Sigrún Davíðsdóttir's Icelog

Bjorgolfur Gudmundsson had quite a story to his name, before buying the lion’s share of Landsbanki, as the Icelandic state sold its share in the bank in 2002. He had created and sunk a shipping company, Hafskip, in the 80s. An affair that got him imprisoned, in front of his young son Bjorgolfur Thor, and landed him in jail for fraud. No doubt, a traumatic experience for both of them.

Just as in the Icelandic sagas, reputation is a leit-motiv in the lives of father and son. Their version of the Hafskip saga was how the almighty in the Icelandic business community in the 80s took a revenge on the challenging intruder, even though Gudmundsson’s wife does indeed stem from one of the historically so powerful Icelandic families. Others beg to differ, saying the investigation and the Hafskip ruling was unequivocal: there was serious fraud committed within Hafskip.

With money and respect stemming from the Landsbanki ownership, as well as controlling the now failed investment bank Straumur, father and son hired people to write their version of the Hafskip saga. Unfortunately, their book was published in autumn of 2008, not quite the right timing for contemplating the past as their Icelandic power house, Landsbanki, collapsed. Moreover, the Icelandic bank crash, yet again, left not only Gudmundsson’s reputation in tatters – he went bankrupt just a few months later – but also the reputation of his son.

An important point of reference for Bjorgolfsson has always been his Danish great-grandfather, the businessman Thor Jensen (1863-1947). Jensen moved to Iceland as a youngster, rose to fame and riches and had twelve children, one of whom became a prime minister. In a society where power runs in families, the off-springs of Thor Jensen have been at the core of power, closely connected to the Independance Party (C). Bjorgolfsson’s wish to associate himself with his illustrious forefather even went so far as to buy Jensen’s ‘mansion,’ on an Icelandic scale, that Jensen built by the little pond in the centre of Reykjavik.

Bjorgolfsson bought the house in a much disputed sale from the Reykjavik city council, in the summer of 2008. It is still thought to be owned by a Novator company, owned by Bjorgolfsson but it’s been empty since he bought it. Not quite, yet, the mood in Iceland to see Bjorgolfsson take up residence there in style and glamour. His house in Notting Hill in London and his country house in England are well out of Icelandic view.

In 2007, a Danish documentary film-maker, Ulla Boje Rasmussen, apparently got the idea to make a film about Thor Jensen. This film, Thor’s Saga, then expanded to encompass his great-great-grandchild, Bjorgolfsson, and will soon be premiered in Denmark. The film is funded by the Danish and the Icelandic Film Institute, in collaboration with TV2 Denmark and the Icelandic Ruv. Bjorgolfsson has, allegedly, had no part in the project.

On Sept. 7, the film will be launched in Copenhagen with a panel debate where Bjorgolfsson will participate. This will be of great interest to those who followed the demise of the two banks where father and son were in control of, Landsbanki and Straumur, with the father as the chairman of the former and his son the chairman of the latter. Bjorgolfsson has not be much seen or heard in Iceland though he did appear in the documentary Maybe I should have, where he storms out when asked how he feels about Icelanders seeing him as a criminal. The debate is organised by the Nordic Council, at the request of Boje Rasmussen, with the Borsen Executive Club. It’s Scandinavia’s largest PR company that organises the film’s PR, Geelmuyeden and Kiese, quite an honour for a documentary film.

The idea is to get an Icelandic politician to participate. The organisers hope to get minister of economy Arni Pall Arnason on the panel but his participation has not been confirmed. Another distinguished participant is Danske Bank’s chief analyst Lars Christensen,who in March 2006 wrote the famous, or infamous from the point of view on Iceland at the time, report on the Icelandic banks. The debate is convened by Anders Krab Johansen, Borsen’s editor.

As readers of Icelog know, the Icelandic Parliament published a 2600 pages report last year, written by an investigative commission. Its conclusion on father and son was damming, as can be seen in the executive summary. Ia, the report pointed out how the two got loans out of Landsbanki and Straumur, way beyond any rhyme and reason and how the connection between the two banks indicates bad governance as demonstrated by loans between the two banks with no collaterals. Bjorgolfsson has recently actively been refuting the report’s conclusions on his Icelandic website. In a statement to the SIC, former minister of finance Arni Matthiesen claimed that Bjorgolfsson had lied to him and others at emergency meeting in October 2008.

