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The still untold story of the Kaupthing loan

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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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Written by Sigrún Davídsdóttir

June 13th, 2019 at 4:11 pm

Posted in Uncategorised

Rowland’s Banque Havilland fined €4 million by CSSF

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The year of 2018 did not end on a happy note at Banque Havilland: on 21 December 2018 the Luxembourg financial authority, CSSF, fined the bank €4m for non-compliance regarding law on money laundering and terrorist financing, “severe findings” according to the CSSF statement, discovered because of an on site inspection:

Banque Havilland S.A. did not comply with professional obligations with regard to the implementation of a robust central administration and sound and prudent business management and to internal governance arrangements as well as the fight against money laundering requirements.

It is worth remembering that Havilland is the bank David Rowland and his son Jonathan, via the Rowland’s investment fund Blackfish Capital, set up after buying the Kaupthing Luxembourg operations, following the default of the Icelandic Kaupthing.

It was intriguing to see that the Rowlands kept the Kaupthing management in place, this was a smooth transition at the time, nourishing speculation in Iceland that the Kaupthing top management was not far away from it all. However, the Blackfish Capital employee Martyn Konig, who became the  CEO of Havilland when the bank opened in 2009, only stayed in the job for a few days before resigning. After his resignation, Jonathan Rowland has been in charge of the bank.

It’s also been duly noted in Iceland that in the many criminal cases in Iceland regarding Kaupthing (all concerning action before the bank defaulted in October 2008), where the Kaupthing top management has been found guilty in several cases as well as large shareholders such as Ólafur Ólafsson, all the questionable deals, without exception, were carried out in Luxembourg. Indeed, the Icelandic Prosecutor, investigating these cases, has conducted several house searches at Banque Havilland, searching for material concerning its previous incarnation as Kaupthing Luxembourg.

As I’ve pointed out time and again, the Luxembourg authorities are fully informed on all investigations going on in Iceland. One case re Kaupthing has been investigated in Luxembourg, the so-called Lindsor case. Lindsor was a BVI company, owned by some Kaupthing employees.

Amongst other things, Lindsor seems to have bought bonds from Skúli Þorvaldsson, a Luxembourg-based businessman and a large client of Kaupthing, and from key employees on the “bank collapse day” 6 October 2008. On that day, the Icelandic Central Bank issued an emergency loan to Kaupthing of €500m, then ISK80bn – of these funds, ISK28bn were used in the Lindsor transaction, effectively moving this sum to Kaupthing insiders and Þorvaldsson (see my blogs concerning the Lindsor case).

So far, no news of the Lindsor investigation have come forth in Luxembourg, while some of those involved have been sentenced to long prison-sentences in Iceland. Incidentally, tomorrow 16 January, a Kaupthing-related case, the so-called Marple case, is coming to appeal court in Iceland, the Country Court (see my blogs concerning the Marple case).

Considering the history of Banque Havilland and the reputation of the Rowlands, it is very interesting to notice the severe fine from the CSSF. If this indicates any turn of events remains to be seen. We are still waiting for the Lindsor investigation (not to mention the Landsbanki Luxembourg equity release loans, another Luxembourg saga extensively covered on Icelog).


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Written by Sigrún Davídsdóttir

January 15th, 2019 at 10:04 am

Posted in Uncategorised

The CBI loan to Kaupthing October 6, 2008 (updated)

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One of the more incomprehensible events in the Icelandic collapse saga is the loan of €500m issued on October 6 2008 by the Central Bank of Iceland to Kaupthing. The burning question is why this loan was issued.

The collateral was the Danish bank, FIH, which CBI became the unhappy owner of after Kaupthing failed. The whole FIH saga is a sorry saga in itself – the CBI sale of FIH has incurred huge losses for the CBI, €180-423m. It’s also unclear how much of the loss stems from the CBI’s bad handling of the sale.

But back to the 500m loan. It indicates that the CBI thought Kaupthing had a greater chance for survival than Glitnir and Landsbanki, which is why the CBI issued the loan. This was a fairly widely held public belief these days. But the CBI should have known better – on Friday October 3, the Bank of England had already taken measures to close down Kaupthing by taking over all deposits coming into the bank from that day. This clearly spelled the end for the bank. Didn’t the CBI know about the UK measures? Or didn’t it care?

