Sigrún Davíðsdóttir's Icelog

It’s not a new story – as Deutsche Bank points out in its response – but it’s a story coming up again with more vigor and new evidence. According to the FT: “Deutsche Bank failed to recognise up to $12bn of paper losses during the financial crisis, helping the bank avoid a government bail-out, three former bank employees have alleged in complaints to US regulators.” – FT Alphaville calls it “papering over the cracks … (allegedly)”

Three Deutsche employees have resigned from the bank, after having raised concerns in 2010 and 2011 with the SEC in the US. One has settled handsomely, has been paid $900,000 to settle a case of unfair dismal, apparently after being in touch with the SEC.

It’s worth keeping in mind that Deutche is the highest leveraged bank in Europe and the US: at the end of last year total assets exceeded Tier 1 capital by 44 times – but that’s still down from 68 times in 2007, when the subprime crisis broke. The average leverage in German banks was 32 times last year and in Europe 26 times.

Watching Deutsche from Iceland, it hardly comes as a surprise that some papering was done at and following crisis crunch time in 2008. Deutsche had issued big loans to Icelandic banks and companies. In the case of the pharmaceutical group Actavis, taken off market in 2007 by Bjorgolfur Thor Bjorgolfsson the loan was huge and for some time the biggest loan on Deutsche’s books. Admittedly a loan saga, which belongs to a different age, the year 2007, as pointed out by Breaking View:

Actavis’s 2007 buyout, by Icelandic tycoon Thor Bjorgolfsson, belongs to a different age. Bjorgolfsson was then reckoned among the world’s richest people and the Actavis deal was worth $6.4 billion including debt – five times the value of Iceland’s biggest listed company today. Deutsche employed bubble-era tactics too. The loans totalled a reported 4 billion euros, including 1 billion of “payment-in-kind” notes. These are particularly risky, since instead of paying interest in cash the PIK-note debt burden expands.

This loan backfired for Deutsche – it couldn’t sell the loan on. As Breaking View points out, the loan stayed with Deutsche until it could finally sell Actavis earlier this year.

Deutsche was also a lender into some interesting Kaupthing schemes, where Deutsche advised Kaupthing to lend companies to invest in Kaupthing’s CDS, in order to lower the CDS and consequently the bank’s borrowing cost (it seems to have had some effect). According to Kaupthing documents Deutsche was also a lender, with Kaupthing, when the bank lent money to a Qatari investor to buy shares in Kaupthing. The Office of the Special Prosecutor in Iceland has brought charges against four Icelanders, as earlier reported on Icelog.* Deutsche is not implied in this case.

Deutsche’s lending to Iceland shows quite a bit of recklessness though we can’t see how reckless they were, i.e. in terms of the loan covenants, if they were lending to holding companies (like the Icelandic banks did) and not into companies with operations and more tangible assets. The feeling is that Deutsche in case of some of the Icelandic loans, i.a. the Actavis loans, Deutsche was too late in sensing changed sentiments in the market and couldn’t sell them off. If that was widely happening within the bank Deutsche had some serious issues – and then the speculations now, of the bank having covered its losses, might possibly make sense.

*The persons indicted are ex-chairman of the Kaupthing board Sigurdur Einarsson,  Kaupthing’s CEO Hreidar Mar Sigurdsson, Kaupthing Luxembourg manager Magnus Gudmundson and Kaupthing’s second largest shareholder Olafur Olafsson.  The District Court has now thrown one of the charges out, related to Magnus Gudmundsson but the OSP will most likely appeal the decision.

 

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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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The pre-fall banking system in Iceland had some intriguing characteristics. One of the more astounding one is how willingly all the three major banks lent a small group of businessmen, tied to the banks through ownership and inter-dealings, beyond all rhyme and reason. This completely reversed the power balance between the banks and their main clients – the clients, not the banks, set the rules of the game. In their game the clients were favoured at the expense and to a great risk for the banks.

