Sigrún Davíðsdóttir's Icelog

For anyone interested in cross-lending and cross-ownership, the collapse of the Icelandic banks provides insights into its effects: the meteoric growth and how opacity hides transactions between related parties, risk and debt within the ensuing complex structures, perfected by owning a bank as well. – All of this is well known to banks and regulators and should have caused concern regarding Lex Greensill’s operations. Yet, Greensill not once but twice had financial institutions – GAM and Credit Suisse – lending insanely against his debt, much of it growing around his dealings with the complex sprawl of companies related to Sanjeev Gupta and later with SoftBank. – Greensill, a consummate networker, made a strategic use of his private jets to woo and impress a small group of people who proved instrumental for Greensill in building up his business; some of them have not fared well.

Afterhours on 1 March, three Greensill companies – Greensill Capital Pty Ltd, Greensill Capital (UK) Ltd and Greensill Bank AG – respectively registered in Australia, UK and Germany, sought to force through an extension of insurance policies, worth US$4.6bn through an injunction at the New South Wales Supreme Court. Justice Stevenson refused the plea. After all, the Greensill companies had known since at least 1 September 2020, that the insurance policy would expire 1 March 2021 and yet did nothing until only days earlier.

On 5 March 2021, the court decision tipped all three Greensill companies – the mother company in Australia and its UK and German subsidiaries, as well as other Greensill companies – into insolvency, putting at risk 50,000 jobs worldwide with 40 Greensill clients.

In an internal recording of his address to staff 15 February, Lex Greensill, the founder of Greensill Group, claimed there was very good work going on regarding the insurance, which would even allow the firm to ramp up activity. – His reassuring words seem to run contrary to the New South Wales decision.

Indeed, why had Greensill Group done so little to have the policies extended? After all, Greensill’s operability relied on insuring the receivables of the invoices it sold on to investors: without insurance, no rating and without rating, no market for the invoices.

The Lex Greensill saga has many intriguing angles. He made good use of his Australian farming family, his “from farming to finance” saga. With support from former prime minister David Cameron and chancellor Rishi Sunak, Greensill’s relatively small company kept UK top civil servants remarkably busy, during the Covid crisis; a sure sign of Greensill’s consummate networking skills.

The Greensill Group went from a value of some hundreds of millions in 2017 to $4bn in 2019 and will leave losses in banking and the UK public sector amounting to billions of pounds. “It’s disturbing that yield-starved investors are still misjudging the dangers of exotic investment products more than a decade after the banking crisis,” Chris Bryant wrote on Bloomberg recently.

Disturbing indeed that banks and investors did not spot the flashing red lights: cross-lending, cross-ownership, the small-time auditors used by the Gupta companies and the mishmash of debt Greensill was peddling. – The Greensill operation is uncannily similar to the Icelandic model, which collapsed in 2008: own plenty of companies and a bank, deal with trusted friends and it all grows very quickly.

Intriguingly, a closer look at the Lex Greensill saga shows that a small number of people – in politics, insurance and finance – have been crucial to his rapid rise. His most important relationship was with Sanjeev Gupta and, in the end, with SoftBank and Masatoyshi Son, giving a particularly interesting insight into the SoftBank way of doing business.

2012: Greensill’s first UK stop: Downing street

In 2011, Lex Greensill, born in 1977, set up a fund, named after himself, in his home country, Australia, as a vehicle for his grand idea: a supply chain financing business. In the UK, Greensill set up Greensill Capital (UK) Ltd in July 2012. To begin with, nothing much happened.

One of the more bizarre parts of Greensill’s bizarre story is his relationship with the Tory-ruled Downing street. When working at Morgan Stanley 2005 to 2009, he bonded with a colleague, the late Jeremy Heywood, who in 2007 joined the Cabinet Office, when Gordon Brown became prime minister. In December 2011, it was announced Heywood would take over as Cabinet Secretary in January 2012. From September 2014 until he resigned in October 2018 for health reasons, Heywood was also “Head of the Civil Service.”

Heywood seems to have been Greensill’s key card to the Cabinet Office. In January 2012, half a year before he set up his UK company, Greensill had been appointed as an unpaid adviser on supply chain financing and stayed in that role until 2015. From 2013, Greensill was a Crown Representative until he left the Cabinet Office in 2016, then well into a blossoming business career.

There is however no contract, so it’s unclear who hired Greensill, what exactly he did and why he got a desk and security clearance, which allowed him to come and go as he pleased. Interestingly, Greensill does not list his Cabinet Office roles on his LinkedIn page, though he does mention the Commander of the British Empire he was awarded in 2017 for his services to the economy, though it is exceedingly hard to point out what exactly he had done for the British economy at the time. An honour also noted in his homeland.

While in Downing street, Greensill hired two other Downing street insiders: Bill Crothers and David Brierwood. Crothers, the government’s chief commercial officer, began advising Greensill Capital in September 2015 and left the civil service at the end of 2015 to join Greensill as a director where he stayed until February 4, 2021. His role at Greensill was known but seen as acceptable since Greensill had at the time no public-sector work.

David Brierwood is another ex Morgan Stanley banker and another Crown Representative at the Cabinet Office from October 2014 to June 2018 and a director of Greensill Capital (UK) from the beginning of 2015 until January 2018.

Brierwood was one of those insiders Greensill was carefully cultivating. As pointed out earlier on Icelog, Brierwood benefitted from a generous loan from the Australian Greensill company in 2014 of AU$6,096,000 with SD Brierwood (likely David’s spouse or other relative) receiving exactly the same amount; thus, loans to the Brierwood family amounted in total to AU$12,192,000. Other related parties profited from loans from Greensill. The revenue of the Australian Greensill company in 2014 was AU$38m.

The ultimate trophy asset: hiring a former prime minister

In 2018, David Cameron started working for Greensill, as is now well known. Cameron was untiring in travelling, taking meetings for Greensill and, when Covid-19 stopped all travelling and in-person meetings, he was equally untiring in messaging former colleagues in government, civil servants who worked under him during his time in Downing street and even foreign officials. Having Cameron acting on his behalf, was a major reason why Greensill was allowed to waste the time of top officials.

Apart from the grandeur of having an ex PM on the team, the Downing street insiders were precious, because Greensill was not only cultivating supply chain financing with businesses but also with the public sector. In addition to Brierwood and Crothers, Cameron would have been a valuable employee to have in dealing with the public sector.

Greensill and public sector contracts

Lex Greensill had his eyes firmly on public sector contracts for supply chain finance scheme. One scheme was set up in the UK, for pharmacists dispensing drugs for the NHS under the “Pharmacy Early Payments Scheme.” How much it earned Greensill Group is not clear.

Also, both in Australia and the UK, Greensill tried to set up a payday scheme for health workers, in the UK for NHS workers. He presented this as a sort of altruism, to be run through a wholly owned Greensill company, Earnd, set up in May 2018 but now in administration. Bill Crothers was one of Earnd’s directors. According to the Company House accounts available, this was never an operation of more than a few hundred thousand pounds, apparently financed by a loan from the mother company of almost £500,000.

The Corona Virus Business Interruption Loan Scheme, CVBILS, was administered by the British Business Bank. Greensill Capital (UK) became one of its trusted lenders. The UK firm used the German Greensill Bank AG to pay out the loans. Banks are not lacking in the UK and it’s difficult to understand why the BBB chose a bank for the scheme that could only administer loans in Germany. Possibly, political connections helped.

In the end, it seems that an abnormal chunk of the Greensill CVBILS lending went in the same direction at most other Greensill lending: to companies owned by Sanjeev Gupta.

Nick Macpherson, a former permanent secretary at the Treasury, recently told the Treasury committee, the intense engagement last year between top officials and such a small firm as Greensill was “unusual” and would have been a huge waste of time, a valuable commodity at a time of crisis. Paul Myners, former City minister, told the committee Lex Greensill had offered him a directorship. Myners refused, thinking after his meeting with Greensill that his operations had “many of the elements of a Ponzi scheme.”

Sacking of an insurance manager set the Greensill collapse in motion

An early key figure in Greensill’s business success was Greg Brereton, the insurance manager at Bond & Credit Company, BCC, now owned by Tokio Marine. In total, BCC underwrote A$10bn for Greensill, i.e. the accumulated figure for the accounts receivable of Greensill, not exposure to Tokio Marine. A clarification Tokio Marine gave after its shares tumbled following news in March of the insurer’s potential exposure to Greensill.

According to the 1 March New South Wales Supreme Court decision, Brereton was placed under internal investigation in May 2020 and dismissed in early July 2020. Two weeks after the dismissal, Tokio Marine first gave notice that Greensill’s insurance policies would not be extended. It can be said that Brereton was Greensill’s most important link but at the same time, the weakest link due to the concentrated insurance risk.

Intriguingly, David Cameron visited BCC on his trip to Australia in 2018 and met with Brereton. It’s easy to imagine what Brereton and the other 23 employees at BCC would have felt at meeting such a notable visitor. An example of Lex Greensill’s consummate understanding of networking and showing off his connections. He had a certain tendency to bigging up his connection: after meeting Barack Obama he apparently called himself an adviser to the US president.

The Gupta connection

The 1 March New South Wales Supreme Court decision tipped Greensill Group into insolvency with administrators appointed 8 March. But other ominous things had already been threatening the company.

On 2 March, before news of the Australian court decision broke, British Business Bank had removed government guarantee for Greensill’s CVBILS loans to Sanjeev Gupta companies. This followed an assessment of EY and law firm Hogan Lovells, finding that in lending to Gupta companies, the German Greensill bank had inadequate security. In addition, Greensill was facing insolvency after Credit Suisse had frozen $10bn investment funds linked to Greensill.

The British Business Bank was not the only one suspicious of the Greensill loans to Gupta. Already in early 2020, the German regulator BaFin, scarred and tarred from the Wirecard scandal, had started investigating Greensill Bank AG’s links to Gupta: allegedly, as much as two thirds of the bank’s lending was to Gupta-related companies. It is alleged that as much as $1bn was lent against insufficient collaterals.

Gupta had been investing in steel and metal for years, buying mothballed steel mills and small mills. In 2016, he had enough companies to set up the Gupta Family Group, GFG, apparently the year Lex Greensill and Gupta met in Australia. Since then, their operations have expanded at the speed of light, together and ever more intertwined, whether in creating debt instruments to create more debt for debt financing or meeting politicians.

At a dinner in Glasgow in June 2017, where they met with Scottish rural economy minister Fergus Ewing, Ewing spoke of the Scottish government’s positive experience of working with Gupta’s GFG.

Like a lender in a small village, Gupta in the global village likes doing business with friends, which has led to myriad of companies with an overload of cross-lending and cross-ownership. Interestingly, Gupta also owns a bank, Wyelands, which Gupta set up only in 2016. The Prudential Regulation Authority recently intervened and ordered Wyelands to repay its depositors, the first time the PRA has taken this action. It had discovered that Gupta’s bank mostly lent funds to only one client: Gupta.

There are other interesting aspects to Gupta: he mostly uses only a small auditor, King & King. It has an office in Wembley and in London: though among the shops on Regents street the office is far from fashionable. This tiny audit firm seems to have audited Gupta companies with combined revenues of almost £2.5bn. As long as Gupta doesn’t fulfil a promise from 18 months ago of comprehensible group accounts, there is no overview over his company sprawl, linked at it is to companies run by Gupta’s friends, employees and others connected to Gupta.

This sprawl of companies didn’t scare Greensill. He also liked doing business with related parties, as well as complexity, things that a financial firm should abhor. Given the complexity, it will not come as a surprise if the Greensill Capital’s debt exposure to the Gupta sprawl, turns out to be more than the $5bn it now stands at.

Greensill’s key contacts in finance: now mostly out of job

Tim Haywood had been jetted to Glasgow for the June 2017 dinner with Fergus Ewing. Haywood was at the time a fund manager at GAM, a Swiss fund set up in 1983 by Gilbert de Bottom, (father of Alain the philosopher). Greensill had introduced the two, Haywood and Gupta, in early 2017, after striking up a business relationship with Haywood in 2016. In total, Haywood would invest more than £2bn in assets Greensill sourced, much of it related to Gupta.

However, already in 2017 colleagues of Haywood were worried over his relationship with Greensill and Gupta, how Haywood was jetting around the world on Greensill’s jets and piling illiquid assets from Greensill, often linked to Gupta, into GAM funds. After internal probes, starting in November 2017, GAM concluded Haywood had broken rules regarding presents and entertainment, as well as rules on investing. Haywood was sacked in February 2019. The Greensill saga has marred GAM ever since.

Some of the GAM purchases were apparently quite out of the ordinary. One example is when  Haywood orchestrated buying an entire issue of bonds issued by a special purpose vehicle called Laufer. Here, the transaction worked since the bonds paid the full amount, as Financial Times mentioned in an article on the GAM saga in March 2019, saying that Laufer had provided funding for Lex Greensill’s firm.

However, as can be seen from Company House documents, Laufer, a UK registered company, did not only provided funding for Greensill but was wholly owned by Lex Greensill, who was also one of its directors. According to Company House, Laufer has not followed other Greensill companies into insolvency and Lex Greensill is still listed as one of its directors.

