Sigrún Davíðsdóttir's Icelog

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

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

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

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

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

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

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This morning, Mar Gudmundsson governor of the Central Bank of Iceland met with three Althingi committees to answer questions on the economic outlook. Here are some points from the meeting:*

–        Due to the Icelandic state’s obligations there will be an outflow of currency in the foreseeable future. Consequently, the state will have to look abroad for funding, the sooner the better. Most likely, there will be a bond issue abroad later this year. The relatively low CDS improves the outlook of refinancing

–        The influence of Icesave on a bond issue is undeniable. If the latest Icesave agreement will be rejected in the coming referendum on April 9^th there might be less luck in seeking refinancing

–        A ‘no’ in the Icesave referendum will delay any easing of the currency restrictions

–        The first step in easing the currency restrictions will most likely be to open doors in Iceland to the off shore kronas

–        The currency restrictions can’t be lifted until it’s clear that Iceland can refinance itself abroad. As long as the currency restrictions are in place, the CBI has to buy currency abroad, instead of borrowing, resulting in a lower exchange rate and higher prices on imported goods.

The CBI recently published a report on Icelandic debt, ‘What does Iceland owe?’ So far, there is only an Icelandic version and an English summary but an English version is due. The main results are:

“The article peers through the maelstrom caused by the collapse of the financial system, causing the outcome of assets and liabilities according to official standards to give a misleading view of the debt position that will be the strongest determinant of Iceland’s welfare in coming years. In the report, the authors estimate the likely outcome of asset and liabilities values that will emerge when the dust settles. This can be called Iceland’s “latent” debt position, but the term “underlying” debt position has also been used. Although there is still considerable uncertainty about the findings, it seems certain that, when the estates of the failed financial institutions have been settled and other factors that skew the overall picture have been accounted for, it will be revealed that Iceland’s net international investment position has not been lower in decades. Net public sector debt, on the other hand, will be considerably higher. The report also estimates the country’s hidden current account balance, which (for the same reasons) is much more positive than official figures indicate, in part because accrued interest on the estates of the failed banks will never be paid.”

According to the CBI the outlook is good, Iceland isn’t as heavily indebted as some other countries etc.: 70% of GDP. If the debt related to Actavis are taken out, the debt is 50-55%. In a comment from an economist he added: ‘What’s the difference between the Irish and the Icelanders? Icelanders are good at pretending to be broke.’

However, this isn’t beyond dispute. Some economists I’ve talked doubt the CBI’s conclusion, pointing out that there has often been a tendency to overestimates in Icelandic figures. Qui vivra verra.

*I didn’t follow the broadcast of the meeting but have based this on news in the Icelandic media.

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It’s now clear who, apart from Banque Havilland, tried to hinder the Office of the Special Prosecutor in Iceland to get access to the documents from Kaupthing Luxembourg, now the Rowland family’s Banque Havilland that bought Kaupthing’s Luxembourg subsidiary. Earlier, when I inquired at the courts in Luxembourg I was told that only those connected to the case could get the verdict. Now, Vidskiptabladid Iceland, has obtained a copy of the verdict.

Unsurprisingly, both Kaupthing’s CEO and chairman of the board, Hreidar Mar Sigurdsson and Sigurdur Einarsson, tried to hinder the OSP to get the documents obtained via house searches a year ago. Another paper, DV, wrote today the the OSP had been very successful in finding documents at the home of Magnus Gudmundsson, who was Kaupthing Luxembourg manager and stayed on at Havilland. Some of the documents were in Gudmundsson’s car. (If you ever drive in an ex-Kaupthing manager’s car look around and try to get a peep into the booth.) Gudmundsson however is not on the OSP ‘opposition team.’

Others in this team are Olafur Olafsson,* the second largest shareholder in Kaupthing and four companies owned by him: Sable Air APS Denmark and three BVI companies, Marine Choice Ltd, Fort Shannon Ltd and Fordace Ltd. In addition there are Skuli Thorvaldsson, Egill Agustsson and his business partner Einar Bjarni Sigurdsson, living in Denmark.