Last summer I read a fascinating and scary book, ‘Mafia Pulita’, ‘The Clean Mafia’, by Antonio Laudati (now a prosecutor in Bari where the Mafia is particularly ingrained and vicious) and Elio Veltri, both well known for their fight against organised crime. Through stories of a few Mafiosi they explain how the Mafia infiltrates the ‘clean’ economy (as opposed to the ‘dirty’ or ‘black’ economy of organised crime) – this is the Mafia that buys what it can and only kills when it has to. I interviewed Laudati on a hot August Sunday morning in Naples where we shared the Napolitan pastry ‘sfogliata’ as he told me about corrupt Italian banks that seemed uncannily similar to the Icelandic banks.

In former times, the Mafia would find a bank clerk, often a low level one, to help channel its ill begotten money into the licit economy. Now instead, there have been cases, mostly in small banks in the North of Italy, where the criminals collude with the managers. The criminals get loans that systematically are far above the exposure anyone else gets, putting the bank itself at great risk. These banks also assist the criminals to borrow money from other banks by guaranteeing their loans though the collaterals, mostly shares and property, often financed by loans from the ‘helping’ banks. This effective loan machine generates money for the criminals, their loans are never paid back but serviced with more loans.

I’m not suggesting a Mafia connection or anything Mafia-related regarding the Icelandic banks; not at all. I just find it intriguing that the only banks with business patterns similar to the Icelandic ones turn out to be corrupt Italian banks that have been closed down by the authorities. As in the Italian banks the Icelandic banks loaned money to few chosen individuals beyond all sensible limits. These clients weren’t much bothered with margin calls nor the collaterals sold when loan covenants were breeched; old loans were serviced with new ones and it does indeed seem likely that in some cases the banks did not expect the loans to be repaid.

Icelanders are now following with anger and resentment how the new banks –Islandsbanki and Arion Bank owned by credit holders respectively in Kaupthing and Glitnir respectively, Landsbanki by the Icelandic state – are refinancing companies owned by some of the major before-the-fall players. Here are the latest examples:

There isn’t much left of Baugur, Jon Asgeir Johannesson’s retail empire spanning UK high streets and other places. Both Baugur Iceland and Baugur UK collapsed under its debt. Administrators have contested various last-minute dealings. Landsbanki was evidently the biggest lender but the two other banks were fairly generous too. The most valuable Icelandic assets are now in Hagar, a holding company that runs a myriad of shops in Iceland, most importantly two supermarket chains, Bonus and Hagkaup (interestingly, Hagkaup was founded by the father of Jon Asgeir’s wife – first Jon Asgeir bought Hagkaup, later he married into the Hagkaup family, though long after its founder’s day). Arion Bank had taken over Hagar, apparently against a debt of ISK70bn (£350m).

After continuous headlines of Hagar’s fate – last summer Johannesson i.a. wowed to bring in foreign investors in 2-3 years time – Arion Bank has now decided to float Hagar later this year. Johannes, Jon Asgeir’s father (who in 1989 founded Bonus with his son, the first step towards the Baugur empire), is the chairman of Hagar. Arion will grant him the right to buy 10% of the company, in addition to the management getting 5% – in Iceland, the takeover trigger is 30%. Before the fall the bank would no doubt have lent preferred buyers against Hagar shares but Arion claims that’s not on offer now. Many Icelanders would have liked to see Hagar broken up so as to correct the ca 60% market share that Hagar has in the food market. Arion maintain that it’s obliged to focus on its profit not correcting competition.

Olafur Olafsson’s foreign profile has been much lower than Jon Asgeir’s though he has been living abroad for years, recently swapping Knightsbridge for Lausanne. Olafsson, who spans the gamut of the pre- and post-privatisation period, rose on the tail of the Progressive Party and the co-operative movement and built his empire on the shipping company Samskip. He later became one of the biggest shareholders in Kaupthing and was the main shareholder of Alfesca that sprung from one of the two main fishing companies, operating since after the war. It seems to have been through Olafsson’s networking that the Quatari businessman al-Thani invested in both Kaupthing (Sept. 2008) and Alfesca (summer 2008). The Alfesca investment never materialised; the Kaupthing one is being investigated as an alleged market manipulation. Olafsson and Samskip’s management have now negotiated a financial reorganisation with Arion and Fortis Bank – it is understood that the owners will bring in new capital.

