. This loan never materialised and it was never clear how this “offer” was made or by whom.

*The Icelandic Parliament has now published its report (in Icelandic but it is short; alors, Google translate is an option) – without an answer from the CBI on the transcript of the fateful telephone call mentioned. All the facts re the loan mentioned above can be found in the report.

**Update 31.3. 2013: Geir Haarde has recently stated that the recording of his conversation with CBI governor Oddsson was done without his knowledge and he would not agree that it was made public. As in many other countries, it is illegal in Iceland to record a phone conversation without making others on the call aware of it.

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