The GAM saga ran in the financial media for months and yet, Lex Greensill was not out of luck. Next stop was Credit Suisse, where Greensill cultivated an executive, who has been much less visible than Haywood, Helman Sitohang, CEO of Credit Suisse Asia Pacific. Five months before Greensill Group collapsed, Sitohang had invited Lex Greensill as a special guest to address its Asia top staff.

At Credit Suisse Greensill apparently had another supporter, Lara Warner, then chief risk and compliance officer but ousted in early April this year. Against advice from risk managers, Warner agreed to a bridge loan of $160m in October, when Greensill failed to secure the $1bn in funding he had hoped for. Credit Suisse had funds stuffed with $10bn of Greensill sourced debt. Greensill’s collapse might cost the bank’s clients as much as $3bn.

Guided by common sense, it is wholly inexplicable how Credit Suisse, after the GAM saga, could enter into this remarkably cosy relationship with Greensill.

From a Softbank star to a falling star

Last but not least, there is Lex Greensill’s short, but sweet and crucial, connection to SoftBank / Vision Fund. Nothing of importance is agreed on at SoftBank without the blessing of its founder Masayoshi Son.

Apparently, a junior executive at the Vision Fund was the first to reach out to Greensill. In May 2019, clearly unperturbed by the GAM debacle, SoftBank invested $800m in Greensill Group, adding $655m in October, then valuing the company at $4bn. Quite a jump from General Atlantic investment of $250m and a value of $1.6bn the previous year. Son in known for liking big vision; Lex Greensill’s vision of a global working-capital market of $55tn was undeniably big.

Given that SoftBank is a serial investor, not all founders enjoy Son’s attention. Greensill though, was quickly enjoying the star treatment at SoftBank, with weekly calls from Son, invitations to SoftBank events where he would be favourably introduced and where he could express his gratitude at “having Masa as a partner and a mentor.” At Vision Fund meetings and presentation, Greensill’s name was often heard.

However, the SoftBank bliss was short-lived: in March 2020, only a month after an investment trip to Indonesia meeting dignitaries, where Son’s light shone warmly on Greensill, the relationship between mentor and mentee evaporated.

Investors were pulling money from the Credit Suisse funds, which had provided the lion share of Greensill’s funding. The phone calls stopped but in December 2020, when Greensill was running out of cash, SoftBank did invest further $440m. However, it seems the cash wasn’t ultimately destined for Greensill though there are at least two stories on where it ended.

One story is that the cash was earmarked for the Credit Suisse funds stuffed with Greensill-sourced debt but did instead go to the German Greensill Bank. Another story is that the cash was meant for Katerra, a Softbank portfolio company, financed by Greensill but with Greensill struggling found itself also in a dire situation.

There is another story of SoftBank’s funding going in an unexpected direction. With the first SoftBank funding for Greensill, the $800m, Greensill’s message was that the funding would be used to develop new technology and expand the invoice financing. Instead, it seems it mostly went to bolster the German Greensill Bank. The question is if SoftBank thought that was a great idea or if it was not informed.

SoftBank and Son do indeed both like size and complexities, one reason why helping Greensill grow rapidly was to SoftBank’s liking. SoftBank hooked some of its own portfolio companies into the Greensill lending carousel.

Financing hypothetical future sales, not actual invoices

The SoftBank connection brings us to the core of Greensill’s business, which eventually became a nail or two in its coffin. The Greensill Group vision was, according to its 2019 annual accounts “to make working capital faster, cheaper and easier to access for businesses of all sizes. We accelerate the movement of cash to where it is needed most, in the real economy.” Acceleration is exactly what Lex Greensill took to new heights, for his own group.

Greensill’s grand idea was invoice discounting or supply chain financing: companies and notably governments around the world pay their invoices from suppliers or service providers within 90 days or more. From the point of view of those who are invoicing, getting paid quickly will lower working capital cost.

Therefore, invoicing parties can be more than happy to accept an offer of 97 or 98cents/pence a dollar/pound, a standard offer from an invoice financing company. The math is simple: if you invoice the government or a company for £100, you are owed this sum. You can then sell your invoice to someone like Greensill for 98p today, instead of waiting for 100p to up to 180 days, or even longer if the invoice isn’t paid on time or at all.

In a market of growing complexities, Lex Greensill was known for very complicated structures and very complicated products. And he had the reputation for being a brilliant salesman, making good use of his “from farming to finance” story. The kind of a salesman who could sell sand in Sahara, or very complicated structures and products where there is no lack of such things.

Being a brilliant salesman created one problem: not getting enough invoices. Consequently, in his drive to accelerate, Lex Greensill seems to have been fine with invoices for non-existing goods or services. Utterly insane, says one source; it made no sense to issue debt to companies for invoices, which might or might not later come into being.

Matt Levine explains this really well on Bloomberg’s Money Stuff. Bluestone is a coal mining company that in mid March, sued Greensill Capital (UK), Lex Greensill and Roland Hartley-Urquhart, Greensill’s vice president, alleging fraud, thereby opening a window into Greensill’s operations, showing a novel and audacious interpretation of “future receivables” – it was so much future that it was based on completely hypothetical transactions that Bluestone hadn’t even contemplated might happen.

These transactions on a hypothetical future seem to have been to SoftBank’s taste. So, Greensill allegedly provided financing to some SoftBank companies  based on predicted future sales, not on issued invoices.

SoftBank invested in the invoice-financing funds Credit Suisse set up around Greensill’s products, the ones that attracted $10bn from investors, which then lent to SoftBank portfolio companies such as Oyo, Fair Financial Corp. and Katerra Inc., creating an intriguing loop. However, this did at some point go too far for Credit Suisse, which saw a conflict-of-interest for SoftBank in this carousel. SoftBank agreed to pull $700m out of the funds.

These future transactions invoices apparently also proved a loop too far for Greensill’s insurers, which brings us back to the March 1 New South Wales Supreme Court decision. As far as I understand, these future invoices were a major issue for the insurers; slightly too much of a froth to insure.

Greensill’s taste for convoluted relationships

Gupta is not the only one who likes doing business with friends. Greensill’s relationship with Andy Ruhan is a good example of his penchant for close and convoluted relationships.

Ruhan, recently in the UK media because of a divorce row – one of these millionaire divorces where the wife claims, and seems to be right, that the husband is concealing assets. Ruhan pops up in a chapter of the Greensill saga where Greensill-sourced assets are causing major problems for investment funds, once so greedy for Greensill assets, i.e. GAM and Credit Suisse.

The assets in question was debt related to Ruhan’s property investments in New York, a good example of how Greensill, although claiming to be a straightforward invoice financing firm, was in reality a debt peddler able to sell whatever he picked up. Here, it clearly didn’t hurt to have a jet to fly people around in: Greensill-jetting Tim Haywood at GAM had bought the debt, although GAM property experts had advised against the purchase.

The Ruhan connection appears to go far back in Greensill’s operations: when Lex Greensill started buying up the German bank, NordFinanz Bank in 2013, then naming it Greensill Bank AG, it turned out that surprisingly the property and hotel investor Ruhan owned a sizeable stake, 26.19%, in this little local German bank. No price given but “for deferred consideration to be determined based on the future enterprise value of the bank.” The transaction is mentioned in Greensill UK 2013 annual accounts, Ruhan isn’t identified by name but has been named later as a previous shareholder in the German bank.

The strategic use of jets and connections

In order to understand Lex Greensill’s modus operandi, it would be interesting to study the flight records of his four jets. Records show for example David Cameron’s use of Greensill’s jets. Greensill paraded Cameron around when Cameron, freshly hired by Greensill, visited Australia in 2018.

The jets seem to have been a Greensill strategy from early on to impress and woo possible business partners and, for Greensill, important people. In January 2015, Greensill Bank AG came handy: according to Greensill Capital UK, the German bank bought a used Piaggio P-180 aircraft, for nine passengers. At this time, Greensill was still in Downing street and the revenue of the Australian Greensill company in 2014 was only AU$38m. – Later he added a second Piaggio.

In 2018, Lex Greensill had various lucky breaks: he got a $250m investment from General Atlantic and hired an ex prime minister. That called for a celebration: that year, Greensill bought a $22m Dassault Falcon 7X. The following year was even better as millions turned into billions with the $1.5bn investment from SoftBank and a valuation of $4bn. He upped his air fleet, with Gulfstream G650, listed at $50m.

With the first Piaggio, the German bank leased the plane to Greensill Capital Management (IoM), listed in the 2014 accounts as an associated company of the Greensill Group. The same arrangement might have been used for the three other jets.

Last November, shareholders in the privately held Greensill Group complained over the group’s many aircrafts and demanded that the planes be sold. The jets neither looked good from an environmental perspective nor did it fit with the planned fundraising of $500m to $600m and further, an IPO planned within two years.

The use of jets figures in stories related to others whose goodwill Lex Greensill found it worth to cultivate. As mentioned earlier, Tim Haywood, the GAM fund manager, was a frequent flier on Greensill’s jets and proved exceedingly important for Greensill during the strategic years of climbing towards ever more sales of his debt.

The flight records of Greensill’s four jets, would no doubt show quite clearly who were his most strategic connections.

Greensill’s strategic use of sponsorship

Lex Greensill also treated Tim Haywood to events in high places. Greensill was awarded Commander of the British Empire in 2017, presented to him by prince Charles. As pointed out earlier, Greensill’s contribution to the UK economy, for which he got the CBE, was minuscule. That same year, Greensill Capital sponsored a concert at Buckingham Palace with the Monteverdi Choir and Orchestra. Lex Greensill invited Haywood but who Greensill’s other guests were is not clear.

By sponsoring the concert, Greensill was helping in several ways. One of the directors of the Monteverdi Choir and Orchestra at this time was David Brierwood, one of Greensill’s Downing street connections, who became a Greensill director. As pointed out earlier on Icelog, Brierwood benefitted from a generous loan from Greensill in 2014 of AU$6,096,000 with SD Brierwood (allegedly David’s spouse or other relative) receiving exactly the same amount.

It was all quite neat: Greensill had Brierwood as a director of Greensill, gave him a generous loan and sponsored the orchestra, where Brierwood was a director – and got a gig at Buckingham Palace, where he could then invite people who were important to his business. – In addition to flight records, it would be really interesting to see the guest list at the Palace concert.

Follow me on Twitter for running updates.

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.

Follow me on Twitter for running updates.

Prosecuting big banks and senior bankers is hard for many reasons: they hire big name lawyers that fight tooth and nail, with delays, deviations and imaginable and unimaginable obstructions of all sorts. PR firms are hired to deviate and create smoke and mirrors. And some journalists seem easily to identify with the pillars of financial society, even talking about “victimless crime.” All of this springs to mind regarding the SFO charges against John Varley former CEO of Barclays and three senior managers – where an Icelandic parallel can possibly throw some light on the few facts in the case of Varley e.al.

In the summer of 2008, as liquidity was tight for many banks, two high-flying banks in the London business community, Barclays and Kaupthing, were struggling. Both sought salvation from Qatari investors. Not the same investors though the name al Thani, a ruling clan in the dessert state of Qatar, figures in both investment stories.

In 2012 as the Icelandic Office of the Special Prosecutor, OSP, brought charges against three Kaupthing managers and the bank’s second largest investor Ólafur Ólafsson, related to Qatari investment in Kaupthing in September 2008, the British Serious Fraud Office, SFO, was just about to start an investigation into the 2008 Qatari investment in Barclays.

In 2015 the four Icelanders were sentenced to 4 to 5 1/2 years in prison for fraudulent lending and market manipulation (see my overview here). SFO is now bringing ex CEO John Varley and three senior Barclays bankers to court on July 3 on the basis of similar charges. As the first UK bankers are charged for actions during the 2008 crisis such investigations are coming to a close in Iceland where almost 30 bankers and others have been sentenced since 2011 in crisis-related cases.

The Kaupthing charges in 2012 filled fourteen pages, explaining the alleged criminal deeds. That is sadly not the case with the SFO Barclays charges: only the alleged offences are made public. Given the similarities of the two cases it is however tempting to use the Icelandic case to throw some light on the British case.

SFO is scarred after earlier mishaps. But is the SFO investigation perhaps just a complete misunderstanding and a “victimless crime” as BBC business editor Simon Jack alleges? That is certainly what the charged bankers would like us to believe but in cases of financial assistance and market manipulation, everyone acting in the financial market is the victim.

These crimes wholly undermine the level playing field regulators strive to create. Do we want to live in a society where it is acceptable to commit a crime if it saves a certain amount of taxpayers’ money but ends up destroying the market supposedly a foundation of our economy?

The Barclays and Kaupthing charges – basically the same

When the Icelandic state prosecutor brings charges the underlying writ can be made public three days later. The writ carefully explains the alleged criminal deeds, quoting evidence that underpins the charges. Thus, Icelanders knew from 2012 the underlying deeds in the Icelandic case, called the al Thani case after the investor Sheikh Mohammed bin Khalifa al Thani who was not charged.

As to the SFO charges in the Barclays case we only know this:

Conspiracy to commit fraud by false representation in relation to the June 2008 capital raising, contrary to s1 and s2 of the Fraud Act 2006 and s1(1) of the Criminal Law Act 1977 – Barclays Plc, John Varley, Roger Jenkins, Thomas Kalaris and Richard Boath.

Conspiracy to commit fraud by false representation in relation to the October 2008 capital raising, contrary to s1 and s2 of the Fraud Act 2006 and s1(1) of the Criminal Law Act 1977 – Barclays Plc, John Varley and Roger Jenkins.