This is quite an intriguing circle of business men. All these people, apart from Einar Bjarni, are names that are already connected to alleged market manipulation and other manipulation by Kaupthing. It’s save to conclude that this is a group of men who formed a close network at the core of deals that the OSP is investigating.

Olafsson was connected to the al-Thani deal: a sheikh from the Qatar ruling family bought 5% in Kaupthing in a highly publicised deal in early September 2008. But instead of the deal showing the sheikh’s believe in Kaupthing it apparently showed that the bank was unable to sell any shares except by offering ‘risk-free’ loans (the risk was all on the bank, making these deals look like a breach of fiduciary duty on behalf of the bank’s management). The sheikh also got a loan of $50m towards future profits. Needless to say there were no future profits only imminent losses. Olafsson got the sheikh another Kaupthing loan to buy shares in Alfesca, where Olafsson is a major shareholder, also a highly publicised deal that then came to nothing. – Olafsson still holds his interests in Alfesca where the chairman is Arni Tomasson chairman of the Glitnir’s ResCom. Olafsson, who earlier lived in London, now lives in Switzerland.

Skuli Thorvaldsson had an interesting relationship with Kaupthing. He has been living in Luxembourg for decades and wasn’t known for being fabulously wealthy. His branch has been property investment. His connection with Kaupthing first became clear when the loan overview from Sept. 08 was leaked on Wikileaks. The SIC made it known that Thorvaldsson was Kaupthing’s biggest debtor in Luxembourg, pretty staggering considering his apparently low key property business. His loans with Kaupthing peaked at €200m just before the collapse of the banks. Thorvaldsson was also involved in Kaupthing plots to lower its CDS: the bank lent Thorvaldsson huge sums through a web of companies enabling Thorvaldsson to buy CDS and affect the bank’s CDS spread. An audacious attempts that Deutsche Bank was involved in – Kaupthing managers claim the idea came from DB but DB claims it, unaware of the aim, only advised these structures. Kevin Stanford and Olafsson were also involved in these CDS acrobatics – and yes, DB’s role is, ahem, interesting.

Agustsson’s business partner is otherwise unknown but Agustsson is connected to companies that were close to Kaupthing and their habit of lending to companies, most noticeably a company called Desulo that has featured in an earlier Icelog on the deals Agustsson and others from the OSP ‘opposition’ were engaged in.

Unsurprisingly, it turns out that those who tried to hinder the OSP to obtain the documents are all, except Banque Havilland, part of Kaupthing’s inner circle, connected to deals and companies that the OSP is investigating.

*4.3.’08: Olafsson has issued a statement saying that he didn’t oppose the handing over of documents to the OSP but that he opposed that documents unrelated to issues being investigated should be handed over.

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Now that the president of Iceland has sent the Icesave bill for a referendum, Icesave is again being debated in Iceland though I sense that it’s not the same burning issue as earlier. Here are some of the aspects that attract the greatest attention.

First of all, was the president within his legal rights to send the bill off to a referendum instead of signing it? Seventy percent of MPs, from all parties, voted for the bill, meaning that here, according to some, president Olafur Ragnar Grimsson is going against the lawful rule of parliament. However, Grimsson points at another vote in Althingi, alongside the bill: the Althingi also voted on a referendum.

Here the vote was narrower. I.a. the Independence Party, in opposition, voted for a referendum. But in an interview following Grimsson’s decision the IP leader Bjarni Benediktsson said that although he had been for a referendum he thought that it had been up to Althingi to decide on a referendum, not the president. He accepted that Althingi vote went against his wish but wasn’t happy with the president’s decision.

When the president presented his decision he spoke of two legislators, Althingi and the people. Legal experts contest this definition: Althingi is the legislator, voted in by the people. The president also pointed out that it’s the same Althingi that voted for the bill now as a year ago, as if that weakened the vote. But this is just his feeling, not supported by the constitution.