Bjorgolfsson’s activities in St Petersburg and later in Bulgaria have raised questions. There was colourful article in the Guardian on his Russian enterprises, Die Welt used unnamed sources to connect Bjorgolfsson with the Russian mafia and Euromoney published a thorough article on the new owners of Landsbanki in 2002, doubting how fit and proper they were to run a bank.

Bjorgolfsson has had some ties to Denmark. He invested in the property group Sjælso Gruppen in 2006, together with his father and Straumur (then called Straumur Burdaras), and in Property Group through Straumur. Already in 2009, I was informed that Bjorgolfsson had sold his shares in Sjælso. As with other Novator entities, the ownership structure was complicated, further complicated by name changes.

A theme to be discussed at upcoming debate in Copenhagen is what can be learnt from the crisis in Iceland and how to secure the finance sector against similar calamities in the future. One of the findings of the SIC report is how Samson, the holding company owned by father and son and a third investor, their St Petersburg partner Magnus Thorsteinsson, were in breach of the Landsbanki sale contract re the financing of the purchase as well as breaching a ban on Samson to engage in other activities than holding the Landsbanki shares.

With this in mind, and on the whole the damning conclusions in the report re Landsbanki and Straumur governance and the questionable lending to by these banks to father and son, the short answer to this questions is to make sure that major shareholders of financial institutions stick to their contracts and to good and transparent governance. – Bjorgolfsson no doubt takes a different view on the SIC findings and any conclusions drawn from the report.

After the failed attempt to rewrite the Hafskip story it will be interesting to see if Thor’s Saga is an attempt to rewrite the recent history of Bjorgolfsson and Gudmundsson – and how successful the film will be.

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Rubbish heaps in Naples and ever-increasing eurozone bail-outs are two sides of the same phenomenon within the EU: unresolved underlying problems

‘Why are you taking a photo of the rubbish heap?’ A swarthy man, in his early 40s, double chin and flabby belly in a wife-beater, appeared from nowhere. I had just snapped a photo of a rubbish heap ‘lungo mare’ in downtown Naples. I told him that Naples is my favourite city in the world, I’ve been coming there for twenty years and I find it painful to watch the decline of this glorious city with its spirited inhabitants. ‘But why do you want to take a photo of the rubbish?’ ‘Why shouldn’t I?’ I asked. ‘The city is now defined by this disgrace.’

The rubbish heaps in Naples have been in the news for years. It’s a miracle that there hasn’t been an outbreak of some horrific plague from the ominously smelly mounds in the sweltering summer heat. Every now and then, the military steps in to remove the rubbish but it’s only a temporary relief. After years of empty promises from politicians the underlying problem still hasn’t been solved.

The local ‘malavita’, the Camorra, dominates the city’s garbage sector and to them, rubbish is gold. Camorra-related companies ignore proper waste disposal but dump any amount of highly toxic amalgam of industrial waste, rubbish from hospitals and homes on land bought from farmers by making them a Camorra offer: an offer that can’t be refused. Whole regions of Naples upland are now horrendously polluted causing birth defects in children, cancer rate to escalate, poison to enter the food chain and making animals suffer.

The crime-infested rubbish sector isn’t confined to Naples. When a company in Northern Italy accepts an offer to have its rubbish removed for a pittance it knows full well that proper rubbish management costs much more. By saving money it supports the ‘malavita.’ The Neapolitan journalist Roberto Saviano, who has recounted the ghastly rubbish business in his books and numerous articles, is on the Camorra’s death list and lives in hiding.

Every time I visit Italy it strikes me how rich this country must be since it’s able to afford the waste of resources and human capacity that organised crime causes. Organised crime hinders progress because it stifles efficiency and the learning that promotes development. The Italians themselves bear the responsibility for the Italian situation. But sadly, the disgraceful rubbish heaps in Naples are also part of a European problem.

The rubbish sector is one part of the ‘clean’ side of Mafia Ltd. The ‘malavita’ managed to take hold of the rubbish sector via the private-public partnerships, widespread in Italy. This interaction of private and public bodies is a hugely lucrative operation ground for the Italian ‘malavita,’ be it the Camorra in Naples, the Mafia in Sicily or the ‘Ndrangheta in Calabria. Sadly, EU money has floated through these channels and fed organised crime. Incidentally, private public partnerships have also been a fertile ground for corruption in Greece. On the whole, the EU has been far from vigilant when it comes to corruption in the member countries.