Unlawful financial assistance contrary to s151 of the Companies Act 1985 – Barclays Plc, John Varley and Roger Jenkins.

The Gulf investors named in 2008 were Sheikh Hamad bin Jassim bin Jabr al Thani, Qatar’s prime minister at the time and Sheikh Mansour bin Zayed al-Nahyan of Abu Dhabi. The side deals the bankers are charged for relate to the Qatari part of the investment, i.e. Barclays capital raising arrangements with Qatar Holding LLC, part of Qatar’s sovereign wealth fund and al Thani’s investment vehicle Challenger Universal Ltd and $3bn loan issued by Barclays to the State of Qatar, acting through the Ministry of Economy and Finance in November 2008.

Viewing the Barclays side deals via the Kaupthing case

The Barclays saga is allegedly that apart from the Qatari investments in Barclays in June and October 2008, in total £6.1bn, there were two side deals, allegedly financial assistance: Barclays promised to pay £322m to Qatari investors, apparently fee for helping Barclays with business development in the Gulf; in November 2008, Barclays agreed to issue a loan of $3bn to the State of Qatar, allegedly fitting the funds prime minister Sheikh al Thani invested, according to The Daily Telegraph.

Thus it seems the Barclays bankers (all four following the June 2008 investment, two of them following the October investment) were allegedly misleading the markets, i.e. market manipulation, when they commented on the two Qatari investments.

If we take cue from the Icelandic al Thani case it is most likely that the Barclays managers begged and pestered the Gulf investors, known for their deep pockets, to invest.

In the al Thani case, the Abu Dhabi sovereign wealth fund had earlier considered buying Kaupthing shares but thought the price was too high. Kaupthing then wooed the Qatari investors with some good offers.

What Kaupthing promised was a “risk-free” loan, a classic Kaupthing special offer to special clients, to place as an investment in Kaupthing. In other words, there was never any money coming into Kaupthing as an investment. It was just money merry-go-round from one Kaupthing account to another: funds going out as a loan and coming back as an investment. In addition, the investors got a loan of $50m directly into their pockets, defined as pre-paid profit.

Barclays hardly made such a crude offer to the Qatari investors but the £322m fee leads the thought to the pre-paid profit in the Kaupthing saga; the Barclays fee could allegedly be defined as pre-payment for services-to-come.

The $3bn loan to the state of Qatar is intriguing, given that the state of Qatar is and the finances of its ruling family have allegedly often seemed closely connected.

What we don’t know regarding the Barclays side deals

The September 2008 Qatari investment in Kaupthing figured in the 2010 report of the Special Investigative Commission, SIC, a report that thoroughly explained and mapped the operations of the Icelandic banks up to the 2008 collapse. The criminal case added details to the SIC saga. It is for example clear that Kaupthing didn’t really expect the Gulf investors to pay back the investment but handed them $50m right away.

Little is yet known about the details of the alleged Barclays side deals. How were the covenants for the $3bn loan? Has this loan been repaid or is it still on Barclays books? And was the service for the £322m ever carried out? Was there any specification as to what Barclays was paying for? Why were these services apparently pre-paid instead of being paid against an invoice after the services had been carried out?

These are some of the things we would need to know in order to assess the side deals and their context and connections to the Qatari investment in Barclays. Clearly, the SFO knows and this will no doubt be part of the coming court case.

The whiff of Qatari investors and how it touches Deutsche Bank

The Kaupthing resolution committee went after the Qatari investors to recover the loans, threatening them with legal proceedings. Investigators from the Office of the Special Prosecutor did question the investors.

According to Icelog sources, the Qatari investors were adamant about clarifying the situation both with Kaupthing and the OSP. The understanding was that the investors were worried about their reputation. They did in the end reach a settlement with the Kaupthing resolution committee as Kaupthing announced in 2013.

These two investment sagas do however leave a certain whiff. In August last year, when it transpired that Qatari investors had invested in troubled Deutsche Bank I sent a query to Deutsche’s spokesman asking if the bank was possibly lending the investors money. I got a stern reply that I was hinting at Deutsche committing a legal offense (well, as if Deutsche had not been found to have rigged markets, assisted in money laundering etc) but was later assured that no, Deutsche had not given any financial assistance to its Qatari investors, no side deals related to their investment in the bank.

Companies don’t commit crimes – people do

Although certainly not the only one, Barclays is a bank with a long register of recent financial sins, inter alia: in 2012 it paid a fine of £290m for Libor manipulation; in 2015 it paid £2.3bn for rigging FX markets and £72m to settle money laundering offenses.

As to lessons learnt: this spring, it turned out that Barclays CEO Jes Staley, has broken whistleblower-rules by trying to unmask a Barclays whistleblower. CEOs have been remarkably short lived at Barclays since Varley left in 2010: his successor Bob Diamond was forced out in 2012, replaced by Antony Jenkins who had to leave in 2015, followed by Jes Staley.

In spite of Barclays being fined for matters, which are a criminal offence, the SFO has treated these crimes (and similar offences in many other banks) as crimes not committed by people but companies, i.e. no Barclays bankers have been charged… until now.

After all, continuously breaking the law in multiple offences over a decade, under various CEOs indicates that something is seriously wrong at Barclays (and in many other big banks). Normally, criminals are not allowed just to pay their way out of criminal deeds. In the case of banking fines banks have actually paid with funds accrued by criminal offences. Ironically, banks pay fines with shareholders’ money and most often, senior managers have not even taken a pay cut following costs arising from their deeds.

In all its unknown details the Barclays case is no doubt far from simple. But compared to FX or Libor rigging, it is manageable, its focus being the two investments, in June and October 2008, the £322m fee and the November 2008 loan of $3bn.

The BBC is not amused… at SFO charges

Instead of seeing the merit in this heroic effort by the SFO BBC’s business editor Simon Jack is greatly worried, after talking to what only appear to be Barclays insiders. There is no voice in his comment expressing any sympathy with the rule of law rather than the culpable bankers.

Jack asks: Why, over the past decade, has the SFO been at its most dogged in the pursuit of a bank that DIDN’T require a taxpayer bailout? In fact, it was Barclays’ very efforts to SPARE the taxpayer that gave rise to this investigation.

This is of course exactly the question and answer one would hear from the charged bankers but it is unexpected to see this argument voiced by the BBC business editor on a BBC website as an argument against an investigation. In the Icelandic al Thani case, those charged and eventually sentenced also found it grossly unfair that they were charged for saving the bank… with criminal means.

Jack’s reasoning seems to justify a criminal act if the goal is deemed as positive and good for society. One thing for sure, such a society is not optimal for running a company – the healthiest and most competitive business environment surely is one where the rule of law can be taken for granted.

Another underlying assumption here is that the Barclays management sought to safe the bank by criminal means in order to spare the taxpayer the expense of a bailout. Perhaps a lovely thought but a highly unlikely one. There were plenty of commentaries in 2008 pointing out that what really drove Barclays’ John Varley and his trusted lieutenants hard to seek investors was their sincere wish to avoid any meddling into Barclays bonuses etc.

Is the alleged Barclays fraud a “victimless crime”?

It’s worth remembering that taxpayers didn’t bail out Barclays and small shareholders didn’t suffer the massive losses that those of RBS and Lloyds did. One former Barclays insider said that if there was a crime then it was “victimless” and you could argue that Barclays – and its executives – did taxpayers and its own shareholders a massive favour, writes Jack.

It comes as no surprise that “one former Barclays insider” would claim that saving a bank, even by breaking the law, is just fine and actually a good deed. For anyone who is not a Barclays insider it is a profound and shocking misunderstanding that a financial crime like the Barclays directors allegedly committed is victimless just because no one is walking out of Barclays with a tangible loss or the victims can’t be caught on a photo.

We don’t know in detail how Barclays was managed, there is no British SIC report. So we don’t know if the $3bn loan has been paid back. If it was not repaid or had abnormally weak covenants it makes all Barclays clients a victim because they will have had to pay, in one way or another, for that loan.

Even if the loan was normal and has been paid a bank that uses criminal deeds to survive turns the whole society into the victims of its criminal deeds: financial assistance and market manipulation skew the business environment, making the level playing field very uneven.

Pushing Jack’s argument further it could be conclude that the RBS and Lloyds managers at the time did evil by not using criminal deeds to save their banks, compared to the saintly Barclays managers who did – a truly absurd statement.

Charging those at the top compared to charging only the “arms” of the top managers, i.e. those who carry out the commands of senior managers, shows that the SFO understands how a company like Barclays functions; making side deals like these is not decided by low-level staff. Further, again with an Icelandic cue, it is highly likely that the SFO has tangible evidence like emails, recordings of phone calls etc. implicating the four charged managers.

The Barclays battles to come

Criminal investigations are partly to investigate what happened, partly a deterrent and partly to teach a lesson. If the buck stops at the top, charging those at the top is the right thing to do when these managers orchestrate potentially criminal actions.

But those at the top have ample means to defend themselves. Icelandic authorities now have a considerable experience in prosecuting alleged crimes committed by bankers and other wealthy individuals.

And Icelanders also have an experience in observing how wealthy defendants react: how they try to manipulate the media via their own websites and/or social media, by paying PR firms to orchestrate their narrative, how their lawyers or other pillars of society, strongly identifying with the defendants, continue to refute sentences outside of the court room etc. And how judges, prosecutors and other authorities come under ferocious attack from the charged or sentenced individuals and their errand boys.

All of this is nothing new; we have seen this pattern in other cases where wealth clashes with the law. And since this is nothing new, it is stunning to read such a blatant apology for the charged Barclays managers on the website of the British public broadcaster. Even if the SFO prosecution against the Barclays bankers were to fail apologising the bankers ignores the general interest of society in maintaining a rule of law for everyone without any grace and favour for wealth and social standing.

Follow me on Twitter for running updates.

“Iceland’s selective default?” was the topic of a seminar in New York this week, organised by EMTA, the association of emerging markets investors. The measures taken by the Icelandic government and the Central Bank to reduce the offshore króna have placed the question mark in the question. Sadly, that question mark was not erased at the meeting but that doesn’t seem to worry the Icelandic government.

The concept selective default has been waved around recently in connection with the measures taken by the Icelandic government: at the strategic time, just before – what is or was to be – the last offshore króna auction, two foreign experts waved the “selective default” banner in Wall Street Journal and FT Alphaville (see my latest on this).

The two writers were present at the EMTA event in New York, James Glassman as the moderator, with Arturo Porzecanski on the panel together with Magnús Árni Skúlason, an Icelandic economist advising some of the funds holding the offshore króna and Lee Buchheit from Cleary, Gottlieb, advising the Icelandic government.*

Very much contrary to how the estates of the failed banks were dealt with last year (as I have repeatedly pointed out) – when nothing was finalised until the creditors had agreed to the measures – the Icelandic government, advised by Cleary, is engaging with offshore króna holders, to use an Icelandic expression, “with two ram’s horns,” meaning belligerently. Or as Buchheit said: let them litigate.

It is indeed a real possibility that the largest funds will litigate their way through this mess. The question is what that would entail for Iceland in terms of inter alia long-lasting and costly litigation, negative effect on credit ratings and possible delays in lifting capital controls, the goal of the whole exercise. In addition, several interesting points came up in the debate: the banks’ estate v offshore króna; recent restrictions on inflows; discrimination based on nationality – and was the recent auction really the last one?

Litigation: a real threat?

Icelandic authorities have deemed the auction successful because of good participation although CBI governor was more cautious. True, there were plenty of bids – but small ones. The large offshore króna holders didn’t participate or their offers weren’t accepted. Ergo, the bulk of the offshore króna is still inside capital controls. There is now litigation in the air, the largest offshore króna holders, all large international funds, have taken the first steps in that direction. The question is what the effect on Iceland and the Icelandic economy will be.

Buchheit said he wanted to puncture what the articles by Glasman and Porzecanski stated. He dismissed that the offshore króna holders had any claim on the Icelandic sovereign. Waving a dollar note, he stated that owning this note didn’t make him a creditor to the US; equally, owning a króna didn’t make the offshore króna holders a creditor to the Icelandic sovereign. – However, the large offshore króna holders aren’t waving króna bills but Treasury securities; around 2/3 of the offshore ISK319bn are Treasury securities which makes the situation slightly more convoluted.

Dismissing any comparison with Argentina, Buchheit did however neither directly counter the argument that the underlying assets are indeed Treasury securities nor give any tangible argument against the Argentina comparison except claiming it was not true. The funds could try litigating but neither Britain nor the Netherlands had found great sympathy for their cause, he said.

This must refer to the Icesave dispute, ruled on by the EFTA Court in January 2013 (link to the Judgement and my digest of the main points.) From the point of view of Iceland this seems a worryingly feeble argument since that dispute was, as far as I can see, fundamentally different from the issues at stake re the offshore króna (see below). Also, the argument that the offshore króna holders had bought their assets with a haircut inside capital controls seems beside the point; the point is that an owner of these securities can demand a payment on time and in full.

The testing point will be if courts – in Iceland and possibly elsewhere – will side with offshore króna holders or not. After all, Argentina decided to negotiate with those holding Argentinian sovereign bonds after a costly dispute lasting 15 years where Cleary Gottlieb was their main adviser (but not Buchheit until at the recent and final negotiations).

