Sigrún Davíðsdóttir's Icelog

Banque Havilland has just celebrated its tenth anniversary: it is now ten years since David Rowland bought Kaupthing Luxembourg out of bankruptcy. A failed bank not only tainted by bankruptcy but severely compromised by stark warnings from the regulator, CSSF. Yet, neither the regulator nor the administrators nor later the new owner saw any reason but to keep the Kaupthing Luxembourg manager and key staff. In four criminal cases in Iceland involving Kaupthing the dirty deals were done in the bank’s Luxembourg subsidiary with back-dated documents. Two still-ongoing court cases, which Havilland is pursuing with fervour in Luxembourg, indicate threads between Kaupthing Luxembourg and Havilland, all under the nose of the CSSF.

“The journey started with a clear mission to restructure an existing bank and the ambition of the new shareholder to lay strong foundations, which an international private bank could be built on,” wrote Juho Hiltunen CEO of Banque Havilland on the occasion of Havilland’s 10th anniversary in June this year.

This cryptic description of the origin of Banque Havilland hides the fact that the ‘existing bank’ David Rowland bought was the subsidiary of Kaupthing Luxembourg, granted suspension of payment 9 October 2008, the same day that the mother-company, Kaupthing hf, defaulted in Iceland.

The last year of Kaupthing Luxembourg’s operations had been troubled by serious concerns at the Luxembourg regulator, Commission de Surveillance du Secteur Financier, CSSF, regarding the bank’s risk management and the management’s willingness to move risk from clients onto the bank.

Unperturbed by all of this, Rowland not only bought the bank but kept the key employees, including the bank’s Icelandic director, Magnús Guðmundsson, instrumental in selling Kaupthing Luxembourg to Rowland. Guðmundsson stayed in his job until 2010, when news broke in Iceland he was under investigation, later charged and found guilty in two criminal cases (two are still ongoing) in Iceland, where he has served several prison sentences. He was replaced by Jean-Francois Willems, another Kaupthing Luxembourg manager, CEO of Banque Havilland Group since 2017. Willems was followed by Peter Lang, also an earlier Kaupthing manager. Lang left that position when Banque Havilland was fined by the CSSF for breaches in money laundering procedures.

David Rowland’s reputation in his country of origin, Britain, was far from pristine ­– in Parliament, he has been called a ‘shady financier.’ However, all that seemed forgotten in 2010 when the media-shy tycoon was set to become treasurer of the Conservative Party, having donated in total £2.8m to the party in less than a year. As the British media revised on Rowland stories, Rowland realised he was too busy to take on the job and stepped out of the spotlight again.

In the Duchy of Luxembourg, Rowland was seen as fit and proper to own a bank. And the bank, CSSF had severely criticised, was seen as fit and proper to receive a state aid in the form of a loan of €320m in order to give the bank a second life.

Criminal investigations in Iceland showed that Kaupthing hf’s dirty deals were consistently carried out in Luxembourg. There were clearly plenty of skeletons in the Kaupthing Luxembourg that Rowland bought. Two still-ongoing legal cases connect Kaupthing and Havilland in an intriguing way.

In December 2018, the CSSF announced that Banque Havilland had been fined €4m and now had “restrictions on part of the international network” for lack of compliance regarding money laundering and terrorist financing, the regulator’s second heftiest fine of this sort. Eight days later the bank announced a new and stronger management team: a new CEO, Lars Rejding from HSBC. It was also said that there were five new members on the independent board but their names were not mentioned. An example of the bank’s rather sparse information policy.

KAUPTHING LUXEMBOURG: RISK, FRAUD AND FAVOURED CLIENTS

2007: CSSF spots serious lack of attention to risk in Kaupthing Luxembourg

On August 25 2008, the CSSF wrote to the Kaupthing Luxembourg management, following up on earlier exchanges. The letter shows that as early as in the summer of 2007, the CSSF was aware of the serious lack of attention to risk. The regulator’s next step, in late April 2008, was to ask for the bank’s credit report, based on the Q1 results, from the bank’s external auditor, KPMG. In the August 2008 letter, the CSSF identified six key issues where Kaupthing Luxembourg was at fault:

1 The CSSF deemed it unacceptable that Kaupthing Luxembourg financed the buying of Kaupthing shares “as this may represent an artificial creation of capital at group level.”

2 Analysing the bank’s loan portfolio, the CSSF concluded that the bank’s activity was more akin to investment banking than private banking as the bulk of credits were “indeed covered by highly concentrated portfolios (for example: (Robert) Tchenguiz, (Kevin) Stanford, (Jón Ásgeir) Johannesson, Grettir (holding company owned by Björgólfur Guðmundsson, Landsbanki’s largest shareholder, together whith his son, Björgólfur Thor Björgólfsson) etc.)” The CSSF saw this “as highly risky and we ask you to reduce it.” This could only continue in exceptional cases where the loans would have a clear maturity (as opposed to bullet loans that were rolled on).

3 Private banking loans should have diversified portfolio of quoted securities and be easy to liquidate, based on a formal written procedure as to how that should be done.

4 Personal guarantees from the parent company should be documented in the loan files so that the external auditor and the CSSF could verify how these exposures were collateralised in the parent bank.

5 As the CSSF had already pointed out in July 2007, the indirect concentration risk should not exceed 25% of the bank’s own funds. CSSF concluded that the bank was not complying with that requirement as the indirect risk concentration on Eimskipafélagið hf, owned by Björgólfur Guðmundsson, and on Kaupthing hf, the parent bank, was above this limit.

6 At last, CSSF stated that only quoted securities could be easily liquidated, meaning that securities illiquid in a stress scenario, could not be placed as collateral. CSSF emphasised that securities like Kaupthing hf, Exista hf and Bakkavor Group hf, could not be used as a collateral, exactly the securities that some of Kaupthing’s largest clients were most likely to place as collaterals.

It is worth keeping in mind that the regulator had been studying figures from Q1 2008; in August, when CSSF sent its letter, the Q2 figures were already available: the numbers had changed much for the worse. Unfazed, Kaupthing Luxembourg managers insisted in their answer 18 September 2008 that the regulator was wrong about essential things and they were doing their best to meet the CSSF concerns.

What the CSSF identified: the pattern of “favoured clients”

The CSSF had been crystal clear: after closely analysing the Kaupthing Luxembourg operation it did not like what it saw. Kaupthing’s way of banking, lending clients funds to buy the bank’s shares and absolving certain clients of risk and moving it onto the bank, was not to the CSSF’s liking. What the CSSF had indeed identified was a systematic pattern, explained in detail in the 2010 Icelandic SIC report.

This was the pattern of Kaupthing’s “favoured clients”: Kaupthing defined a certain group of wealthy and risk-willing clients particularly important for the bank. In addition to loans for the client’s own projects, there was an offer of extra loans to invest in Kaupthing shares, with nothing but the shares as collateral. In some cases, Kaupthing set up companies for the client for this purpose, or the bank would use companies, owned by the client, with little or no other assets. The loans were issued against Kaupthing shares, placed in the client’s company.

How this system would have evolved is impossible to say but over the few years this ran, these shareholding companies profited from Kaupthing’s handsome dividend. The loans were normally bullet loans, rolled on, where the client’s benefit was just to collect the dividend at no cost. In some cases, the dividend was partly used to pay off the loan but that was far from being the rule.

What the bank management gained from this “share parking,” was knowing where these shares were, i.e. that they would not be sold or shorted without the management’s knowledge. Kaupthing had to a large extent, directly and indirectly funded the shareholdings of the two largest shareholders, Exista and Ólafur Ólafsson. In addition to these large shareholders there were all the minor ones, funded by Kaupthing. It can be said that the Kaupthing management had de facto complete control over Kaupthing.

All the three largest Icelandic banks practiced the purchase of own shares against loans to a certain degree but only Kaupthing had sat this up as part of its loan offer to wealthy clients. In addition, Kaupthing had funded share purchase for many of its employees.* This activity effectively turned into a gigantic market manipulation machine in 2008, again especially in Kaupthing, as the share price fell but would no doubt have fallen steeper and more rapidly if Kaupthing had not orchestrated this share buying on an almost industrial scale.

The other main characteristic of Kaupthing’s service for the favoured clients was giving them loans with little or no collaterals. This also led to concentrated risk, as pointed out in para 2 and 3 in the CSSF’s letter from August 2008 and later in the SIC report. As one source said to Icelog, for the favoured clients, Kaupthing was like a money-printing machine.

Back-dated documents in Kaupthing

After the Icelandic Kaupthing failed, the Kaupthing Resolution Committee, ResCom, quickly discovered it had a particular problem to deal with. The ResCom had kept some key staff from the failed bank, thinking it would help to have people with intimate knowledge working on the resolution.

A December 23 2008 memorandum from the law firm Weil Gotschal & Manges, hired by the ResCom, pointed out an ensuing problem: lending to companies owned by Robert Tchenguiz, who for a while sat on the board of Exista, Kaupthing’s largest shareholder, had been highly irregular, according to the law firm. As the ResCom would later find out, this irregularity was by no means only related to Tchenguiz but part of the lending to favoured clients.

The law firm pointed out that some employees had been close to these clients or to their closest associates in the bank and advised that all electronic data and hard drives from Sigurður Einarsson, Hreiðar Már Sigurðsson and seven other key employees should be particularly taken care of. Also, it noted that two of those employees, working for the ResCom, should be sacked; it could not be deemed safe that they had access to the failed bank’s documents. The ResCom followed the advice but by then these employees had already had complete access to all material for almost three months.

Criminal cases against Kaupthing managers have exposed examples of back-dated documents, done after the bank failed. According to one such document, Hreiðar Már Sigurðsson was supposed to have signed a document in Reykjavík when he was indeed abroad (from the embezzlement case against HMS). There is also an example of September 2008 minutes of a Kaupthing board meeting being changed after the collapse of Kaupthing. No one has been charged specifically with falsifying documents, but these two examples are not the only examples of evident falsification.

The central role of Kaupthing Luxembourg in Kaupthing hf’s dirty deals

The fully documented stories behind the many dirty deals in Kaupthing first surfaced in April 2010 in the report by the Special Investigative Commission, SIC. Intriguingly, these deals were, almost without exception, executed in Luxembourg.

By the time the SIC published its report, the Icelandic regulator, FME, already had a fairly clear picture of what had been going on in the banks. The fraudulent activities in Kaupthing made that bank unique – and most of these activities involved fraudulent loans to the favoured clients. In January 2010, the Icelandic regulator, FME, sent a letter to the CSSF with the header “Dealings involving Kaupthing banki hf, Kaupthing Bank Luxembourg S.A., Marple Holding S.A., and Lindsor Holdings Corporation.”

Through the dealings of these two companies, Skúli Þorvaldsson profited over the last months before the bank’s collapse by around ISK8bn, at the time over €50m. These trades mainly related to Kaupthing bond trades: bonds were bought at a discount but then sold, even on the same day, at a higher price or a par. Þorvaldsson profited handsomely through these trades, which effectively tunnelled funds from Kaupthing Iceland to Þorvaldsson, via Kaupthing Luxembourg.

Þorvaldsson was already living in Luxembourg when Kaupthing set up its Luxembourg operations in the late 1990s. He quickly bonded with Magnús Guðmundsson; Icelog sources have compared their relationship to that of father and son. When the bank collapse, Þorvaldsson was Kaupthing Luxembourg’s largest individual borrower and, in September 2008, the bank’s eight largest shareholder, owning 3% of Kaupthing hf through one of his companies, Holt Investment Group. At the end of September 2008, Kaupthing’s exposure to Þorvaldsson amounted to €790m. The CSSF would have been fully familiar with the fact that Þorvaldsson’s entire shareholding was funded by Kaupthing loans.

In addition, the FME pointed out that four key Kaupthing Luxembourg employees, inter alia working on those trades, had traded in bonds, financed by Kaupthing loans, profiting personally by hundreds of thousands of euros. Intriguingly, these employees had not previously traded in Kaupthing bonds for their own account. Some of these trades took place days before Kaupthing defaulted, with the FME pointing out that in some cases the deals were back-dated.

The central role of Kaupthing Luxembourg in Kaupthing’s Icelandic criminal cases

Following the first investigations in Iceland, the Office of the Special Prosecutor, OSP, in Iceland, now the County Prosecutor, has in total brought charges in five cases against Kaupthing managers, who have been found guilty in multiple cases: the so-called al Thani case, and the Marple Holding case, connected to Skúli Þorvaldsson, who was charged in that case but found not guilty.

The third is the CLN case, the fourth case is the largest market manipulation ever brought in Iceland. The charges in the fifth case concern pure and simple embezzlement where Hreiðar Már Sigurðsson, at the time the CEO of Kaupthing Group, is charged with orchestrating Kaupthing loans to himself in summer of 2008 in order to sell Kaupthing shares so as to create fraudulent profit for himself. Three of the cases are still ongoing. The two cases, which have ended, the al Thani case and the market manipulation case resulted in heavy sentencing of Sigurðsson, Magnús Guðmundsson and Sigurður Einarsson, as well as other employees.

The first case brought was the al Thani case where Sigurðsson, Guðmundsson, Einarsson and Ólafsson were charged were misleading the market – they had all proclaimed that Sheikh Mohammed Bin Khalifa al Thani had bought shares in the bank without mentioning that the shares were bought with a loan from Kaupthing. The lending issued by the Kaupthing managers was ruled to be breach of fiduciary duty. The hidden deals in this saga were done in Kaupthing Luxembourg. Equally in the Marple case and the CLN case: the dirty deals, at the core of these cases, were done in Kaupthing Luxembourg.

Hreiðar Már Sigurðsson has been charged in all five cases; Magnús Guðmundsson in four cases and chairman of the board at the time Sigurður Einarsson in two cases. In addition, the bank’s second largest shareholder and one of Kaupthing’s largest borrowers Ólafur Ólafsson was charged and sentenced in the al Thani case.

What the CSSF has been investigating: Lindsor and the untold story of 6 October 2008

One of the few untold stories of the Icelandic banking collapse relates to Kaupthing. On 6 October 2008, the Icelandic Central Bank, CBI, issued a €500m loan to Kaupthing after the CBI governor Davíð Oddsson called the then PM Geir Haarde to get his blessing. This loan was not documented in the normal way: it is unclear where this figure of €500m came from, what its purpose was or how it was then used. As Oddsson nonchalantly confirmed on television the following day, the loan was announced by accident on the day it was issued. The loan was issued on the day the government passed the Emergency Act, in order to take over the banks and manage their default.

On the day that Kaupthing received the CBI loan, Kaupthing issued a loan of €171m to a BVI company, Lindsor Holdings Corporation, incorporated in July 2008 by Kaupthing, owned by Otris, a company owned by some of Kaupthing’s key managers. The largest transfer from Kaupthing October 6 was €225m in relation to Kaupthing Edge deposit holders, who were rapidly withdrawing funds. The second largest transfer was the Lindsor loan.

Having obtained the loan of €171m, Lindsor purchased bonds from Kaupthing entities and from Skúli Þorvaldsson, again via Marple, which seems to have profited by €67.5m from this loan alone. In its January 2010 letter to the CSSF, FME stated it “believes that the purpose of Lindsor was to create a “rubbish bin” that was used to dispose of all of the Kaupthing bonds still on the books of Kaupthing Luxembourg as the mother company, Kaupthing Iceland, was going bankrupt… Lindsor appears to FME to be a way to both reimburse favoured Kaupthing bondholders (Marple and Kaupthing Luxembourg employees) as well as remove losses from the balance sheet of Kaupthing Luxembourg. These losses were transferred to Lindsor, and entity wholly owned by Kaupthing Iceland,” at the time just about to go into default.

In addition, FME pointed out that most of the documents related to these Lindsor transactions had not been signed until December 2008 “but forged to appear as though they had been signed in September 2008. Employees in both Kaupthing Luxembourg and Kaupthing Iceland appear to have been complicit in this forgery.” – Yet another forgery story.

Intriguingly, when the OSP in Iceland decided to investigate Marple Holding, it already had a long-standing relationship with authorities in Luxembourg, having inter alia conducted multiple house searches in Luxembourg, first in 2010, with assistance from the Luxembourg authorities.

The purpose of the FME letter in January 2010 was not only to inform but to encourage the CSSF to open investigations into these trades. It took the CSSF allegedly some years until it started to investigate Lindsor. According to the Icelandic daily Morgunblaðið, the Prosecutor Office in Luxembourg now has the fully investigated case on his desk – the only thing missing is a decision if the case will be prosecuted or not.

Judging from evidence available on Lindsor in Iceland, there certainly seems a strong case to prosecute but the question remains if the investigation wins over the extreme lethargy in the Duchy of Luxembourg in investigating financial institutions.

AND SO, BANQUE HAVILLAND ROSE FROM KAUPTHING LUXEMBOURG’S COMPROMISED BOOKS

Enter the administrators

It is clear, that already in the summer of 2008, before Kaupthing Luxembourg collapsed together with the Icelandic mother company, Luxembourg authorities were fully aware that not everything in the Kaupthing Luxembourg operations had been in accordance with legal requirements and best practice.

On 9 October 2008, Kaupthing hf was put into administration in Iceland. On that same day, Kaupthing Luxembourg was granted suspension of payment for six months with the CSSF appointing administrators: Emmanuelle Caruel-Henniaux from PricewaterhouseCoopers, PWC, and the lawyer Franz Fayot. After Banque Havilland later came into being, PWC became the bank’s auditor. Its auditing fees in 2010 amounted to €422,000. In 2017, the fees had jumped to €1.3m.

Fayot was to play a visible role in the second coming of Kaupthing Luxembourg and has, as PWC, continued to do legal work for Banque Havilland. From 1997 to 2015 Fayot worked for the law firm Elvinger Hoss Prussen, EHP, another name to note; in 2015 Fayot joined the Luxembourg lawyer, Laurent Fisch, setting up FischFayot.

Contrary to the measures taken in Kaupthing Iceland, there was allegedly no visible attempt by the Kaupthing Luxembourg administrators to comparable scrutiny: Magnús Guðmundsson stayed with the bank and worked alongside the administrators with other Kaupthing employees. Their aim seems to have been to make sure that the bank, bursting with skeletons, would be sold on to someone with a certain understanding of Kaupthing’s business model.

The Kaupthing sale could only have happened with the understanding and goodwill of Luxembourg authorities: in spite of knowing of the severe issues and faulty management, the regulator seems to have left the administrators and Kaupthing staff to its own devices. Crucially, the state of Luxembourg was instrumental in giving the bank a second life, as Banque Havilland, by guaranteeing it a state aid of €320m.

JC Flowers, the Libyans and Blackfish Capital

Consequently, right from the beginning, everything was in place to enhance Kaupthing Luxembourg’s appeal for restructuring; the only thing missing was a new owner. The Luxembourg government had already outlined a rescue plan, drawing in the Belgian government, as Kaupthing Luxembourg had operated a subsidiary in Belgium where it marketed its high-interest accounts, Kaupthing Edge.

In a flurry of sales activity, the administrators contacted 40 likely buyers but the call for tender was open for everyone. The investment fund JC Flowers, which earlier had been involved with Kaupthing hf, had briefly shown interest in buying the Luxembourg subsidiary. But already by late 2008, Kaupthing Luxembourg seemed to be firmly on the path of being sold to the Libyan Investment Authority, LIA, the Libyan sovereign wealth fund, at the time firmly under the rule of the country’s leader Muammar Gaddafi.