In a recent FT article the Italian ex-EU commissioner Mario Monti blamed the euro debacle partly on the EU being too deferential and too polite to its member states. The large and powerful ones within the EU, have time and again prevented monitoring economic development. Greece’s unsustainable debt was hidden under incorrect official figures – and interestingly, Germany and France opposed giving Eurostat powers to conduct proper investigations. (It’s an interesting angle though it doesn’t quite explain the problem of the eurozone. Data on lending to the eurozone countries has at all times been available from Bank for International Settlements.)

Evidence for the same is evident in many other EU countries. The EU has systematically closed its eyes to corruption in Greece. In 2008 Bertie Ahern resigned as a prime minster due to corruption allegation. Amongst other things he had bought a flat for money he couldn’t account for. In Italy, 84 out of 945 MPs, almost 10%, are under investigation for corruption; 49 out of the 84 are members of prime minister’s Silvio Berlusconi’s party. Minister of agriculture in Berlusconi’s government Saverio Romano has been under investigation for eleven years for alleged Mafia connections, going back more than two decades. France had its Elf affaire. – Only corruption in Bulgaria and Romania seems visible enough for the EU to worry the EU.

Monti is right that had the EU been less polite and taken a more critical approach the problems of the eurozone would not have risen. But the EU reflects the individual countries. In all the European countries, and in the US, debt has been extolled and welcomed, both at private and public level and the purveyor of debt, the banks, have been praised to the skies and the architects of debt, the bankers, have been awarded obscene remuneration.

It’s now abundantly clear that there wasn’t a credit crunch but a debt crunch, caused by reckless over-lending by banks who thought they would forever be able to securitise and sell it off. Yet, the European politicians keep on being polite. Polite to the bankers that armed with excel and inspired by greed and badly structured incentives over-lent to Greece, Ireland, Portugal, Spain, Italy and now clearly to Cyprus as well. Belgium could very well be going the same way – and then it’s no longer a crisis in the periphery but right at the heart of Europe.

It’s now four years since the European Central Bank first provided liquidity ‘to permit an orderly functioning of the money market.’ In a statement 14 August 2007 Jean-Claude Trichet president of the ECB said: ‘We are now seeing money market conditions that have gone progressively back to normal… This attitude… will help to consolidate a smooth return to a normal assessment of risks in liquid markets.’ That was wishful thinking – but this same wishful thinking still prevails: that by bailing out the banks everything will be normal.

That key question is ‘what’s normal?’ It’s clearly not returning back to the over-lending of this last decade. And it’s clearly not following the risk assessment of the last decade. Risk was miscalculated and underpriced.

Trichet’s view in August 2007 still guides the action of the ECB and the European Union, expressed in ever more insane amount of money tied up in bailing out the banks that got it all wrong in the first place. In autumn 2008 many politicians gravely warned against socialising the losses and privatising the profits. Yet, this is exactly what’s going on.

In her comment to Monti’s article the economist Megan Greene pointed out the dangers to this route: ‘A new political class will be brought to power by electorates in the core countries that are fed up with contributing to bail-out programmes.’ There will be ample room for demagogues and unsavoury forces to play on voters’ anger and frustration.

Europe is a rich continent. So rich that it’s now inflating the EFSF with €440bn, though €2 trillion is needed to pre-empt a meltdown in Italy and Spain. The second Greek rescue packet of €160bn, added to the €110bn last year, will only tide Greece over for a limited period.

So far, the ECB and EU politicians have pretended there is only one way of resolving the problem: by letting the tax payers pay. When will the European Union and the ECB drop the politeness and say bluntly to the banks: ‘Your calculations were wrong, you over-lent and as you know, in the financial sector rectifying this kind of mistake is called a write-down. In this case the mistake was huge. Alors, the write-down has to reflect the size of the mistake.’ Any other solution will be like the rubbish heaps in the centre of Naples: they are removed but new heaps grow because the underlying problem hasn’t been resolved.

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It’s not that there is any lack of interesting subjects that nothing is coming up on Icelog. For the time being, my focus is elsewhere: I’m in the final stage of finishing a novel, in Icelandic, that will be published in Iceland in autumn or late winter if I reach the final paragraph. The novel, hopefully a thrilling one if not outright a thriller, takes place in London and Iceland Dec. 2009 until spring 2010. It’s a docu-drama, with a background of financial matter, written into the events of Icelandic banking and business and the contacts with international tycoons and banks.

