Sigrún Davíðsdóttir's Icelog

Archive for December, 2013

Now what about Luxembourg and financial supervision?

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Three Kaupthing bankers and the bank’s second largest shareholder were recently sentenced in Iceland to 3 to 5 1/2 years in prison for market manipulation and breach of fiduciary duty. The story behind the case is a share purchase in Kaupthing in September 2008. At the time, all four now convicted – then chairman of the board Sigurður Einarsson, CEO Hreiðar Már Sigurðsson, Kaupthing Luxembourg manager Magnús Guðmundsson and investor Ólafur Ólafsson – were interviewed in the Icelandic media where they underlined the strength of Kaupthing by pointing out that a Qatari investor, al Thani, had bought 5.1% in the bank.

What they failed to mention was that al Thani was not so much risking his own money as Kaupthing money: via an intricate scheme based on a few offshore companies the funds for the share acquisition came from Kaupthing itself. And where was the master plan carried out? In Luxembourg.

Kaupthing subsidiary in Luxembourg was at the centre of the al Thani saga. That was were the idea was brought into action, money into one vehicle and out into another. It is a well known fact in Iceland that most of the banks’ most questionable deals were indeed carried out in Luxembourg. It is an intriguing thought that Luxembourg was time and again chosen at the preferred place for these deals.

In early 2011 I was in Luxembourg and had a meeting at the Luxembourg financial services authorities, Commission de Surveillance du Secteur Financier, CSSF.* I met with a few people in a meeting room. I was on one side of a huge table, four or five people on the other side. Already then it was clear that the Icelandic banks had been doing some rather “inventive” banking in Luxembourg. I presented some of the cases I knew of. On the other side of the table there were only expressionless faces and then I was told that rules and regulations were strict in Luxembourg. Nothing contrary to laws could take place in Luxembourg banks.

In the CSSF 2012 Annual Report its Director General Jean Guill writes:

During the year under review, the CSSF focused heavily on the importance of the professionalism, integrity and transparency of the financial players. It urged banks and investment firms to sign the ICMA Charter of Quality on the private portfolio management, so that clients of these institutions as well as their managers and employees realise that a Luxembourg financial professional cannot participate in doubtful matters, on behalf of its clients.  

“… cannot participate in doubtful matters…” – If only matters were that simple. Now four people have been sentenced to prison in Iceland for participating in doubtful matters that violate Icelandic laws, according to the Reykjavík District Court, but were carried out in Luxembourg, by using Luxembourg expertise and the so very favourable circumstances created in Luxembourg over decades.

A group of Landsbanki Luxembourg clients have for several years been trying to catch the attention of the Luxembourg authorities, a saga that Icelog has reported on time and again. This group had taken out equity release loans at Landsbanki. These clients have asked 1) serious questions about the dealings of Landsbanki Luxembourg before it went bankrupt – such as evaluation of property, calculations on loans breaching the collateral limit, investments related to the loans and how products were sold; 2) serious questions as to how the estate has been run, its misleading information or lack thereof, numbers that did not add up.

None of this has been addressed by the CSSF or other Luxembourg authorities so far. However, the Luxembourg paper Wort has reported that two cases related to Landsbanki Luxembourg are now being investigated, quoting minister of justice Octavie Modert.

So far, and to great cost and immeasurable emotional distress the bank’s clients – mostly elderly citizens living in France and Spain – have been left to battle on their own. In Luxembourg the State Prosecutor issued a press release in support of the Landsbanki Luxembourg administrator – unthinkable in most other European countries – thereby making it look as if the Landsbanki Luxembourg clients were trying to evade paying their debt. – Through court cases in Spain and France the group has made some advances but none of this is taken into any consideration at all in Luxembourg.

One client has shown me a set of calculations regarding one specific loan portfolio. Landsbanki Luxembourg, prior to its collapse, had claimed that this portfolio no longer covered the loan so the borrower was obliged to pay a certain amount in cash as a cover. As far as I could see, the number from the bank was wrong: the client was not in breach and should not have been obliged to pay. I could of course well be wrong. I sent this calculation to someone from Landsbanki Luxembourg with whom I had been in touch and whom I had told of this. I know for certain that this person got the calculation but I never heard back.

Only Luxembourg authorities can access documents regarding the operations of Landsbanki Luxembourg. Although the bank’s managers have been charged with criminal offenses in Iceland (case pending but due in the new year) by the Icelandic Office of the Special Prosecutor as well as being sued in a civil case by the Landsbanki Winding-up Board for misleading reporting Luxembourg authorities have not been willing to listen to well-founded claims by the Landsbanki Luxembourg clients: unanswered questions about the Landsbanki Luxembourg operations before the bank’s demise in October 2008 – as well as the administrator’s operations.