The LIA certainly had the means to purchase the Luxembourg bank. In the end, however, two things proved an unsurmountable obstacle. The creditors rejected the Libyan plan 16 March 2009, possibly taking the reputational risk into account. And perhaps most importantly, given that the Luxembourg state wanted to enable the purchase with considerable funds, the Luxembourg authorities did in the end balk at the deal with the Libyans but only after months of negotiations.

Blackfish Capital and Jonathan Rowland’s “lieutenant”

In 2008, Michael Wright, a solicitor turned businessman, was working for Jonathan Rowland, son of David Rowland. In an ensuing court case, Wright described his role as being Jonathan’s “lieutenant” in spotting investment opportunities.

By 2013, Wright had fallen out with the Rowlands, later suing father and son in London where he lost his case in 2017. According to the judgement, Wright maintained that he had played a leading role in securing the purchase of Kaupthing Luxembourg for the Rowlands: after being introduced to Sigurður Einarsson or “Siggi” as he called him, already in late 2008, Wright brought the opportunity to purchase Kaupthing Luxembourg to the Rowlands.

The Rowlands admitted that Wright had been involved in “some discussions” with Einarsson and Kaupthing Bank representatives in early 2009 relating to “a proposed transaction concerning bonds,” which did not materialise but that the contact leading to the Rowlands acquiring Kaupthing Luxembourg came “subsequently.” The judge on the case noted that all three men were unreliable witnesses.

As late as March 2009, a deal with the LIA to purchase Kaupthing Luxembourg still seemed on track. According to Kaupthing hf Creditors’ report, updated in March 2009, the government of Luxembourg and a consortium led by the LIA had signed a memorandum of understanding with the aim of enabling Kaupthing Luxembourg to continue its operations. In order to facilitate the restoration, the governments of Luxembourg and Belgium had agreed to lend the bank €600m, enabling the bank to repay its 22,000 retail depositors.

From other sources, Icelog understands that the Rowlands were only contacted after it was clear that neither JC Flowers nor LIA would be buying Kaupthing Luxembourg. The person who contacted the Rowlands, according to Icelog sources, was indeed Magnús Guðmundsson, who had heard that father and son might be looking for a private bank to buy. By early June 2009, the Rowlands’ agreement with the administrators was in place.

Interestingly, there had apparently been some tentative interest from large Kaupthing shareholders – who nota bene had all bought Kaupthing shares with Kaupthing loans. The Guðmundsson brothers, Lýður and Ágúst, who owned Exista, Kaupthing’s largest shareholder, had allegedly been interested in joining David Rowland as minority shareholders but that did not happen. In an open letter to Hreiðar Már Sigurðsson and Magnús Guðmundsson, published in January 2019, Kevin Stanford, once close to the Kaupthing managers, claimed the two bankers did explore the possibility of buying Kaupthing together with the Guðmundsson brothers but the plan was abandoned.

Whatever the reality of these tentative plans, they show that the Kaupthing managers and the largest shareholders focused on keeping Kaupthing Luxembourg alive, caring less for other parts of the bank. That is intriguing, given the role of the Luxembourg subsidiary in Kaupthing’s dirty deals.

The €320m Luxembourg state aid for restructuring

From contemplating a loan of €600m, as the Kaupthing hf creditors had been led to believe, the final figure was a still generous €320m. Led by Luxembourg, with half of the funds provided by the Belgian government through an inter-state loan, the deal was finalised 10 June 2009. The sum of €320m was decided since €310m was deemed to cover the liquidity shortfall with €10m extra as a margin.

In December 2008, the Kaupthing Luxembourg shares had been moved to a new company, Luton Investments (now BH Holdings), set up by a BVI nominee company, Quebec Nominees Limited that Kaupthing Luxembourg had often used (and most likely owned).

Rowland took Luton Investments over in May 2009. On 10 July, Rowland increased its capital by the agreed amount of €50m, raising its capital to the agreed figure, according to the restructuring plan. Rowland also pledged to add further €25 to 75m in liquidity. The private banking activities and the deposits, at 13 March 2009 €275 to 325m, were taken over by Rowland’s Blackfish Capital, and registered as a new bank, Banque Havilland. Its starting balance was €1.3bn, €750 to 800m of which were existing commitments to the Luxembourg Central Bank, BCL.

Part of Rowland’s lot was also Kaupthing Luxembourg’s entire infrastructure, including headquarters and IT system. With Kaupthing’s staff of 100 employees, Banque Havilland had from the beginning funding, infrastructure and staff to ensure a smooth transition from the old Kaupthing Luxembourg to the new Banque Havilland.

On July 9 2009, the European Commission gave its approval of the state aid. It indicates that the Banque Havilland’s main source of income during its early years, was indeed the money coming from the Luxembourg state.

Pillar Securitisation

Banque Havilland’s €1.3bn starting balance was only around half of old Kaupthing Luxembourg’s balance sheet. The rest, €1.2bn, more or less the old bank’s lending operations, for which no buyer was found, was placed in a new company, Pillar Securitisation, in order to be sold over the coming years, to pay off the main creditors: the Luxembourg state, the Luxembourg deposit guarantee fund, AGDL, Luxembourg Deposit Guarantee Association (funded by retail banks), and Kaupthing Luxembourg’s inter-bank creditors.

Having received a banking licence, Banque Havilland came into being on July 10 2009: Luton Investments, the sole owner of Kaupthing Luxembourg, was split in two, Banque Havilland, the “living” bank and Pillar Securitisation, the “dead” bank. Crucially, Pillar was de facto not a separate unit: it had no staff but was run in-house by Banque Havilland, residing at the Banque Havilland address at 35A avenue J.F. Kennedy, formerly the premises of Kaupthing Luxembourg.

The proceeds of Pillar were vital for the recovery of creditors since asset sales of that company determine their recovery. The main creditors were the two governments that lent into the restructuring. The loan was divided into a super-senior tranche of €210m and a senior tranche of €110m, split in two to repay the two states, Luxembourg and Belgium. The same was for the AGDL, and the around €300m it covered as deposits were transferred: AGDL received bonds in return.

Having scrutinised the state loans to Kaupthing Luxembourg, the European Commission ruled that the loans amounted to state aid: after all, no commercial bank would have agreed to a non-interest loan to a bank during suspension of payment. These advantages were conferred to Blackfish Capital via the state-aided restructuring plan. However, the Commission was equally clear that this state aid was compatible with the Treaty, which does allow for a remedy caused by “serious disturbance in the economy of a Member State.”

Interestingly, the original plan was to wind Pillar down in just a few years; ten years later, that goal has still not been reached.

ROWLAND, THE BANK OWNER

What Rowland bought: CSSF’s concerns and Kaupthinking in practice

By buying a failed bank, Rowland showed he was not too bothered about reputational risk. By keeping the ex-manager of Kaupthing Luxembourg, Magnús Guðmundsson and his staff, he also showed that he was not worried about Kaupthing’s activities. True, much of that story was not public at the time. Rowland would however have heard of CSSF’s serious concern in summer of 2008, before the bank failed. Concern, related to risky loans to large shareholders and related parties, that would have leapt out of the books on due diligence.

Although the CSSF had been chasing Kaupthing for credit risk and over-exposure to large clients and shareholders, the regulator was apparently as unbothered as the administrators that the Kaupthing managers were in charge of the bank during its suspension of payment.

Not only did CSSF apparently not follow up on earlier worries but the Luxembourg state decided to facilitate the bank’s second life with loans, notably without making it a condition that the management should be changed.

In Banque Havilland’s 2010 annual accounts, COO Venetia Lean (Rowland’s daughter) and CFO Jean-Francois Willems stated in their introduction that the bank would focus on retaining clients who met “strategic requirements… Towards the end of the year the family started to introduce members of its network to the Bank and we are working on the development of co-investment products whereby clients have the opportunity to invest alongside the family.” This focus, on co-investing with the family, is no longer mentioned.

Rowland’s first foreign investments after Luxembourg: Belarus and Iceland

In November 2010, Banque Havilland embarked on its first foreign venture, in Belarus: ‘the first Belarusian foreign direct investment fund,’ apparently a short-lived joint-venture with the Russian Sberbank Group. The press release seems to have disappeared from the Havilland website.

From 2011 to 2015 Banque Havilland expanded both in Luxembourg and abroad, i.e. in Monaco, London, Moscow, Liechtenstein, Switzerland and Nassau, either by buying banks or opening offices. The expansion in Monaco, Liechtenstein and Switzerland were done inter alia by buying Banque Pasche in these three locations. In the London office it set up a partnership with 1858Ltd in order to add art consultancy to its services.

Rowland’s interest for Icelandic investments did not end with Kaupthing Luxembourg. Contrary to most other foreign investors at the time, Rowland did not seem unduly worried by capital controls in Iceland, in place since autumn 2008. In the spring of 2011, it transpired that he had bought just under 10% of shares in the Icelandic MP Bank, which he held through a family-owned company, Linley Limited, represented on the MP board by Michael Wright.

MP Bank was named after its founder Margeir Pétursson, a Grand Master in chess, who set it up in 1999. In 2005, Pétursson was interested in expanding abroad but rather than following Icelandic bankers to the neighbouring countries, he made use of his knowledge of Russian and bought Lviv Bank in Ukraine. MP Bank survived the banking collapse in 2008 but was struggling. By 2010, the bank was no longer under Pétursson’s control and he left the board. In early 2011 the bank was split in two, with Pétursson still running that part owning the bank’s foreign assets.

At the time Rowland bought shares in MP Bank the bank was being revived with new capital and new shareholders. Another new foreign shareholder, who bought a stake in MP, equal to Rowland’s, was the ex-Kaupthing client, Joe Lewis, who, with Kaupthing loan to buy shares in Kaupthing and scantily covered loans, fitted the characteristics of a favoured client.

Enic was a holding company Lewis co-owned with Daniel Levy through which they held their trophy asset, Tottenham Hotspur. Kaupthing Singer & Friedlander, KSF, Kaupthing’s UK subsidiary, had issued a loan of €121.9 million to Enic, with shares in the football club as collateral. Kaupthing deemed the club was worth €89m, which meant the loan was only party covered in addition to the collateral being highly illiquid. Yet, the rating of the collateral on Kaupthing books was ‘good’ as Kaupthing had “confidence in the informal support of the principals.” According to the loan book “Joe Lewis is reputedly extremely wealthy and a target for doing further business with.”

Kaupthing, Banque Havilland and Kvika

In 2009, the former KSF director Ármann Þorvaldsson published a book, Frozen Assets, about his Kaupthing life. In it, he tells, almost with palpable nostalgia, of sitting on Lewis’ yacht in June 2007, discussing further projects; Þorvaldsson was keen to build a stronger relationship with the man estimated to be one of the 20 richest people in the UK. What ties were being forged on the yacht is anyone’s guess.

Rowland was clearly as unworried about MP Bank’s reputation – at the time, involved in some court cases – as he had been about Kaupthing Luxembourg’s reputational risk. In 2014, MP Bank and Virðing, an Icelandic asset management company with numerous ex-Kaupthing employees, attempted to merge with MP Bank, giving rise to rumours in Iceland that a new Kaupthing was in the making. The merger floundered. In the summer of 2015, both Rowland and Lewis apparently sold their stakes to Straumur, another resurrected Icelandic investment bank. Yet, according to Linley Limited 2015 annual accounts, the MP Bank shares were written down that year and Rowland is no longer a shareholder in the bank.

After the Straumur purchase in 2015, MP Bank changed its name to Kvika. As Virðing and Kvika did indeed merge in 2017, the former director of KSF, Ármann Þorvaldsson became CEO of Kvika until he recently demoted himself by swapping places with Kvika’s deputy CEO Marínó Örn Tryggvason, another ex-Kaupthing employee, and moved to London in order to focus on Kvika London. The question is if Kaupthing’s former clients in London will be tempted to bank with Kvika. One of them has already stated to Icelog that he will not be switching to Kvika.

Out of the three largest Icelandic banks, that collapsed in October 2008, Kaupthing, or rather Kaupthing-related people, both managers and shareholders, seem to be the only ones who keep giving the idea that Kaupthing-connections are still alive and meaningful. These musings reverberate in the Icelandic media from time to time.

THE KAUPTHING SKELETONS IN BANQUE HAVILLAND

The Kaupthing – Banque Havilland link: Immo-Croissance

One link that connects old Kaupthing with Banque Havilland is the real estate company, Immo-Croissance, founded in 1988. By the time, Immo-Croissance attracted Icelandic attention, it owned two prime assets in Luxembourg, Villa Churchill and a building, set for demolition, on Boulevard Royal, where the land was the valuable asset. In 2008, Jón Ásgeir Jóhannesson, the Icelandic businessman of Baugur-fame and a long-time large borrower of Kaupthing and all other Icelandic banks, had set his eyes on Immo-Croissance.

Jóhannesson had hoovered up real estate companies here and there, most notably in Denmark, where he had been on a wild shopping spree, all merrily funded by the three Icelandic banks. Interestingly, he used Kaupthing Luxembourg for this transaction – Kaupthing put up a loan of €122m – although a consortium under Jóhannesson’s control had been the largest shareholder in Glitnir since spring 2007.

In November 2007, Immo-Croissance’s board reflected the Baugur ownership as Baugur-related directors took seat on the board, together with Kaupthing employee Jean-François Willems. Under Baugur-ownership, Immo-Croissance apparently went on a bit of a cruise through several Baugur-owned companies. In  June 2008, a Baugur Group company, BG Real Estate Europe, merged with Immo-Croissance, whereby magically the €122m loan to buy Immo-Croissance landed on Immo-Croissance own books.

But as with so many purchases by the Kaupthing’s favoured clients, Baugur’s purchase depended entirely on Kaupthing’s funding. By the end of September 2008, Baugur was in dire straits and Immo-Croissance was sold, or somehow passed on to SK Lux, a company belonging to the Kaupthing Luxembourg’s largest borrower, Skúli Þorvaldsson.

According to Icelog sources in Luxembourg, familiar with the Immo-Croissance deals in 2008, the SK Lux purchase of Immo-Croissance left all the risk with Kaupthing Luxembourg, a consistent pattern in deals financed by Kaupthing for the bank’s favoured clients.

The second and third life of Immo-Croissance

A key person in the Immo-Croissance saga, as in the origin of Banque Havilland, is the lawyer Franz Fayot, Kaupthing Luxembourg’s administrator until the bank was sold in summer of 2009. It was during his time as administrator of Kaupthing Luxembourg that Immo-Croissance was put up for sale, as SK Lux defaulted when the Kaupthing loan came to maturity at the end of October 2008.

At the time, Dexia was interested in buying Immo-Croissance. Its offer was a set-off against Kaupthing debt to Dexia, in addition to a cash payment. Kaupthing Luxembourg however preferred to sell to an Italian businessman Umberto Ronsisvalle and his company, R Capital. Guðmundsson arranged the deal for Ronsisvalle through Consolium, a Luxembourg company set up by an Icelandic company, later taken over by Guðmundsson and a few other ex-Kaupthing bankers. Consolioum went through name changes, with some of the bankers’ wives later taking over the ownership as the bankers got indicted or were at risk from being indicted in Iceland.

Ronsisvalle offered €5.5m. In addition, Immo-Croissance would get a loan from Kaupthing Luxembourg of €123m to refinance the earlier loan. This time however the loan was against proper guarantees, not like the earlier loan to the Icelandic Immo-Croissance owners, where no guarantees to speak of were in place.

By the end of January 2009, Umberto Ronsisvalle was in charge of Immo-Croissance but only for some months. By early summer 2009, the Kaupthing-related directors were again in charge, amongst them Jean-François Willems.

The unexpected turn of events took place in early 2009. Ronsisvalle paid the €5.5m but asked for some payment extension since he had problems in moving funds. He had understood that Kaupthing had agreed but hours after he provided the funds, Kaupthing changed its mind: it announced the loan was in default and moved to take a legal action to seize not only Immo-Croissance but also the collaterals, getting hold of €35m. The thrust of Kaupthing’s legal action was that Ronsisvalle had tried to take over Immo-Croissance without paying for it.

Early on, a judge refuted this Kaupthing allegation, pointing out that there was both the down-payment of €5.5m and the guarantees, contrary to earlier arrangements. Ronsisvalle’s side of event is that Kaupthing manipulated a default in order to get hold of the cash and the collaterals, in addition to keeping the assets in Immo-Croissance, a saga followed by the Luxembourg Land.

Havilland, Immo-Croissance and EHP

The lawyer for Kaupthing in the Immo-Croissance case was Pierre Elvinger from the legal firm Elvinger Hoss Prussen, EHP, where Franz Fayot worked prior to taking on the administration of Kaupthing. As the case has stretched over a decade now, Pillar Securitisation replaced the old Kaupthing Luxembourg in the Immo-Croissance chain of legal cases. Franz Fayot has been a lawyer for Havilland in these cases.

In 2013, the case had reached a point where a judge had ordered Pillar to hand back Immo-Croissance to Ronsisvalle, its legal owner according to the judge. The problem was that in the meantime, Pillar had sold the company’s two most valuable assets, Villa Churchill and the building on Boulevard Royal.

In an article in Land, in July 2013, it was pointed out that Villa Churchill was sold to a company owned by three partners at EHP. The Boulevard Royal asset was sold to Banque de Luxembourg, a private bank where one EHP partner was a member of the board. In both cases, questions were raised regarding the price and a friendly deal.

EHP complained about the reporting and its comment was published in Land: EHP pointed out that Fayot ceased to be administrator as Banque Havilland and Pillar Securitisation came in to being in July 2009, whereas the two assets were sold in 2010. Also, that the price had to be agreed on by Immo-Croissance owner, Pillar Securitisation, i.e. the Pillar creditors’ committee.

What the law firm does not mention is that Fayot has stayed in business relationship with Banque Havilland, inter alia as a lawyer for Banque Havilland, for example in the Immo-Croissance cases and in a case against a Kaupthing employee whom Havilland has kept in a legal battle for over a decade.

Court cases related to this action are still ongoing but Ronsisvalle has so far won at every stage and has regained control of the company after fighting in court for years. He is now involved in a legal battle with Banque Havilland and Pillar regarding the assets sold. Since Immo-Croissance was placed in Pillar Securitisation, the outcome could in the end spell losses for the creditors of Pillar, mainly the two governments that provided the state-aid, which made Kaupthing Luxembourg an attractive and largely risk-free purchase.

The ex-Kaupthing employee hounded by Banque Havilland

On 9 October 2008, the day of Kaupthing Luxembourg’s default, the bank’s risk manager resigned. In his opinion, the bank had paid far too little attention to his warnings on exposures to the large favoured clients, with equally little notice being taken to the CSSF’s warnings on the same issues. The attitude of the bank’s management seemed to be that it could not care less.

In his resignation letter, the risk manager referred to the CSSF August letter to the Kaupthing management. In spite of the warnings, Kaupthing had, according to the risk manager, not taken any measures to diminish the risk, thus probably aggravating the bank’s situation. And by doing nothing, the bank had cast shadow over the reputation of both the bank itself and its risk professionals.

In addition, the bank had not dedicated enough resources to its risk management, leaving it both lacking in personnel and IT solutions. This had also led to the standards of risk management, as expressed in the bank’s Handbook, being wholly unachievable. All of this had become much more pressing since the bank’s liquidity position had turned dramatically for the worse after 3 October 2008.

As he had resigned by putting forth a harsh criticism of the bank, effectively making himself an internal whistle-blower, he expected to be contacted by the CSSF. When that did not happen, he did contact the regulator. It turned out that the letter had not been passed on to the CSSF and no one there was particularly interested in meeting him. After pressing his point, the risk manager did get a meeting with the CSSF, which showed remarkable little enthusiasm for his message.