The general feeling among Icelandic legal experts is that by his decision the president has redefined his power. The president has, according the constitution, the right to send bills to a referendum. No president had done it until Grimsson, in 2004, sent a hotly debated bill on media ownership (that many saw as The Independence Party going against Baugur’s grip of the Icelandic media) to a referendum. The media bill was then consequently withdrawn. Then it was the Icesave bill last year – and now again. The move now is widely questioned since this time the Icesave bill had a wide support in Althingi.

It’s clear that the EFTA Surveillance Authority keeps an eye on the situation. The EFTA court will not rule on the Icesave agreement itself, that’s beyond its remit. Its focus of interest is the decision by the Icelandic government from Oct. 2008 to differentiate between depositors in Iceland and abroad (this decision is often referred to as being part of the Emergency Act, passed on Oct. 6 2008 but this differentiation is actually not part of the Act).

Icesave keeps on attracting attention abroad. Yesterday, WSJ wrote on the ‘Icelandic Freeze-Out’, pointing out that this time polls indicate, as pointed out earlier on Icelog, that Icelanders might vote for the agreement. WSJ then goes on:

“A yes vote in a referendum likely to be held in early April would leave Iceland in hock to London and The Hague for as long as 35 years—and this because the British and Dutch governments decided, of their own volition, to bail out their own citizens. (My underlining.)”

It’s highly questionable how long the payments will stretch out, 35 years is the maximum but it seems that the Landsbanki assets will go a long way to cover the Icesave debt though there is some exchange risk involved. It’s however completely wrong that the British and Dutch governments decided, on their own, to pay their respective Icesave depositors.

The Icelandic government kept saying that the deposits were completely save and guaranteed by the state, as did the governor of the Central Bank David Oddsson, earlier PM and now editor of Morgunbladid, an Icelandic newspaper, in early February 2008. After the collapse of the banks, Icelandic ministers met with their opposite numbers in Brussels early November 2008 and reiterated their intentions to pay. At the time, the IP and the social democrats were in government. The IT changed tone only when they landed in opposition in March 2009. The present government is led by the social democrats, with the Left Green at their side.

Many Icelanders feel that the president’s decision is highly motivated by his past: he was an energetic cheerleader for the Icelandic banking ‘Wunder,’ travelled to open bank branches and mixed with the bankers and businessmen now tainted by alleged fraud. By putting himself so firmly against the big nations who are squeezing the little one he might well be positioning himself to run for his fifth term next year, an unprecedented length of time. There is no legal limit to an Icelandic president’s time in office.

The president has pointed at the benefits that his decision had last time: a much more favourable agreement. However, it’s come at a cost to businesses but it’s a cost that’s not easy to calculate. Right now, the CDS has again shot up. There might be some Icelanders who shrug their shoulders, refusing to pay. Others might be worried about the consequences of an international isolation and the cost of being seen as a people who flip flop and doesn’t honour its words.

As to the political consequences, it’s difficult to say. If the referendum rejects the bill the government really has run out of options since the UK and the Dutch government will not try negotiating a fourth time. Could the government resign? Though nothing is impossible, it’s not terribly likely since the opposition wouldn’t be keen to wade into the Icesave mess.

For the time being, the most exciting part of the political scene is the Independence Party. Some feel that Benediktsson showed great courage to support the agreement (though admittedly the party had a hand in it, having supported Lee Buchheit to lead the negotiations). Die-hard followers of David Oddsson (now fewer than earlier from his own party but with some unexpected support from the far-left Icesave-opposition) will support his attempts to drive Benediktsson, who has stood up to Oddsson, out of office though there is no apparent leader-in-waiting. Oddsson, earlier no fan of Grimsson, is now writing laudatory editorials about him, underlined by the messianic photo of Grimsson on Morgunbladid’s front page on Monday.