Noticeably, an administrator has the duty to investigate operations, as indeed the Landsbanki Winding-up Board has done. The administrator, Yvette Hamilius and lawyers working for her, have stated in Luxembourg media that everything the administrator has done is according to the law.

In one case that the Landsbanki Luxembourg administrator took to court, the administrator caused delays of, in total, 200(!) days. And on it goes.

The fact that the numerous authorities in Luxembourg, such as the CSSF and the State Prosecutor have either ignored pleas from clients or outrightly sided with the administrator, without any chance of the claims actually being heard or looked at, shows a horrendous lack of care for clients and a sound protection for the financial industry. And everyone can pretend that it is, as Director General Guill points out: that professionalism and transparency is such in the financial sector in Luxembourg that financial players “cannot participate in doubtful matters.”

One way to supervise financial institutions is by box-ticking: to look at each item in its narrow and isolated meaning, never look at connections or behaviour, never try to understand meaning and context. The institutions know this and prepare their material accordingly. Then there is little to fear. One reason why so little was seen and caught before 2008 was this attitude by regulators. Judging from the lack of interest in claims by Landsbanki Luxembourg clients this still seems to be the attitude among Luxembourg authorities. Authorities in Cyprus have announced that banks in Cyprus will be investigated, a little bit is being done in Ireland and the UK. When will Luxembourg follow suit? From anecdotal evidence there have been things going on in Luxembourg that merit investigations.

* See an earlier Icelog report on Luxembourg and the Icelandic banks. – Here is an earlier Icelog on Landsbanki Luxembourg.

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Written by Sigrún Davídsdóttir

December 18th, 2013 at 3:57 pm

Posted in Iceland

Why are bankers investigated in Iceland and not so much elsewhere?

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Today, I was interviewed both on BBC radio 5 live and BBC radio 2 regarding bankers being sentenced to prison in Iceland. On both stations I was asked why bankers are being prosecuted in Iceland. I would rather turn that question around? Why are bankers not being investigated – and eventually charged, if there is a case against them – in other countries, for example in Britain?

Lets imagine that a huge big building crashes in the centre of London. Luckily, no one gets killed but damages run to millions, the whole area is disrupted, causing further financial damages and troubles for people and businesses for weeks and months and even years. How would this incident be treated? Would the authorities just say that this was tough luck and let it be? No, I very much doubt it. This incident would be investigated to the core and no one would rest until the cause was found. Also to make sure other buildings could not just suddenly and unexpectedly collapse. If it was then found there was willful negligence, corners cut to make more money and there would be emails and other evidence to show it those to blame would be prosecuted and their case brought to court.

The financial collapse, not just in Iceland but here in the UK and elsewhere was like a huge big building – indeed many of them – crashing. No, no one died but the financial damage has been great, shocks and after-shocks, lives and societies disrupted and upset.

Following the collapse of the three largest banks in Iceland in October 2008, the parliament decided on two things: one, to set up a special investigative commission, the SIC commission, that would clarify all aspects of the collapse, causes and failures in the running up to the collapse. This report, 2600 pages in 9 volumes (with some digital appendixes) came out in April 2012.

The chapters on the banks tell well documented stories of their lending practices, how some of the largest shareholders used the banks like their private banks, loans against no or weak collaterals, lending beyond legal limits and so on. A true thriller beating all financial fiction.

The other measure was to set up an office of a special prosecutor. No one applied. Finally, a sherif from Akranes, a small town on the bay opposite Reykjavík, was talked into taking on the job, Ólafur Þór Hauksson. He had no experience and no resources. Eva Joly was brought to Iceland to tell Icelanders and the authorities that staff and resources would be needed, this would take a long time and be costly. Eventually, three other prosecutors were hired and when the Office was at its biggest there were over 100 people working there. Now it’s being reduced and the cuts of the new centre-right government have also been sensed there.

Already in the SIC report there were stories that raised questions about possible criminal activities. The al Thani loan saga was one of them. Further, the OSP has now charged the top managers in all the three banks. The al Thani case was the first big case to reach sentencing. The three Kaupthing managers now sentenced are also charged in another large market manipulation case, as are managers from Landsbanki and Glitnir (on both cases see here).

