Sigrún Davíðsdóttir's Icelog

Of the known unknowns of the Icelandic banking collapse in early October 2008, the most intriguing story is the €500m emergency loan issued to Kaupthing by the Icelandic Central Bank. In the early hours of 6 October 2008, the prime minister and other leading ministers had realised that the only thing to do was to put in place the Emergency Act, enabling the authorities to take over the banks. Yet, on that same day, the CBI shovelled €500m from the fast depleting foreign currency reserve into Kaupthing although the governor of the CBI at the time did not believe Kaupthing would ever be able to repay the loan. The CBI has now published a much delayed report on the loan: it leaves all the fundamental questions unanswered and adds one question to the sorry saga: is it ever a good idea to let an organisation investigate itself?

“What are we doing? We are deciding we’re not paying the debt of spendthrifts… We are not going to pay other people’s debts. We are not going to pay debt of the banks that have been somewhat reckless.’ This is how the then governor of the Central Bank, Davíð Oddsson, explained in an interview 7 October 2008 the drastic measures Icelandic authorities had taken with the Emergency Act the day before.

The governor was also asked about a certain loan to Kaupthing. He explained that the information had been made public by mistake the previous day; a so-called bridge loan amounting to €500m to be repaid in a few days. In the unlikely circumstances that the bank would default on the loan, the CBI had a good collateral, the Danish FIH Bank, a Kaupthing subsidiary.

The day before appearing on television, the governor had described this loan rather differently. In a telephone conversation with then prime minster Geir Haarde, Oddsson sought the agreement of the prime minister for the loan, which they had apparently discussed earlier.

Intriguingly, Oddsson made the call not from his office but the office of another employee, where Oddsson knew the call could be recorded. That recording remained a mystery for years as the CBI refused to release it, claiming it contained sensitive information. In November 2011, Morgunblaðið, where the editor is a certain Davíð Oddsson, published a transcript of the call. Haarde expressed his annoyance but no measures were taken against the paper for the publication of material it could not explain how it had obtained.

In the phone call 6 October 2008, Oddsson emphasised that the loan was risky and would most likely be of some relief for Kaupthing for only four or five days, adding: “I don’t expect we will get this money back. They say they will repay us in four or five days but I think that’s untrue or let’s say wishful thinking.”

That inkling proved to be correct – less than 48 hours after receiving the loan, Kaupthing was in default. Neither Oddsson nor Haarde have ever explained why the loan was issued.

Now a report (only in Icelandic) on the loan saga, published by the CBI 27 May shows that there is no documentation to be found at the CBI on the loan: nothing that explains why the loan was issued, what it was intended for nor properly how Kaupthing made use of it. Worse is, that the new report fails standards set in other reports, most recently a report on how Kaupthing was bought in 2003 on false premises. The obvious question is: was it ever justified that the CBI would write a report on its own deeds?

The unannounced report and its unclear goal

In the new report, CBI governor Már Guðmundsson says in his preface that the work on the report started four years ago. As far as I can see, there is no press release on the CBI website to announce that the CBI is now embarking clarifying its €500m loan to Kaupthing nor has this ever been mentioned in the bank’s annual reports.

When I checked my emails, I can see that I first heard about the report in late 2016: I wrote to the bank’s spokesman in November 2016 asking him about the report I had then just heard Guðmundsson mention in the media, also when it could be expected. The answer was that the bank was waiting for the final results of the sale of the FIH. I mentioned that the sale, which was obviously going to incur losses for the bank, was the result of the loan – the interesting bit was why the loan was issued.

Over the years, my inquiries into the report-in-making have usually been answered by pointing out that the final result of the FIH sale – which happened in 2010 – was still due.

In his preface, governor Guðmundsson writes that since the collapse, the bank has been focused on the present and the future, rather than the past. Also, that the FIH sale had been a complicated issue and those working on it had been very busy doing other things. I have to say that I find it beneath the dignity of the bank to explain the long conception time by saying that CBI employees have been busy. It just gives the sense that this report was far from any priority at the CBI.

From the preface, it is clear that to begin with the report was meant to focus on the loss-incurring FIH sale. Only after receiving a query from prime minister Katrín Jakobsdóttir as late as November 2018 on how Kaupthing made use of the loan, i.e. where the funds flowed, the bank had set about to make inquiries to clarify this issue.

This indicates that there was no proper plan to begin with but to focus on the FIH sale, not on the real issue: why did the CBI lend Kaupthing €500m when the governor was clear the loan was a risk and would not be repaid?