The intense, and incredible, attention on Icesave has detracted attention from other issues that should have been discussed more, such as the state aid to the banks and later to other financial institutions. If lucky, the Icelandic state might have to fork out ISK50bn, to foreign Icesave deposit holders (but more if less lucky and the exchange rate falls). So far, the government has put ca ISK26bn, €162m, into VBS, a bank that survived Landsbanki by 8 months because Landsbanki had financed it far too lavishly (another story). Eight months later, VBS was bust. ISK12bn went into the insurance company Sjova (any national harm that an insurance company would go bust?) and now enough billions into collapsed building societies, bringing these numbers close to a possible Icesave payment. I leave it to the readers to contemplate whether paying foreign deposit holders is more of an issue than saving Icelandic financial fiefdoms.

Icesave isn’t formally linked to Iceland’s EU application but EU can’t disregard the issue. Most people I’ve spoken to do think that EU will want to see an end to the dispute before the application is processed further. At a press conference yesterday morning, Denmark’s foreign minister Lene Espersen aired her concern if the referendum would put an end to an agreement. Iceland would have to settle the dispute with the Dutch and the UK.

The IMF seems to be indicating that the currency restrictions can’t stay in place forever and should be lifted as soon as possible. With Icesave in limbo it won’t happen. It can be argued that the Icelandic currency (or the non-currency as a friend of mine says) is now artificially high, making the Icelandic business environment a Wonderland, cut off from reality. The currency restrictions were seen as a temporary necessity for Iceland to adjust after the crash. At some point, Iceland will need to adjust to the real world.

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Kaupthing’s ad campaigns underlined the banks innovative thinking as ‘thinking beyond.’ Scrutinising the minutes of the Credit Committee of the Board of Kaupthing hf’s  last meeting, Sept. 24 2008, the loan decisions seem far beyond rhyme and reason, at least from the perspective of the bank’s shareholders minus the major shareholders who were being laced with more loans.

Unsurprisingly, the CC was lending more to companies owned by Lydur and Agust Gudmundsson and Olafur Olafsson, the bank’s biggest shareholders in addition to Robert Thenguiz Discretionary Trust. Skuli Thorvaldsson and Kevin Stanford were getting loans to buy CDSs in Kaupthing in order to influence the bank’s CDS. In spite of their companies’ lousy credit rating they were getting yet more loans. Not loans to do anything new but loans to pay older loans.

The billions of ISK sunk into these companies are however dwarfed by the sums that Kaupthing was offering the Uzbek oligarch Alisher Usmanov, recently in the news as an eager investor in Facebook. Usmanov owned 1.48% in Kaupthing. Since Kaupthing had the policy to lend large clients and employees to invest in Kaupthing shares the first thought here is that Usmanov’s ownership was of that kind.

Through one of his companies, Epion, Kaupthing offered Usmanov two loan facilities, in total €1,1bn, to acquire up to 9,9% of shares in Sampo Group. Intriguingly, Exista was selling its 20% in Sampo at the time through Citigroup and Morgan Stanley. It doesn’t take much imagination to think that this deal was somehow linked with Exista’s sale. Exactly how isn’t clear to me. Perhaps Epion was supposed to buy what the two banks couldn’t sell or Epion was supposed to buy but didn’t get around to it because the bank collapsed before it could pay out the loan. Whatever the plan was Exista did in the end lose €1,4bn euros when it sold its 19,98% in Sampo early October 2008.

Usmanov, through his Gallagher Holdings, was also seeking an approval to build up to $1.2bn of stake, by CFDs, in Norilsk Nickel. At the time, Usmanov had a total exposure of $827.000 in CDF trading positions that did ‘not reflect regulatory exposures,’ according to the minutes. An important client at Kaupthing has told me that he found it difficult to understand Kaupthing’s thinking on this deal since the bank ran a huge risk by building up this position in illiquid shares. Perhaps the Sampo deal was important enough according to Kaupthing to run this risk. According to my sources, Kaupthing was planning to expand in Russia and saw a major advantage in having the well-connected Usmanov on board.