The CSSF, in August 2008 so critical of the Kaupthing Luxembourg management, now seemed wholly uninterested in the bank. That is rather remarkable, given that the state of Luxembourg had risked millions of euros to revive the bank, now run by the bankers that the CSSF had earlier criticised.

Baseless accusations of hacking and theft of documents

The risk manager heard nothing further from the CSSF nor from the administrators but strangely enough he got a letter from Magnús Guðmundsson, with the Kaupthing logo as if nothing had happened. He finally brought his case to Labour Court in Luxembourg both to assert that he had had the right to resign and to get a final salary settlement with Kaupthing Luxembourg.

Although the risk manager quit Kaupthing around nine months before Banque Havilland came into being, that bank counter-sued the risk manager for hacking, theft of documents and breach of banking secrecy. Interestingly these allegations were raised in 2010, after the risk manager had been called in as a witness by the UK Serious Fraud Office and the Icelandic OSP.

The hacking and theft allegations ended with a judgment in 2015, where the risk manager won the case. The judge found that the risk manager had obtained these documents as part of his duties and could legitimately hold them as evidence in the Labour Court case. This case had delayed the Labour Court case, which then could only be brought to court by the end of 2017, a still ongoing case.

Technically, the labour case was part of the liabilities that Banque Havilland took over and litigations take time. The remarkable thing is that Banque Havilland has pursued the case without any regard for the evidence of illegalities taking place in Kaupthing as well as not paying consideration to the fact that the CSSF had severely criticised Kaupthing’s management.

After all the risk manager had quit Kauthing as he felt he could no longer work with the management the CSSF had found to be failing. Using the courts to harass people is a common tactic, used to the fullest in this case. Havilland has pursued the case forcefully, which is why the case is still doing the rounds in the various courts of Luxembourg thus undermining the risk manager both financially and in terms of his professional reputation.

If a Banque Havilland employee has ever contemplated criticising the bank or in any way bringing up anything about the bank, this case shows how the Havilland owners might react. It is not certain that the attitude of Luxembourg authorities regarding whistle-blowers rhyme with European legislation.

Luxembourg, the rotten heart of financial Europe             

The ongoing legal wrangling with the risk manager and the Immo-Croissance are two stories that embody the strong and long-lived ties between Kaupthing Luxembourg and Banque Havilland. Both Franz Fayot and Pierre Elvinger from EHP, the company that still resides in Villa Churchill bought out of Immo-Croissance, have represented Banque Havilland in court.

Quite remarkably, the CSSF lost all interest in Kaupthing Luxembourg, after the bank failed. Instead, it chose to lend funds to its new owners, who had less than a stellar reputation. Owners, who kept the Kaupthing management, that had given rise to the CSSF’s earlier concerns.

In addition, after knowing full well what had gone on in Kaupthing Luxembourg and being fully informed about the criminal cases in Iceland, the Luxembourg Prosecutor, now seems to be dithering as to bringing a case related to Lindsor Holding, not to mention other cases that were never investigated.

This is the state of affairs in Luxembourg, still the rotten heart of financial Europe.

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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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At the height of the banking crisis in 2008, Qatari investors stepped in to invest in two European banks – Barclays and Kaupthing. Later, these investments were and are the focus of criminal charges, not against the investors but the bankers, who orchestrated the investments. Both cases show that the Qatari investors were intent on profiting not only from the investments but also from hidden fees and sham arrangements. “A sham agreement requires two parties;” if the defendants were dishonest, so were the other party, the Qatari investors,” said Justice Jay during the Barclays trial recently. – This is not only relevant in connection to stories from 2008 but raises impertinent questions regarding Qatari investments in Deutsche Bank and other banks.

In autumn 2008, many Western banks were forced to seek emergency loans from governments. Three banks – Barclays, Deutsche Bank and Credit Suisse – were boastful of the fact that they did not need government funding. As has now become abundantly clear, all three tapped heavily into US measures to save US banks and foreign banks operating in the US. Even more to brag about was the fact that Barclays and Credit Suisse were able to raise funds in the market: Qatari investors were crucial in saving the two banks. Admittedly investment at a high price but these were singularly difficult times.

The Barclays investors were two Royal Qataris. Sheikh Hamad bin Jassim bin Jabr Al Thani, at the time Qatari’s prime minister, also known by his initials, HBJ. In 2013, The Independent dubbed him “the man who bought London” where he has invested both through his private companies and Qatar Investment Authority, QIA. His co-investor was Sheikh Mohammed Bin Khalifa Al Thani who in 2008 also invested in Kaupthing. Barclays paid them £66m for bringing along Sheikh Mansour Bin Zayed al Nahyan, well known in the UK for high octane investments such as Manchester City Football Club, another 2008 investment of his.

The Barclays Qatar story took a different turn in 2012 when the Serious Fraud Office, SFO, opened a criminal investigation into the Barclays deal with the Qataris: the price for the investment was even higher than previously disclosed as Barclays had kept quiet about two “Advisory Services Agreements.” On the basis of these agreements, Barclays paid the Qatari investors and Sheikh Mansour £322m; allegedly, no advice was given. The four Barclays bankers – Barclays CEO at-the-time John Varley and then-senior executives Roger Jenkins, Richard Boath and Tom Kalaris – who orchestrated the payments are now fighting criminal charges in court. Intriguingly, charges against Barclays PLC concerning a loan of $3bn to the Qatari investors were dismissed last year by the High Court.

In Iceland, the Special Prosecutors has exposed another Qatari investment saga, at the core of a criminal case against three Kaupthing bankers and the bank’s second largest investor. It turned out that a Qatari investment in Kaupthing in September 2008 was entirely funded by Kaupthing. Sheikh Khalifa was not charged but charges brought against three Kaupthing bankers and Ólafur Ólafsson, the second largest shareholder at the time, all of them sentenced to lengthy prison sentences.

Now, to the plights of Deutsche Bank. It survived 2008, much thanks to US funding but in 2014 Deutsche Bank was lacking capital; luckily, Sheikh Hamad bin Jassim bin Jabr Al Thani and Sheikh Mohammed Bin Khalifa Al Thani started investing in the bank, eventually becoming the bank’s largest investors. Now, as the German government hopes that a merger between two weak banks, Deutsche Bank and Commerzbank, might (contrary to evidence and experience) make a strong bank, the Qatari investors have indicated they might be ready to invest further.

Intriguingly, two criminal cases regarding Qatari investments show hidden deals the banks did with the Qataris to meet their demands for benefits beyond what investors could normally expect. The question is if these hidden favours were only relevant for these two cases – or if they are general indications of Qatari investors’ preferences in doing deals. If so, it raises questions regarding other Qatari investments in European banks.

Kaupthing and the Qatari investment in September 2008

After a tsunami of bad news in 2008, the one good news for Kaupthing came in September, miraculously a week after the collapse of Lehman Brothers: Sheikh Mohammed Bin Khalifa Al Thani, of the Qatari ruling family, had privately invested in Kaupthing. The investment amounted to 5.01%, just above the 5% threshold that triggered a notification to the Icelandic stock exchange, securing media attention. This investment made the Sheikh Kaupthing’s third largest investor and the only major foreign investor.

In a statement, the Sheikh claimed he had followed Kaupthing closely for some time and was satisfied of its performance and good management team. Chairman of Kaupthing Sigurður Einarsson said at the time that the bank’s strategy to diversify the shareholder base was paying off. To Icelandic media Kaupthing’s CEO Hreiðar Már Sigurðsson said this showed investors had faith in the bank.

But this investment was not enough to save the bank: in the second week of October 2008, Kaupthing collapsed, together with 90% of the Icelandic financial system.

The Kaupthing undisclosed loan and fees behind the Qatari investment

Only months later, rumours were circulating that the Qatari investment in Kaupthing had not been quite what it seemed to be. In April 2010, when the Icelandic Special Investigative Commission, SIC, published its report one of its many colourful stories recounted the reality behind this Qatari investment in Kaupthing: it had been entirely funded by Kaupthing and Sheikh Mohammed Bin Khalifa Al Thani had apparently only lent his name to this Kaupthing PR stunt. The go-between was Ólafur Ólafsson, Kaupthing’s second largest investor.

The mechanism was that Kaupthing lent funds to an Icelandic company owned by the Sheikh. In addition, Kaupthing issued a loan of $50m, labelled as advance profit, to another company owned by the Sheikh. The three Kaupthing bankers involved in the transaction – Hreiðar Már Sigurðsson, Sigurður Einarsson and Kaupthing Luxembourg’s director Magnús Guðmundsson – and also Ólafur Ólafsson were charged for breach of fiduciary duty and market manipulation and sentenced to between three and five and half years in prison (further on Icelog on the Icelandic al Thani case). Although the case was called “the Al Thani case,” the Sheikh was not charged with any wrongdoing.

Kaupthing had further plans of joint ventures with the Sheikh. In summer 2008 there had been an announcement, duly noted in the Icelandic media, that the Sheikh was investing in Alfesca, owned by Ólafsson. According to the SIC report, also here the plan was that Kaupthing would finance Sheikh Al Thani’s Alfesca investment.

In August and September 2008 Kaupthing, advise by Deutsche Bank, financed credit linked notes, CLN, transactions linked to Kaupthing’s credit default swaps, CDS, in order to influence, or rather manipulate, the CDS spreads. Two rounds of transactions were carried out: first via companies owned by a group of Kaupthing clients, then on behalf of Ólafur Ólafsson. A third round was planned, via a company owned by Sheikh Mohammed Bin Khalifa Al Thani, mimicking the earlier transactions, again with Deutsche Bank. Neither the Sheikh’s involvement with Alfesca nor the CDS trades happen as Kaupthing had run out of time and money (further on the CDS saga, see Icelog).

Barclays and Qatari investors in June and October 2008

Kaupthing was a small fry in the financial ocean, Barclays a much bigger fish. Already in spring of 2008, funding worries at Barclays were rising – the share price was falling, market conditions worsening. As Marcus Agius, Barclays chairman of the Barclays’ board 2006 to 2012, recently a witness for the prosecution in the criminal case against the four Barclays bankers, explained in court 19 February 2019, Barclays wanted to be ahead of the market, i.e. adequately capitalised: in the summer of 2008 it was time to raise capital, in fierce competition with other banks.

Consequently, Barclays decided to raise capital and underwriting was arranged. As summerised in Barclays 2008 Annual Report: On 22nd July 2008, Barclays PLC raised approximately £3,969m (before issue costs) through the issue of 1,407.4 million new ordinary shares at £2.82 per share in a placing to Qatar Investment Authority, Challenger Universal Limited (a company representing the beneficial interests of His Excellency Sheikh Hamad Bin Jassim Bin Jabr Al-Thani, the Chairman of Qatar Holding LLC, and his family), China Development Bank, Temasek Holdings (Private) Limited and certain leading institutional shareholders and other investors, which shares were available for clawback in full by means of an open offer to existing shareholders. Valid applications under the open offer were received from qualifying shareholders in respect of approximately 267 million new ordinary shares in aggregate, representing 19.0 per cent. of the shares offered pursuant to the open offer. Accordingly, the remaining 1,140.3 million shares were allocated to the various investors with whom they had been conditionally placed.

The Qatari investors were new to Barclays. At the time, Barclays’ top management saw it as highly beneficial for the bank to attract major investors from the Middle East, according to Agius. Keen to expand, the bank aimed at being a global player. The Qatari connection fitted the bank’s vision of its goal in the international world of finance.

The second round in autumn 2008 – the “tart” and the Sheikh

In autumn 2008, market conditions went from worrying to worse than anyone had thought possible, according to Agius’ witness statement in court. There were only two options: accept state funding or try another capital raising. Barclays hoped to again raise capital from the Qataris.

This time, the Qataris brought another Middle Eastern investor to the table, Sheikh Mansour Bin Zayed al Nahyan. Interestingly, there was some confusion if an Abu Dhabi public body was investing or if Sheikh Mansour was investing privately as Barclays publicly stated to begin with. In the end, the investor turned out to be International Petroleum Company where Sheikh Mansour was a chairman.

The Abu Dhabi investment saga is an even more colourful financial thriller than the Qatari saga. An independent financier Amanda Staveley advised Sheikh Mansour and got at least 30m of the £110m Sheikh Mansour allegedly got in fees from Barclays. In addition, Staveley’s company has sued Barclays for fees of £720m plus interests and cost, potentially well over £1bn,in relations to Sheikh Mansour’s investment. Her case is on hold until the criminal case against the Barclays four is brought to an end.

Somewhat ungracefully, the Barclays bankers referred to Staveley as a “tart” in a telephone recording played at the Southwark County Court recently during the Barclays trial. Intriguingly, this name-calling came from one of the charged bankers, Roger Jenkins, who argued for £25m bonus for 2008 as he had been instrumental in bringing in the Sheikhs, rather belittling Staveley’s part in it.

Barclays’ cash call of £6.1bn in times of panic

There was panic in the autumn air of 2008. Barclays fought to raise capital in order to avoid making use of the 8 October 2008 banking package, in total a staggering £500bn on offer from the government; for comparison, the total government annual spending was 618bn. One condition: participating banks would have to sign up to an agreement with the FSA on executive pay and dividend, making it rather unappealing for the well-paid Barclays bankers.

After some hesitation from the Gulf investors – they allegedly left the negotiations but returned – the bank could finally put out an innocuous statement on 31 October 2008 that Barclays had “held discussions in recent days with Qatar Holding LLC and entities representing the beneficial interests of HH Sheikh Mansour Bin Zayed Al Nahyan (“the Investors”) who agreed … to invest substantial funds into Barclays.” 

As summerised in Barclays 2008 Annual Report, Barclays would issue “£4,050m of 9.75% Mandatorily Convertible Notes (MCNs) maturing on 30th September 2009 to Qatar Holding LLC, Challenger Universal Limited and entities representing the beneficial interests of HH Sheikh Mansour Bin Zayed Al Nahyan … and existing institutional shareholders and other institutional investors. If not converted at the holders’ option beforehand, these instruments mandatorily convert to ordinary shares of Barclays PLC on 30th June 2009. The conversion price is £1.53276 and, after taking into account MCNs that were converted on or before 31st December 2008, will result in the issue of 2,642 million new ordinary shares.”

Further, Barclays issued warrants on 31 October 2008 “in conjunction with a simultaneous issue of Reserve Capital Instruments [RCI] issued by Barclays Bank PLC … to subscribe for up to 1,516.9 million new ordinary shares at a price of £1.97775 to Qatar Holding LLC and HH Sheikh Mansour Bin Zayed Al Nahyan. The warrants may be exercised at any time up to close of business on 31st October 2013.” – Qatar Holding now held 6.4% of Barclays shares.

Expensive and unpopular funding

Fund raising in these tumultuous times, as banks were scurrying for government money, might have looked like quite a feat. But the reception to Barclays fundraising was disappointing: the news came as a surprise to the market and existing shareholders were dismayed; also because the fund raising had not been a normal process, Agius said in court.

Reaching the agreement with the Sheikhs had been tough. In an email to Roger Jenkins John Varley said the Qataris and Sheikh Mansour had had “too good a deal.” It did in fact prove difficult to get shareholders to agree; many of the smaller shareholders were very upset.

At least one large shareholder in Barclays voiced concern publicly: though at the time not knowing how high the cost was indeed for Barclays, the pension fund Scottish Widows claimed the capital raising had been driven through at a high cost, just to avoid state ownership and its effect on bonuses. However, by the end of November Barclays shareholders had agreed to the capital raising.

In his foreword to the Barclays 2008 Annual Report, Agius acknowledged the anger the capital raising had caused among shareholders: “…we also recognised that some of our shareholders were unhappy about some aspects of the November capital raising. This unhappiness is a matter of great regret to us.” Further, Agius set out to explain the process and the great care taken by the board to make these difficult decisions “…as we sought to react to the circumstances prevailing at the time. The Board regrets, however, that the capital raising denied Barclays existing shareholders their full rights of pre-emption and that our private shareholders were not able to participate in the raising.”

It was indeed an expensive undertaking: the official terms seemed quite generous, 2% on the RCIs, 4% on the MCNs, as Agius pointed out in court. The RCIs carried interests of 14% until June this year, 2019, (see 2008 Annual Report p.228) when the rate would be 13.4% on top of three months LIBOR. The initial coupon was deemed to carry a cost of 10% after tax for Barclays. In addition, there was a disclosed fee of £66m to the Qatari investors, for having introduced Sheikh Mansour.

The undisclosed fees of £322m for the Sheikhs – and a Barclays loan to the investors

What Agius and others at the bank say they did not know was that the cost of extracting investment from the Qatari and Abu Dhabi Sheikhs were even higher than disclosed. The four Barclays bankers agreed to fees totalling £322m, to be paid over 60 months, hidden in two so-called “Advisory Services Agreements,” ASAs, now the focus of the SFO case against the Barclays four.

What transpires from the Barclays court case is that the three Sheikhs wanted fees for investing; the original figure floated was £600m. It was not trivial to dress up the agreed fee as anything remotely acceptable: after all, these three investors were getting fees no other investors were offered. When the “Advisory Services Agreements” surfaced in communication between the Barclays bankers and the Qataris negotiating on behalf of the Middle Eastern investors as a way for Barclays to pay the companies investing, it turned out that Sheikh Hamad bin Jassim bin Jabr Al Thani also wanted fees for his personal investment.

The bankers saw the absurdity in an ASA with a prime minister: he could not be an adviser to Barclays any more than a US president could be an adviser to JP Morgan! The solution was to increase the total payment for the ASAs to QIA: there would probably be some means to get the extra funds from QIA to its chairman, Sheikh Hamad bin Jassim bin Jabr Al Thani.

The thrust of the criminal case against the four Barclays bankers is if the fees were paid for real service, if any services were given in return for the exorbitant fees. So far, witnesses have not been aware of any services given; indeed, Agius and other witnesses were not aware of the ASAs until some years later, when the they surfaced in relation to the SFO investigation.

It is also known that the Qatari investors got a loan of $3bn from Barclays at the time, which is interesting given the Kaupthing story. This information surfaced in SFO charges against Barclays bank itself; this case was however dismissed in May 2018 by the Crown Court; in October 2018 the High Court ruled against SFO’s application to reinstate the case.

Deutsche Bank – another big bank at the mercy of Qatari investors

Deutsche Bank survived the 2008 crisis through the open funding route in the US. As Adam Tooze points out: In Europe, the bullish CEOs of Deutsche Bank and Barclays claimed exceptional status because they avoided taking aid from their national governments. What the Fed data reveal is the hollowness of those boasts.”  Fed records show “the liquidity support provided to a bank like Barclays on a daily basis, revealing a first hump of Fed Borrowing during the Bear Stearns crisis and a second in the aftermath of Lehman (p.218).”

As time passed, the German bank behemoth, weighed down by falling share prices inter alia caused by scandals and fines for financial misdemeanour and sheer criminal acts in various countries, struggled to stay above required capital ratio. Already in 2014, there were news of Qatari investments in Deutsche Bank according to Der Spiegel: the deal in 2014 had been arranged by the then CEO of Deutsche, Anshu Jain. Of course, Jain knew Sheikh Hamas bin Jassim Bin Jabr Al Thani, one of the wealthiest and most influential men in the Gulf. The Sheikh had long been a valued Deutsche customer, even before the 2014 investment of €1.75bn in Deutsche made him one of the larger shareholders in Deutsche.