As to interesting development in Iceland there is of course the Icelandic EU membership negotiations, ongoing investigations by the Office of the Special Prosector, new evidence on well known persons and events and what the formerly so famous Icelandic tycoons and bankers are doing now. More on all this later.

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‘Business but not breaking the law.’ This is how Justice Arngrimur Isberg described some of the most blatant money-making tricks at the heart of the charges in the Baugur case, brought against Jon Asgeir Johannesson and his companions in 2005. At the time, Isberg threw out charges of fraud and breach of fiduciary duty since in his opinion it was normal business that caused a loss of ISK325m to Baugur whereas Johannesson and his companions made at least ISK200m in a deal where Johannesson had hidden his ownership of a company sold to Baugur.

On Tuesday, Isberg yet again caused a major surprise, now with his ruling* in the Byr case.

As explained in an earlier Icelog the Byr saving society wasn’t among the heavy-weights in the Icelandic financial world. Prosecutor Bjorn Thorvaldsson had demanded a jail sentence of five years for Jon Thorsteinn Jonsson chairman of the board of Byr, a saving society, Byr CEO Ragnar Gudjonsson and the CEO of MP Bank Styrmir Thor Bragason for breach of fiduciary duty. In addition, Bragason was charged with money laundering. The investigation centered on two overdraft loans, in total ISK1bn (now €6m), from Byr, in October and December 2008 to a holding company, Exeter Holding. Exter then bought Byr shares from Jonsson and others related to Byr at a conspicuously favourable rate. Byr investors were being pursued by MP Bank with margin calls since MP Bank had earlier lent a group of Byr employees to buy into Byr.

I was in Iceland during the court hearings. It was interesting to see one Byr- and MP Bank-employee after the other, as well as others related to the case, give witness. Their memory was often so poor that one wonders how they get out of bed in the morning. They didn’t understand emails they had sent or received. And so on.

At the core of the Byr case were loans to buy shares in Byr with only these shares as collateral. Justice Isberg didn’t pose many questions himself to the witnesses but he did, at some point, ask if this type of loan was necessarily a bad thing for a bank. Maybe he thought his question would clarify something but it mainly seemed he was trying to figure out himself what was so harmful about these loans.

Yesterday, Justice Isberg acquitted the three of them. This ruling was done at the County Court. No doubt, the Special Prosecutor will appeal to the Supreme Court.

According to the ruling, Byr clearly broke its own rules on collaterals, loan ratio and loans to related parties. It lent to a company, Exeter, with a negative equity, owned by a heavily indebted individual. All of this characterised loans to the favoured clients of the Icelandic banks. But no, nothing of this amounted to breach of fiduciary duty nor, in the case of Bragason, to money laundering. According to Isberg, the three couldn’t possibly have been defrauding the bank with these loans since they didn’t realize these loans could cause harm to the bank. Isberg sees nothing intentional about these bad loans. According to Justice Isberg the three couldn’t possibly have known the harm these loans did to Byr.

There were indeed three judges on the case. The second, who used to work as a broker, was in accordance with Isberg. The third, Ragnheidur Hardardottir, wanted to sentence the Byr managers but acquit Bragason.

It’s interesting to keep in mind that lending against own shares was one of the characteristics of Icelandic banking and consequently a major topic in the SIC report a year ago. That Justice Isberg didn’t seem to have understood how wrong and how harmful to a financial institution these loans are was nothing less than frightening. It’s intriguing to keep in mind that Eva Joly has often pointed out that in cases regarding financial crimes it’s often a major problem how ignorant judges often are of finance and business.

The Byr ruling was a test case for the Special Prosecutor. So many of the cases that he will bring to court will most likely reflect similar situation: the charged has done things that cause a loss to a listed company. Since these were clever people and there is a certain purpose to the deals the Prosecutor will charge them for a criminal intent. The Byr case shows that there can be judges who absolutely can’t see any criminal intent. Just negligence.

There are many cases in Iceland where a drug dealer has been caught with a bag of ‘goods’ and he just says he didn’t know what it was whereas the judge rules that it had to be clear to him what he was supposed to do with the drugs. In these cases, the judge reads into the circumstances certain intent. In the Byr case, the judge sees the loans, sees the losses they cause, but he can’t see anything intentional though the loans make no sense except understood in the context they were made.