By Monday October 6 it was clear that the banks had no chance of survival – the politicians and others had come to terms with the facts over the weekend – and that’s what PM Geir Haarde told the stunned nation in a televised speech at 4pm that Monday. It was also abundantly clear that one big risk factor was the banks’ inter-connectedness.

After the loan came to the light it was for quite a while unclear where the money went. The SIC report from April 2012 indicates that €200m were used to guarantee Kaupthing Sweden, where the Government stepped in for the bank (I actually thought the Swedish Government stepped in, making the Icelandic guarantee superfluous but perhaps I misunderstood something?). The rest? Apparently, it was divided between various other operations, in Luxembourg, Norway and Finland.

But here is another mystery, as far as I can see. Within Kaupthing’s management it was clear that the KSF operation in the UK was a central place in the Kaupthing universe. A failed KSF would cause cross-defaults, leading to the collapse of the Kaupthing Group. As far as I know, Kaupthing got this CBI loan for saving KSF – but none of the money went to the UK.

At the trial over Geir Haarde, the ex-PM was asked what happened to the money. He said it went to a different place than Kaupthing had indicated. Unfortunately, this wasn’t pursued by the prosecutor.

But most terribly regrettably, David Oddsson former Governor of the CBI wasn’t asked at the trial why the CBI issued this loan to Kaupthing, ia if those responsible at the CBI knew that the UK action against Kaupthing had already started, what Kaupthing’s motivation was for receiving the loan and if the CBI did anything to guarantee that the loan was used for its stated purpose.

This perhaps isn’t a big issue – but it’s one of the few completely murky events of these fateful days in early October 2008. Well, there is of course the offer of a Russian loan.

*In May 2010, Vidskiptabladid (in Icelandic) wrote that on Oct. 6 2008 Kaupthing lent ISK28bn to Lindsor, a BVI company that figured in other Kaupthing transactions. The CBI loan to Kaupthing that day amounted to ca ISK80bn. The Lindsor loan was apparently used to buy bonds from Kaupthing Luxembourg and other securities from Skuli Thorvaldsson and the bank’s key managers.

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Written by Sigrún Davídsdóttir

March 8th, 2012 at 5:35 am

Posted in Iceland

The Kaupthing investigation: outlines of an extensive and calculated fraud

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Although the Office of the Special Prosecutor had asked for the court rulings on the custodial sentences of two ex-Kaupthing managers not to be published the charges have been seeping into the Icelandic media through the day. The most extensive leak throws light on the charges against Magnus Gudmundsson ex-manager of Kaupthing Luxembourg and manager of Banque Havilland until his arrest last week. Most likely, it’s the defense team of those arrested who are responsible for the leaks that are clearly against the interest of the OSP.

The OSP is investigating five separate issues of what they call ‘extensive, calculated and unparalleled fraud.’ Gudmundsson appears to be at the centre but it’s highly likely that these issues involve at least Hreidar Mar Sigurdsson Kaupthing’s ex-CEO as well as Sigurdur Einarsson ex-executive chairman.

1 Gudmundsson is being investigated for involvement in dealings with the sole purpose of increasing the bank’s share value. This market manipulation is thought to have been going on from June 2005 until the demise of Kaupthing in October 2008.

It’s known that the Icelandic Financial Authorities, FME, has been investigating what is thought to be an extensive market manipulation in all the banks, not only Kaupthing.

The report of the Althingi Investigative Committee, published on April 12, also throws light on this issue. According to the report the bank bought 29% of the bank’s shares, issued on June 30 2008. The bank’s own trade in its shares amount to 60-75% of all trade on the Icelandic Stock Exchange from June to October 2008.

The OSP seems to suspect that managers and certain key employees responsible for the bank’s proprietary trading carried out these trades in a calculated way in order to influence the share price. It then became a major problem for the bank what to do with all the shares it bought. Gudmundsson seems to have played a key role in ‘parking’ the shares.

This throws light on the extensive loans that Kaupthing issued to key employees and many of its major shareholders and clients with the bank’s shares as collateral. It was almost a rule that the bank’s clients bought shares in addition to what other business they had with the bank, i.e. extra money was thrown into the loans for the purpose of buying Kaupthing shares. A foreign employer of the bank recently explained to me that he had been very surprised when he realized, some years ago, how the bank mildly insisted that any big client/borrower also bought shares in the bank – shares that the client wouldn’t need to pay for but that the bank financed with loans.