At this CC meeting the Israeli London-based brothers Moses and Mendi Gertner also got a share of Kaupthing’s thinking beyond. Although their company, Crosslet Vale, was on the exception list with regard to credit rating, their loan facility was increased from $120m to $350m. Earlier that year, Crosslet Vale, got a Kaupthing loan to the equivalent of €120m, in Swedish krona, to buy shares in Kaupthing. According to the minutes the brothers have been investing in Congo. – For Kaupthing’s big client a loan to buy shares in the bank was like a piece of chocolate with a cup of coffee.

The complicated deal with Sheik Mohamed al Thani was also presented at this meeting. In collaboration with Deutsche Bank it was structured around credit link notes. One of al Thani’s companies was supposed to get a loan of $50m, which was ‘parts of the profits of the transaction,’ according to the minutes. In other words, al Thani wasn’t supposed to wait for the profit to materialise.

Some of these loans were already known. What is truly revealing – or horrifying – is the ease with which the CC poured billions of krona into either sinking ships or clients that hardly served the broader interests of shareholders outside the narrow circle of the chosen few. Just this single meeting and the loans shovelled out seems a clear cut case of breach of fiduciary duty. Whether the Special Prosecutor thinks the same is still unclear.

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Bondholders in Landsbanki don’t need to hold their breath much longer. In an interview with minister of finance Steingrimur J Sigfusson on Bloomberg Sigfusson states clearly that there won’t be much left after the priority claims have been paid out.

“The comments end hopes creditors, including BNP Paribas SA and Nordea Bank AB, may have had of recouping their share of $27.4 billion in debt owed them since Landsbanki’s collapse in October 2008.” All in all the collapse of the Icelandic banks left a debt of $85bn.

The question is what these two banks and banks such as Deutsche Bank had in mind when they showered the little island in the North Atlantic with amounts equalling decades of its GDP. Deutsche’s cooperation with Kaupthing in influencing its CDS is now being investigated by the Serious Fraud Office, as part of its investigation into Kaupthing. Deutsche has also been scrutinising its cooperation with Landsbanki, I’m told. Deutsche’s business with Thor Bjorgolfsson, one of Landsbanki’s major shareholders and the largest shareholder of Straumur, goes a long way back, back to his beginnings in Russia.

The Icelandic banks then lent the money on to their clients, often against no collaterals. Any read faces out there in international banks that were so lavish in their dealings with the Icelandic banks?

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Back in the 80s, one of the highlights of the year in the US financial sector was the annual Beverly Hills’ junk bond convention organised by the godlike junk bond king, Michael Milken. But as so masterly recounted in ‘The Den of Thieves’ – and confirmed in a US court, Milken was a common fraudster, convicted and sentenced to ten years in prison after being indicted on 98 counts of racketeering and fraud. This included a whole raft of illegal activities such as insider trading, stock parking, tax evasion and taking cut of illicit profits that others gained based on Milken’s information. This looks like a list of activity some of his Icelandic brothers-in-spirit might eventually be convicted of if the Office of the Special Prosecutor is on the right track.

In an interview recently in Iceland Eva Joly, the investigative Norwegian-French judge who sent around 30 high-placed people to prison in the Elf trial, pointed out that some high-flyers never admit to any wrongdoing even when they are convicted and sent to prison. Milken was one of them. This is the story according to the man himself, as published on his website:

“In 1989, the government charged Milken with securities/reporting violations in a case that continues to engender controversy. He admitted conduct that resulted – during a brief period in his 20 years on Wall Street – in five violations. Although such conduct had never before (nor has since) been prosecuted criminally – a fact rarely mentioned in press reports – he resolved the case without a trial to prevent further impact on his family. After paying a $200 million fine and serving a one-year-and-10-month sentence, he resumed his philanthropic work.”