If this will be the case regarding pending charges, it’s clear that it will be very hard for the Special Prosecutor to get rulings in his favour. It will be of utmost interest and importance to see what the Supreme Court makes of the Byr case. Not all is yet lost and it’s still too early to send the Special Prosecutor packing. The Byr case shows that the Special Prosecutor has some formidable hurdles in court. And Icelanders are asking if it really is the case that circa 30 individuals who turned the Icelandic economy on its head will be able to live happily ever after with the proceeds that most Icelanders will be as ill begotten.

*The ruling is here, in Icelandic.

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The Monetary Policy Committee of the Central Bank of Iceland has decided to keep the CBI’s interest rates unchanged, see the press release below:

The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged. The deposit rate (current account rate) will remain 3.25%, the maximum bid rate for 28-day certificates of deposit (CDs) 4.0%, the seven-day collateralised lending rate 4.25%, and the overnight lending rate 5.25%.

The inflation outlook has deteriorated since the last MPC meeting, at least in the near term, and real Central Bank rates have fallen. Recent data do not materially change the overall outlook for growth and employment. However, given recent announcements, the outlook is for a more expansionary fiscal stance than previously forecast.

Headline inflation has increased for four consecutive months, reaching 3.4% in May, and will likely remain elevated through next year. However, core inflation still remains close to target. The increase in inflation reflects a weak króna and the recent rise in commodity and oil prices. To the extent that the króna is broadly stable and these price increases are temporary, they are unlikely to have a lasting effect on inflation over the medium term.

Given the current exchange rate, however, pay increases implied in recent wage agreements are not consistent with the inflation target over the medium term. As the recovery progresses, wage pressures stemming from the traded goods sector may therefore cause longer-term inflation expectations to drift upwards. To reduce the risk of such an outcome, tighter monetary policy may become warranted in the near term, with actual policy moves depending, as always, on developments and prospects.

The MPC stands ready to adjust the monetary stance as required to achieve its interim objective of exchange rate stability and ensure that inflation is close to target over the medium term.

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“Iceland is obliged to ensure payment of the minimum compensation to Icesave depositors in the United Kingdom and the Netherlands, according to the Deposit Guarantee Directive.” This is the conclusion in a reasoned opinion on 24 pages the EFTA Surveillance Authority, sent to Iceland Friday June 10. Further, ESA concludes:

In its emergency response to the banking crisis in October 2008, the Icelandic Government made a distinction between domestic depositors and depositors in foreign branches. Domestic deposits continued to be available after they were taken over by New Landsbanki, whereas the foreign depositors lost access to their deposits and did not enjoy the minimum guarantee. It is not possible to differentiate between depositors to the extent they are protected under the Directive. By acting as it did Iceland failed to ensure that the depositors received the compensation to which they are entitled under the  Directive.

The Icelandic Government is now requested to take the measures necessary to comply with this reasoned opinion within three months. Should Iceland not comply, the Authority will need to consider taking the case to the EFTA Court.

An overview of the opinion is found in the ESA press release that also has links to earlier documents regarding Icesave.

As stated above, Iceland now has three months to fulfil the Directive. All this had been negotiated and settled in the Icesave III agreement. Now there is the order to pay, in addition to the interests on the loans to the UK and the Netherlands as they paid out their Icesave depositors.

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The saving society Byr wasn’t among the heavy-weights in the Icelandic financial world. These days, two previous Byr managers and the CEO of MP Bank are on trial in Reykjavik following an investigation by the Office of the Special Prosecutor. Today, prosecutor Bjorn Thorvaldsson demanded a jail sentence of five years for Jon Thorsteinn Jonsson chairman of the board of Byr, its CEO Ragnar Z Gudjonsson and MP Bank’s CEO Styrmir Thor Bragason for breach of fiduciary duty. In addition, Bragason is charged with money laundering.

The investigation centres on two overdraft loans, in total ISK1bn (now €6m), from Byr, in October and December 2008 to a holding company, Exeter Holding. In October, as the banks were collapsing and Byr hardly lending anything at all, Byr lent ISK800m to Exeter, which proceeded to buy Byr investment from Jonsson and others related to Byr at a rate not seen elsewhere on the market. It so happened that these Byr people were being pursued by MP Bank with margin calls since MP Bank had earlier lent a group of Byr employees to buy into Byr.

It wasn’t until late December 2008 that the board of Byr was told of the ISK800m loan. At the same meeting, the loan was increased by ISK200m. The board of Byr was told that the additional loan was to serve interests and cost of the previous loan. In fact, the ISK200m was used to buy Byr investment from a certain Birgir Omar Haraldsson who at the time was an alternate on the board.