2 Issues related to alleged market manipulation and breach of fiduciary duty on behalf of Gudmundsson in relation to several companies. One of them is Holt Investment Ltd, a company related to Skuli Thorvaldsson, an Icelandic businessman living in Luxembourg and a major client of Kaupthing but otherwise not very visible. Thorvaldsson was the biggest borrower in Kaupthing Luxembourg. Another company is Desulo Trading Ltd, registered in Cyprus in October 2007. Desulo’s manager is an Icelandic businessman, Egill Agustsson. From mid 2008 until the collapse of Kaupthing Desulo Trading Ltd borrowed ISK13,4bn to buy shares in Kaupthing. Companies related to Kevin Stanford seem to be part of these suspicious trades. Loan agreements and other documents related to Kaupthing’s dealings with these companies are found to be in breach of the bank’s own rules, made without proper documentation and with insufficient collaterals. It’s alleged that it was clear to the managers that these loans were contrary to the interests of the bank as a listed company.

Most likely, the dealings with these companies are only the tip of the iceberg – it’s clear that this extensive ‘parking’ explains many otherwise inexplicable loans to key employees and trusted clients. The OSP mentions deals going back to 2005 – I’ve heard that signs of market manipulation can be traced as far back as to 2004.

3 It’s clear from earlier reports that Kaupthing, advised by Deutsche Bank, tried to influence its CDS spreads. The investigation focuses on two companies, Chesterfield United Inc. and Partridge Management Group, that Kaupthing fed a loan of €260m through four other companies, Trenvis Ltd., Holly Beach S.A., Charbon Capital Ltd and Harlow Equities S.A. in order to trade in the bank’s CDS and influence the spread. The companies were connected to the bank’s major shareholders/clients Olafur Olafsson and Skuli Thorvaldsson. Loans from Deutsche Bank formed a part of this package. When DB made margin calls Kaupthing lent money to these companies to meet the calls. Kaupthing did in the end lose €510m on these transactions and DB refuses any responsibility.

During its last hours, on Oct. 6 2008, Kaupthing got a loan from the Icelandic Central Bank of €500m. Though Kaupthing already seems to have been doomed there was still a belief among Icelandic regulators that Kaupthing might survive though Landsbanki and Glitnir would fail. It now seems that some of this loan was used to lend these companies used to give entirely wrong information about the bank’s standing. – The investigation aims at clarifying who was responsible and whether it was i.a. a question of a breach of fiduciary duty.

4 Two companies, Marple Holdings S.A., owned by Skuli Thorvaldsson and Lindsor Holdings Corporation, owned by Kaupthing’s key employees, bought Kaupthing bonds, issued in 2008 when Kaupthing, as many other banks, ran into financing difficulties. The aim seems to have been to remove any risk of a falling bond price from the beneficial owners of these companies to the bank itself. Documents related to these companies seem to have been falsified so as to indicate that the deals had been done earlier than was the case.

5 In September 2008 Kaupthing announced that the Qatari investor Sheik Sheikh Mohammed Bin Khalifa Al-Thani was buying 5% of the bank. The OSP is investigating if a Kaupthing loan to companies related to the Sheikh and Olafur Olafsson were intended finance the deal so that the Sheikh was actually not putting any money into the deal, done only to make the bank look stronger than it was. (Olafsson owns a food company, Alfesca, that had announced in summer of 2008 that the Sheikh was buying shares in the company. That deal was never finalized but it’s unclear if Kaupthing was also here the lender of a loan that was never going to be repaid.)

In short: the issues investigated relate to deals between Kaupthing and major shareholders/big clients that favoured the key employees and affiliated clients but dumped any losses onto the bank. The investigation focuses on breach of fiduciary duty, counterfeiting and market manipulation and involves billions of kronur.

Kaupthing operated in Luxembourg for eight years and in London since 2005. It operated in all the Scandinavian countries and in the US. In the UK the FSA was warned: the board of Singer & Friedlander, the bank that Kaupthing bought in 2005, repeatedly made it clear to the FSA that it didn’t think the mangers of Kaupthing were ‘fit and proper’ – and yet, nothing was done and in none of these countries the regulators saw anything questionable. Yet, the meteoric growth of the band and ‘incestuous’ relationships with major shareholders should have been an indication, as well as persistent rumours. The good thing is that Serious Fraud Office is now conducting its own investigation of Kaupthing.

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Written by Sigrún Davídsdóttir

May 12th, 2010 at 12:15 am

Posted in Iceland