Cooperation last year, none this year

It now seems that the Icelandic strategy is to fix the offshore króna overhang with this last auction with remaining funds placed on locked low-interest accounts with the CBI, as the Treasury securities reach maturity, thus ignoring the possible legal risk. The next steps will then be towards lifting controls on the domestic economy, most importantly the pension funds. Only later will the locked accounts be revisited.

Magnús Árni Skúlason stressed that the funds he advised had come up with many proposals as to how to solve the issue. He pointed out that due to the very strong and booming Icelandic economy and sizeable foreign currency reserves it was difficult to argue for a haircut on grounds of a weak economy.

As I’ve repeatedly pointed out I find the difference in approach last year with the creditors of the failed banks and now with the offshore króna holders perplexing. In the latest IMF Article IV Consultation with Iceland, concluded on June 20, the IMF compares its 2014 recommendations with Authorities’ responses. On capital controls the IMF recommended in 2014 that the “updated liberalization strategy should be comprehensive, conditions based, and with an emphasis on a cooperative approach with appropriate incentives.”

As to the Authorities’ response the “updated liberalization strategy released in June 2015 takes a staged approach. The bank estates were resolved first, in a cooperative manner, which minimized legal and reputational risks and won credit rating upgrades. The authorities are now working to release offshore króna investments via an auction. Residents will be addressed thereafter (emphasis mine).

Minister of finance Bjarni Benediktsson has earlier emphasised the same as the IMF above, as did Buchheit at the EMTA meeting, that creditors have not challenged the measures last year in lifting capital controls on the banks’ estates. Due to the “cooperative manner” last year there were no legal challenges, which again raises the question why it’s suddenly not important to avoid the legal and reputational risk. So far, no clear answer.

Misconceptions on Icelandic “vindictiveness”

In his FT Alphaville guest blog Arturo Porzecanski criticised the Icelandic government for its measures on offshore króna, pointing out that the measures would place Iceland in selective default. He also strongly criticised recent law authorising the CBI to impose measures to discourage foreign inflows into Iceland.

Porzecanski embellished his points further at the EMTA meeting. According to him, the Icelandic government is, in his words, being “vindictive;” as if investors were responsible for the 2008 crisis, the government now wanted to “bleed investors” as it had tried last year with what he called a “departure tax” on creditors of the failed bank. However, he didn’t mention that the outcome an agreement with creditors (see my blog). To him this all smelled of punitive coercive action, just as in Greece and Argentina.

The tone in Iceland towards foreign investors has at times been harsh, mainly because of the politics at play, but Porzecanski’s description is to my mind out of proportions. After all, a 2010 report by an Icelandic Special Investigative Commission on the 2008 banking collapse, firmly and squarely placing the responsibility with Icelandic authorities, the CBI and politicians. And Icelandic bankers have been sentenced to imprisonment for criminal actions before the collapse of the banks.

The measures to temper inflows have long been expected: already in 2012 the CBI published a report on Prudential Rules Following Capital Controls, outlining what is needed to preserve financial stability once the capital controls have been lifted. Quoting IMF research one of the measures announced is restricting inflows, as indeed many countries have done over the past decades.

Porzecanski claims this is just done because the inflows were seen as a problem earlier, saying there is no justification for this measure. Well, he is right that the inflows were seen as a problem earlier, indeed the capital controls were put in place with the blessing of the IMF because of inflows, now the offshore króna overhang. As Porzecanski should be aware of and as emphasized in the 2012 report, IMF research underpins these measures, as do many economists. From the publication of the 2012 report it was clear that in due course these fairly traditional restrictions would be made use of.

Discriminating between foreigners and Icelanders?

A question from the audience at the EMTA event, on potential discrimination between Icelanders and foreigners, raised some interesting issues. The point was that Icelanders holding a króna would get a full króna whereas the offshore króna measures subjected foreign króna holders to getting only say 70 aurar (100 aurar = 1 króna). Buchheit’s point was that there was no discrimination involved. – Yet, the question still raises an interesting aspect.

The Emergency Law, passed on 6 October 2008 did differentiate between deposits held by individuals and entities domiciled in Iceland and abroad (which has partly shaped the definition of the offshore króna). This division was in fact a version of splitting the banks into a bad and good bank since roughly the foreign loans were put into the estates and Icelandic deposits into the new, living banks (it was slightly more complicated but this is the rough outline). – The Emergency Law has been contested in Icelandic courts and found to be in accordance with the constitution and Iceland’s international obligations.– These were extreme measures in extreme time taken by a sovereign defending its vital interests.

Eventual discrimination came up also in the Icesave case as the EFTA Surveillance Authority claimed in the EFTA Court, focusing on the use of the Icelandic Deposit Guarantee Fund, TIF. The question of discrimination was deflected in the Judgement due to the course of events in Iceland: the deposits had indeed been moved from the failed banks to the new banks but not reimbursed by the Icelandic TIF. Consequently, the Icelandic TIF didn’t need to reimburse foreign depositors, i.e. there was on discriminations involved and no breach of the relevant Directive. – Maybe it’s my lack of legal intricacies but I don’t quite see the relevance of the EFTA Court Icesave Ruling for the offshore króna problematic (as above, link to the Judgement and my digest of the main points.)

Is this really the last auction – and more confusion

In his introductory remarks Buchheit mentioned offhandedly that there are FX auctions all the time and this latest one was just another auction, in a series of 22 offshore króna auctions. Porzecanski asked if this meant this latest really was just another auction, would there be auctions following this announced last one but got no answer.

Porzecanski also pointed out that this last auction was indeed not a proper auction, more like bringing work of art to an auction house which then would set the price, i.e. no bidder on the other side.

During the question and answer session Skúlason mentioned that one concern of his was that part of the underlying assets was indeed Treasury bonds. Buchheit agreed there were some bonds, which would be paid in full and on time as Iceland had a stainless record in terms of fulfilling its sovereign obligations: it has never defaulted. – This statement seems to conflict with earlier statements – unless there is some tricky teleological interpretation behind the advice to the Icelandic government.

Last year, my main worry regarding the estates of the failed banks was if the government was ever going to have the political strength to agree on the necessary measures (mainly the haircut of the estates’ króna assets) and secondly that these measures would steer clear of legal risks. This year, the worry is that for some inexplicable reasons the cooperative method isn’t in vogue, in Iceland, possibly leading to legal risks and reputational damage so astutely avoided last year. Maybe I’m missing something but the discussions at the EMTA meeting didn’t inspire much confidence: “let them litigate” sounded decidedly belligerent compared to the cooperative approach last year.

*I had been invited to join the panel but ended up only listening via phone from London.

Follow me on Twitter for running updates.

What do Russia’s president Vladimir Putin and Iceland’s prime minister Sigmundur Davíð Gunnlaugsson have in common? Both have recently tried some pre-emptive damage-control measures before the material from a leak, administered by International Consortium of Investigative Journalists, ICIJ, is published. Gunnlaugsson’s wife has a BVI company as do or did minister of finance Bjarni Benediktsson and another minister. – While waiting for the ICIJ leak it’s worthwhile revising on the Icelandic offshorisation: Iceland is probably one of the most offshorised countries in the world.

Since his wife posted on Facebook March 15 that she owned a “company abroad” prime minister Sigmundur Davíð Gunnlaugsson has tried in various ways to brush off this whole affair of his link to an offshore company. As so often, when dignitaries are under pressure to inform the information given has proved to be less than informative.

Two things have been taken up by his critics: although members of parliament are required to register financial interests Gunnlaugsson had not seen it necessary to register this company since it was his wife’s and while Iceland was negotiating with creditors to the banks he did not mention that this wife holds claims in the banks.

This led to queries from a Rúv journalist to all parliamentarians as to offshore companies. Both Bjarni Benediktsson minister of finance and minister of justice Ólöf Nordal acknowledged such ownership. They have both mentioned that they had had questions regarding their ownership from an Icelandic journalist working with the ICIJ. Several other politicians or people with political ties now also acknowledge owning offshore companies but nothing as spectacular as the PM offshore link.

Since 2013 Group of States against Corruption, GRECO, have been reminding Iceland of its faulty measures against corruption, i.a. that interests of public officials are not transparent enough. This was latest underlined in GRECO’s fourth evaluation round, published March 23. In addition, foreign-owned companies are a particularly sore subject in a country where capital controls have for almost eight years prevented both individuals and companies from investing abroad.

Leaked material will be published later today by international media such as the Guardian, Süddeutsche Zeitung, DR, SVT and Rúv in collaboration with the ICIJ. All three offshore companies, which have now surfaced, were set up by Landsbanki Luxembourg. The context for the three new Icelandic-owned offshore companies is interesting: the Icelandic banks were extremely efficient in selling offshore solutions to their clients, also much less wealthy clients than foreign banks would have offered these services to.

Following the banking collapse in October 2008 I started investigating matters related to the Icelandic banks. What I found most surprising was how diligently the banks had been in selling offshore services. I believe it’s not too much to say that Iceland was the most offshorised country in the world because so many small business-owners were offered offshore companies. As often happens in Iceland things spread quickly. During the heady years up to 2008, a source said to me “you just weren’t anyone unless you owned an offshore company.”

Ca 250-300 individuals might have owned offshore companies

The easiest way to search was to use Luxembourg, the gate to most of the Icelandic offshore sphere, to search for companies. There is no official statistics regarding offshore companies but my guess is that perhaps 250-300 individuals owned offshore companies. Most of these people would own only one company except the wealthiest businessmen might have many to their name.

Among companies there were Baugur Group and others that had a veritable offshore galaxy connected to their activities. Certainly, the use of offshore companies is not an Icelandic invention but the Icelandic banks seem to have taken it further than in many other countries, resulting in utterly meaningless ownership of offshore companies by small investors who could perfectly well invest without owning such a company.

“Don’t be silly”

After the prime minister’s wife informed on her “company abroad” it quickly transpired that the company wasn’t only abroad but offshore, registered in the BVI. The debate in Iceland has been hefty and the truth has appeared only slowly.

At first, Gunnlaugsson claimed the company was entirely his wife’s affair, which made people wonder why he then chose to use his own spokesman, paid for by the public purse, to deal with questions. The Icelandic media was also quick to pull up sound-bites from the election campaign in 2009 where Gunnlaugsson pointed out that since his wife was wealthy he couldn’t be bought by anyone.

Apart from questions from the media, which have been sparsely answered, the PM chose to inform through chosen channels. Since the original Facebook message proved somewhat uninformative the couple has brought out the following: a short message on Gunnlaugsson’s own webpage, much in praise of his unselfish wife who had sacrificed possible wealth because of her husband’s political carrier; a letter from KPMG, to confirm that all due taxes have been paid; an interview in Fréttablaðið, owned by the wife of Jón Ásgeir Jóhannesson, of Baugur fame, at one time owner of a myriad of offshore companies, where the questions left something to be desired; an interview on a private radio station, also owned by Jóhannesson’s media company; a 12 page questions and answers, published on Gunnlaugsson’s webpage, informing i.a. on why the offshore company is called Wintris (thus this relevant fact that the name was not chosen by the wife but came with the “company-packet”) – on social media in Iceland this Q&A is widely called “the prime minister’s interview with himself.”

Gunnlaugsson has however been entirely unwilling to submit himself to being questioned by Rúv or any media known for independence. A few days after the story broke a Rúv journalist managed to track him down in the Alþingi’s parking basement where the prime minister had found an unusual way out of the building as the journalist was standing by the main door. When the journalist asked the PM what he wanted to say regarding Wintris Gunnlaugsson said laughing: “Látt’ekki svona” which might be translated as “Don’t be silly.”

The Wintris saga – so far

Pálsdóttir is independently wealthy, the daughter of a businessman who i.a. owned the Toyota dealership in Iceland. Following the sale of the dealership in 2005 Pálsdóttir got her share of the sale in 2007.

Here comes the first slight ambiguity. In his first response the PM says that when she acquired the assets, in 2007, the couple had lived in the UK “for a few years” intending to live abroad for a few more years, either in Denmark or in Britain. Strangely enough the prime minister has never been able to clarify completely where he lived 2005 until late 2008 when he showed up in Icelandic politics. These years have sometimes been referred to as Gunnlaugsson’s lost years and his academic achievements were for a while not quite clear.

What is clear is that he finished the Icelandic equivalent of A levels in 1995 and then graduated from the University of Iceland a decade later with a BS business degree and media studies. During that time he worked for some years at Rúv; a BS degree normally takes three years to finish if the student is studying full time.

According to his CV on the Alþingi website he was an exchange student at the Plekhanov University in Moscow, studied international relations and public affairs in Copenhagen and then economics and politics in Oxford during these three years. Icelandic media has tried, unsuccessfully, to get information from Oxford University as to what exactly Gunnlaugsson had studied; it seemed the student had asked the OU not to give any information on his time there. Also, according to his CV he worked part time for Rúv 2000 until 2007.

Whatever the exact timing of his whereabouts and studies the couple decided to keep the money abroad, meaning that the assets, which originated in Iceland, were moved abroad. This, at the time when Iceland was functionally part of the free flow of funds in the European Economic Area and in terms of access to funds in Iceland it shouldn’t have mattered where the couple lived.