The money paid into Exeter flowed into MP Bank, at a time when liquidity was scarce. The Exeter deal solved personal problems for many key employees at Byr and for MP Bank.

But who was the owner of Exeter, the company chosen to do the deals? The owner was an investor, Agust Sindri Karlsson, who in 1989 was one of the founders of MP Bank and sat on the board of MP and other related companies until summer of 2008 when he left all these boards, upset that the bank was making what he felt were unjustified margin calls on him. Intriguingly, at the same time that Karlsson was being chased by MP to pay his debt with the bank the CEO of MP found Exeter, as a party in the Byr deal, adding ISK1bn to the Karlsson company sphere that was already over-indebted.

The Byr managers are charged with breach of fiduciary duty, sacrificing the interests of Byr for themselves and a few Byr-related parties. Bragason is charged for participating in their illegal activity, as well as money laundering when he received money procured by criminal action. The three deny all wrongdoing.

Byr has been in the news since 2009 when a couple, Sveinn Margeirsson and Rakel Gylfadottir, who had invested in Byr, became suspicious of the Byr management. They set up a website, Margeirsson was elected on the board of Byr and from within he was able to track relevant document and the course of action that laid bare serious breach in lending to related parties. The couple handed their documents to the OSP that pursued the investigation. If there had been more people like the inquisitive couple, the situation in Iceland would have been different.

The Byr loans don’t amount to much, compared to the lending of the three big banks to favoured clients. But Byr shows all the trends of the big banks in a nutshell.

Byr broke its own rules on collaterals, loan ratio and loans to related parties. It lent to a company, Exeter, with a negative equity, owned by a heavily indebted individual. All of this characterised loans to the favoured clients of the Icelandic banks: loans that were only for the well connected few.

It’s also clear from the Exeter loans that the Byr managers, who originally got the loans from MP Bank to buy into Byr, believed at the time they were making a ‘risk-free’ investment. They didn’t expect margin calls and such nuisance. The loans were supposed to be ‘risk-free’ for the investors whereas all the risk was shouldered by the lender who didn’t take the necessary precaution in securing collaterals and guarantees.

It’s also symptomatic for the two Exeter loans that they were tunnelled via a SPV owned by a man who was already heavily indebted to MP Bank. In return, MP Bank seems to have stopped making margin calls on him. As seen elsewhere, there seems to be a certain quid pro quo, built into the transaction.

Compared to cases where the OSP might later bring charges the Exeter case is a simple one. A clear case of crude breaches. The three charged were unknown outside the Icelandic banking world. If the managers and the big owners of the three big banks in Iceland will ever be charged it’s clear that they will buy the service of the best lawyers in Iceland and no doubt seek foreign advisers. That will be a real test for the Special prosecutor and his team. The Exeter case was a dress rehearsal for the great legal spectacles to come.

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Earlier, the EFTA Surveillance Authority had indicated that it would answer Iceland by the end of the May. It now seems that this time will be stretched until after the coming weekend.

In my reporting for Ruv in Iceland, I have indicated that to some ESA experts the Icelandic answer seemed feeble. I find it unlikely that ESA will be convinced by Iceland’s answer, which I found to be short on legal reasoning and long on beside-the-point arguments. In the end, it matters what the ESA lawyers think. We will know next week.

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Icelandic banks grew and expanded abroad and caught attention in countries where they operated but they never got rid of rumours of dodgy dealings, of money laundering and Russian connections. In spring of 2006, the expansion of Icelandic banks and businesses in Denmark attracted attention, causing worries and consternation. According to a Danish source this was even discussed informally on the board of the Danish National Bank. All along, the only people who seemed totally oblivious to these rumours were the financial services authorities in the countries where the Icelandic banks operated.

And so it was in Luxembourg, at the Commission de Surveillance du Secteur Financier, CSSF, the financial services authorities of this tiny state, which builds its wealth on offshore operations at the heart of Europe.

Only a few weeks after the collapse of the Icelandic banks in October 2008 my attention was drawn to the banks’ operations in Luxembourg. I spent months trawling through the Mémorial/Tagesblatt, the official publication that lists information on Luxembourg companies. The banks, especially Kaupthing, had from 1999, set up hundreds of companies for their Icelandic clients. In 2005, Kaupthing started a successful UK operation, which meant that many of the bank’s largest UK clients also had accounts and companies in Luxembourg.