Ólafur Ólafsson, Kaupthing’s second largest shareholder, was also charged in the al Thani case and now sentenced. Other earlier high-fliers charged earlier are Jón Ásgeir Jóhannesson, Glitnir’s largest shareholder and also Hannes Smárason, once a close business partner of Jóhannesson and then recently called in by Kári Stefánsson CEO of the genome company deCode, where Smárason was once a CFO, to run a company in the US. After the charges Smárason stepped down from the post.

But what about the UK? The Serious Fraud Office investigated Kaupthing but dropped the investigation after serious mistakes were done. Libor rigging was at first only investigated as if it was a natural disaster so no person was culpable. A bank rigged Libor, a bank got fined – and yet a bank is made up of people who think, plan and act.

The SFO is now investigating Libor rigging as possibly criminal activities and some people have been charged. Who are these people? Traders and others who actually carried out the alleged criminal activities. Are we to believe that they took up this pastime of fixing libor just for the fun of it? However it could happen it means that those in charge of these banks did a rather poor job of overseeing them. Shouldn’t that failure be investigated?

Every day seems to bring news of banks being fined – there are record fines, ever bigger fines, ever more serious deeds and banks are still more willing to buy sovereign bonds or some financial product with the cheap money they get from governments rather than dirtying their hands on servicing companies. There is libor rigging, money laundering, selling swaps that customers lose money on, currency rate rigging and alleged driving companies into bankruptcy rather than helping them to restructure – all of these “oversights” are treated as if they were carried out by machines and systems, not by reasoning and calculating people of flesh and blood. And for some reason shareholders patiently see their dividend capped by fines and yet say nothing.

When asked about the ongoing investigations in Iceland by non-Icelandic journalist they often seem to assume that there is something special about bankers being investigated; that this is somehow because something is different in Iceland, perhaps the law, perhaps that smallness. No, there is nothing special about Iceland in this respect. Deeds were done, they looked suspicious, there are laws against which these deeds can be tested and then a prosecutor brings charges if there are enough reasons to assume something criminal could have been going on. This is normal if someone robs a car or causes something as disastrous as a house collapse. When banks and banking systems collapsed it suddenly seemed something else had gone on. The strange thing is not why bankers are being prosecuted in Iceland – but why this is not happening elsewhere to the same degree.

PS Anrigaut, an Icelog reader has pointed out to me that Max Keiser has copied and pasted this log on his website but without attributing it to Icelog. I asked him (via Twitter and in a comment on his website) to add a link to the Icelog article. My tweet has now been added to his website.

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Written by Sigrún Davídsdóttir

December 12th, 2013 at 11:33 pm

Posted in Iceland

Reykjavik District Court rules in the al Thani case today

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A ruling in the so-called al Thani case is expected today at 3pm in Iceland. The Office of the Special Prosecutor earlier charged Kaupthing top managers – Sigurður Einarsson, Hreiðar Már Sigurðsson, Magnús Guðmundsson – and the second largest Kaupthing shareholder, Ólafur Ólafsson, for market manipulation and breach of fiduciary duty. The case derives its name from a member of the Qatar-ruling al Thani family, involved in the case but not charged.

Involving both management and a shareholder this case is one of the most extensive cases brought by the OSP. So far, the District Court has tended to be more lenient than the Supreme Court in cases brought by the OSP. All of the OSP cases have gone to the second and highest court, the Supreme Court. No matter the outcome, this case will almost certainly be appealed by either party.

The OSP had demanded a six year unsuspended imprisonment for Einarsson and Sigurðsson and four years for the other two. See here for earlier Icelogs on the al Thani case.

UPDATE: Sigurðsson has been sentenced to 5 1/2 years, Einarsson 5 years, Ólafsson 3 1/2 years and Guðmundsson 3 years.

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Written by Sigrún Davídsdóttir

December 12th, 2013 at 1:13 pm

Posted in Iceland

Fitch on the Icelandic debt relief program

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Compared to the skepticism of many Icelandic economists (except those who worked on the debt relief or were somehow connected to it), it was surprising to see how positive Fitch Ratings review of the Icelandic debt relief plan is: Fitch deemed the program “appears” to be “fiscally neutral” but added that “another round of write-downs may dent investor perceptions of Iceland’s business environment, and the prospect of foreign bank creditors in the failed banks bearing most of the cost may make it more difficult to remove capital controls.” The program amounts to ISK150bn, 8.5% of GDP (see earlier report on Icelog).

As Fitch points out the government aims to “fully finance the plan, via as-yet-unspecified budget adjustments, and tax increases – primarily an increase in the levy on Icelandic banks’ balance sheets from 0.145% of total outstanding debt to 0.366%. This bank tax is levied on Iceland’s new banks as well as on its failed banks, Kaupthing Bank, Glitnir Bank, and Landsbanki Islands, through their winding up committees.”