In her FB message Pálsdóttir claimed she was under particular EEA tax scrutiny, something that proved to be a “misunderstanding” when the media inquired as to what exactly this meant. In her original message she also indicated that she was posting this because of rumours regarding her assets. Only later came the information the couple had received questions some days earlier from an ICIJ journalist regarding her offshore company.

Creditors and claims

Another drip of information brought out that Wintris did indeed own claims in the Icelandic banks, i.e. the PM’s wife had invested in bank bonds before the banks collapsed and now owned claims.

Gunnlaugsson has emphasised that Wintris is not his company. Another ambiguity is how exactly the ownership was separated. Pre-nuptials are not uncommon in Iceland but that doesn’t seem to have been their arrangement. The same counts for information that Wintris has always been declared to tax authorities, again somewhat ambiguous.

Before broadcasting a piece on Rúv on Friday regarding “Controlled Foreign Corporations,” CFC, I had asked the PM’s adviser and the KPMG-employee who wrote the letter if the tax filing in Iceland was done by using a CFC form, as is the only correct way of filing a company like Wintris. I did not get an answer. (In a blog post Gunnlaugsson has today expressed anger at my reporting.)

Since becoming a prime minister finding a solution for lifting capital controls, where the banks’ estates and their creditors were a significant part of the equation has been one of Gunnlaugsson’s major task. He claims he was not at all obliged to declare interest, given that his wife held claims in the banks. On the contrary, he claims it would have been an impossible situation had his wife’s interest been known. Some political opponents claim that Gunnlaugsson can’t simply set his own ethical standards and definition.

Gunnlaugsson’s wife is a client of Crédit Suisse, which following the collapse of the Icelandic banks took over private banking for some wealthy Icelandic clients. Crédit Suisse has at times invited its clients to meeting abroad. I have asked the PM’s adviser if Pálsdóttir has ever accepted such invitations but again, no answer has been forthcoming.

Pálsdóttir has claimed she instructed CS not to invest in any Icelandic asset. Questions from Icelandic media on the content of her CS portfolio have not been answered.

Principles, not persons

Much of the debate in Iceland regarding Wintris so far has centred on if Gunnlaugsson profited, via Wintris, from decisions taken regarding the plan to lift capital controls and its effect on creditors.

This angle is, from my point of view, rather futile. Although Gunnlaugsson has in the Wintris debate repeatedly emphasised his own valiant action against the creditors his version can be contested. It was clear already by 2012 that what needed to be done regarding the estates was to write down the ISK assets; there was not enough foreign currency to pay the ISK in the estates in FX.

Creditors were ready to negotiate by late 2012 but given the fact that the left government was greatly weakened by internal fights it didn’t have the political strength and mandate to enter into negotiations. It was clear to all involved that this would have to wait until after the elections.

During the election campaign Gunnlaugsson talked about the billions that would fall in the lap of the Icelandic state; billions that would be used to write down private loans and for other good things. It then took the government two years to find the solution. My understanding was during that time, as I repeatedly mentioned on Icelog, that the two government leaders disagreed: Benediktsson wanted to find the least risky solution in unison with creditors, Gunnlaugsson wanted to play hardball, ignoring the legal risk Benediktsson repeatedly referred to. The two leaders have challenged his course of events.

Ultimately, this affair is not about people but principles – if leading politicians should be connected to offshore companies at the same time that Icelandic authorities have joined international effort to fight tax havens and secrecy jurisdiction. It is after all perfectly possible to invest, at home or abroad, without owning an offshore vehicle.

Follow me on Twitter for running updates.

In the case of Glitnir there was a retrade – the numbers have been renegotiated since the June plan. The government has talked effusively about clarity and transparency in liberalising capital controls but the process of introducing such a plan has been characterised by obfuscation and opacity. The plan seems sensible but earlier promises by the prime minister’s party, the Progressives, of gigantic windfall seem to have pushed the government to play a game of make-believe, smoke and mirrors. Selling the banks will prepare for the coming years: drumming up the fear of foreign investors masks the fact that the greatest danger is the mind-set of the boom years.

The press conference October 28, to introduce the assessment made by the Central Bank of Iceland, CBI of the draft proposals from Glitnir, Kaupthing and LBI, was a very low-key event held at Hannesarholt, a small culture house in the centre of 101 Reykjavík – nothing like the hugely publicised and carefully staged June event at Harpan, the glass palace by the harbour.

In June, when the plan to lift capital controls was formally introduced, the emphasis was on the large funds, altogether ISK850bn or 42.5% of Icelandic GDP, which could be recovered by the planned stability tax. There was albeit to be some deduction, the number was closer to ISK660bn but yet, the tax was the thing and the numbers astronomical.

Already then, it was heard from all directions that in spite of the tax rhetoric, minister of finance Bjarni Benediktsson was not keen on the stability tax. He preferred a negotiated stability contribution, seeing it as best compatible with his goal of the least legal risk and taking the shortest time, as the International Monetary Fund, IMF, also recommended.

Lo and behold, the CBI now recommends stability contribution, as governor Már Guðmundsson presented last week (full version in Icelandic; a short one in English) firmly supported by Benediktsson at last week’s press conference. The stability contribution mentioned is ISK379bn but plenty of numerical froth was whirled up, as so-called counter-active measures, pumped up to a sum of ISK856bn, no doubt meant to trump the tax of ISK850.

With the booming Icelandic economy luckily there are strong indications that the economy can well cope with the measures planned; getting rid of the controls will be a big leap forward for Iceland. What leaves a lingering irritation is the illusion and mis-information used, no doubt to make the Progressive party’s election campaign promises look less outrageous now that the plan goes in an entirely different direction compared to its earlier promises.

A bank or two

Due to the toxic legacy of Icesave, the Left government (2009-2013) was forced to take over the new Landsbankinn. What now came as a surprise was to see the government accepting to take over Íslandsbanki as part of the Glitnir solution.

Clearly, Glitnir with its large share of ISK assets was always going to be a tricky situation to solve but well, this turn of event was a surprise.

Until the announcement, Glitnir’s winding-up board, WuB, had bravely tried to convert its largest Icelandic asset, Íslandsbanki, into foreign currency by selling it to foreigners paying in foreign currency. Time and again there was news about an imminent sale, to outlandish elements – Arabic and Chinese investors were mentioned.

Cough cough, getting such investors accepted as fit and proper by Icelandic authorities was never going to be trivial though getting the Icelandic political class agreeing to foreign owners was a no less daunting task. After all, Iceland is the only European Economic Area, EEA, country where the banks are entirely under domestic ownership.

It is still unclear what the price tag on Íslandsbanki is. At first I understood that the bank would be acquired for a fraction of its book price of ISK185bn, of which Glitnir owns 95%, ie. ISK176bn. Now I’m less sure; apparently the price might be as much as ISK164bn.

Glitnir number crunching

According to previously published information, the stability contribution amounted in total to ISK334bn. The recent changes to the Glitnir contribution are not entirely easy to decipher.

As I pointed out earlier the new Glitnir agreement was indeed a retrade since Íslandsbanki was unable to honour previous plans. With the new plan Glitnir gives up 40% of the planned FX sale of Íslandsbanki, valued in ISK at ISK47bn as well as Íslandsbanki dividend of ISK16bn, meant to be paid in FX, in total ISK63bn. In return creditors are allowed to exchange more ISK into FX than earlier planned.

This seems to rhyme with the Ministry of finance press release: “According to the above-described proposal, the transfer of liquid assets, cash, and cash equivalents will be reduced by 16 b.kr. because of the proposed foreign-denominated dividend to Glitnir, which will not be paid, and 36 b.kr. due to other changes provided for in the amended proposal from the Glitnir creditors.”

(From the Oct. 28 Icelandic CBI report; counter-active measures related to the estates of the three big banks, at end of 2015; 1. line Cash; 2. Other ISK assets; 3. Other assets in FX; 4. Cash-sweep assets)

 

The interesting thing is that the CBI report seems to indicate that this has negative impact on the CBI currency reserve, by ISK51bn

(From the Oct. 28 Icelandic CBI report; counter-active measures related to the estates of the three big banks, at end of 2015; 1. ISK converted into FX; 2. FX recovery by ESÍ, Assets held by CBI, from the estates, in FX until 2019)

 

Smoke and mirrors

It has been my firm opinion that since the estates, because of capital controls, can’t be resolved as a private company normally would, i.e. without a state interference, the outcome should be negotiated. This has now happened, a welcome and wise approach.

The smoke-and-mirrors events that the government has chosen in introducing the latest step towards lifting the controls is however neither wise nor welcome. Considering the emphasis in June on the stability tax the step taken now towards stability contribution can’t be said to be a logical step on from the June plan though an entirely sensible plan. Indeed, the June emphasis on the tax was a deviation from what Benediktsson seems to have intended for quite some while, i.e. a negotiated contribution and not a one-sided tax.

Value of Íslandsbanki v Arion

With news that investors are seeking to buy Arion it seems that the p/b in question is 0.6-0.8, where the lower estimate may turn out to be the more realistic one.

However, this is in stark contrast to the p/b that the state seems to be paying for Íslandsbanki, i.e. 0.93. Considering the banking sector in Iceland – probably still too big and still miraculously gaining from one-off legacy windfall – this price for Íslandsbanki would be nothing less than staggering and could well be seen as a total failure on part of those negotiating for the government.

Arctica Finance and Virðing – ties to politics and the past

It comes as no surprise that the pension funds are buyers in spe of the Icelandic banks. According to news in Iceland, it seems there are two finance firms – Virðing and Arctica Finance – vying for buying Arion. As could be expected, both have ties to politics and the past.

Virðing is run by ex-Kaupthing bankers i.a. Kaupthing Singer & Friedlander manager Ármann Þorvaldsson, owned by investors with various ties to the boom times and very active during the last few years. Arctica Finance was set up by bankers mostly from old Landsbanki, i.a. Bjarni Þórður Bjarnason, seen to be strongly connected to the Independence Party, Benediktson’s party. Unsurprisingly, both firma are courting the pension funds, the source of the greatest financial power in Iceland.

The really worrying aspect here is that the pension funds have all clung religiously to their mantra of being non-interfering non-active owners. During the boom years the pension funds were closely aligned with the banks and in the end lost heavily because of these ties and their unquestioning and uncritical attitude to the banks. There were clear indications of clustering: certain pension funds seemed particularly close to certain banks and certain large shareholders.

The billionaire-makers of Iceland: the pension funds

In most countries such ties exist to a certain degree but in Lilliputian Iceland these ties of friendship, kinship and political ties, border on the incestuous.

If we are now seeing these old ties revived among owners of one or more banks Iceland is set for round two of running the banks as during the boom years: with a chosen group of what I have called “preferred clients” and their fellow-travellers, i.e. clients who got collateral-light or no-collateral loans, who got bullet loans that were continuously rolled on, never classified as non-performing – and then all other clients who just got the professional scrutiny any normal person can expect from a bank.

Indeed, the pension funds are not only king-makers in the new Iceland but billionaire-makers. This has to a certain degree started, though on a minor scale so far: the pension funds are already investing with groups of investors who are doing very well from these ties. Clearly, investors chosen as the funds’ co-investors are pre-destined to do exceedingly well.

Indeed, the pension funds are not only king-makers but billionaire-makers.

The fight against foreign ownership – to control Iceland

This possible danger of the pension funds repeating past mistakes is compounded in an Icelandic-owned banking system with no foreign competition and no foreign ownership, a wholly exceptional situation in Europe.

Seen from this point of view it is utterly fascinating to notice that many in power in Iceland, both in politics and business, have for decades fought with all their might against foreign ownership of banks or any sort of important businesses in Iceland – and still do.

From the point of view of these old bastions of power Iceland needs to be connected to the outer world but only to the degree that Icelandic entities can make use of connections abroad, not the other way around, i.e. no foreign ownership in Iceland. Needless to say, these powers fiercely oppose closer connection to the European Union – nothing more than the EEA, thanks!

The fight to link with the pension funds and to buy banks is the latest apparition of interest politics in Iceland: it is a battle of the soul of Iceland and the weapons are fear of foreigners and foreign ownership though the real danger is entirely domestic: the danger of the same mind-set that ruled the banks during the boom years and eventually pushed them off a cliff in October 2008.

Follow me on Twitter for running updates.

Last week started with a TV interview where prime minister Sigmundur Davíð Gunnlaugsson spent the best of half an hour arguing with the journalist, much to the dismay of many TV watchers. Then there was a report on Iceland and the EU, which led to the government deciding to break off EU membership negotiations, in spite of earlier promises to vote on continued negotiations; a decision ex prime minister Þorsteinn Pálsson called the greatest political betrayal in Icelandic history. And lastly, it was also last week that the government, at the 12^th hour, announced it was going to take time to set up a committee to ponder on changes, or not, at the Central Bank. This which means that the CBI will clearly not be taking any major decisions until new governor(s) are in place, which again must set some creditors thinking – and perhaps also some Icelanders.

For two days protesters have gathered outside the Icelandic Alþingi, parliament. It is not an angry mob, more like a crowd during an interval at a theatre waiting patiently for the second half. What started out as an awkward election promise is now a millstone around the neck of prime minister Sigmundur Davíð Gunnlaugsson but more seriously minister of finance and leader of Independence Bjarni Benediktsson. At the time, Benediktsson himself now against Icelandic membership of the European Union (but pro EU some years ago) but trying to avoid alienating pro-EU voters, eased out of anything final on the matter by promising a referendum on continuing the negotiations or not.