No paper trail, no documentation at the CBI

As pointed out in the CBI report there is indeed no paper trail of the loan, no documentation, nothing, at the bank. The report emphasises that everything regarding the loan seems to have been planned outside the bank. Therefore, the report has nothing to add on why the loan was issued, why the loan figure was €500m, what it was intended to do etc.

There have been indications earlier, that the documentation regarding the loan, the collateral, interest rates etc. was only made some days after the loan was issued, i.e. that the loan document was back-dated. Again, this is not mentioned in the CBI report and what exactly is on paper is not clear. It is however clear that there is no paper trail as to how the loan came into being, i.e. there is a lacuna at the bank regarding this loan, which the governor at the time suspected, so as not to say knew, would not be repaid.

The report states that decisions regarding the Kaupthing loan were taken outside of the bank, explaining the lack of documentation at the bank. However, it does not make it entirely clear if ever there was a documentation, which then has disappeared or if there really never were any documents at all in the bank.

Since the lacuna must have been clear from early on, the CBI knew from early on that by only focusing on documents in the bank, nothing much would come out of its investigation. Why it did not try to turn to other sources, such as the FME, which took a back-up of all the banks right after they failed or the Kaupthing estate, indicates that publishing a report with nothing in it, did not feel too disturbing.

Where did the loan end up?

Already in earlier criminal cases against Kaupthing managers, notably the CLN case, evidence emerged as to how some of the €500m were used, or rather how funds were allocated on 6 October 2008 as the collapse of Kaupthing was imminent. There has however not been any comprehensive overview of transactions in Kaupthing these days, i.e. how did Kaupthing allocate funds from 6 October 2008, when the loan was issued.

Interestingly, we know that as the bank was stumbling to default, the Kaupthing managers had their eyes on making payments to fulfil the bank’s obligations in the CLN transactions, in total €50m. Also, Kaupthing issued a loan to a company called Lindsor Holding Corporation, a total of €171m. Lindsor was owned by some Kaupthing employees and amongst other things used to buy bonds from Skúli Þorvaldsson, an Icelandic businessman living in Luxembourg, with strong ties to Kaupthing. This diminished Þorvaldsson’s losses but increased Kaupthing’s losses.

Lindsor is the only Icelandic entity being investigated by Luxembourg authorities. Over two years ago it seemed that criminal charges might soon be brought in that case but since then, total silence. Yet another example of the extreme lethargy in the Duchy when it comes to investigating banks (see here blogs related to Lindsor).

The CBI report mentions these two loans but in its overview of outgoings it does not list the Lindsor loan, only the CLN transactions. This, in addition to the single highest payment €225m to deposit holders in Kaupthing Edge, €170m to Nordic central banks, €42m REPO payments to two European banks, €203m in foreign currency transactions – and then, the only novelty in the CBI report: 400-500 “small transactions” according to the CBI report, i.e. lower than €10m, in total €114,5m.

It is not clear why the Lindsor loan is mentioned but not added to the list. Also, there is no further information regarding the “small transactions” – who were the beneficiaries, individuals or companies, who owned the companies, how many transactions at around €8 to €10m etc.?

A bank is rarely a good collateral

In his preface, governor Már Guðmundsson concludes that in hindsight, the lending was miscalculated. However, the lending was not miscalculated only in hindsight: the governor at the time did not believe the loan would ever be repaid.

Governor Guðmundsson also claims that one lesson from the Kaupthing loan saga is that shares in a foreign bank do not constitute a good collateral. In my opinion, this is too limited a lesson: a bank, domestic or foreign, is not a good collateral.

In evaluating collateral, not only its monetary value is of importance but also how quickly and easily it can be sold. A bank makes a bad collateral as it can hardly ever be a quick sale and it is also costly to sell. For good reasons, central banks do not normally accept a bank as a collateral; they prefer assets that can be sold easily and quickly at not too high a cost.

I have not scrutinised that part of the report, which deals with the loss-incurring sale of the FIH bank as I have very little insight into that story. The sale itself turned into quite a saga in Denmark, covered by the Danish media.

Poorly planned and sloppily executed work

To my mind, it is beneath the dignity of the bank to publish this report as so much is lacking. The long time it took to write it cannot be excused by CBI employees being busy; it just shows that writing the report was never a priority.

If the CBI concluded it did not have the authority to ask for further information, it should have turned to the Prime Minister Office to suggest the report should be written by someone with the proper authority to do so. Indeed, it is a fundamental question why the CBI was allowed to handle this investigation, an untrustworthy move from the beginning.

Almost eleven years after the banking collapse in early October 2008, one key story of these days is still untold. The CBI is clearly uninterested in the story. The question is if the political powers in Iceland are equally uninterested.

*I have long been interested in this loan, see here a blog from 2013 on the CBI loan to Kaupthing.

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