The often-stated aim of the government was not to finance the plan itself but that is indeed what it turns out to be: government funded. The funding is to come from increasing levy on the balance sheets of banks, as pointed out earlier on Icelog, from 0.145% to 0.366% – not only on operating banks but on the failed banks as well.

The Winding-up Boards of both Glitnir and Kaupthing have both stated that they doubt the legality of posing a levy on estates as expressed in a written statement by Kaupthing. The levy will most likely be challenged. Maybe it is unlikely that the Supreme Court will dare to go against the government but the levy is by no means in the Treasury coffers yet.

Economists have also pointed out that the estimated effect on inflation in the government’s calculation is 3.7% over 4%, not a trivial number but others see this as an unlikely low number. To “correct” inflation some years ago by possibly increasing inflation in the coming years and thereby wiping out the effect seems unwise, to say the least.

The unavoidable negative effect on the Housing Finance Fund – this almost decade old unsolved disaster – makes the debt relief all the more worrying. This government, as the previous government, keeps throwing money at the fund – this year ca ISK5bn (€31.8m) – only to keep the fund going, without resolving the underlying problems.

Fitch points out that a levy could dent recovery of the estates (which is why it will most likely be challenged in court) “and may further dent international investor sentiment towards Iceland. This could have a negative impact on investment, growth, and external finances, and may make it even more challenging to unwind capital controls in an orderly fashion.”

This is of great concern for Iceland since foreign investment and expertise is greatly needed. And everything that makes it more difficult to unwind the capital controls poses a major problem for the Icelandic economy. In addition, as the Argentinians know all too well, demagogy and populism thrive in capital controls.

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Written by Sigrún Davídsdóttir

December 8th, 2013 at 9:59 pm

Posted in Iceland

In search of the Silicon Valley pixie dust – an interview with Roelof Botha, Sequoia Capital

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Entrepreneurs come to Silicon Valley in search of its pixie dust, says Roelof Botha partner at Sequoia Capital. It is not easy for other places to emulate the Valley – it now has a story spanning almost a century. Over the years Sequoia has itself created a bit of pixie dust by being good at picking companies that later soar to success. Now that the Icelandic company Plain Vanilla has had funding from Sequoia Icelog met with Botha to learn about Sequoia’s investment strategy and get an insight into the mind of an investor who knows the start-up world inside out.

At this time of the year, the flaming red leaves in the grove by the offices of Sequoia Capital add glow to the low-key office space, built into the environment much like in Scandinavia or Japan. Sequoia is the legendary venture capital fund, which has seen so many of the companies it invested in at an early stage thrive and blossom ­­– companies like Apple, Oracle, Google, Jive (which earlier this year bought Clara, an Icelandic software company), Dropbox, Airbnb, Y Combinator, Evernote, Tumblr, Square and Instagram to name but a few.

Sequoia recently invested in Icelandic Plain Vanilla. Following its QuizUp fame Icelog had the opportunity to meet Roelof Botha who has been with Sequoia for a decade (and whose partners so far have not spent much time on giving media interviews).

In the interview (listen here; 15:02 min.) Botha outlines Sequoia’s vision: to be a leading investor and business partner for tomorrow’s enduring technology companies. Botha points out that unlike 40 years ago, venture capitalists of today must provide not only money but also expertise: today, venture funds need to be a business partner to the companies they invest in.

Founder of Plain Vanilla Þorsteinn Friðriksson, called Thor by non-Icelanders, is the type of founder Botha loves to meet: Þorsteinn has great energy and a clear vision of his company, says Botha.

In general, founders are the kind of people who can tear down walls when needed, not necessarily easy to get on with. Compared to even just twenty years ago, says Botha, entrepreneurs now are lucky enough to have a global market at their fingertips.

Starting in a small market like Iceland or the Scandinavian countries, which have a high density of talent, can even be an advantage because it pushes companies to look elsewhere for markets. The challenge in small countries is to find the expertise needed – the expertise found at all levels in an ecosystem like Silicon Valley. Starting a company in the Valley is not a prerequisite for success but this ecosystem attracts entrepreneurs from all over the world to the Bay Area in search of some of its pixie dust, says Roelof Botha.

The above and much more can be heard here (15:02) where I started by asking Roelof Botha to describe Sequoia’s investment strategy.

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Written by Sigrún Davídsdóttir

December 3rd, 2013 at 10:45 pm

Posted in Iceland