A history of broken promises

Both parties promised in no uncertain terms that they would not break off negotiations without a referendum but instead hold a referendum on whether to continue the membership negotiations. What the two parties had not foreseen was that there would be a clear majority for continuing.

Many voters now seem to feel that this promise has been broken in spite of the coalition parties offering various different version of actually-not-broken-promise. The government had said it would make up its mind on EU after a report it had promised already last autumn. Now that the report is out, a balanced overview of the negotiations and options, the government intends to skip earlier promise and instead break off the negotiations without any further ado. It even seemed to want to rush the matter through parliament last week, holding a parliamentary debate only a day after the 1000 pages report had been published thus giving MPs no time to study the report but it was forced to change its tempo and give more time.

This awkward promise of a referendum on continued negotiations now haunts the government. Benediktsson tries to spin it as being impossible to continue though he struggles to explain what should have changed since the promise was given. He did however say in a TV debate last night that he could “not completely” keep his promise.

This issue is particularly difficult for Benediktsson, less for Gunnlaugsson whose party is firmly against EU membership. Although opinion polls indicate that majority of Independence party voters are against EU membership the business elite, except for those with interests in the fishing industry, is for membership. This is turning into a major problem for the government. One Independence party member, Vilhjálmur Bjarnason, has said he will reflect the opinion of many party members and vote against breaking off the negotiation. The government’s majority is however still secure.

One who voices dismay in no uncertain terms is Benediktsson’s fellow party member ex prime minister Þorsteinn Pálsson who calls the change of course “the greatest political betrayal ever” in Icelandic politics. Pálsson is a respected commentator and many well-known Independence party members from the business community who side with him.

In addition, Iceland also now has its very own version of Sarah Palin. Last week, Progressive MP and chairman of the budgetary committee Vigdís Hauksdóttir stated during a radio debate: “There is famine in Europe now” and later said that Malta is “a self-governing zone within a larger country. It is not a country.” Before these remarkable statements her most memorable statement had been (during a TV interview on earlier promised action on the health service “at once” her party were in power) that the phrase “at once” was an “elastic concept” – a novel and highly creative interpretation that has now turned into a saying in Iceland.

CBI in limbo

By stepping in to make changes at the CBI the government has effectively kicked the CBI off the field of any major decisions regarding the estates of the collapsed banks and ultimately of the capital controls for some time, probably most of this year. This is seen a cause for worry in the business community tired of non-action on the capital controls. The bigger companies, often with foreign operations that ease the pain of the controls, find their way within the controls but smaller and medium sized companies are complaining loudly.

The first step towards changes is to set up a working group (no names yet) apparently to come up with suggestions as to what the changes should be. As pointed out earlier, it seems that the government was going to set all of this in motion at a later date but then realised, at the last moment, that by waiting it might have to pay the present governor Már Guðmundsson salary of the rest of his 5 year term, which would have been renewed automatically February 20 unless he had been notified. Which he then duly was, on that day. *

The situation now is of completely opacity as to the procedure. Also there is a complete lack of policy as to where the government is heading with the CBI. It is unclear who will come up with proposals, unclear what the government policy is (some indication that the FME, financial supervisory authority, might be put under the CBI as it was until 1998) and it is also unclear as to what the criteria will be for hiring a new governor and if there will be more than one governor. And obviously it is completely unclear as to how long all this will take and when new governor(s) might be in place.

Will the past replace the future?

Generally, countries where the government meddles in matters of the central bank do not fare well. Right now, it is not only the Icelandic government that is creating such headlines but also the governments in Hungary and Nigeria. Not exactly countries that Iceland has been comparing itself to over the years.

One of the more interesting remarks made by the prime minister in the TV interview a week ago was when he stated on CBI independence that “it would be good to have an independent central bank if we had a different government.”

The fact that the CBI had criticised the “correction” – debt write-down for borrowers who could afford their loans and consequently had not profited from earlier write-downs by the previous government – was obviously a matter of great irritation to the prime minister.

This ill-prepared intervention against the CBI has instigated a feeling in Iceland that the country is about to be steered back to the past where all public institutions and state-owned companies were carved up between the political powers. People were chosen to leading offices of power not according to merits but according to party affiliation. It came as a great surprise when Benediktsson recently appointed a young ex banker, Halla Sigrún Hjartardóttir. She has no previous experience of bank supervision but is an investor with rumoured connections to wheeling and dealing connected to the oil company Skeljungur. Not exactly a career similar to her opposite numbers in the neighbouring countries. The question is if this was only the first of similar nominations.

The question is if old politicians will now be put into power as once was the rule rather than the exception. Might ex prime minister Davíð Oddsson become the chairman of the board of Landsvirkjun? And will his successor as party leader and later prime minister Geir Haarde. So far, the rumours are utter speculations but they indicate a state of mind prepared to see the past turn into the future.

The past practices of the old banks live on (in hidden assets)

It remains to be seen if the strong feeling of the political past being projected into the future materialises. What clearly lives on from pre-collapse Iceland is the effect of the old banks’ operations, both its earlier practices and that most of the big borrowers still have access to considerable assets.

Post-crisis bankrupt companies with humongous debt and hardly any assets (left) shows how assets did migrate out of these companies to somewhere mostly out of sight and reach of administrators. Most of the well-known holding companies, supporting the ownership of the major shareholders of the banks have followed this pattern, i.a. Novator, Baugur, Exista, Fons etc. This alleged migration of wealth out of sight was facilitated by the banks’ lenient lending practices: the banks took all the risk, the favoured borrowers got covenant-light loans.

The clearest shift of risk took place during the winter of 2007 and 2008 when foreign banks, reacting to falling share price in the Icelandic banks, initiated margin calls affecting almost all of the big Icelandic bank shareholders who had placed their Icelandic bank shares as collaterals with foreign banks. The Icelandic banks, rather than seeing their shares flood the market evidently precipitating further falls in share price if not a total meltdown, stepped in and increased their lending to these shareholders. By Easter 2008, this shifting of risk and rapidly increased exposures was over and done with.

In only a few months these moves, well documented in the SIC report, hugely increased the Icelandic banks’ already considerable exposures to their largest shareholders and their business partners, in some cases going over legal limits (though in some cases the banks’ lending hovered under the legal limits by abstruse definition of “related parties”: i.a. Glitnir did not consider Jón Ásgeir Jóhannesson and his wife as related parties nor did Landsbanki classify Björgólfur Guðmundsson and his son Björgólfur Thor Björgólfsson as related parties).

Coming soon: transfer of wealth of historic magnitude

What is at stake in the coming months and years? The banks have amassed a great amount of assets that will be sold. Already, there is anecdotal evidence that the practice from the old banks, of issuing loans to favoured clients against shares with non-too punishing haircut, is abounding. After all, the banks do want to lend money and inside capital controls bad practices can fester.

The most prized assets, already for sale, are the two new banks, Íslandsbanki and Arion, owned by foreign creditors. Most likely these assets are highly coveted by certain forces in Iceland where banks have always bastions of political power and centres of handing out assets to favoured clients.

How the foreign-owned ISK assets of the estates – not only if Glitnir and Kaupthing but also of Straumur and Icebank – will be dealt with decides to a certain degree the price tag on Íslandsbanki and Arion. Any government action, affecting the price, such as converting all foreign assets into ISK/paying foreign cash out in ISK will be of huge interest to Icelanders with money and ambition to buy into Íslandsbanki and Arion.

It is no understatement that the sale of Arion and Íslandsbanki will greatly affect the business climate in Iceland in the coming years and possibly decades. If these assets could be sold on the cheap, aided by pension funds willing to act as silent owners by the side of active investors, the past might indeed be the future, not only in politics but also in the business community.

And now, over to creditors and mobile and educated Icelanders

By the end of 2012 both Glitnir and Kaupthing had presented the CBI with drafts of composition. The matter is still unsolved. Most of last year was lost to election and then a run-in time for the new government. That year went by without any bringing any clarity as to the abolition of the capital controls and the steps needed to solve the problem of the foreign-owned ISK assets.

Now the CBI is in limbo. What will creditors do when faced with an uncertain future of the CBI and an uncertain effect on how to resolve the problem of the ISK assets in Iceland? The creditors have various possibilities. Do they deem the government to be hindering access to the estates’ fx assets? If so, they could try to sue the Icelandic state abroad, i.a. in London. Argentina is the scare example of a country that for years has been kept under pressure from creditors. Not necessarily the Icelandic saga any time soon.

Some drama might come later. Then, on the other hand there will not necessarily be any big drama: some of the creditors might just silently choose to sell their claims. In troubled times the buyers are investors looking to recover their claims by litigating every penny, or in this case, every króna.

Ireland is now back in the market though the country is by no means on a safe ground yet. When will Iceland be in the market to refinance its debt? Judging from the government’s tendency to prolong problems instead of solving them it might take a while. Even a long while.

For Icelanders locked inside capital controls there is yet another “if”: if Iceland will be further isolated from other countries the effect of the growing income difference of the mobile and well educated classes compared to the neighbouring countries might take its toll. As counts for much in Iceland the changes are very gradual. Lost opportunities or loss of work force who does not return to Iceland after studies abroad is difficult to calculate.

* In his letter to CBI employees, Guðmundsson noted that he should have been alerted before midnight February 19. However, he was apparently not notified until evening of February 20. It remains to be seen if this will pose a problem for the government: if Guðmundsson will/cannot reapply, i.e. he could possibly claim that he should be paid for the rest of his term. Judging from his previous dealings regarding his salary, where Guðmundsson maintained earlier promises had been broken – he lost a court case on this issue – Guðmundsson will no doubt explore his position were he to lose his job.

See below for recent three blogs on power and politics in Iceland. The latest blog on capital controls is here. 

Follow me on Twitter for running updates.

Those who understood the Eurozone correctly were those who understood that politics mattered more than economics. It might very well be the same in Iceland: in order to understand the course of events regarding capital controls, foreign-owned ISK assets and the estates of the failed banks, politics might weigh more than the economics. And as in Europe the political weight might bode messy course.

To continue with the Eurozone analogy: the (at first hidden, later more overt) agenda of all action taken by the EU was to prevent any bank in the Eurozone failing. It was deemed to be bad for the reputation of the young currency area and in the Realpolitik it counted that the strong German and French governments were adamant in sheltering their own banks from unwise lending to the debt-ridden periphery. Both these agendas were politically driven and those who understood the political dominance over sound economic thinking got their predictions right: no euro-exit, good public money thrown in to reward bad lending.

In Iceland, there might also be an agenda, other than just abolishing the capital controls without jeopardising financial stability: the Progressive Party and its leader, prime minister Sigmundur Davíð Gunnlaugsson has time and again, since the election campaign early last year and after it came to power, stated that there will unavoidably be money for the state coffers when the bank estates will be dealt with in order to abolish the controls (see more on facts and figures in an earlier Icelog).

The Independence Party, led by minister of finance Bjarni Benediktsson, has appeared to be less focused on abolition as a way to enrich Iceland. Recently though he has faintly echoed Gunnlaugsson’s view that doing it quickly, via bankruptcy rather than the more long-term composition the creditors are keen on, might be a sensible way. It is not clear though if he really believes it or is just putting pressure on the creditors.

It seems increasingly clear that the abolition of the capital controls, which needs an action plan on dealing with the foreign-owned ISK assets of the estates, might well be more dependant on political solutions than purely finding a way to secure financial stability. Both parties will want as much of the credit for a plan to abolish the controls – but the Progressive party seems also keen to create a situation where it will be seen as having won over the foreign creditors. The Progressive narrative is that it secured an Icelandic victory in the Icesave case (though the Icesave problems are alive and kicking in the unsolved Landsbanki bonds) – and now it is going to secure a victory over other foreigners, the creditors.

The necessary solutions will be conjured up in the tense political sphere between the two parties.

What, when and how?

There is probably no one in Iceland who is as yet able to answer the question what exactly is needed to resolve issues preventing the abolition of the capital controls, when action will be taken and how it will all be brought about.

Because of the Progressive’s earlier promises the government’s agenda might not be only to abolish the controls and to secure financial stability but to make sure the state profits from it. Compared to other countries fighting to abolish controls, such as Cyprus, this is a novel situation and makes it a whole lot more difficult.

How much does the government want from the process of abolition? It clearly wants at least ISK120bn since that is what it is claiming in tax from the estates of Landsbanki, Glitnir and Kaupthing, albeit over the next four years. But judging from sources close to the government it seems that a whole lot more is desired – probably all the ISK assets of the two estates (Landsbanki is in a different place due to its creditors and the bonds between old and new Landsbanki) and a slice, let’s say 10-15% of the fx assets.

If this really is the goal then this is the “what” needed to solve the controls conundrum, from the point of view of the government.

When action will be taken is unclear. On a Rúv TV talk show (in Icelandic) February 9 Benediktsson once again said that the abolition could start this year, it would not happen over night but over some years and it all depended on if there could be some harmonisation of expectations. Recently he also said it might be seen as unfair to Icelanders that the creditors were the first ones to get out with their money.

There is now a working group at work on behalf of the government on issues related to the capital controls. It first seemed it would finish its taks in February but now March or April seems more realistic. The group consists of both bankers and lawyers (led by much respected banker, Sigurbjörn Þorkelsson living in London). The group is not expected to come up with one solution but various scenarios. If their indirect remit is to show that the only viable way out of the controls is that the creditors hand over both all ISK assets and a slice of the fx then that will surely be part of their solution.