In autumn 2016, more was needed. Again, the Sheikh was ready to invest, this time with Sheikh Hamad Bin Khalifa Al Thani, the Kaupthing investor. The two surpassed BlackRock as Deutsche’s largest shareholders, via two investment vehicles, the BVI-registered Paramount Services Holdings Ltd and Supreme Universal Holdings Ltd., registered in the Cayman Islands, respectively owned by Sheikh Jassim and Sheikh Khalifa.

With the Kaupthing saga in mind, I sent some questions to Deutsche Bank in August 2016, asking if Deutsche knew how the Qatari shareholders had financed their investment in the bank, if Deutsche could guarantee that the bank was not lending the Qatari shareholders, or anyone related to them, the invested funds, entirely or partly, and if the Qataris were getting in dividend in advance or other benefits that might later arise from their investments.

On 25 August 2016, Deutsche’s spokesman Ronald Weichert gave the following answer:

Special agreements with individual shareholders would be a breach of the stock corporation act. We want to point out, that allegations or the mere assumption that the Supervisory Board or the Management Board could enter into such an agreement or could have entered into such agreement, are absolutely unfounded and is highly defamatory. There is absolutely no indication to justify such a reporting or any allegation of this kind.

In addition to the Icelandic Al Thani case, I pointed out that Deutsche had quite some track record in being fined or scrutinized for various illegal activities, which made the tone in the answer somewhat surprising and a tad misplaced.

In addition, I mentioned that the Qatari shares purchase in Deutsche Bank, at a crucial time for the bank, had intriguingly, been just high enough to be flagged (as with the Al Thani Kaupthing investment); exactly this fact had caused attention in the media in various countries, an interest reflected in my question. I was merely trying to understand the situation, based on what had transpired in Kaupthing and Barclays with Qatari investors.

Qatari networks in European banks, with a Chinese hint 

As Der Spiegel pointed out, there have long been rumours about the origin of the fortune of Sheikh Hamas bin Jassim Bin Jabr Al Thani “some of which don’t cast a particularly flattering light on the sheikh…” He himself has mentioned that his wealth, “like that of all Qataris, may be questionable from a Western point of view. But according to Qatari standards, it was legitimate and had been obtained through legitimate business.” – And, as Der Spiegel noted, the Sheikh had a predilection for investing in the financial sector.

When the long-troubled Dexia sold Banque International a Luxembourg, BIL, in 2011, the Sheikh bought 90% of the shares via a Luxembourg company, Precision Capital, for €750m, with the remaining 10% going to the Luxembourg government, indirectly giving the bank a touch of state guarantee. BIL has offices in Switzerland, the Middle East and in Denmark, since 2000, and Sweden since 2016. In 2017, Precision Capital sold its holdings in BIL for €1.6bn, more than double the purchase price less than six years earlier.

The buyer was Legend Holdings, a Chinese investment fund with roots in the technology industry, best known as the owner of Lenovo Group. The Chinese fund enthusiastically touted its BIL acquisition as a new Chinese European co-operation and the fund’s gateway into Europe.

BIL is well connected in tiny Luxembourg: the chairman of the board is Luc Frieden, former minister for various ministries in Jean-Claude Juncker’s governments, last minister of finance 2009 to December 2013 when both Juncker, now president of the European Commission since 2014 and Frieden left Luxembourg politics. After politics, Frieden joined Deutsche Bank as vice chairman in 2014. Based in London, he advised the bank on international and European matters, as well as being chairman of Deutsche’s supervisory board in Luxembourg, until he joined BIL’s Board in early 2016, a post he kept after Legend Holdings became the bank’s largest shareholder.

In 2012, Precision Capital also bought a Luxembourg banking group, KBL European Private Bankers, which owns seven small banks and asset managing firms spread over Europe. One of them is Merck Finck, with sixteen offices in Germany.

Legend Holdings purchase of BIL coincided with other Chinese companies buying into European banks. Fosun is now the largest shareholder in Portugal’s largest listed bank, Millennium BCP, holding 24% of its shares.

Most noticeable was however HNA Group interest in Deutsche Bank.The HNA Group, formerly Hanan Airlines, holds €83bn in global assets, mainly in hotels and airlines. HNA Group is not state-owned but its chairman, Chen Feng, is a member of the National Congress of the Chinese Communist Party. In 2017 HNA Group had suddenly become Deutsche’s largest shareholder, peaking with a shareholding of just under 10%. HNA Group announced in September 2018 it would sell its stake of 7.6% over the coming 18 months; it is no longer among the largest shareholders in Deutsche.

The Chinese interest in European banks has been a cause for concern and controversy, both in terms of political ties to Chinese authorities and in terms of management issues.

Deutsche Bank – more is needed, again the Qataris stand ready to invest

The 2014 purchase of Deutsche Bank shares was at the time seen as Sheikh Hamas bin Jassim Bin Jabr Al Thani’s most important strategic investment so far in European banks. In 2016, there had been rumours that the Qataris aimed at owning anything up to 25% of shares in Deutsche and were interested in exerting greater influence on the bank, which was not run to their taste. However, no such drastic steps were taken though the Sheikh showed support for Deutsche’s chairman, Paul Achleitner who faced criticism after the bank’s shares lost 50% of their value in early 2016.

The position of the largest shareholder in Deutsche has been wandering between a few firms. BlackRock had long been the largest shareholder until the investment by two Qatari-owned companies. In May 2017, the order changed as Deutsche raised capital. Although the two Qatari companies had been rumoured to be willing to increase their shareholding, they did not. Not then.

This was when the Chinese HNA Group replaced the two Qatar companies as the largest shareholder, holding just under 10%, a stake worth approximately €3,4bn. Shortly after the investment in Deutsche Bank, Hanan Group’s chairman Chen Feng visited Doha and met with Qatar dignitaries.

Now, BlackRock is again Deutsche’s largest single shareholder with 4.88%. However, the two Qatari companies, Paramount Services Holdings and Supreme Universal Holdings, each hold respectively exactly 3.05% and should for all practical purposes be seen as operating together, again making them the largest shareholder with 6.10%.

For years, Deutsche insiders have been searching for a turn-around plan for the bank without a clear success. Deutsche is now at a critical point: the echelons of power in Deutsche and the German government have come to the conclusion that the problem of two weak large banks – Deutsche and Commerzbank – will best be solved by merging them.

Again, Deutsche is in need of capital. It now seems that the public Qatar entity, QIA, stands ready to invest in Deutsche. A strategic investment as Qatar’s deputy prime minister and minister of foreign affairs Sheikh Mohammed bin Abdulrahman Al Thani, also chairman of QIA, has stated that Qatar is interested in further investments in Germany.

Recently, Deutsche reluctantly disclosed a hidden loss of $1.6bn, stemming from municipal bond-investment from a run-up to the 2008 crisis, which does little to strengthen the bank’s position prior to the merger with Commerzbank. – And then there is the latest scandal: Deutsche’s involvement in Danske Bank’s laundering of €230bn through its Estonian branch. In the end, Deutsche might be not only need capital but also moral vision, which might not necessarily come with Qatari funds.

Credit Suisse and the Qataris

The Qatari investment in Credit Suisse in 2008 was definitely a turning point for the bank and saved it from needing a state bailout. Though Qatar Holding has lowered its shareholding in the bank, it is still the largest shareholder with 5.21%, followed by Harris Associates, Norges Bank, the Olayan Group, owned by a Saudi family investing in the West since the 1950s and BlackRock.

The investment in Credit Suisse 2008 did not come cheaply for the bank: as in Barclays, the investment was more complicated than just buying shares. It was designed as convertible bonds in Credit Suisse, with a coupon of between 9 and 9.5%. This means that while regular shareholders have seen meagre dividends, Qatar Holding collects CHF380m each year from Credit Suisse.

Until February 2017, an Al Thani of the younger generation, Sheikh Jassim bin Hamad Al Thani, son of Sheikh Mohammed Bin Khalifa Al Thani, was on the board. When the young Sheikh stepped down, apparently without explanation, he was not replaced by another Qatari. His departure did not make much difference on the board except there would be fewer cigarette breaks without him.

At the time, there were speculations that Qatar Holding would be selling its stake in the bank, that Credit Suisse might be cutting the ties to the Qataris and would possibly use the opportunity to replace the convertible bonds with less expensive options as they came callable in 2018.

The bank did indeed do that at first opportunity, October 23 2018. In order to cut funding cost, it bought back around CHF5.9bn of debt issued after the financial crisis to QIA and the Olayan family; Qatar held just over CHF4bn, Olayan Group the rest, both being entitled to 9.5% on the securities.

The Qatar shareholding in Credit Suisse briefly dipped below 5% last year but then rose again to the present 5.21%. Some changes were made to the board in February 2019 but it is as if the Qataris have lost interest in the bank: in spite of being the largest shareholder they have not had a representative on the board since 2917.

Who learns what from whom?

“A sham agreement is one that does not mean what it says,” said Justice Jay to the jury recently at the trial against the four Barclays bankers. “It requires two parties. The counterparty to the [advisory services agreements] was a Qatari entity. The logic of the prosecution case that these defendants were dishonest must be that one or more individuals comprising or connected with the Qatari entity was equally dishonest in the criminal sense. There’s no getting around that.”

There was a sham agreement with Qatari investors at the core of the Icelandic criminal case against the three Kaupthing bankers and the bank’s second largest shareholder parallel to the sham agreement with Qatari investors at the core of the Barclays case.

It is not surprising to hear of corrupt business practices in the Middle East – it is known as a thoroughly corrupt part of the world with fabulously wealthy rulers where neither democracy nor transparency is a priority. As can be seen from the billions of pounds, dollars and euros, paid in fines by systemically important Western banks in less than a decade, partly for criminal activity, these banks do not have the highest of moral standards either.

The belief, perhaps a naïve one, was that when businessmen from corrupt parts of the world would do business with Western banks they would have to adhere to Western standards. Apart from the moral standards in Western banks clearly being shockingly low in too many cases, it seems that bankers at Barclays – and Kaupthing – were ready to meet the Middle Eastern investors at the level set by the investors. The question is how other banks have met the requests for the special treatment Middle Eastern investors seem prone to demand.

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“It’s not unlikely that an international bank wants to avoid being accused of market manipulation,” said Prosecutor Björn Þorvaldsson in Reykjavík District Court on October 11, 2017. The “international bank” was Deutsche Bank and the court case was the so-called CLN case. Deutsche was not charged with anything – the criminal case was against Kaupthing managers, charged with fraudulent lending of €510m into a scheme concocted with Deutsche. However, both Kaupthing administrators and liquidators of two BVI companies saw a way of using alleged market manipulation in these transactions to recover from Deutsche the €510m, Kaupthing had paid to Deutsche. In December 2016, Deutsche eventually concluded that paying €425m was preferable to having to recount the ignominious saga in court. All parties to the agreement are unwilling to divulge further facts but a UK court document throws light on Deutsche’s part in the alleged market manipulation, affecting not only Kaupthing’s CDS spreads but also the bond market. – The question is if this really was the only scheme of alleged market manipulation that Deutsche instigated. Further, the case throws light on how tension between Deutsche’s staff working on the scheme and those responsible for legal and reputational risk was dealt with, potentially explaining the same in other Deutsche schemes.

In January 2009, Kaupthing’s ex-chairman Sigurður Einarsson felt compelled to send a letter to family and friends to counter claims in the Icelandic media regarding Kaupthing’s activities in the months before the bank failed in October 2008. One was that in 2008 the bank had traded on its own credit default swaps, CDS, linked to credit-linked notes, CLN, to bring down the bank’s CDS spreads and thus lower the bank’s cost of financing.

Einarsson wrote that Kaupthing had indeed funded such transactions, via what he called “trusted clients” in cooperation with Deutsche Bank; the underlying assumption was that a reputable international bank would not have done anything questionable – those were the days before international banks like Deutsche were being questioned and fined for criminal actions.

The Icelandic 2010 Special Investigations Committee, SIC, report told the CDS saga in greater detail, documenting Deutsche’s full knowledge from the beginning. A 2012 London court decision added to the story: in order to recover documents related to the transactions, Stephen Akers and Mark McDonald from Grant Thornton London – appointed liquidators of two BVI companies, Chesterfield and Partridge, used in the CDS transactions in the names of the “trusted clients” – had brought Deutsche Bank to court.

The CDS saga was summed up in 2014 charges in a criminal case in Iceland: Einarsson, Kaupthing’s CEO Hreiðar Már Sigurðsson and head of the bank’s Luxembourg operations Magnús Guðmundsson were charged with breach of fiduciary duty, causing a loss of €510m to Kaupthing, some of which Kaupthing paid to Deutsche literally as Kaupthing was failing. – All of this has earlier been reported in detail on Icelog(most notably here, December 2015 and here, November 2017).

The latest addition to the CDS saga is in another court document, consolidated particulars* from 2014, as the liquidators of the two BVI companies sought to recover funds from Deutsche in a civil case by suing Sigurðsson, Einarsson, Venkatesh (or Venky) Vishwanathan the Deutsche senior banker who liaised with Kaupthing on the CLN trades and, most importantly, the liquidators sued Deutsche Bank. The fifth defendant was Jaeger Investors Corp., BVI, a director nominee for Chesterfield and Partridge.

The 2014 document shows, in extensive quotes from emails etc., that contrary to Deutsche’s version in its Annual Reports etc., the bank was fully aware of the fact that Kaupthing set up these trades and funded them in order to influence its CDS spreads, i.e. allegedly the scheme was effectively a market manipulation. In addition, the Icelandic criminal case related to the CLN transactions documented that Deutsche was on the other side of the bet, thereby effectively creating a hedge for itself.

Thus the Icelandic SIC, the Icelandic Special Prosecutor, the Kaupthing administrators and of course the liquidators of the two BVI companies have all come to the same conclusion: Kaupthing and Deutsche colluded in market manipulation.

This goes a long way to explain why Deutsche, by the end of 2016, chose to settle with Kaupthing – Deutsche Bank was not going to be dragged into court to explain the discrepancy between its public statements and internal Deutsche documents, in addition to profiting from being a counterparty in the transactions. The liquidators alleged Deutsche took part in criminal activity. This has however not been tested in court; the SFO had as early as 2010 looked at these transactions but later apparently dropped its investigation as so many others.

One intriguing aspect of the CLN transactions is that Deutsche staff took measures to hide facts from staff working on legal and reputational risk. This has immense ramification for so many other questionable transactions in the bank, which have come to light over the last few years, inter alia Deutsche’s involvement in the largest known case of money laundering of all times: Danske Bank money laundering in Estonia 2007 to 2015, a saga still in the making.

The Deutsche version of the CDS saga (is very short)

Deutsche first mentioned the CLN claims in its 2015 Annual Report (p. 340). As an introduction to the bank’s 2016 Annual Report, Deutsche CEO John Cryan sent out a message to the bank’s employees on February 2 2017 where the settlement with Kaupthing was one of four legal issues the bank had resolved and chose to emphasise.

Deutsche has consistently presented the CDS transactions as if it had only learned of the realities well after the CLN transactions, as here in 2017 (the text is the same in Deutsche’s 2015 and 2016 (p. 369) Annual Reports):

Kaupthing CLN Claims

In June 2012, Kaupthing hf, an Icelandic stock corporation, acting through its winding-up committee, issued Icelandic law claw back claims for approximately € 509 million (plus costs, as well as interest calculated on a damages rate basis and a late payment rate basis) against Deutsche Bank in both Iceland and England. The claims were in relation to leveraged credit linked notes (“CLNs”), referencing Kaupthing, issued by Deutsche Bank to two British Virgin Island special purpose vehicles (“SPVs”) in 2008. The SPVs were ultimately owned by high net worth individuals. Kaupthing claimed to have funded the SPVs and alleged that Deutsche Bank was or should have been aware that Kaupthing itself was economically exposed in the transactions.Kaupthing claimed that the transactions were voidable by Kaupthing on a number of alternative grounds, including the ground that the transactions were improper because one of the alleged purposes of the transactions was to allow Kaupthing to influence the market in its own CDS (credit default swap) spreads and thereby its listed bonds. Additionally, in November 2012, an English law claim (with allegations similar to those featured in the Icelandic law claims) was commenced by Kaupthing against Deutsche Bank in London (together with the Icelandic proceedings, the “Kaupthing Proceedings”). Deutsche Bank filed a defense in the Icelandic proceedings in late February 2013. In February 2014, proceedings in England were stayed pending final determination of the Icelandic proceedings. Additionally, in December 2014, the SPVs and their joint liquidators served Deutsche Bank with substantively similar claims arising out of the CLN transactions against Deutsche Bank and other defendants in England (the “SPV Proceedings”). The SPVs claimed approximately € 509 million (plus costs, as well as interest), although the amount of that interest claim was less than in Iceland. Deutsche Bank has now reached a settlement of the Kaupthing and SPV Proceedings which has been paid in the first quarter of 2017. The settlement amount is already fully reflected in existing litigation reserves and no additional provisions have been taken for this settlement.

As can be seen from the text, the wording is carefully calculated. Inter alia, Deutsche has never in its public statements mentioned when and how it learned of the realities of the scheme, i.e. it was funded by Kaupthing in order to manipulate its CDS spreads.

Deutsche sent Venky Vishwanathan on leave in the spring of 2015 because of his involvement in the Kaupthing scheme. In 2016, Reuters reported that Vishwanathan was suing Deutsche for unfair dismissal. The status of his case is unclear; he has not responded to my queries on LinkedIn.

An overview of the Kaupthing CLN transactions

In February 2008, at the time of the first meeting regarding the CDS spreads with Deutsche bankers, the Kaupthing management was smarting from steadily increasing financing cost; Kaupthing managers insisted the bank was unfairly targeted by hedge funds and were trying to figure out how Kaupthing could erase the image of weakness implied by the CDS spreads. Already at the first meeting with Venky Vishwanathan it was abundantly clear that Kaupthing was seeking to use own funds to influence the CDS spreads; that was the plan from the beginning – the question was just how to structure it in order to influence the CDS spreads most effectively.

The CDS scheme was developed further in the coming months as the pressure on Kaupthing increased: in spring 2008, the CDS spreads stood alarmingly at 900bp. Deutsche advised against Kaupthing’s original idea of its own direct involvement in the transactions. The solution was to find trusted clients of Kaupthing – Kevin Stanford and his wife Karen Millen, Tony Yerolemou and Skúli Þorvaldsson, all large clients of Kaupthing – who would in name own Chesterfield, the BVI company, entirely funded by Kaupthing; the transactions would be done via Chesterfield.

The Chesterfield transactions were done in August 2008. According to the SIC Report (p.26-28; in Icelandic), the CDS spreads changed on 10 August 2008, following the transaction, from 1000bp to 700bp. Though the spread diminished only for some days, it was deemed success, which should be repeated. For the second round, in September, the CLN transactions were done via another BVI company, Partridge, owned by Ólafur Ólafsson, domiciled in Switzerland, still a wealthy businessman, then Kaupthing’s second largest shareholder and a major borrower in Kaupthing. Again, the Partridge transactions were wholly funded by Kaupthing, organised by Deutsche on behalf of Kaupthing.

In total, Kaupthing paid €510m to Deutsche for the Chesterfield and Partridge trades, the last millions transferred to Deutsche from Kaupthing just as the bank teetered; it formally failed 9 October 2008. Emergency funding from the Icelandic Central Bank to Kaupthing of €500m was partly used to pay Deutsche as part of the Partridge transactions although the funding had been issued to safeguard Kaupthing’s UK operations (See the longer version on Icelog.)

Kaupthing accordingly lost the €510m because the two BVI companies had no assets to speak of, which made it clear from the beginning that should the trades go awry, the loans would be non-recoverable; a fact the liquidators noted, as did the Special Prosecutor in Iceland.