Milken’s version skips the fact that he has a lifetime ban on working in securities and paid around $1,1bn in fines and various settlements with the SEC and investors who lost money on his schemes – not to forget that he was indeed convicted and received a sentence of ten years, out of which he should serve a minimum of three years. In the end he only served just over two years because he was diagnosed with prostate cancer with only around two years to live.

Yet, he still lives to tell the story and the glamorous Beverly Hills conference, now the Global Conferencen, is again a major get-together, last held in April this year. Milken is still among the wealthiest people on this planet and has been very astute at using his wealth to buy himself respect and a seat at the right tables. His story is an intriguing example in any debate on whether crime pays – his $200m SEC fine bore no relation to the sums he made on the activities he was fined for. This spring, he shared the podium at the Global Conference with no less than the economist superstar Nouriel Roubini – which to my mind rather reduced Roubini to a junk bond status.

Icelanders follow with avid interest how those who bankrupted the Icelandic financial system – bankers and businessmen alike – still live in apparent wealth. Just this week, it turned out that Magnus Kristinsson and his family all drive around in big and expensive cars though the banks have had to make a ISK50bn, £265m, write-off on his debt. At the height of the folly, Kristinson commuted from his home in the Vestman Islands by his own helicopter – his original source of wealth was fishing. Kristinsson is unknown abroad but well known in Iceland, i.a. for owning Gnupur, an investment company that was the first – and only – investment company to fail during the winter of 2007-08. Its collapse immediately sent the banks’ CDS spreads sky-rocketing and a shiver down the spine of bankers and businessmen: if this was the effect of the bankruptcy of a small obscure investment company it was obvious that if a major company like Baugur, FL Group or Exista would fail the effect would be cataclysmic. The banks made sure it didn’t happen.

The question in Iceland is if and when the Viking raiders and their bankers will go to prison. The story of Michael Milken shows that crime can pay.  For the time being, names like Johannesson or Bjorgolfsson only attract scorn and anger in Iceland – but if Icelanders will be hit by the same kind of general amnesia that helps Milken buying his place in elevated company there might be Icelandic institutions in the future bearing these and other now so infamous names.

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David Rowland, the owner of Blackfish Capital UK, has been named the treasurer of the Conservative party. Through their ownership of Banque Havilland Luxembourg David and his son Jonathan are almost household names in Iceland. But there are other intriguing Tory connections to the Icelandic banks, notably Kaupthing.

David and Jonathan Rowland, or rather their investment company Blackfish Capital, took over the Kaupthing operation in Luxembourg last year and turned it into Banque Havilland. Havilland draws its name from the family’s Guernsey address, the splendid Havilland Hall. Father and son firmly deny any connections to the owners of Kaupthing but they held onto Magnus Gudmundsson until he was taken into custody due to the Kaupthing investigation in Iceland. The Rowlands have stressed that house searches at the former Kaupthing premises in Luxembourg earlier this year were unrelated to Banque Havilland. It is of interest that Martyn Konig, a well merited banker who had worked for Blackfish, resigned as a chairman of Havilland almost as soon as it opened.

Earlier, the Rowlands weren’t bothered neither over the Kaupthing investigation in Iceland nor in the UK – and yet, it’s been clear for a long time that the Kaupthing Luxembourg operation was central in all the deals and connection that are being investigated, be it the al Thani case or loans to UK business men such as Kevin Stanford and Robert Tchenguiz. It’s interesting to notice that al Thani is of the Qatari ruling family. Recently, a court case in London showed that a Qatari company bowed to pressure from Prince Charles. Christian Candy who won that case was also one of Kaupthing’s clients and a partner in joint ventures with the bank.