Then there is the CBI working on current account forecast, which ideally should underpin a payment forecast – how much fx will there be for paying out creditors in the coming years? The next CBI Monetary Bulletin will be out now on February 12, clearly an important event. The last CBI currency auction was deemed to have gone well for the bank and the bank has been unexpectedly active in the currency market (see here a short overview from Íslandsbanki).

It will be interesting to see if the CBI stats appeal to the government and the working group or if they will seek other ways to underpin their own plan, whenever it emerges.

The goal will determinate the road to the goal. The thing to look for is if it will be a neat solution, nested within present rules and regulations or will it be an all-Icelandic messy solution, depending on special legislation.

Difficult decisions in tense political climate

Icelandic political pundits have noticed, from early on in the life of the coalition that the two party leaders rarely are in tandem on important issues. The first great big test of the government was the execution of the Progressives’ promise on extensive debt relief. That promise was defused by the Independence Party, which cut it down from vaguely promised ISK300bn to ISK80bn – and instead of funds coming from the resolution of the estates it will be financed by banking tax, albeit partly from the estates.

However, the promise could be said to have been kept. Thus the Progressives strengthened their reputation as a party to be trusted and the leadership of the Independence Party could feel quietly satisfied that it had delivered the promise in a way it deemed viable.

The second test was another Progressive promise, abolishing indexed loans. A committee delivered a split report – majority came up with several solutions to change loans but in no way supporting the Progressive view it should be chucked out fast; a minority report suggested the loans should and could be abolished right away. (The Icelandic debate on indexed loans is truly weird from a foreign point of view: the problem rather seems the chronic inflation rather than the loans per se but that is not reflected in the debate.) Again the Progressives could say this promise was now all on track though what exactly is the track is not clear whereas the Independence Party said little other than there was now material to study.

The outcome so far is that the Progressives have kept their promises. Although it has been done with cutting off a toe here and a heal there to make it all fit the party seems to have managed to stay its course. The Independence leadership can be quietly content that it has indeed managed to steer the toe- and heel-cutting to suit its own policies. So far so good for Benediktsson.

Some Independence supporters are feeling uneasy that the party has staked its own existence on carrying out Progressive promises that were far from the Independence line. The point of view of the Independence leadership might well be that the promises better be gotten out of the way as soon as possible in order to avoid distraction in focusing on other matters. Such as the capital controls.

In spite of smooth executions so far there seems to be quite some tension between the two parties, also regarding the capital controls. No matter the rhetoric the course so far it has been decided by the Independence party. This might indicate that Benediktsson really decides on the important issues regarding the economy. But the future is not always like the past.

Both coalition parties need to get the most out of their time in government. The Independence party because it is used to be in government; a leader who does not again firmly position the party for another term is politically dead. The Progressives need to turn their tide tangibly in order to escape what seemed to be their imminent future up until the Icesave ruling: that they would keep on hovering around 12% of votes.

Young politicians in an atmosphere of former times

The Left government put effort into breaking out of the old political mould i.a. by nominating people on merit more than for party allegiance. It seemed for a while that this was an answer to the call of the time. However, although the two coalition leaders are young their attitude seems to hark back to the olden times.

The biggest test when it comes to nominating people for leading positions is the governorship of the CBI; it expires in autumn. The position needs to be advertised six months in advance, i.e. by February 20. One rumour was that it would look bad to do it at the last moment so had nothing been done by end of January it was a sign that Már Guðmundsson would be reappointed.

Now the rumour mill is in overdrive. The Progressives are said to be hell-bent on getting rid of Guðmundsson. Allegedly they cannot forgive him for wanting to negotiate on Icesave and in addition the party would like to be able to influence the bank’s position on major matters, such as the capital controls. So much for the independence of the central bank.

However, the problem for the Progressives is that Guðmundsson is widely respected, not only in Iceland but even more importantly abroad. He has the high standing and trust that a governor of a central bank needs in order to be taken seriously and in order for a country to be taken seriously in terms of monetary policy. It seems highly unlikely, if not impossible, that the Progressives can come up with anyone anywhere near Guðmundsson’s format.

The Independence leadership has been said to be more bent towards keeping Guðmundsson, also in order to encourage trust and stability. One version has it that the government might keep Guðmundsson but make some other changes, i.a. add a vice-governor, favourable to the Progressives or change the present one, Arnór Sighvatsson, also well respected.

The new magazine Kjarninn wrote last week that the Progressives wanted to appoint a banker at MP bank, Sigurður Hannesson, for the CBI job. Hannesson is head of private wealth management and has, to say the very least, a CV that differs radically from the CV of central bankers in the neighbouring countries. But he is very close to Gunnlaugsson.

Kjarning also wrote that Benediktsson was in charge of this appointment and his idea was to appoint Ólöf Nordal, a lawyer who has just left parliament to follow her husband to Switzerland. Kjarninn pointed out that her credentials were that she practically grew up in the CBI where her father was a governor. It is not clear from the context if Kjarninn was serious about her merits but yes, yet an altogether different CV from central bankers in the Western world.

Should Guðmundsson not get reappointed the whole capital control conundrum will get postponed… until late this year. Should Guðmundsson get ousted for someone of much more inferior professional standing it bodes a return to the Icelandic past of clientilismo and political patronage. And that bodes ill for everything – also the abolition of capital controls – and everyone in Iceland, except of course those with the right connections.

The paradox of political (non-)intervention

It is not altogether a uniquely Icelandic situation that the government refuses to negotiate with creditors claiming it has nothing to do with winding up of failed private banks. This is often the case with semi-sovereign debt situations. However, the situation in Iceland is tricky because with the approval of all MPs parliament voted last year that the government should indeed be part of the estate equation.

This was what happened when parliament approved a change of the currency law stipulating that the CBI can only give exemption to the law, above certain sums (which firmly includes the estates) with the blessing of the minister of finance, after he has presented it to the parliament (which does not need to approve it but well, a minister is unlikely to go against the parliament on this issue.)

Therefore, there is this paradox that the government – or the minister in charge – denies to negotiate an agreement that cannot pass through the CBI without his political blessing.

This situation greatly frustrates creditors. They feel they are trying to do everything right, talking to the CBI, trying to figure out what write down is needed (obviously, from their point of view as small as possible) by studying the current account, studying what assets can be used to negotiate on (such as assets owned by the CBI holding company, ESÍ etc), stretching out payments and in general trying to figure out all variables that can be used in negotiations.

But so far, this is just a monologue – there is no one who wants to sit down on the other side of the table. And yet the government clearly indicates it does want certain things from the creditors – it is just not going to tell them what it wants and no, not negotiate with them. The creditors have to figure it out themselves and reach a conclusion that satisfies the government.

This is seemingly an impossible way to go about things. And it is even more impossible if the government wants not only to find a solution that safeguards financial stability and takes into account the current account balance over the coming years but, in addition, wants to secure money for the treasury.

But one day the government will, in some way, make its position clear. Until then, when, how and what are only things to be guessed. And as we know from the Eurozone crisis: figuring out the economics is easy – guessing the politics is a lot more difficult.

Follow me on Twitter for running updates.

So far, there is no solution in sight in matters that need to be solved in order to abolish capital controls in Iceland. The government blames creditor of the estates of Glitnir and Kaupthing but unresolved dispute in Landsbanki matters as well though hardly ever mentioned. The government seems to play a waiting game, perhaps to make creditors more forthcoming. Ministers maintain the government cannot interfere in a process of private companies and yet they seem to be contemplating interfering via laws, which would directly expose the government to being sued by creditors. The creditors mostly remain silent but might have more cards up their sleeves than the government seems to believe.

“It seems they’ve (creditors) been waiting to see whether the government would somehow step into the process. But this is not a project for the government. The only role of the government here is to assess whether they come up with a solution which allows for the lifting of the controls,” prime minister Sigmundur Davíð Gunnlaugsson recently said to Bloomberg. He has also stated that “I’m unaware of them having found any solution” which would allow the banks to complete creditor settlements. In September Gunnlaugsson said the controls could be lifted “in foreseeable future” if the creditors were “willing to assist us.”

And here is the creditors’ view, as expressed by Steinunn Guðbjartsdóttir head of Glitnir’s winding-up board: “It’s definitely not Glitnir that’s delaying the process when it comes to completing creditor settlements. Our proposals have simply not been answered, making it impossible for us to move forward.”*

In problem keeping the capital controls in place is the fact that foreigners own more ISK assets than can possibly be converted into foreign currency in the foreseeable future – a problem contained by the capital controls. Hence, the problem of foreign-owned ISK has to be resolved before the controls can be abolished. It will not happen over night, will no doubt take some years to abolish them in stages. However, it will be a decisive step when the ISK assets of the old banks – Kaupthing, Glitnir and Landsbanki – have been resolved

Who is waiting for whom – and what is everyone waiting for? How should these seemingly conflicting statements be interpreted? Here is an attempt at interpretation, as well as sizing up the problem and the possible solutions.

1 By late 2012 both Glitnir and Kaupthing had presented their drafts for composition of the two estates. The Central Bank, CBI, which needs to accept a composition agreement due to the capital controls, rebutted the Glitnir draft but has not replied to a new draft from Glitnir sent a new in November. Kaupthing has had no answer.

2 The CBI can only give its permission if the minister of finance, Bjarni Benediktsson, accepts the proposal, after presenting it to the parliament economy and trade committee.

3 When Gunnlaugsson claims he is unaware of any solution he is of course aware of the drafts ­– but his words need to be understood in the right context: he doesn’t recognise the solutions put forth by the estates as acceptable.

4 By saying that controls can be lifted when creditors “are willing to assist us” the prime minister seems to mean that when creditors have accepted what the government wants them to accept the government will accept their proposal.

5 The government has clearly indicated that it cannot enter into negotiations with creditors of private companies so how this “assisting” by the creditors should come about is not clear. Nor is it clear how the creditor should be informed as to what exactly is needed to solve issues now blocking a CBI agreement to composition.

6 There are those who warn that by engaging with the creditors the government might make itself liable to being sued, thus creating an unforeseen risk. At the same time, the government seems to be contemplating a legal intervention, which would clearly make it an actor in the game.

7 Further, it is not possible to prevent risk by not engaging since creditors could – and most likely will – at some point lose patience and seek ways to litigate abroad. The worst scenario would be a version of the Argentinian situation where every sum in foreign currency that Iceland pays to fulfil foreign obligation will be litigated.

Below are some points of importance in order to understand the issues at stake.

Two ways to resolve the Glitnir and Kaupthing estates: negotiate – or not

In principle, there are two ways to solve the dilemma of the two estates, i.e. how to proceed with the winding up and eventually pay out what is due to the creditors:

A) Agreement with the creditors, based on composition.

B) Bankruptcy proceedings, meaning i.a. that assets have to be sold within a fairly short time span with less creditor control than with the abovementioned route.

By presenting drafts for composition for both Kaupthing and Glitnir the creditors of these two banks (to a large extent the same creditors, ca. half are institutional bondholders owning bonds of the two banks before the collapse and then hedge funds and others dealing in distressed assets who bought the bonds after the collapse). Composition means that the estates are run as holding companies, owned by creditors, who by selling assets when circumstances are favourable recover over time what there is to recover from the estates.

Recovery from bankruptcy proceedings will most likely be less, which is one reason why the creditors oppose it. Also it means they have less control over the course of events.

Under normal circumstances a government doesn’t engage with bankrupt private companies. In Iceland, the capital controls and laws passed last spring, just before the dissolution of parliament up to the election, changed all of that. At stake are first and foremost the ISK assets of Glitnir and Kaupthing – and the majority is tied up in the new banks, Íslandsbanki and Arion, respectively owned by the estates.

The amount of ISK assets of the two estates totals ISK417bn but differs greatly. Kaupthing’s ISK assets are ISK141bn, whereof Arion’s valuation amounts to ISK116bn. Glitnir owns a good deal more of ISK or ISK276bn, whereof Íslandsbanki is valued at ISK132. Kaupthing owns 87% of Arion; Glitnir owns 95% of Íslandsbanki. The rest of both banks is owned by the Icelandic state.

If the two banks could be sold for foreign currency the Kaupthing ISK problem would be more or less solved. Glitnir has a tougher task. The creditors seem to have some faith in this being possible; others find that hard to believe but it will ultimately all depend on the price.

Who will buy Iceland or rather, the two banks Íslandsbanki and Arion?

Those who buy these two banks will wield great power in the Icelandic business community and in Iceland in general. First, when the idea was floated in the late 1990s that Landsbanki would be privatised the intention of the Davíð Oddsson government (conservative) was spread ownership.

That policy evaporated when the bank was sold to father and son Björgólfur Guðmundsson and Björgólfur Thor Björgólfsson. Eventually, the three big banks – Landsbanki, Kaupthing and Íslandsbanki (later named Glitnir; the new bank has reverted to the old name) were owned and dominated by large shareholders who incidentally were not only the respective bank’s largest shareholders but their largest borrower. No wonder that ownership of the two banks, now for sale, awakes disturbing thoughts.

Who will buy the banks? Foreign investors with no previous ties to Iceland, Icelanders with money abroad, clients (Icelandic or foreign) who got mountains of loans on favourable terms from the Icelandic banks before the collapse? Or the Icelandic pension funds? There is no lack of guesses.