Al-Thani and the CLN trades that never happened

A very intriguing part of this story surfaced in the SIC Report (p.26-28): there had been plans for a third round of Kaupthing-funded CLN transactions through Brooks Trading Ltd, owned by a Qatari investor, Sheikh Mohamed Khalifa al Thani. Kaupthing agreed to a loan of €130m to Mink Trading, an al Thani company, in addition to a loan of $50m to Brooks Trading Ltd, another al Thani company, as up-front profit from the trades.

Again, the purpose of the loan to Mink Trading was to invest in CLN linked to Kaupthing’s CDS, again via Deutsche Bank in transactions structured as the Chesterfield and Partridge transactions. But Kaupthing ran out of time; the loan to Brooks Trading was paid out according to the SIC Report, not the loan to Mink Trading; the al Thani CLN transactions never happened.

Sheikh al Thani is a well-known name in Iceland from his role in another Kaupthing criminal case, the so-called al Thani case; although the case is commonly named after the Sheikh he was not charged (the $50m loan to Brooks Trading might have been connected to the real al Thani case, not the CLN transactions, according the the SIC Report). In the al Thani case the three Kaupthing managers, charged in the CLN case, and Ólafur Ólafsson were sentenced to three to 5 ½ years in prison. As in the CLN case, the bankers were charged for fraudulent lending, breach of fiduciary duty and market manipulation; Ólafsson was sentenced for market manipulation.

According to the SIC Report Kaupthing also agreed to lend Ólafsson €50m against profits from the Partridge trade but SIC documents do not show that the loan was issued.

The doggedly diligent liquidators

The liquidators of the two BVI companies, Stephen Akers and Mark McDonald, quickly seem to have sensed a potentially intriguing story behind the CDS transactions and had some impertinent questions for Deutsche Bank. When Deutsche was remarkably unwilling to answer their questions the liquidators took legal action against the bank in order to obtain documents, as seen in this UK court decision in February 2012.

In his affidavit in the 2012 Decision, Akers said: “It is very difficult to see how the transactions made commercial sense for the Companies.” ­– As the liquidators were to uncover the short answer here is that the transactions did not make sense for the companies, which were only a tool for Kaupthing managers, as Deutsche full well knew.

This can be gauged in detail from the 2014 consolidated particulars. Well documented, it recounts the whole saga behind the CLN transactions, inter alia the following:

Already at the initial meeting in February 2008 it was clear that Kaupthing’s only reason for setting up the schemes was to bring down its CDS spreads and Kaupthing would fund the transactions; Kaupthing was willing to pay Deutsche for reaching this goal and Deutsche agreed to assisting Kaupthing in reaching it, i.e. bringing down its CDS spreads; from Kaupthing, its most senior managers were involved; at Deutsche, senior staff in London worked on the plan (para 56). A larger group were kept informed by emails, amongst them Jan Olsson managing director of Deutsche and CEO of Deutsche in the Nordics.

After a slow start, the urgency increased in summer 2008: on 18 June 2008, Vishwanathan sent an email to the Kaupthing managers proposing a concrete strategy: “Kaupthing should fund the purchase of a CLN referenced to itself. DB, as the vendor of the CLN, would then hedge its exposure under the CLN, by selling Kaupthing CDS in the market, and this would have the desired effect of lowering Kaupthing’s CDS spread.” (para 62.)

A flurry of emails followed, also because Deutsche’s legal department was hard to please (para 68-69). The bank’s Global Reputational Risk Committee was involved. Kaupthing managers understood that Deutsche staff was “bit stressed about this from a ‘reputation’ point of view.” In July, Deutsche invited Hreiðar Már Sigurðsson and his family on a trip to Barcelona, i.e. paid for flights and hotel, where Sigurðsson attended DB’s Global Markets Conference and discussed the CDS scheme (para 75).

The conclusion was that Kaupthing could not be seen to go directly into the market in transactions linked to its own CDS. The solution was to set up a Luxembourg company for the CDS trades, as Sigurðsson explained in an email to Vishwanathan during the conference: Kaupthing’s lawyer would be “setting up the lux company for our trade” (sic), also offering to discuss further “the right structure that you (i.e. Deutsche) would be comfortable with.” (para 79). That same day, Vishwanathan sent an email to a colleague informing him he was working on “putting together a bespoke ETF for some of (Kaupthing’s) close high net worth clients to take a view on (Kaupthing) CDS…” (para 80).

Late July, Kaupthing’s lawyer in Luxembourg presented an overview in an email to Deutsche’s Shaheen Yusuf, including the ownership structure with the names of the four Kaupthing clients who owned Chesterfield. The presentation clearly stated that the funding, €125m, would come from Kaupthing and that the CLN used was part of a wider scheme where Deutsche would offer CDS for sale with a total nominal value of €250m (para 89). – This document included everything regarding the planned transactions, also the funding.

As all of this is documented in email exchanges between Kaupthing managers and Deutsche staff it is clear that when Deutsche claims, inter alia in its 2015 and 2016 Annual Reports it did not know a) that the funding came from Kaupthing – and – b) that the aim of the transactions was to lower Kaupthing’s CDS spread, it goes against documents, which Deutsche had on its system at the time and should still have.

Avoiding a paper trail

Given that Deutsche’s legal department and its Global Reputational Risk Committee had been worried, the overview and its detailed information on funding etc. was unavoidably a strong dosis for Deutsche to stomach. Yusuf called Kaupthing – it’s not clear if she spoke to Hreiðar Már Sigurðsson or Magnús Guðmundsson – but her mission was to ask Kaupthing to withdraw the presentation and replace it with a new one where the fact that Kaupthing was funding the transactions would be omitted. The Kaupthing Luxembourg lawyer quickly followed her instructions, sending another presentation, with the requested changes: Kaupthing was no longer referenced as the lender.

The BVI liquidators point out that there was a phone call and not an email, concluding this was done in order to avoid a paper trail at Deutsche (para 92-93).

When the Chesterfield trades were executed in August 2008, the effect was immediate, just as Deutsche bankers had promised (para 114). In an email to Vishwanathan Hreiðar Már Sigurðsson said it seemed “our Barcelona trip paid of” (sic) – the trip where the plans were finalised (para 115-116).

Indeed, so pleased were the Kaupthing managers that they decided to do another trade of the same kind (in spite of a very short-lasting effect) (para 117). This time, it would be through a company owned by Ólafur Ólafsson, very much a part of the Kaupthing’s inner circle and a close friend of the Kaupthing managers.

“Are u not paid to work for us?”

Due to force majeur, the second CDS transactions hardly registered: Lehman Brothers collapsed on the 15 September 2008, shaking the world’s financial system to its core. Two days later, Kaupthing’s CDS spread had deteriorated further and stood at record 1150bp. As if nothing had happened in the world of finance, Magnús Guðmundsson, clearly less than pleased, wrote in an email to Vishwanathan: “How can the CDS spread be were they are compare to our trade(.) Are u not paid to work for us? (sic)” (para 128).

This exchange clearly shows how Kaupthing saw Deutsche’s role – Deutsche was acting on behalf of Kaupthing, not for the owners of the two BVI companies. Both Kevin Stanford and Tony Yerolemou have stated they had no idea how the BVI companies in their name were used – they had no idea of the funds that flowed through their companies as Kaupthing strove to meet margin calls. – Interestingly, these are not the only examples of Kaupthing using clients’ companies without the owners’ knowledge.

The liquidators conclude that the nature of the transactions of Chesterfield and Partridge were unlawful as “they were intended to, and did, secretly manipulate Kaupthing’s CDS spreads and thereby the market for CDS referenced to Kaupthing, and the market for Kaupthing bonds.” (para 142-148, further 149-176.)

According to the liquidators, Deutsche Bank broke laws on market manipulation and market abuse not only in the UK but also in other countries where financial products, influenced by Deutsche’s unlawful activities, were traded. (para 143-145).  This abuse and manipulation did not only affect Kaupthing’s CDS but also Kaupthing’s bonds as the manipulated CDS affected the pricing of Kaupthing bonds.

Further questions regarding the CDS transactions

In addition to market manipulation and being counterpart to trades Deutsche itself set up, the Kaupthing CLN transactions have other interesting aspects to ponder on.

Emails between Deutsche staff show how employees involved in the Kaupthing transactions were allegedly prepared to withhold information on the owners of the BVI companies from Deutsche’s own know-your-customer team. Also, the staff was aware of the reputational risk from being involved in transaction where a bank tried to influence its own CDS spreads.

There is nothing to indicate that this was done because the Deutsche bankers engaging with Kaupthing were less ethical than other colleagues or more prepared to stray away from the straight and narrow road of regulation – rather, that this was a way of working at the bank. It can only be assumed that in a case like this there was no guidance from the echelons of power at Deutsche, relevant to keep in mind given the enormous sums Deutsche has paid out over the years in fines, also in cases with criminal ramifications.

The CLN saga shows the inner workings of Deutsche, relevant to understand how the bank’s internal safeguarding against illegal activities were side-lined when up against the possibility of profit. Relevant for so many other cases of questionable conduct that have surfaced in the last few years. Intriguing to keep in mind regarding the latest Deutsche scandal: it’s role in Danske Bank’s money laundering in Estonia where $230bn were laundered in 2007 to 2015, where Deutsche seems to have handled around $180bn.

Another aspect is how keenly the Kaupthing managers honoured the agreement with Deutsche. Money was tight in August 2008 when the Chesterfield transaction was done. In September, money was quite literally running out and no doubt the three managers had a lot on their mind. Yet, they never lost focus on these transactions with Deutsche, diligently though with great effort meeting margin calls, even making use of the emergency lending from the Icelandic Central Bank. The managers have explained that Kaupthing’s relationship mattered greatly. Yet, given what was going on at the bank, the question still lingering in my mind why these transactions were apparently so profoundly important to the Kaupthing managers.

Deutsche Bank – the bank that paid €14.5bn(!) in fines March 2012-July 2018

Over the last few years, Deutsche Bank has been fighting regulators on all continents. In total, Deutsche paid fines of €14.5bn from March 2012 to July 2018 for criminal activity ranging from Libor fixing to money laundering, according to ZDF. And there might well be more to come as Deutsche is now involved in the largest money laundering saga of all times, Danske Bank’s laundering of $230bn from 2007 to 2015 where Deutsche allegedly handled close to $180bn of the $230bn.

Intriguingly, in June 2010 the SFO was looking at Deutsche’s role in the CDS trades, according to the Guardian. But as with so much of suspicious activities in UK banks around 2008 (and forever!) nothing more was heard of SFO’s investigation.

Deutsche has refuted having known about the realities of the CDS transactions – that Kaupthing was indeed funding the trades and doing it in order to lower its CDS spreads. However, the paper trail within the bank tells a very clear story, according to the liquidators: Deutsche full well knew the realities and thus took part in market manipulation that in the end affected not only the CDS spreads but, much more seriously, the price of Kaupthing’s bonds. The same was clear already from the SIC Reportand from the CLN criminal case in Iceland.

As mentioned earlier on Icelog, the CLN charges (in Icelandic) support and expand the evidence of Deutsche’s role in the CDS trades. The charges show that Deutsche made for example no attempt to be in contact with the Kaupthing clients who at least on paper were the owners of the two companies; Deutsche was solely in touch with Kaupthing. Inter alia, the owners were not averted regarding margin calls; Deutsche sent all claims directly to Kaupthing, apparently knowing full well where the funding was coming from and who was making the necessary decisions.

Another interesting question is who was on the other side of the CDS bets, i.e. who gained in the end when the Kaupthing-funded companies lost so miserably?

According to the Icelandic Prosecutor, the three Kaupthing bankers “claim they took it for granted that the CDS would be sold in the CDS market to independent investors and this is what they thought Deutsche Bank employees had promised. They were however not given any such guarantee. Indeed, Deutsche Bank itself bought a considerable part of the CDS and thus hedged its Kaupthing-related risk. Those charged also emphasised that Deutsche Bank should go into the market when the CDS spread was at its widest. That meant more profit for the CLN buyer Chesterfield (and also Partridge) but those charged did not in any way secure that this profit would benefit Kaupthing hf, which in the end financed the transactions in their entirety.”

Deutsche’s fees for the two CLN transactions amounted to €30m for the total CDS transactions of €510m. In addition, Deutsche will have profited from going into the market buying “a considerable part of the CDS” thus hedging its risk related to Kaupthing.

Effectively, Deutsche was not interested in having the realities of the case tested in court – it did not want to spell out in court its part in the Kaupthing market manipulation and it did not want to spell out it had itself been a counterpart in the trades. After years of legal wrangling, it chose to settle with Kaupthing and agreed to pay back €425m of the €510m Kaupthing paid to Deutsche for these transactions. – Another case of alleged banking fraud buried in the UK.

*Published by Kjarninn Iceland as an attachment to an open letter (in English but the attachments are linked to the Icelandic version) to Hreiðar Már Sigurðsson and Magnús Guðmundsson from the well-known UK retailer, Kevin Stanford. He and his ex-wife Karen Millen were clients of Icelandic banks, also of Kaupthing. – All emphasis above is mine.

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The Bill passed by the Icelandic parliament in December 2008 on setting up an independent investigative commission, the Special Investigative Commission did not catch much attention at the time. The goal was nothing less than finding out the truth in order to establish events leading up to the 2008 banking collapse, analyse causes and drawing some lessons. The SIC report was an exemplary work and immensely important at the time to establish a narrative of the crisis. But in hindsight, there is yet another lesson to be learnt: its importance does not diminish with time as it helps to counteract special interests seeking to rewrite history.

There were no big headlines when on 12 December 2008 Alþingi, the Icelandic parliament, passed a Bill to set up an investigative commission “to investigate and analyse the processes leading to the collapse of the three main banks in Iceland,”which had shaken the island two months earlier. The palpable lack of enthusiasm and attention was understandable: the nation was still stunned and there was no tradition in Iceland for such commissions. No one knew what to expect, the safest bet was to not expect very much.

That all changed when the Commission presented its results in April 2010. Not only was the report long – 2600 pages in print in addition to online-only material – but it did actually tell the real story behind the collapse: the immensely rapid growth of the banks, from one GDP in 2002 to ten times the GDP in 2008, the stronghold the largest shareholders, incidentally also the largest borrowers, had on the banks’ managements, the political apathy and lax regulation by weak regulators, stemming from awe of the financial sector.

Unfortunately, the SIC report was not translated in full into English; see executive summary and some excerpts here.

With time, the report’s importance has not diminished: at the time, it clarified what had happened thus preventing those involved or others with special interest, to reshape the past according to their own interests. With time, hindering the reshaping of the past has become of major importance, also in order to draw the right lessons from the calamitous events in October 2008.

What was the SIC?

According to the December 2008 SIC Act (in Icelandic), the goal was setting up an investigative commission, that would, at the behest of Alþingi, seek “the truth about the run-up to and the causes of the collapse of the Icelandic banks in 2008 and related events. [The SIC] is to evaluate if this was caused by mistake or neglect in carrying out law and regulation of the financial sector in Iceland and its supervision and who could be held responsible for it.” – In order to fulfil its goal the SIC was inter alia to collect information on the financial sector, assess regulation or lack thereof and come up with proposals to prevent the repetition of these events.

In some countries, most notably in South Africa after apartheid, “Truth Commissions,” have played a major part in reconciliation with the past. Although the remit of the Icelandic SIC was to establish the truth, the SIC was never referred to as a “truth commission” in Iceland though that concept has been used in foreign coverage of the SIC.

The SIC had the power to make use of a vast array of sources, both by calling in people to be questioned and documents, public or private such as bank data, including data on named individuals, data from public institutions, personal documents and memos. Data, normally confidential, had to be shared with the SIC, which was obliged to operate as any other public body handling sensitive or confidential information.

Although the SIC had to follow normal procedures of discretion on personal data the SIC could “publish information, normally subject to discretion, if the SIC deems this necessary to support its conclusions. The Commission can only publish information on personal matters of named individuals, including their financial affairs, if the public interest is greater than the interest of the individuals concerned.” – In effect, this clause lift banking secrecy.

One source close to the process of setting up the SIC surmised the political intentions behind the SIC Act did not include lifting banking secrecy, indicating that the extensive powers given to the SIC were accidental. Others have claimed the SIC’s extensive powers were always part of the plan. I am in two minds about this but my feeling is that the source close to the process was right – the powers to scrutinise the main shareholders were far greater than intended to begin with.

Naming the largest borrowers, incidentally also the largest shareholders

Intentional or not, the extensive powers enabled naming the individuals who received the largest loans from the banks, incidentally their largest shareholders and their closest business partners. This was absolutely essential in order to understand how the banks had operated: essentially, as private fiefdoms of the largest shareholders.

In order to encourage those called in for questioning to speak freely, the hearings were held behind closed doors; there were no public hearings. The SIC had extensive powers to call people in for questioning: it could ask for a court order if anyone declined its invitation, with the threat of taking that person to court on grounds of contempt in case the invitation was declined.

Criminal investigation was not part of the SIC remit but its power to call for material or call in people for questioning was parallel to that of a prosecutor. As stated in the report, the SIC was obliged to inform the State Prosecutor if there was suspicion of criminal conduct:

The SIC’s assessment, pursuant to Article 1(1) of Act no. 142/2008, was mainly aimed at the activities of public bodies and those who might be responsible for mistakes or negligence within the meaning of those terms, as defined in the Act. Although the SIC was entrusted with investigating whether weaknesses in the operations of the banks and their policies had played a part in their collapse, the Commission was not expected to address possible criminal conduct of the directors of the banks in their operations.

As to suspicion of civil servants having failed to fulfil their legal duties, the SIC was supposed to inform appropriate instances. The SIC was not obliged to inform the individuals in question. As to ministers, the SIC was to follow law on ministerial responsibility.

The three members

The SIC Act stipulated it should have three members: the Alþingi Ombudsman, then as now Tryggvi Gunnarsson, an economist and, as a chairman, a Supreme Court Justice. The nominated economist was Sigríður Benediktsdóttir, then lecturer at Yale University (director of Financial Stability at CBI 2012 to 2016 when she returned to Yale). The chairman was Páll Hreinsson (since 2011 judge at the EFTA Court).

In addition to the Commission there was a Working Group on Ethics: Vilhjálmur Árnason professor of philosophy, Salvör Nordal director of the Centre for Ethics, both at the University of Iceland and Kristín Ástgeirsdóttir director of the Equal Rights Council in Iceland. Their conclusions were published in Vol. 8 of the SIC report.

In total, the SIC had a staff of around 30 people. As with the Anton Valukas report, published in March 2010, on the collapse of Lehman Brothers, organising the material, especially the data from the banks, was a major task. The SIC had access to the databases of the three collapsed banks but had only limited data from the banks’ foreign operations.

There were absolutely no leaks from the SIC, which meant it was unclear what to expect. Given its untrodden path, the voices expressing little faith were the most frequently heard. I had however heard early on, that the SIC had a firm grip on turning material into searchable databases, which would mean a wealth of material. With qualified members and staff, I was from early on hopeful that given their expertise of extracting and processing data the SIC report would most likely prove to be illuminating – though I certainly did not imagine how extensive and insightful it turned out to be.

Greed, fraud and the collapse of common sense

After the October 2008 collapse, my attention had been on some questionable practices that I heard of from talking to sources close to the failed banks.

One thing I had quickly established was how the banks, through their foreign subsidiaries, had offshorised their Icelandic clients. This counted not only for the wealthy businessmen who obviously understood the ramifications of offshorising but also people with relatively small funds. These latters had in many cases scant understanding of these services.