On a visit to Luxembourg last year, I gathered that the CSSF had been completely ignorant of what was going on in the Icelandic banks. It seemed that the CSSF had not had any insight into the fact that the banks breached the limits how much they could lend to each entity/person and the insufficient or no collaterals/guarantees.

However, I have recently learnt that this wasn’t the case at all. The CSSF was indeed very worried about the situation in the Icelandic banks, at least in Kaupthing and Landsbanki (the Glitnir operation in Luxembourg was never big, it came too late to the game). So worried, that following the Q1 result in 2008 CSSF asked the external auditors of the two banks for a thorough report, ia on credit risk.

How Landsbanki responded I do not know but if they met the CSSF as they met demands from the UK FSA it’s safe to conclude that they were neither swift nor forthcoming. Kaupthing Luxembourg managers dragged their feet. The deadline was in June 2008, the report wasn’t finished until the latter half of July. The report was based on Kaupthing’s position at the end of March. The CSSF didn’t like what they saw but in reality the situation, by late summer 2008, was much worse than the report indicated since the underlying numbers had changed much for the worse.

Kaupthing answered in the Kaupthing way, claiming that the CSSF was entirely wrong about essential things. There was, according to the Kaupthing Luxembourg management nothing wrong and the credit risk well managed. However, Kaupthing Luxembourg was in the end forced to sell assets, providing some much needed liquidity. On Friday October 3 Kaupthing Luxembourg manager Magnus Gudmundsson told some employees that the Luxembourg operations were now secured for the coming months.

Evidently, Kaupthing’s management also convinced people at the Central Bank of Iceland that Kaupthing was, contrary to Glitnir and Landsbanki, in a strong position to weather the storm. On Monday 6 October 2008 the CBI agreed to provide Kaupthing a loan of €500m. Considering the fact that Kaupthing, as well as Landsbanki, was from Friday 3 October forced to put all new deposits into Bank of England, meaning that the banks were no longer operating freely, the loan is incomprehensible. I’ve never been able to certify if the CBI knew about the BoE action but my conclusion is that the CBI must have been aware of it.

It’s never been explained what happened to the €500m. Some of it seems to have gone to Sweden, some of it to Luxembourg. But the real mystery is why this money wasn’t used to save Kaupthing by strengthening Kaupthing Singer & Friedlander. Due to cross default clauses it was clear that if KSF collapsed it would trigger a Kaupthing default. KSF and Kaupthing were in a dialogue with the FSA during the last days. FSA set certain conditions for liquidity, Kaupthing claimed it could meet the limits but never did. Not even when it had the €500m.

But back to Luxembourg in October 2008. Although CSSF had been chasing Kaupthing for credit risk and over-exposure to only a few clients it didn’t seem too concerned about the way the Kaupthing managers had run the bank. Kaupthing went into administration, Franz Fayot, a well connected Luxembourg lawyer, was appointed an administrator. But little changed at the bank where Gudmundsson and the other Icelanders kept on running the bank. Apparently, no questions were asked, in spite of CSSF serious doubts.

After JC Flowers and the Libyan Investment Agency had considered buying Kaupthing but decided against it, the English investor, David Rowland finally took Kaupthing over. His bank, Banque Havilland now acts as an administrator for the Kaupthing assets in Pillar Securitisation. The Luxembourg state risked a loan of €320m to facilitate the deal with Rowland, again no questions asked in spite of CSSF’s earlier doubts and worries.

Rowland fired all his Icelandic employees, except one, after the Office of the Special Prosecutor arrested Gudmundsson last year. The message was that Iceland wasn’t important for Havilland any longer. Yet, suddenly Rowland appeared as an investor in an Icelandic bank, the resurrected MP bank. Rowland seems to have an exotic interest in outliers, investing in Iceland and Belarus. MP bank has invested in Ukraine and the Baltic countries. The question is why Rowland, who was called ‘shady’ in the UK Parliament, is suddenly so interested in Iceland and a bank there.

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The ash plume has resided, looks like the eruption in Grímsvötn 2011 is over. There is however some ash floating around in the air, might cause local disruption here and there in the coming hours, over Iceland and elsewhere but that should be the end of it.

Today, there is glorious weather in Reykjavik, sunny and ca 12C. The darkness encroaching on the city and the whole of Southern Iceland has disappeared and the mood of the country improved.

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