One thing that will clearly affect the price is how the estates will be resolved. With bankruptcy the assets would have to be sold quickly, most likely knocking the price down should two banks be sold simultaneously in Lilliputian Iceland. Conspiracy theorists might feel that if the government eventually acts in a way that lowers the price of the banks – and some investors with intriguing ties to the past banks or with the government parties (or both) – it will be no coincidence.

The official “abolition manager” that never was – and the working group without a chairman

In August, it was announced that “next week” the prime minister would appoint “an abolition manager” to oversee the process of abolishing the capital controls. But nothing happened. According to rumours the two party leaders could not agree on who should be appointed. And no one was ever appointed.

In November, a working group of four was mentioned but by the beginning of the New Year it had grown to six. There is to be no chairman (too difficult to decide on?) but a former banker, Sigurbjörn Þorkelsson is in charge though without the title. He was thought to be the one favoured by Benediktsson as an “abolition manger.” The others are two engineers, Jón Birgir Jónsson (a banker in London) and Jón Helgi Egilsson, lawyers Eiríkur Svavarsson and Reimar Pétursson as well as Ragnar Árnasson professor of economics. This group is now said to be working fast and furiously on mapping out various scenarios for the government.

In principle, no one knows what the government’s policy is in the matters of the two estates; the two party leaders have not specified how they would like to see the bank estates dissolved. Benediktsson has however said that bankruptcy law do not stipulate that composition can be negotiated forever, hinting at some change in the bankruptcy law and possibly that he would prefer rout B).

His comment could also be understood to indicate that the government was prepared to or preparing to intervene in the bankruptcy process with a bill aimed at the estates. That will be a tricky undertaking because, like in most Western countries, assets of estates are protected by laws on property rights. Creditors will obviously challenge anything that smacks of infringement on such rights.

A legal intervention – or any government intervention – will be a u-turn from the government’s present stance on declared and staunch non-engagement. It might well open up a Pandora’s box of possible legal action against the government, not only in Iceland but also abroad.

Neither A) nor B): the “krona-path”

In addition to A) and B) there is another path, which is often mentioned in the debate in Iceland but apparently not always well understood.

According to Icelandic bankruptcy law, the value of a failed company is calculated in ISK, which means that whatever fx it owns is converted into ISK, as well as all claims. This does not mean that that the assets themselves are converted; the conversion is for auditing purposes only.

The assets of the three banks are as follows (in ISK)

ISK                             Fx                                Domestic fx assets

Glitnir             276bn                        614bn                        35bn

Kaupthing      141bn                        570bn                        62bn

Landsbanki     51bn                         405bn                        385bn

There are those who argue – and both Gunnlaugsson and Benediktsson have touched upon this – that the estates should be considered as pure ISK assets meaning that they should also pay creditors only in ISK. This would then create an almighty ISK overhang the moment this was paid out, increasing the already far too big a reserve of ISK owned by foreigners (which after all is what the capital controls are reining in).

How could the creation of a humungous overhang, in addition to the already insurmountably large one, be a solution? Because this would be a way for the state to get a slice of the fx assets, which should then be converted back into fx, but at a much less favourable rate; another possible execution is some sort of exit levy.

A recent ruling of the Icelandic Supreme Court has been mentioned as an argument for the “krona-path”: on September 24 2013 the Court ruled in a case (in Icelandic) linked to the Landsbanki estate. The thrust of the case was that when Landsbanki paid preferred creditors, on December 2 2011 and May 24 2012, the bank used the currency rate on April 22 2009, the day the bank entered into bankruptcy proceedings.** The creditors challenged Landsbanki’s decision, lost in Reykjavík District Court but won in the Supreme Court. Consequently, it is now clear that the currency rate on the day of payment counts.

Those who adhere to the “krona-route” have interpreted this court decision to mean that an estate should pay out in ISK – whereas the decision, according to many lawyers, only says that an estate can pay out in ISK but, most importantly, does not need to. One Icelandic lawyer (not working for creditors) mentioned to me that converting fx assets into ISK in order to pay the creditors could well be seen as expropriation, again exposing the government to being sued by creditors. Since most of the fx assets are outside of Iceland, creditors claiming to be an offer for expropriation could sue the Icelandic state abroad, most likely in London.

Another cause for legal action on behalf of the creditors against the government might be if at some point they feel that by inaction the government is preventing them from accessing their undisputed assets: the fx assets. After all, the fx assets are the property of failed private companies, unrelated to the government as repeatedly emphasised by the government.

The action taken in autumn 2008 with the “Emergency Act” and capital controls was taken under exceptional circumstances. Although the lack of foreign currency poses problems there is no emergency, comparable to October 2008, to justify any exceptional measures. On the contrary, there is time to negotiate terms and conditions.

What the capital controls contain

Ultimately, the government seems to favour not so much a route as a goal: a goal that brings as much to the public coffers as possible.

During the election campaign last spring prime minister Gunnlaugsson repeatedly claimed it was “unavoidable” that in dissolving the estates money would be due for the Icelandic state. As with so many other things, he never specified how exactly this should/would happen but seemed to indicate the “krona-route”: that converting fx assets should/would/needed to be converted into ISK thereby securing great wealth to the state coffers.

An aside here is that most Icelandic economists heartily agree that channelling mountains of ISK into the economy would be an almighty economic disaster. Ideally, any such windfall should be taken aside, if not actually burned. But for some reason, this argument is hardly ever uttered aloud in Iceland.

Before guessing how much is enough for the government, let us revise on how much ISK assets the capital controls contain. As mentioned above, the ISK assets of Glitnir and Kaupthing amount to ISK417 bn. The “glacier bonds” – essentially invested in carry trades in the years before the collapse – now amount to ISK340bn. Since this is money owned by a diverse group there is no one to negotiate with.

Further, these assets might partly be “patient” money, not waiting to run out of Iceland where interest rates are still attractive. There is also intriguing evidence that ca. half of the “glacier bonds” is owned by… Icelanders who bought it at a knock-down price after the collapse (which might be why this is not much talked about any longer as a problem, all the focus being on the “vulture” hedge funds” as they are often referred to in the Icelandic public debate). The last batch of foreign-owned ISK is the Landsbanki bond, debt of new Landsbanki to the old Landsbanki, now ISK247bn.

In total, the ISK assets contained by the capital controls are close to ISK1000bn. However, dividend in the new banks, which is not paid out, piles up so the problem is not diminishing but increasing. And then there are the classic collateral damages of controls such as less investment and corruption.

How much is enough – and the narrative to support it

Then there is the question: how much is enough for the government? How much, measured in krona, is the value of the “willingness to assist,” from the point of view of the government? Ultimately, it depends on how the government views the estates: as a problem to solve – or a rich fishing ground.

Consequently, there are two possible answers:

1 Enough to run a sustainable economy where a balance of payment will ultimately decide the course of payment of ISK assets. This is a calculation the CBI is working on. Leaving aside the “glacier bonds,” the problem is the Glitnir and Kaupthing assets as well as the Landsbanki bond, in total ISK665bn. This is not an insurmountable sum, the creditors know they will not get the whole amount, are willing to negotiate (if they can find anyone to talk to) and there are state-owned assets (in the CBI holding company, ESI), which could be part of the solution. – If this procedure is followed there is however nothing for the government to lay its hands on because ultimately this is not a process, where the government is involved except to secure financial stability as spelled out by the CBI.

2 Considering how prime minister Gunnlaugsson has spoken – and indeed promised Icelanders – he and his party clearly do indeed see the estates as a fishing ground, ready to be exploited. Finance minister Benediktsson has never uttered anything in this direction and there are indications, i.a. from the appointment of an abolition director that the two party leaders do not see eye to eye in this matter. It is by now a well-established pattern in the political debate that the prime minister says X and then a few days later the finance minister says Y on the same matter. From sources close to the two coalition parties, I hear that the ultimate goal should be all of the ISK assets of the two estates and a slice of the fx assets – otherwise, the financial stability of Iceland is threatened. I am not claiming this is what the two party leaders have in mind, only that this is consistently heard from sources close to the two leaders. – The path would probably be some version of the “krona-path” and a legal intervention.

Both ministers have consistently said that the new banking levy, also on the estates (quite unorthodox to tax debt; will most likely be challenged by the estates; another saga for another day) is only natural because of the cost the banking collapse caused the Icelandic society (though how the new banks, founded after the collapse, could have caused harm is a bit of a mystery). This narrative might also well be used to argue for a “catch” from the estates (though again, this spreading of the original sin could be debated).

The tax, calculated to cost the three estates ISK120bn over four years, is an interesting sum because it indicates to the creditors that this is at least the sum wanted by the government. This sum could then be the starting point in a negotiation though, if the rumours I keep hearing, this would be very far from what the government has in mind.

The fact that Iceland won the case that the EFTA Surveillance Authority, ESA, brought against Iceland because of Icesave, emboldened the leadership of the Progressive Party. The fact that Icesave was not resolved with the British and the Dutch had two drastic consequences: it moved the ownership of Landsbanki over to the state meaning that the state, at least indirectly, guarantees a bank – and in addition burdens the state through the Landbanki bond. This is not part of the “Iceland won Icesave-saga,” as commonly told in Iceland.

In the Icelandic debate on the estates and the creditors it can at times sound as if it is decidedly un-Icelandic not to seek a “windfall” from the creditors. To be on the side of the rule of law in this matter does not seem enough. No doubt, the tone will become harsher at the hour of decision.

Contrary to natural catastrophes such as earthquakes and eruptions, the catastrophes stemming from wrong political decisions unfold over a long time. The consequences will be felt long after the term of this government comes to an end.

* Glitnir Winding-up Board has today made an unexpected move: it has hired MP Bank’s Corporate Finance Division as a financial advisor in finalising a composition agreement, to “independently review and evaluate solutions to that end.” Especially ALMC (former Straumur Bank, already through composition, now operationg under a new name, ALMC), which seemed to be sure it was going to act as Glitnir’s advisor. The intriguing part of this assignment is that a close friend and advisor to prime minister Gunnlaugsson, Sigurður Hannesson is head of private banking at MP and the CEO of MP, Sigurður Atli Jónsson, is the prime minister’s brother in law. Whether this intimacy will simplify Glitnir’s task in guessing what is enough to negotiate composition remains to be seen.

**The legal procedures are described here, p. 6, for Kaupthing; the same counts for Landsbanki and Glitnir.

Follow me on Twitter for running updates.

Yesterday, a team of 70 people, at the request of the Office of the Special Prosecutor, searched 16 properties in Iceland related to shareholders, clients and directors of Glitnir Bank. The action continues today where some people have been brought in for questioning.

The names figuring in Icelandic media are Jon Asgeir Johannesson, Palmi Haraldsson, Larus Welding. Welding who lives in London is said to be on his way to Iceland and already seems to have an appointment with the OSP. Johannesson has said in an interview with the paper owned by his wife that he has not been called in for an interrogation by the OSP.

According to Olafur Hauksson at the OSP the searches are connected to five cases, all familiar to those who follow the new Icelandic sagas of the collapsed banks:

1 Loans to a company called Stim, almost the name for the alleged market manipulation inherent in so many deals in the Icelandic banks. Stim was related to FL Group where Jon Asgeir Johannesson, Hannes Smarason and Palmi Haraldsson were among well-known names connected to Stim. Stim got a loan from Glitnir of ISK20bn to buy shares in FL and Glitnir itself. A major owner in Stim when it surfaced in November 2007 was a fishing company, Samherji, one of the largest Icelandic fishing companies.

2 Loans to FS-38, to buy shares in Aurum Holding Ltd (the UK Goldsmith jewellery chain), already a famous case in Iceland where a loan of ISK6bn was in the end offloaded for 1 krona.

3 Loans to Stodir (Landic Properties, a Baugur real estate company), Baugur and 101 Capital (owned by Ingibjorg Palmadottir, Johannesson’s wife).

4 A deal where GLB FX, a fund with Glitnir, bought a Stim bond from Saga Capital (now Saga Investment Bank). Saga Capital, based in Akureyri, was one of the owners of Stim.

5 Glitnir’s buying of shares in Tryggingamidstodin, TM, an Icelandic insurance company. This deal figures in the Glitnir charges against Johannesson, Haraldsson e.al. in New York.

All of these cases are well known in Iceland and these companies all figure in the report of the Althingi Investigative Commission. There is absolutely nothing unexpected here and now it seems that premises of Johannesson, Haraldsson, Larus Welding ex-CEO of Glitnir and others have been searched. According to Visir, the media owned by Johannesson, Thorvaldur Ludvik Sigurjonsson the CEO of Saga Investment Bank has been imprisoned earlier this morning, to be interrogated by the OSP. Sigurjonsson was on TV yesterday, claiming that neither he nor Saga was a part in the Stim case but that they had only dealt with a Stim bond. However, it was more than that since Saga, in November 2007, owned 25% of Stim.

When and if these people will be interrogated by the OSP remains unclear but it’s an ongoing investigation. Icelanders have long expected that the OSP would move in on the group around Glitnir. People connected to Kaupthing were interrogated and taken into custody in spring, now Glitnir. Now it’s only Landsbanki people who haven’t, at least not yet, been in the same situation as those of Glitnir and Kaupthing.

Follow me on Twitter for running updates.