In the last few years, as information on offshorisation has come to the light via Offshoreleaks etc., it has become clear that Iceland was – and still is – the most offshorised country in the world (here, 2016 Icelog on this topic). Once the “art” of offshorisation is established, with all the vested interests accompanying it, it does not die easily – this might be considered one of the failed banks’ more evil legacies.

Another point of interest was how the banks had systematically lent clients, small and large, funds to buy the banks’ own shares, i.e. Kaupthing lent funds to buy Kaupthing shares etc. Cross-lending was also a practice: Bank A would lend clients to buy Bank B shares and Bank B lent clients to buy Bank A shares. This was partly used to hinder that shares were sold when buyers were few and far behind, causing fall in market value. In other words, massive market manipulation had slowly been emerging. Indeed, the managers of all three failed banks have in recent years been sentenced for market manipulation.

It had also emerged, that the banks’ largest shareholders/clients and their business partners had indeed been what I have called “favoured clients,” i.e. enjoying services far beyond normal business practices. One side of this came to light in the banks’ covenants in lending agreements: in the case of the “favoured clients,” the lending agreements tended to guarantee clients’ profit, leaving the banks with the losses. In other words, the banks took on far greater portion of the risk than these clients.

Icelog blogs I wrote in February 2010, before the publication of the SIC report, give some sense of what was known at the time. Already then, it seemed fair to conclude that greed, fraud and the collapse of common sense had been decisive factors in the event in Iceland in October 2008.

Monday morning 12 April 2010 – when time stood still in Iceland

The excitement in Iceland on Monday morning 12 April 2010 was palpable. The press conference was transmitted live. All around Iceland employers had arranged for staff to watch as the SIC presented its conclusions.

After Páll Hreinsson’s short introduction, Sigríður Benediktsdóttir gave an overview of the main findings regarding the banks, presenting “The main reasons for the collapse of the banks,” followed by Tryggvi Gunnarsson’s overview of the reactions within public institutions (here the presentations from the press conference, in Icelandic).

The main reason for the collapse of the three banks was their rapid growth and their size at the time they collapsed; the three big banks grew 20-fold in seven years, mainly 2004 and 2005; the rapid expansion into new/foreign markets was risky; administration and due diligence was not in tune with the banks’ growth; the quality of loans greatly deteriorated; the growth was not in tune with long-time interest of sound banking; there were strong incentives within the banks grow.

Easy access to short-term lending in international markets enabled the banks’ rapid growth, i.e. the banks’ main creditors were large international banks. With the rapid expansion, also abroad, the institutional framework in Iceland, inter alia the Central Bank and the FME, quickly became wholly inadequate. The under-funded FME, lacking political support, was no match for the banks, which systematically poached key staff from the FME. Given the size of the humungous size of the Icelandic financial system relative to GDP there was effectively no lender of last resort in Iceland; the Central Bank could in no way fulfil this role.

This had no doubt be clear to the banks’ management for some time. In his book, “Frozen Assets,” published in 2009, Ármann Þorvaldsson, manager of KSF, Kaupthing’s UK operation, writes that he “always believed that if Iceland ran into trouble it would be easy to get assistance from friendly nations… despite the relative size of the banking system in Iceland, the absolute size was of course very small.” (P. 194). – A breath-taking recklessness, naivety or both but might well have been the prevalent view at the highest echelons of the Icelandic financial sector at the time.

The banks’ largest shareholders and their “abnormally easy access to lending”

When it came to “Indebtedness of the banks’ largest owners” the conclusions were truly staggering: “The SIC concludes that the owners of the three largest banks and Straumur (investment bank where the main shareholders were the same as in Landsbanki, i.e. Björgólfur Thor Björgólfsson and his fater) had abnormally easy access to lending in these banks, apparently only because their ownership of these banks.”

The largest exposures of the three large banks were to the banks’ largest shareholders. “This raises the question if the lending was solely decided on commercial terms. The banks’ operations were in many ways characterised by maximising the interest of the large shareholders who held the reins rather than running a solid bank with the interest of all shareholders in mind and showing reasonable responsibility towards shareholders.” – Creative accounting helped the banks to avoid breaking rules on large exposures.

Benediktsdóttir showed graphs to illustrate the lending to the largest shareholders in the various banks. It is worth keeping in mind that these large shareholders all had foreign assets and were all clients of foreign banks as well. In general, the Icelandic lending shot up in 2007 when international funding dried up. At this point, the Icelandic banks really showed how favoured the large shareholders were because these clients were, en masse, getting merciless margin calls from their foreign lenders.

In reality, the Icelandic banks were at the mercy of their shareholders. If the large shareholders and/or their holding companies would default, the banks themselves were clearly next in line. The banks could not make margin calls where their own shares were collateral as it would flood the markets with shares no one wanted to buy with the obvious consequence of crashing share prices.

Two of the graphs from the SIC report, shown at the press conference in April 2010, exposed the clear drift in lending at a decisive time: to Björgólfur Thor Björgólfsson, still an active investor based in London and to Fons, a holding company owned by Pálmi Haraldsson, who for years was a close business partner of Jón Ásgeir Jóhannesson, once a king on the UK high street with shops like Iceland, Karen Millen, Debenhams and House of Fraser to his name.

The lending related to Fons/Haraldsson is particularly striking since Haraldsson was part of the consortium Jóhannesson led in spring of 2007 to buy around 40% of Glitnir: after the consortium bought Glitnir, the lending to Haraldsson shot up like an unassailable rock.

Absolution of risk

The common thread in so many of the SIC stories was how favoured clients – and in some cases bank managers themselves – were time and again wholly exempt from risk. One striking example is an email (emphasis mine), sent by Ármann Þorvaldsson and Kaupthing Luxembourg manager Magnús Guðundsson, jokingly calling themselves “associations of loyal CEOs,” to Kaupthing’s chairman Sigurður Einarsson and CEO Hreiðar Sigurðsson.

“Hi Siggi and Hreidar, Armann and I have discussed this (association of loyal CEOs) and have come to the following conclusion on our shares in the bank: 1. We set up a SPV (each of us) where we place all shares and loans. 2. We get additional loans amounting to 90% LTV or ISK90 to every 100 in the company which means that we can take out some money right away. 3. We get a permission to borrow more if the bank’s shares rise, up to 1000. It means that if the shares go over 1000 we can’t borrow more. 4. The bank wouldn’t make any margin calls on us and would shoulder any theoretical loss should it occur.We would be interested in using some of this money to put into Kaupthing Capital Partners [an investment fund owned by the bank and key managers] Regards Magnus and Armann”

This set-up, where the borrower is risk-free and the bank shoulders all the risk, has lead to several cases where bankers being sentenced for breach of fiduciary duty, i.e. lending in such a way that it was from the beginning clear that losses would land with the bank. (Three of these Kaupthing bankers, Guðmundsson, Einarsson and Sigurðsson, not Þorvaldsson, have been charged and sentenced in more than one criminal case).

The “home-knitted” crisis

Due to measures taken in October 2008 in the UK against the Icelandic banks, there was a strong sense in Iceland that the Icelandic banks had collapsed because of British action. The use of anti-terrorism legislation by the British government against Landsbanki greatly contributed to these sentiments.

A small nation, far away from other countries, Icelanders have a strong sense of “us” and “the others.” This no doubt exacerbated the understanding in Iceland around the banking collapse that if it hadn’t been for evil-meaning foreigners, hell-bent on teaching Iceland a lesson, all would have been fine with the banks. Some leading bankers and large shareholders were of the opinion that Icelanders had been such brilliant bankers and businessmen that they had aroused envy abroad: British action was a punishment for being better than foreign competitors (yes, seriously; see for example Þorvaldsson’s book “Frozen Assets”).

The story told in the SIC report showed convincingly and in great detail how wrong all of this was: the banks had dug their own grave. Icelandic politicians and civil servants had tried their best to fool foreign countries and institutions how things stood in Iceland. Yes, the turmoil in international markets toppled the Icelandic banks but they were weak due to bad governance, great pressure by the largest shareholders and then weak infrastructure in Iceland, as I pointed out in a blog following the publication of the SIC report.

This understanding is at times heard in Iceland but the convincing and well-documented story told in the SIC report has slowly all but eradicated this view.

Court cases and political controversies

Some, but by far not all, of the dubious deals recounted in the SIC report have ended up in court. The SIC brought a substantial amount of cases deemed suspicious to the attention of the Office of Special Prosecutor, incidentally set up by law in December 2008. However, most if not all of these cases had also been spotted by the FME, which passed them on to the Special Prosecutors.

CEOs and managers in all three banks have been sentenced in extensive market manipulation cases – the bankers were shown to have directed staff to sell and buy shares in a pattern indicating planned market manipulation. In addition, there have been cases involving shareholders, most notably the so-called al Thani case (incidentally strikingly similar to the SFO case against four Barclays bankers) where Ólafur Ólafsson, Kaupthing’s second largest shareholder, was sentenced to 5 1/2 years in prison, together with the bank’s top management.

In total, close to thirty bankers and major shareholders have been sentenced in cases related to the old banks, the heaviest sentence being six years. The cases have in some instances thrown an interesting light on operations of international banks, such as the CLN case on Deutsche Bank.

The SIC’s remit was inter alia to point out negligence by civil servants and politicians. It concluded that the Director General of the FME Jónas Fr. Jónsson and the three Governors of the CBI, Davíð Oddsson, Eiríkur Guðnason and Ingimundur Friðriksson, had shown negligence as defined in the law “in the course of particular work during the administration of laws and rules on financial activities, and monitoring thereof.” – None of them was longer in office when the report was published in April 2010 and no action was taken against them.

The Commission was of the opinion that “Mr. Geir H. Haarde, then Prime Minister, Mr. Árni M. Mathiesen, then Minister of Finance, and Mr. Björgvin G. Sigurðsson, then Minister of Business Affairs, showed negligence… during the time leading up to the collapse of the Icelandic banks, by omitting to respond in an appropriate fashion to the impending danger for the Icelandic economy that was caused by the deteriorating situation of the banks.”

It is for Alþingi to decide on action regarding ministerial failings. After a long deliberation, Alþingi voted to bring only ex-PM Geir Haarde to court. According to Icelandic law a minister has to be tried by a specially convened court, which ruled in April 2012 that the minister was guilty of only one charge but no sentence was given (see here for some blogs on the Haarde case). Geir Haarde brought his case to the European Court of Human Rights but the judgment went against him. Haarde is now the Icelandic ambassador in Washington.

The SIC lacunae

In hindsight, the SIC was given too short a time. With some months more, the role of auditors in the collapse could for example have been covered in greater detail. It is quite clear that the auditing was far too creative and far too wishful, to say the very least. The relationship between the banks and the four large international auditors, who also operate in Iceland, was far too cosy bordering on the incestuous.

The largest gap in the SIC collapse story stems from the fact that the SIC had little access to the banks foreign operations. Greater access would not necessarily have altered the grand narrative. But court cases have shown that some of the banks’ criminal activities, were hidden abroad, notably in the case of Kaupthing Luxembourg. – As I have time and again pointed out, it is incomprehensible that authorities in Luxembourg have not done a better job of investigating the banking sector in Luxembourg. The Icelandic cases are a stern reminder of this utter failure.

As mentioned above, only excerpts of the report were translated into English. To my mind, this was a big error and extremely short-sighted. Many of the stories in the report involve foreign banks and foreign clients of the Icelandic banks. The detailed account of what happened in Iceland throws light on not only what was going on in Iceland but also in other countries where the banks operated. The excerpts are certainly better than nothing but by far not enough – publishing the whole report in English would have done this work greater justice and been extremely useful in a foreign context.

Why the SIC report’s importance has grown with time

It is now just over eight years since the publication of the SIC report. Whenever something related to the collapse is discussed the report is a constant source and the last verdict. The report established a narrative, based on extensive sources, both verbal and written.

Some of those mentioned in the report did not agree with everything in the report. When they sent in their own reports these have been published on-line. However, undocumented statements amount to little compared to the report’s findings. Its narrative and conclusions can’t be dismissed without solid and substantiated arguments to counter its well-documented conclusions.

This means the story of the 2008 banking collapse cannot easily be reshaped. This is important because changing the story would mean undermining its conclusions and lessons to be learnt. In a recent speech, Tory MP Tom Tugendhat mentioned the UK financial crisis as the “forces of globalisation.” These would be the same forces that caused the collapse of the Icelandic banks – but from the SIC report Icelanders know full well that this is far too imprecise a description: the banks, both in the UK and Iceland, collapsed due to lack of supervision and public and political scrutiny, following year of lax policies.

Lessons for other countries

In order to learn from the financial crisis, countries need to know why there was a crisis – with no thorough analysis no lessons can be learnt. Also, not only in Iceland was criminality part of the crisis. Though not a criminal investigation, many of these stories surfaced in the SIC report, another important aspect.

Greece, Cyprus, UK, Ireland, US – five countries shaken and upset by overstretched banks, which needed to be bailed out at great expense and pain to taxpayers. However, all of these countries have kept their citizens in the dark as to what happened apart from some tentative and wholly inadequate attempts. The effect of hiding how policies and actions of individuals, in politics, banking etc, caused the calamities has partly been the gnawing discontent and lack of trust, i.a. visible in Brexit and the election of Donald Trump as US president.

Although Iceland enjoyed a speedy recovery (Icelog Sept. 2015), I’m not sure there are any particular economic lessons to be learned from Iceland. There were no magic solutions in Iceland. What contributed to a relatively speedy recovery was the sound state of the economy before the crisis, classic but unavoidably painful economic measures, some prescribed by the IMF, in 2008 and the following years – and some luck. If there is however one lesson to learn it is the importance of a thorough analysis of the causes of the crisis.

The SIC was, and still is, a shiny example of thorough investigative work following a major financial crisis, also for other countries. It did not alleviate anger; anger is still lingering in Iceland. An investigative report is not a panacea, nothing is, but it is essential to establish what happened and why, with names named.

There are never any mystical “forces” or laws of nature behind financial crisis and collapse. They are caused by a combination of human actions, which can all be analysed and understood. Without analysis and investigations it is easy to tell the wrong story, ignore the causes, ignore responsibility – and ultimately, ignore the lessons.

This is the second blog in “Ten years later” – series on Iceland ten years after the 2008 financial collapse, running until the end of this year.

Follow me on Twitter for running updates.

Deutsche Bank has studiously tried to hide some transactions with Kaupthing in 2008 – and in December 2016 probably thought it had succeeded when it agreed to settle for €425m to Kaupthing and two now bankrupt BVI companies set up in 2008 by Kaupthing. The story behind these deals figured in two Icelandic court cases and one of them, the so-called CLN case, has now taken an unexpected turn: the Supreme Court has ordered the Reykjavík Country Court to scrutinise the transactions as it reopens the CLN case. But what is Deutsche Bank hiding? “It’s not unlikely that an international bank wants to avoid being accused of market manipulation,” said Prosecutor Björn Þorvaldsson in Reykjavík District Court on October 11.

In early 2008 Kaupthing managers were rightly worried about the sky-rocketing credit default swap, CDS, spreads on the bank; in spring of 2008 the spreads had crept up to 900 points, a wholly unsustainable rate for any bank. According to multiple sources over the years, Deutsche Bank came up with a simple plan: Kaupthing should buy CDS on itself linked to credit linked notes, CLNs, Deutsche Bank would issue. Except Kaupthing should not be seen doing it: finance it, yes – but through two BVI companies owned by trusted clients in deals set up by Deutsche Bank. Thus, the market manipulation was neatly out of sight.

Only later did it transpire that Deutsche Bank was not only the broker in deals it knew were set up to manipulate the market – hence the remark by Prosecutor Björn Þorvaldsson – but it was actually on the other side of the CDS bets, a player in that market. Consequently, the bank profited handsomely, both from fees and from the actual CDS deals.

In the Deutsche Bank universe this unglorious saga of transactions to manipulate the market etc is however not at all true. Yes, Deutsche Bank admits it was the broker but it knew nothing of the purpose of the transactions, had no idea Kaupthing did finance the two BVI companies and certainly was not on the other side of the bets. This is what Deutsche Bank has stated in a London court and in witness statements in criminal proceedings Iceland (where Deutsche Bank is not being charged).

However, outside of the Deutsche Bank universe (and well, probably in some hidden corners inside Deutsche given the email trail that has surfaced in Icelandic court) there is abundant evidence showing the Deutsche Bank involvement. Certainly, Icelandic prosecutors are in no doubt Deutsche Bank was involved in the planning, knew of the Kaupthing funding and made money from the funds.

Kaupthing had poured €510m into the CDS bets. Early on, the administrators of Kaupthing and the two BVI companies eyed an interesting opportunity to claw these funds back. Until December last year, the administrators, in separate actions, have been suing Deutsche Bank in various places over these transactions.

When the legal fights were about to come up in court Deutsche Bank relinquished: to avoid having the whole well-documented saga exposed in court, with evidence running counter to the Deutsche Bank version of the CDS saga, Deutsche Bank finally agreed to pay €425m, around 85% of the millions that went through Deutsche Bank into the CDS schemes.

Intriguingly, in 2010 the Serious Fraud Office, SFO, had its eyes on Deutsche Bank’s CDS transactions with Kaupthing but this case seems to have evaporated as so many of the suspicious deeds in UK banks.

The story of these CDS transactions is a central part in the still on-going so-called CLN case. Kaupthing bankers have been charged for fraudulent lending and breach of fiduciary. Below, the focus is on the role of Deutsche Bank in the CDS transactions – what its real role was and why Deutsche Bank was in the end so keen to settle when nothing in the original 2008 agreements obliged it to pay anything back.

DB’s own version

In June 2012, Kaupthing hf, an Icelandic stock corporation, acting through its winding-up committee, issued Icelandic law claw back claims for approximately € 509 million (plus costs, as well as interest calculated on a damages rate basis and a late payment rate basis) against Deutsche Bank in both Iceland and England. The claims were in relation to leveraged credit linked notes (“CLNs”), referencing Kaupthing, issued by Deutsche Bank to two British Virgin Island special purpose vehicles (“SPVs”) in 2008. The SPVs were ultimately owned by high net worth individuals. Kaupthing claimed to have funded the SPVs and alleged that Deutsche Bank was or should have been aware that Kaupthing itself was economically exposed in the transactions. Kaupthing claimed that the transactions were voidable by Kaupthing on a number of alternative grounds, including the ground that the transactions were improper because one of the alleged purposes of the transactions was to allow Kaupthing to influence the market in its own CDS (credit default swap) spreads and thereby its listed bonds. Additionally, in November 2012, an English law claim (with allegations similar to those featured in the Icelandic law claims) was commenced by Kaupthing against Deutsche Bank in London (together with the Icelandic proceedings, the “Kaupthing Proceedings”). Deutsche Bank filed a defense in the Icelandic proceedings in late February 2013. In February 2014, proceedings in England were stayed pending final determination of the Icelandic proceedings. Additionally, in December 2014, the SPVs and their joint liquidators served Deutsche Bank with substantively similar claims arising out of the CLN transactions against Deutsche Bank and other defendants in England (the “SPV Proceedings”). The SPVs claimed approximately € 509 million (plus costs, as well as interest), although the amount of that interest claim was less than in Iceland. Deutsche Bank has now reached a settlement of the Kaupthing and SPV Proceedings which has been paid in the first quarter of 2017. The settlement amount is already fully reflected in existing litigation reserves and no additional provisions have been taken for this settlement. (Emphasis here and below is mine).