A source close to the Havilland informed me earlier this year that the Rowlands were interested in private banking and had been looking for a bank to buy for some time. When the Libyian Investment Authority’s offer for restructuring Kaupthing was turned down by the bank’s creditors and JC Flower’s rumoured interest didn’t materialise the Rowlands stepped in to buy the bank. The good assets were put into Havilland and Pillar Securitisation took over the bad assets, administrated by Havilland.

Unexpectedly, the Rowlands and Blackfish are also a well-known name in Latvia. When the renowned newspaper Diena was sold last year it seemed at first that Latvian businessmen with previous ties to the paper were buying it. Then it turned out they didn’t really have that kind of money and in the end the real owners came forth: Blackfish and the Rowlands. Why they suddenly wanted to own a newspaper in Latvia seemed hard to explain – and hasn’t really been explained except the Rowlands say they won’t interfere with the editorial line. That didn’t satisfy the Diena journalist: most of them left the paper and have now founded a new paper.

David Rowland moved from Guernsey to England in 2009 to be able to donate money to the conservatives. He has donated £3m, is now the party’s major donor – and that qualifies him to be the next party treasurer when Michael Spencer steps down in autumn. Now that the Conservatives are in government Spencer isn’t quite the kind of name they want to be linked to. Spencer has long had a reputation for being rather unsquemish when it comes to ways to make money. Last December, Spencer’s company Icap made $25m settlement with the US Securities & Exchange Commission, following a four years investigation, to escape charges for using fake trades to encourage customers to trade.

But Spencer’s company Icap was also a broker in the UK and did business with the Icelandic banks. Butlers, Icap’s financial consultancy, advised its customers, i.a. many of the UK councils, to keep their funds with the Icelandic banks even though the rating agencies, unbelievably late, downgraded the banks. Consequently, the councils that used the advice of Butlers lost badly and lost more than those who had other or no advisors. A possible conflict of interest has been alleged but strongly denied by Icap and Spencer. But the owner of a company that used fake trades would certainly have found a common ground with the Icelandic banks that are now being investigated i.a. for market manipulation.

Interestingly, the incoming and the present treasurer of the Conservative party aren’t the only conservative high-fliers with Icelandic connections. Tony Yerolemou is one of the Tories important donors and has been over the years. The Cypriot food producer was one of the owners of Katsouris Food, sold to Bakkavor in 2001. He got very close with the Bakkavor owners Lydur and Agust Gudmundsson who eventually became Kaupthing’s biggest shareholders. – And mentioning the Rowlands: as administrator Pillar is claiming back a Kaupthing Luxembourg loan to Lydur who might lose his £12.8m house on Cadogan Place if he can’t refinance his loan.

The Rowlands might also have to pick over their fellow conservative Yerolemou who not only sat on the Kaupthing board but had huge loans with the bank through Luxembourg. When the bank collapsed Yerolemou was one of the bank’s biggest debtors, his loans through Luxembourg amounting to €365 (whereof £203m were unused). The report of the Althingi Investigative Commission concludes that because of the loans and because his companies were firmly in red Yerolemou hadn’t been fit and proper to be on the bank’s board. Together with Skuli Thorvaldsson Yerolemou was involved in companies organised by Kaupthing and partly financed by Deutsche Bank to influence Kaupthing’s CDS spread. Yerolemou has been the chairman for Conservatives for Cyprus – and interestingly, the Conservative party had pledged before the election to give Cyprus priority when the party would be in power. Yerolemou has donated money to the campaigns of various MPs, i.a. Theresa Villiers now minister of State for transport and who also very much has the interest of Cyprus at heart.

Apart from ongoing investigations in Iceland the Serious Fraud Office is conducting an investigation into Kaupthing. With the conservatives in power and the particular ties that some conservatives have had with Kaupthing it will be of great interest to see what happens with the SFO investigation. It’s also interesting to see if authorities in Luxembourg make a move to look more closely at the Kaupthing operation in Luxembourg.

Who would have guessed there were so many Icelandic ties to the Conservative party? There are many stories to follow here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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