This is Deutsche Bank’s very brief story of the CNL saga and the settlement in the bank’s 2016 Annual Report. – Not admitting anything and yet, for no reason at all judging from the Annual Report, it paid Kaupthing an undisclosed sum, now known to be €425m.

Sigurður Einarsson’s letter to friends and family January 2009: the first tangible evidence of the CDS transactions

As recounted in an earlier Icelog there were rumours soon after the October 2008 banking collapse that Kaupthing had funded transactions connected to the bank’s CDS in order to manipulate the spread, thus lowering the bank’s ominously high financing cost.

At the end of January 2009 former chairman of the Kaupthing board Sigurður Einarsson told his side of the various stories swirling in the media. Yes, it was true that Kaupthing had funded transactions by what he called Kaupthing’s “trusted clients” to influence the bank’s CDS spread but it had done so on advice from Deutsche Bank.

The SIC report April 2010, the CDS story in some details

The story was told in greater detail in the 2010 report by the Icelandic Special Investigations Committee, SIC (p. 26-28, Vol. 2; in Icelandic). It was clearly stated and documented that Deutsche Bank came up with and concocted the plan. Summarised, the SIC recount of the CDS transactions is the following:

Kaupthing set up two BVI companies, Chesterfield and Partridge, for the sole purpose of carrying out the CDS transactions. Chesterfield was owned by three companies, in turn owned by four Kaupthing clients: Antonios Yerolemou, Skúli Þorvaldsson and the fashion entrepreneurs Karen Millen and Kevin Stanford, respectively owning 32 %, 36% and 32%. The Icelandic businessman Ólafur Ólafsson owned Partridge, also through another company.

Kaupthing lent funds to the four companies owning the two BVI companies that acted in the CDS transactions – all the companies were in-house with Kaupthing, which carried out all the transactions. The beneficial owners were only asked for consent to begin with but were not involved in the transactions themselves.

All of the owners were, as Einarsson said in his letter, longstanding and “trusted clients” of Kaupthing. In 2001, Yerolemou, a Cypriot businessman prominent in the UK Cypriot community and a Conservative donor, had sold his business, Katsouris, to Exista, Kaupthing’s largest shareholder and stayed close to Kaupthing, also briefly as its board member. Stanford had a long-standing relationship with Kaupthing as with the other Icelandic banks and Ólafsson was the bank’s second largest shareholder.

Like Einarsson, the SIC report traced the origin of the transactions to Deutsche Bank:

“At the beginning of 2008, Kaupthing sought advice from Deutsche Bank as to how it could influence its CDS spreads. In a presentation in early February, Deutsche Bank advised Kaupthing, for instance, to spend all liquid funds it received to buy back its own short-term bonds in an attempt to normalise the CDS curve. In the summer the idea of a credit-linked note transaction appeared in an email communication from an employee of Deutsche Bank. It states that this would mean a direct impact on the CDS spreads rather than an indirect one, as in the case of buy backs of own notes. It also states that this transaction will be financed. The message concludes by stating that the issue has to be timed right to get the ‘most “bang” for the buck’. In e-mail messages exchanged by Sigurdur Einarsson and Hreidar Mar Sigurdsson following this, the two agree that they do not need to involve pension funds, but that there is ‘no question’ that they should do this. 


Sigurdur Einarsson said that the initiative for the transaction had come from Deutsche Bank. ‘It involved getting parties to write CDSs against those who wanted to buy them. This was to create a supply of CDSs, of which there were none. Because what we saw was happening on the market, or what we thought we saw, was that the screen price was always rising and there were certain parties, certain funds that put in a specific bid, no transaction, raised the bid, no transaction, raised it, raised it, raised it, raised and raised.‘” (As translated in Akers and Anor v Deutsche Bank AG 2012.)

According to the SIC the CLN transactions “can be assumed to have actually made an impact on the CDS spreads on Kaupthing.” The SIC report came up with the total amount lost by Kaupthing on these trades: €510m, all of which had been paid to Deutsche Bank as the broker of the underlying deals.

The administrator of Partridge and Chesterfield also wondered about Deutsche Bank’s role

Further information came up in a London Court in 2012: soon after Kaupthing failed, Partridge and Chesterfield unavoidably went bankrupt; after all, their only assets were the CLN linked to the failed CDS bet. Their administrators, Stephen Akers from Grant Thornton London and his colleague, quickly turned to Deutsche Bank to get answers to some impertinent questions regarding the two companies. When Deutsche Bank was not forthcoming Akers took a legal action demanding from Deutsche Bank documents related to the transactions. A decision was reached in February 2012.

In his affidavit in the 2012 Decision, Akers said: “It is very difficult to see how the transactions made commercial sense for the Companies. This request for information is in part to explore how the Companies might have expected to benefit from the transactions, to identify what the Companies’ purposes and objectives in entering into the transactions were and how the Companies were expected to repay the loans from Kaupthing if there was movement in the market in the ‘wrong’ direction (as transpired). … The Joint Liquidators are keen to understand, through requests for information and documents from key parties, why these particular transactions were entered into by these particular companies. 

46. From the information that the Joint Liquidators have been able to gather about the transactions …, it seems possible that the Companies were involved in a wider package or scheme, although it is too early to comment definitively on the purpose of such scheme, contemporaneous reports and documents suggest that the purpose might have been to manipulate the credit market for Kaupthing.“

In his Decision, Justice Newey holds up the “possibility of market manipulation” quoting the above statement from the SIC report, noting the report’s conclusion “that the CLN agreements “can be assumed to have actually made an impact on the CDS spreads on Kaupthing.””

In the 2012 Decision it’s pointed out that “Deutsche Bank strongly denies any suggestion that it entered into the CLN transactions in order to manipulate the market. In other respects, too, it takes issue with the picture painted in the Icelandic report. Among other things, it says that the CLNs were not in any way unusual or commercially unreasonable transactions; that it was not aware that Kaupthing was itself financing the purchase of the CLNs, if that is what happened; and that it did not act as adviser to Chesterfield, Partridge or Kaupthing.”

DB was right that the CLNs were not in any way unusual – but the CLNs per se were not the problem that drove Akers to collect information but the whole transactions. However, there is abundant documentation, inter alia emails to and from Deutsche Bank etc. to show that Deutsche Bank was indeed aware that Kaupthing was financing the two companies’ bet on the Kaupthing CDS. And Deutsche Bank definitely advised Kaupthing in this set up, again born out by emails.

The “bang for the buck” email, quoted in the SIC report was written by Venkatesh Vishwanathan, a senior Deutsche Bank banker who oversaw the CDS deal with Kaupthing. In his witness statement in the Akers 2012 case he gave his interpretation: “I say the way to proceed would involve ‘hitting the right moment in the market to get the most bang for the buck’ because an investor investing in a CLN product would want the best return and the coupon available over the term of the CLN, should it run to maturity, is set when the CLN is issued. That was why market timing was important. I was not suggesting, as Mr Akers says, that Kaupthing would get ‘bang for its buck’ by Deutsche selling CDS protection.”

Vishwanathan’s interpretation runs contrary to what Akers claimed and other sources support: that the transactions were set up for Kaupthing, via the two companies, in order to influence the market.

DB placed Wishwanatahn on leave in 2015, in autumn 2016 he had sued the bank for unfair dismissal. According to his LinkedIn profile, Wishwanathan now lives in Mumbai (he has not responded to my messages).

Additional evidence: the Icelandic CLN case

In 2014, Sigurður Einarsson, Kaupthing’s CEO Hreiðar Már Sigurðsson and head of Kaupthing Luxembourg Magnús Guðmundsson were charged of breach of fiduciary duty and fraudulent lending to the two BVI companies, Partridge and Chesterfield, causing a loss of €510m to Kaupthing.

The charges (in Icelandic) support and expand the earlier evidence of Deutsche Bank role in the CDS trades. Deutsche Bank made for example no attempt to be in contact with the Kaupthing clients who at least on paper were the owners of the two companies. Deutsche Bank was solely in touch with Kaupthing. When the two companies needed for example to meet margin calls its owners were not averted; Deutsche Bank sent all claims directly to Kaupthing, apparently knowing full where the funding was coming from and who needed to make the necessary decisions.

But who was on the other side of the CDS bets, who gained in the end when the Kaupthing-funded companies lost so miserably?

According to the Icelandic Prosecutor, the three Kaupthing bankers “claim they took it for granted that the CDS would be sold in the CDS market to independent investors and this is what they thought Deutsche Bank employees had promised. They were however not given any such guarantee. Indeed, Deutsche Bank itself bough a considerable part of the CDS and thus hedged its Kaupthing-related risk. Those charged also emphasised that Deutsche Bank should go into the market when the CDS spread was at its widest. That meant more profit for the CLN buyer Chesterfield (and also Partridge) but those charged did not in any no way secure that this profit would benefit Kaupthing hf, which in the end financed the transactions in their entirety.”

DB fees amounted to €30m for the total CDS transactions of €510m.

The oral hearings in the CLN case were in Reykjavík in December last year. I attended the hearings, which further not only supported the story of Deutsche Bank’s involvement but provided ample tangible evidence as witnesses were questioned and emails and other documents projected on a screen.

The side story in the al Thani case

A short chapter in the CDS saga is the fact, already exposed in the SIC report, that Kaupthing had indeed planned with Deutsche Bank to set up yet another company to trade on Kaupthing’s CDS. Kaupthing issued a loan of $50m to Brooks Trading Ltd, via another company called Mink Trading, both owned by Sheikh Mohamed Khalifa al Thani. The purpose was to invest in CLN linked to Kaupthing’s CDS, via Deutsche Bank, identically structured as the CDS transactions through Chesterfield and Partridge. CDS transactions through Brooks were however never carried out.

Sheikh al Thani played a role in another Kaupthing case, the so-called al Thani case; the Sheikh was not charged but the three Kaupthing managers, charged in the CLN case, and Ólafur Ólafsson were sentenced to three to 5 ½ years in prison. The bankers for fraudulent lending, breach of fiduciary duty and market manipulation; Ólafsson was sentenced for market manipulation.

The 2008 last minute CBI loan to Kaupthing

The evidence brought out in the CLN case – the tracing of the transactions, emails, phone calls etc. – shows that the Kaupthing managers were extremely focused on exactly these transactions. Kaupthing was teetering and yet they never wavered from paying to Deutsche Bank, the agreed sums and the margin calls that followed. It almost seemed as if nothing else mattered in their world, a sense further strengthened by some back-dated documents related to the CDS transactions.

The last payments were made just as the bank was collapsing, 7 October 2008; the bank went into administration 8 October. During these last weeks, foreign currency was scarce at the bank in Iceland where the payments originated. On 6 October, prime minister Geir Haarde addressed the stunned nation on radio and television at 4pm, to announce the Emergency Act enabling Icelandic authorities to deal with collapsing banks in an orderly manner. – Hreiðar Már Sigurðsson, then CEO of Kaupthing but only for 48 more hours, has said in court that when he heard of the Emergency Act he knew it was over for the banks.

At noon of 6 October, Geir Haarde and the governor of the Central Bank, CBI, Davíð Oddsson, who both knew the Emergency Act was coming later that day, agreed the very last lending to the banks: Kaupthing would be given a loan of €500m. This, to permit Kaupthing to meet payments the Bank of England and the FSA were demanding as a guarantee for the bank’s UK subsidiary, Kaupthing Singer & Friedlander.

The reasons for this loan have never been completely clarified (see Icelog on this story): documents and an audio of the phone call between Oddson and Haarde remains classified in spite of valiant attempt by the Icelandic media to unearth this evidence. The CBI has promised a report on the Kaupthing loan “soon” but so far without a publication date.

Whatever the motivation, the CBI issued the loan directly to Kaupthing without securing it would be used as promised, i.e. to strengthen Kaupthing’s UK subsidiary. Instead, part of it was used 7 October when Kaupthing paid, via the two BVI companies, the last €50m CDS transactions to Deutsche Bank.

This is how much the CDS transactions mattered to the Kaupthing managers who never, not even in the mid of the cataclysmic events engulfing the bank these early days in October 2008, took their eyes off the CDS transactions with Deutsche Bank.

When the Deutsche Bank December 2016 agreement surfaced…

In January 2016, the Reykjavík District Court acquitted the three Kaupthing managers of the fraudulent lending and breach of fiduciary duty they had been charged with in the CLN case. In February this year, the Office of the Special Prosecutor (now Office of the District Prosecutor, encompassing the earlier OSP and other duties), appealed that decision to the Supreme Court.

In March 2016, I reported on Rúv (in Icelandic) that Deutsche Bank had indeed come to an agreement with Kaupthing: on-going legal cases, mentioned in Deutsche Bank’s annual reports 2015 and 2016 (but not in earlier reports), had now been settled with Deutsche Bank agreeing to pay Kaupthing more than €400m.

The agreement had been sealed in December 2016. Kaupthing made no big deal of the millions accruing from Deutsche Bank – no press release, just silence.

I pointed out that what Deutsche Bank had stated in the 2012 court case in London was not in accordance with other sources. Also that the bank had mentioned the Kaupthing claims in its 2015 Annual Report but stated it had filed defence and continued to defend them.

I concluded that Deutsche Bank 1) refuted it knowingly participated in transactions knowing set up to mislead the market 2) refuted that Deutsche Bank planned the transactions 3) denied knowing Kaupthing was itself financing the transactions aimed at lowering its CDS spreads. Further, I pointed out that statements from the Prosecutor in the CLN case showed that Deutsche Bank was not only the broker in these transactions but was actually on the other side of the bet it set up for Kaupthing and gained handsomely when Kaupthing failed.

I did at the time send detailed questions to Deutsche Bank regarding the bank’s statements in the 2012 London court case and its version of the case in its annual reports. Deutsche Bank’s answer to my detailed questions was only that bank was not commenting “on specific aspects of this topic,” only that “Deutsche Bank has reached a settlement over all claims relating to credit-linked note transactions referencing the Icelandic bank Kaupthing. The settlement amount is already fully reflected in existing litigation reserves.”

In my email exchange with Deutsche Bank I mentioned that this matter had wider implications – Deutsche Bank has stated in court and in its annual reports that it had nothing to do with the CDS trades except selling the CLN related to it. Thus, it could be argued that the stance taken by Deutsche Bank, compared to abundant evidence, has been misleading and that has much wider implications than just being a matter between Deutsche Bank and Kaupthing. – The answer was, as before: settlement reached, no further comments.

It’s interesting to note that at the time Deutsche Bank reached an agreement of paying €425m to Kaupthing it was struggling to reached its required capital level, looking for €8bn. That did allegedly force the bank to finish several outstanding cases, the Kaupthing case being one of them.

Why did Deutsche Bank change its mind and meet 85% of the Kaupthing claims?

Following my March reporting on the agreement between Deutsche Bank and Kaupthing where Kaupthing did indeed recover around 85% of its CDS transactions with Deutsche Bank the three Kaupthing managers charged in the CLN case, now fighting an appeal by the Prosecutor, turned to the Supreme Court asking for the case to be dismissed: according to them, the basis of the claims had been the €510m loss to Kaupthing – and now that there was apparently hardly any loss the case should be dismissed.

Their demand for dismissal came up at the Supreme Court 11 October where the Court stipulated that in order to understand the demand for dismissal the Court needed to get a deeper understanding of the Deutsche Bank agreement with Kaupthing. The District Prosecutor had obtained a copy of the agreement handed to the Court but not made public in its entirety.

During the oral hearings that day Prosecutor Björn Þorvaldsson maintained that the agreement did not change the charges in the CLN case to any substantial degree: the loans had been illegal, no matter if the money was then much later clawed back. He said that according to the agreements in 2008, Deutsche Bank had been entitled to the funds and Kaupthing had no claim for clawing them back.

So what did then change, why did Deutsche Bank decide to meet the Kaupthing claims and pay back €425m of the original €510m it got from the CDS transactions?

The Prosecutor said one could only guess: 1) Perhaps Deutsche Bank wanted to hide that the Kaupthing loans to the two companies did indeed end up with Deutsche Bank 2) Did Deutsche Bank see it as harmful to the bank’s reputation that the details of the transactions would be exposed in a court case? 3) Was it accusation of being part of market manipulation that irked Deutsche Bank?

As Þorvaldsson said in court 11 October: “It’s not unlikely that an international bank wants to avoid being accused of market manipulation.”

The Supreme Court ruling on issues related to the Deutsche Bank Kaupthing agreement

The Supreme Court decided on the dismissal request 19 October. According to the Decision, Deutsche Bank signed two agreements in December 2016 regarding the 2008 CDS transactions. One was an agreement with the two companies involved, Chesterfield and Partridge. The other one is with Kaupthing.

The aim was to effectively end three court cases where Kaupthing was suing Deutsche Bank in addition to cases brought by the two companies against Deutsche Bank. According to the agreement the two companies and Kaupthing agreed to put an end to their legal proceedings against Deutsche Bank – and Deutsche Bank concurred to pay €212.500.000 to Kaupthing and the same amount to the two companies, in total €425m. Further, the agreement stipulated that Kaupthing (as the largest creditor of the two companies) would get 90% of the Deutsche Bank payment to the two companies. In total, Deutsche Bank paid €425m to end all dispute, whereof over €400m would go to Kaupthing.

The thrust of the arguments, on one side the Prosecutor, on the other side the three defending bankers was that the Prosecutor said that issuing the loans was the criminal deed, that’s what the three were being charged for – whereas the three defendants claimed that since Deutsche had now paid most of the transactions back it showed that the bank felt legally obliged to pay on the basis of the 2008 contracts.

In its Decision the Supreme Court scrutinised the final settlement of the CDS transactions concluded at end of October 2008, which indicated that Deutsche Bank did indeed not feel obliged to pay anything back to the owners of the CLNs. Same when Icelandic police interrogated two (unnamed) Deutsche employees: nothing that indicated Deutsche Bank thought it was obliged to pay anything back.

The Supreme Court concluded that based on the information at hand on the December 2016 settlement it was neither clear “why the bank (DB) agreed to issuing these payments, what the arguments were nor what material was the basis for the claims by Kaupthing and the two companies in their legal actions against Deutsche Bank. It is also not clear what was the nature of the (December 2016) payments, if they related to earlier contracts (i.e. the 2008 contracts) or if they were damages and if they were damages then what was their nature.

Based on this, the Supreme Court then decided against dismissal, as demanded by the three bankers, sending the case back to the Reykjavík District Court for a retrial where questions regarding the December 2016 settlement should be clarified in addition to the charges brought by the District Prosecutor.

This means that although Deutsche Bank settled with Kaupthing and the two companies the actions of Deutsche Bank will be scrutinised by Icelandic Court, probably already next year.

A short revision of dodgy Deutsche Bank transactions

As other international banks, Deutsche Bank has had a lot to answer for over the last few years and paid billions in fines for its rotten deeds. Contrary to Iceland, bankers in the UK and the US, have mostly been able to wipe the cost of their criminal deeds on shareholders (and why on earth have shareholders such as as pension funds and other public-interest organisations been so patient with banks’ criminal deeds?)

In April 2015 Deutsche Bank settled LIBOR manipulation cases with US authorities, paying $2.175bn and £226.8m to the UK Financial Conduct Authority, FCA as mentioned in the bank’s 2015 Annual Report.

In January this year it paid £163m to the FCA, the largest fine ever paid to the FCA, for “serious anti money-laundering controls falings” in the so-called mirror trades, where $10bn were sent out of Russia to offshore accounts “in a manner that is highly suggestive of financial crime.” At the same time, US authorities fined the bank $425m for the same offense, pointing out that “Deutsche Bank and several of its senior managers missed key opportunities to detect, intercept and investigate a long-running mirror-trading scheme facilitated by its Moscow branch and involving New York and London branches.” – Many years ago, a source said to me Deutsche Bank really should be called Russische Bank.

In May, the US Fed fined Deutsche Bank $41m “for failing to ensure its systems would detect money laundering regulations.”

In additions, there have been fines for violating US sanctions. Lastly, there is focus on Deutsche Bank and its tight connection to US president Donald Trump. And so on and so forth.

Summing it up – seen from Iceland: why Deutsche Bank would want to settle

In this context it is interesting that Deutsche Bank has decided to pay €425m to Kaupthing, a high sum in any context, even in the context of fines Deutsche Bank has had to pay over the years.

From all of these various sources it is easy to conclude as did the State Prosecutor in October that yes, one reason why Deutsche Bank would want to bury it involvement in Kaupthing’s CDS trades in the summer of 2008 is that this looks like a market manipulation by a major international bank. Further, Deutsche Bank has questions to answer regarding its own involvement in the market, i.e. it did not only broker the CDS deals, knowing full well who financed the two BVI companies, but it was actually a player in that market, making a lot more from the deal than only the fees.

Updated 14.6.2018: a retrial has been ordered, the case will come up next winter. This time, there will also be some focus on DB’s role in order to understand the context better though neither DB nor any DB bankers are charged. 

Follow me on Twitter for running updates.

“If bankers who act fraudulently are not put in jail with their bonuses returned, assets confiscated and banned from future practice, we will only give a green light to similar risk-laden behaviour in new forms.”

According to The Guardian, Gordon Brown adds, in a convoluted way, that if the conduct of bankers was dishonest judging from what would be considered reasonable and honest, then there was a case for Britain following the example of Ireland, Iceland, Spain and Portugal and in launching prosecutions.

So, now we know: Gordon Brown former prime minister and leader of the Labour Party now thinks banks and bankers should have been investigated and prosecuted in connection to the financial crisis; the crisis that struck in August 2007, when Brown had been prime minister for only a few months. He had however been Chancellor of the Exchequer for a decade.

We know of his change of heart because this is what he writes in his coming memoir, My Life, Our Times.

He’s right that something has been in Ireland, Spain and Portugal but only in Iceland were the banks investigated in a fairly concise way. So far, over twenty bankers and others connected to financial wrongdoing in the months and years up to the 2008 banking collapse have been sentenced to imprisonment.

Better late than never – but this is a staggering admission from the man who more than anyone formed that atmosphere that allowed the banks to act with impunity. From his seat of great power he watched the crisis unfold and followed its aftermath until the Labour party lost the elections in the spring of 2010: Brown first had ten years as a Chancellor and then three years as prime minister to shape the banking environment.

Soon after the events in the UK in early October 2008, when the Icelandic banks, also operating in the UK, collapsed and British banks like RBS, HBOS and Lloyds TSB were bailed out, the Serious Fraud Office, SFO, started scrutinising the ongoings. It did look at the Icelandic banks but it had its eyes also on the interaction between the Icelandic banks and international banks operating in London. One case was mentioned in The Guardian in June 2010, focusing on an intriguing connection between Kaupthing and Deutsche Bank. Nothing has apparently come of that investigation.*

We know that the SFO was suffering at the time from lack of funds which in turn led to difficulties in attracting highly skilled people who would always be able to get better paid jobs elsewhere. Gordon Brown, as Chancellor and as prime minister, did little to nurture the SFO.

It’s good that Gordon Brown has seen the error of his earlier days, an error that profoundly shaped the atmosphere of impunity the banks operated in – but it’s very very sad that he totally wasted the opportunities he had to stimulate a healthy atmosphere where banks, like any other business and bankers, like any other persons, would be scrutinised, investigated and, if needed, prosecuted, without fear or favour.

*This case touched an Icelandic criminal case, the so-called CLN case. More evidence has come up on this lately, more coming soon on Icelog.

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Yet another case from the Office of Special Prosecutor v Kaupthing’s three top managers is up in Reykjavík District Court these days. As in several other cases, the charges centre on breach of fiduciary duty, ultimately causing the bank a loss of €510m. The loans went to two companies owned by Kaupthing clients that used the funds to buy credit linked notes and enter into credit default swaps related to Kaupthing in order to lower the bank’s collateral debt swap spread. Does this sound like market manipulation? Deutsche Bank seems to think it might, strongly denying any involvement in the scheme except as the issuer of the notes though Icelandic sources tell a different story.* – But who made a killing on the other side of the CDS bet? Partly Deutsche Bank, according to the OSP but this part of the CLN saga is still not entirely clear, which is one of the reasons why the court hearings might be interesting.

Soon after the collapse of the three largest Icelandic banks in early October 2008 there were plenty of allegations, also in the Icelandic media, of possible wrongdoing in the banks. One of the stories told centred on Kaupthing funding transactions connected to the bank’s CDS.

At the end of January 2009 former chairman of the Kaupthing board Sigurður Einarsson wrote a letter to friends and relatives explaining his side of the media reports. The first matter he dealt with was the CDS story: it was true that Kaupthing had funded transactions by what he called “trusted clients” of the bank to influence the bank’s CDS spread, following a proposal from Deutsche Bank, DB.

This story was told in greater detail in the 2010 report by the Icelandic Special Investigations Committee, SIC: also here, the idea is said to have originated with DB.

Further information came up in a London Court in 2012: the two BVI companies set up for the transactions, Partridge and Chesterfield, went bankrupt soon after Kaupthing failed. Their administrators, Stephen Akers from Grant Thornton London and a colleague, quickly turned to DB to get answers to some impertinent questions regarding the two companies.

Now, the CDS saga is summed up in the OSP charges (in Icelandic) against Einarsson, Kaupthing’s CEO Hreiðar Már Sigurðsson and head of the bank’s Luxembourg operations Magnús Guðmundsson in a case of breach of fiduciary duty and causing a loss of €510m to Kaupthing, some of it paid out on Kaupthing’s last day of trading.

In orchestrating the loans the three managers took great care that DB would get paid, i.e. the deal would not fall through due to lack of funds at a time when Kaupthing had practically no foreign currency left and was running out of liquidity.

According to the charges DB not only organised the transactions but also took part of the opposite bet. What is still lacking in this saga is who, together with DB, was on the other side of the bet the two companies lost?

Einarsson’s letter 2009 and transactions with “trusted clients”

In his letter to friends and family 26 January 2009 Einarsson pointed out that although the UK Financial Services Authority, FSA, had in the third week of August 2008, ascertained that Kaupthing’s UK operation, Kaupthing Singer & Friedlander, KSF, was well funded the CDS spread on Kaupthing stayed high. Unreasonably so according to Einarsson who claimed having heard from foreign journalist that false rumours on Kaupthing were being spread, even by PR firms. There were also rumours, wrote Einarsson, that the CDS market was being manipulated, not only in relation to Iceland. (The letter was later leaked to the Icelandic media, see here, in Icelandic; excerpts below, my translation).

“Following a proposal from Deutsche Bank it was decided to test what would happen if the bank itself (i.e. Kaupthing) would buy such insurance. This was however not a trivial matter since the bank could not issue insurance on itself. The solution was to get our clients we trusted well and with whom we had had a long relationship, built on trust and loyalty, to make these transactions on behalf of the bank. Of course we would never have entered into these transactions except for the particular circumstances. These transactions were made with the interest of the bank at heart and in full accordance to law and regulations.”

Following Lehman’s collapse September 15 2008 the CDS spread on Kaupthing increased; not only Kaupthing but the international banking system felt under siege, wrote Einarsson.

“As the bonds (i.e. credit linked notes), that we at Kaupthing and our business partners had purchased, were leveraged and had now gone down in price there were only two options. To hand over further funds or give up, have the bonds sold and lose a part of or all the original investment. The latter option was to my mind simply preposterous. Kaupthing enjoyed good liquidity and nothing indicated the bank would not withstand the pressure, just as it had done in 2006 and in spring 2008. If on the other hand the bonds had been sold the bank would have suffered a loss and the risk was that the increased offer of bonds would have undermined the bank and diminished its access to credit lines.”

This had been the rational behind these transactions, wrote Einarsson, made to maintain Kaupthing as a going concern contrary to media reports that funds had been taken out of the bank before it collapsed.

The SIC report April 2010

One of the many interesting stories in the SIC report was the story of the Kaupthing transactions regarding the CLNs. Two BVI companies, Chesterfield and Partridge, were set up by Kaupthing. The former was owned by three companies under the ownership of Antonios Yerolemou, Skúli Þorvaldsson and Karen Millen and Kevin Stanford, respectively owning 32 %, 36% and 32%. Ólafur Ólafsson owned the latter, through another company.

All of the owners were, as Einarsson said in his letter, longstanding clients of Kaupthing. Yerolemou, a Cypriot businessman prominent in the UK Cypriot community and a Conservative donor, had sold his business, Katsouris, to Exista, Kaupthing’s largest shareholder, in 2001 and stayed in touch, i.a. as a board member of Kaupthing in 2007. Stanford had a long-standing relationship with Kaupthing as with the other Icelandic banks and Ólafsson was the bank’s second largest shareholder.

The SIC report traced the origin of the transactions to DB but earlier in 2008 than Einarsson said in his letter. The SIC report states:

“At the beginning of 2008, Kaupthing sought advice from Deutsche Bank as to how it could influence its CDS spreads. In a presentation in early February, Deutsche Bank advised Kaupthing, for instance, to spend all liquid funds it received to buy back its own short-term bonds in an attempt to normalise the CDS curve. In the summer the idea of a credit-linked note transaction appeared in an email communication from an employee of Deutsche Bank. It states that this would mean a direct impact on the CDS spreads rather than an indirect one, as in the case of buy backs of own notes. It also states that this transaction will be financed. The message concludes by stating that the issue has to be timed right to get the ‘most “bang” for the buck’. In e-mail messages exchanged by Sigurdur Einarsson and Hreidar Mar Sigurdsson following this, the two agree that they do not need to involve pension funds, but that there is ‘no question’ that they should do this. 


Sigurdur Einarsson said that the initiative for the transaction had come from Deutsche Bank. ‘It involved getting parties to write CDSs against those who wanted to buy them. This was to create a supply of CDSs, of which there were none. Because what we saw was happening on the market, or what we thought we saw, was that the screen price was always rising and there were certain parties, certain funds that put in a specific bid, no transaction, raised the bid, no transaction, raised it, raised it, raised it, raised and raised.‘” (As translated in Akers and Anor v Deutsche Bank AG 2012.)

According to the SIC report the CLN transactions “can be assumed to have actually made an impact on the CDS spreads on Kaupthing.”

Akers v Deutsche Bank

Stephen John Akers works at Grant Thornton in London and has a fearsome reputation as a diligent administrator. On being appointed a liquidator in 2010 of the two BVI companies, Chesterfield and Partridge, together with his colleague Mark McDonald, the two quickly set about to understand the nature of the transactions in the two companies.

They turned to DB with two impertinent key questions: 1) How did the transactions make commercial sense for the two companies? 2) How were the two companies expected to repay the loans from Kaupthing in case the markets moved against them, as indeed did happen?

When answers were not forthcoming from DB Akers sued the bank to get access to documents related to the transactions. In February 2012 a judge ruled DB should hand over the information asked for.

As to the purpose of the companies Akers states in his affidavit that “it seems possible that the Companies were involved in a wider package or scheme, although it is too early to comment definitively on the purpose of such scheme, contemporaneous reports and documents suggest that the purpose might have been to manipulate the credit market for Kaupthing” (Emphasis mine).

In court, DB strongly denied suggestions “it entered into the CLN transactions in order to manipulate the market” and took “issue with the picture painted in the Icelandic report. Among other things, it says that the CLNs were not in any way unusual or commercially unreasonable transactions; that it was not aware that Kaupthing was itself financing the purchase of the CLNs, if that is what happened; and that it did not act as adviser to Chesterfield, Partridge or Kaupthing.”

Further, in a witness statement, Venkatesh (nick-named Venky) Vishwanathan, the DB employee who wrote the email the SIC report quotes, supported the DB position. His interpretation of the “bang for the buck” is: “I say the way to proceed would involve ‘hitting the right moment in the market to get the most bang for the buck’ because an investor investing in a CLN product would want the best return and the coupon available over the term of the CLN, should it run to maturity, is set when the CLN is issued. That was why market timing was important. I was not suggesting, as Mr Akers says, that Kaupthing would get ”bang for its buck” by Deutsche selling CDS protection.”

Thus, Vishwanathan claims the email was not referring to Kaupthing getting the timing right for the most bang but the two companies investing in the CLN.

The OSP charges

According to the charges the first round of loans was made end of August 2008 to the three companies funding Chesterfield, in total €130m. However, these late August loans were issued so the companies could repay an earlier money market loan from Kaupthing Luxembourg, which already in early August had been used to instigate the transaction organised by DB in return for CLN as the company entered into a CDS with DB on Kaupthing; €125m were used on the CLN transaction but DB got €5m in fees. In September 2008 Kaupthing issued further loans of €125m to Chesterfield to meet margin calls from DB.

The Partride loans were issued in September, first €130m, of which €125m were used on the same kind of CLN transactions as Chesterfield though with the difference that DB only got a fee of €3.625.000 with apparently the rest, €1.375.000 left behind in Ólafsson’s company (the charges do not clarify why or for what purpose these funds were left in Ólafsson’s company or why DB settled for a lower fee than on the other transaction for the same amount). Also here there were margin calls from DB, for which Partridge got a further loan of €125m.

In total, Kaupthing lost €510m on these transactions. As Akers pointed out this loss was entirely predictable if the market turned and Kaupthing went out of business – after all, the two companies were unhedged. In other words, the two companies had little or no assets beyond the CLNs meaning that it was, according to the OSP, clear from the beginning that the companies should never have received the loans they got.

Urgency and faulty documentation

The charged Kaupthing managers steered the operations of the two companies and followed closely that the loans were paid to DB. According to emails between Sigurðsson and Einarsson as the scheme was being planned, quoted in the SIC report, the two seemed to have at first planned to ask some pension funds to participate but instead opted for the trusted clients.

The two were adamant that payments should go through to DB no matter what. In one instance, payment was due on 2 October 2008 but the managers made sure it was paid already on 22 September.

The most remarkable part of these loans is that they were being paid to DB literally up to the last hours of Kaupthing. Almost the only un-told saga (my account of this is here) from these last days relates to a rather incomprehensible loan of €500m given to Kaupthing by the CBI at noon on October 6 2008, hours before prime minister Haarde addressed the stunned nation to spell out the catastrophe in view: the banks could all fail, necessitating Emergency Law.

The CBI loan was given, as far as is known, to meet demands by the FSA for funds to strengthen KSF: the funds were ear-marked to prevent the failure of KSF in order to prevent cross-defaults, which would bring down the mother-bank in Iceland. However, nothing indicates the funds were used for that purpose and the CBI does not seem to have made any safeguards as to how the loan would be used.

Sigurðsson has later said that the Kaupthing management was unaware of the imminent Emergency Law as the loan was issued; as soon as he was aware of the Law, later in the afternoon, he knew the banks would not survive.

Yet, next day October 7, €50m were paid to DB in connection with the CLNs transactions, which were based on the premises that Kaupthing would be a going concern in five years time. The OSP charges state that the CBI loan enabled this last payment to DB. – On October 8 the Kaupthing board resigned; the day after Kaupthing in Iceland was taken over by administrators.

Further, the OSP charges show the loan documentation was lacking and the foreign owners were not entirely informed by Kaupthing of the transactions. Ólafsson says Sigurðsson asked him to participate; Sigurðsson claims Ólafsson or his representative asked for Ólafsson to be included.

According to the charges, documents related to these loans were changed twice after Kaupthing went into administration, first a few days after the collapse and again in December 2008.

Apart from this, the choice of clients to lend to was quite remarkably a direct challenge to complaints from the Luxembourg financial services authority, Commission de Surveillance du Secteur Financier, CSSF. In August 2008 the CSSF warned Kaupthing Luxembourg of the precarious position of some of its large debtors and shareholders. Choosing these clients for further loans was a direct challenge to the CSSF warnings, again a sign that the Kaupthing managers were willing to go to a great length to execute this plan.

The bang for the buck-writer – on leave since early 2015

The writer of the “bang for the buck” email, Venky Vishwanatha, later became DB’s head of corporate finance in Asia. Earlier this year he was put on leave, according to Bloomberg, as DB “faces civil court cases over alleged mis-selling of derivatives by a group he helped oversee, the people said, asking not to be named because the information is confidential. … The court cases relate to allegations that Deutsche Bank manipulated the market when it sold 450 million pounds ($700 million) of credit-linked notes in 2008 to two U.K. companies associated with the failed Icelandic lender Kaupthing Bank Hf, said the people. Vishwanathan was involved in the sale of the notes when he worked for Deutsche Bank in London and co-ran the bank’s western European financial institutions group at the time, one person said.”

Bloomberg quotes an e-mailed statement from DB saying the bank entered into credit linked transactions in 2008 with two counterparties, referencing Kaupthing. “Following Kaupthing’s bankruptcy, claims to recover funds have been brought against the bank. We will continue to defend ourselves vigorously against these claims.”

Did it make sense to try to influence the CDS via the CLN transactions?

The Kaupthing managers claim lending to influence the CDS spread was an understandable attempt, given the situation at the time. As mentioned above the BVI administrators could not quite see the sense.

Further, CDS spread is a measure of trust, the high spread indicated low trust. As it were, the transactions seemed to influence the spread for a few days. Considering the cost to Kaupthing and the risk, this was a high-wire act that resulted in losses and made absolutely no material difference to Kaupthing’s situation, except increasing the losses.

Also, these transactions were invisible to the market – of course Kaupthing did not advertise it was itself going into the market to finance the CDS linked transactions. If found out, this would definitely not have looked good, having a negative influence on the trust-factor the bank was trying to influence.

The large sums of money needed, the very little impact and the great risk might show the despair among the bank’s management. A sober scrutiny, also from the technical point of view, does not indicate this ever was a good idea. And then there is the market-manipulation angle DB contests.

The result was that the bank lost €510m by setting up a trade with remarkable little influence on the bank’s CDS spread, which at the same time created a hell of a good deal for those on the other side of the bet.

Who was on the other side of the bet?

As referenced above DB denies all involvement in the CLNs transactions apart from issuing the CLNs. Yet, according to the charges DB was much more heavily involved.

The Kaupthing managers assumed, according to the charges that DB would go into the market to find those willing to take the opposite position but, according to the charges, the managers did not do anything to inquire into the matter.

As it turns out, according to the OSP charges, DB did indeed take part of the position for itself. It is however unclear if DB was the end beneficiary here or if it was possibly acting on behalf of clients. In the end, DB turned out to be one of the largest creditors in all the failed Icelandic banks.

The interesting side saga looming in the coming court case is what role DB did play – and who made the handsome profit from the trades that caused Kaupthing such losses.

*Obs: neither Deutsche Bank itself nor any DB employees are charged in the Icelandic case but the outcome in Iceland might have ramification for civil cases related to the scheme.

The above is not based on accounts at the court case, but as stated above, mainly on Einarsson’s 2009 letter, the 2010 SIC report, the 2012 Aker ruling and lastly the OSP charges in the present case. I will be blogging in the coming days on what has transpired at the court case. – The CDS saga was one of the first cases related to the banking collapse that caught my attention so I’ve been following it for over six years.

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