Icelandic Group is the other major Icelandic fishing company that in 2005 was bought by Magnus Thorsteinsson and Björgolfur Gudmundsson. These two, together with Gudmundsson’s son Bjorgolfur Thor Bjorgolfsson, bought 40% as Landsbanki was privatised in 2002. At the time it was understood that the money came from the sale of the Bravo Brewery in St Petersburg to Heineken for $400m (their St Petersburg enterprise gave rise to myriads of stories about Iceland’s ‘Russian connections’ and ‘Russian money’ culminating when Russian authorities seemed to contemplate bailing Iceland out in Oct. 2008 – one of the many untold stories of the fall). It’s now clear that if there was any profit from the Bravo sale it only partly, if at all, financed the Landsbanki deal – the three simply got a loan from Bunadarbanki just like those who bought Bunadarbanki (later merging with Kaupthing), Olafsson being one of them, got a loan from Landsbanki.

Thorsteinsson and Gudmundsson are both bankrupt in Iceland. As most companies touched by the two (and all the other ‘viking’ investors) Icelandic sank under its debt in October 2008 when Landsbanki’s new CEO, put in place just after the bank’s demise, revived it. Icelandic’s present management has been running the company since 2007. In spite of losses since 2005, Landsbanki, now on its second CEO since the fall, still keeps the company afloat, claiming that the company will be able to clear out its debt in due course. Since Icelandic hasn’t published an annual report since 2007 it’s difficult to judge its position.

The latest stories of Hagar, Samskip and Icelandic – all important companies within the major Icelandic business conglomerates during the boom – show that certain relations seem to reach if not beyond the grave then at least beyond bankruptcies. Those who had the greatest hold on the old banks are still flying but some of these financial cliffhangers might still crash as the administrators edge in. In Iceland, the feeling is that it’s happening only very slowly – people find it difficult to understand that billions in debt in companies fallen by the road side do not affect the general standing of those whose financial acrobatics brought down the banks and the krona. Returning to former times when the political parties meted out favours through the banks is not an option – and yet there is a great pressure on the Government to do whatever it takes to prevent what is seen as cementing the unfairness in the unhealthy banking system before the fall.

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

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

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

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

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

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

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

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

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

KAUPTHING LUXEMBOURG: RISK, FRAUD AND FAVOURED CLIENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Back-dated documents in Kaupthing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Enter the administrators

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

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

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

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

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

JC Flowers, the Libyans and Blackfish Capital

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

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

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

Blackfish Capital and Jonathan Rowland’s “lieutenant”

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

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

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

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

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

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

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

The €320m Luxembourg state aid for restructuring

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

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

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

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

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

Pillar Securitisation

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

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

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

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

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

ROWLAND, THE BANK OWNER

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

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

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

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

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

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

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

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

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

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

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

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

Kaupthing, Banque Havilland and Kvika

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

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

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

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

THE KAUPTHING SKELETONS IN BANQUE HAVILLAND

The Kaupthing – Banque Havilland link: Immo-Croissance

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

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

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

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

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

The second and third life of Immo-Croissance

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

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

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

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

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

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

Havilland, Immo-Croissance and EHP

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

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

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

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

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

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

The ex-Kaupthing employee hounded by Banque Havilland

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

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

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

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

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

Baseless accusations of hacking and theft of documents

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

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

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

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

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

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

Luxembourg, the rotten heart of financial Europe             

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

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

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

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

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

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

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

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

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

What was the SIC?

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

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

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

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

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

Naming the largest borrowers, incidentally also the largest shareholders

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

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

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

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

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

The three members

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

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

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

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

Greed, fraud and the collapse of common sense

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Absolution of risk

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

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

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

The “home-knitted” crisis

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

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

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

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

Court cases and political controversies

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

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

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

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

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

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

The SIC lacunae

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

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

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

Why the SIC report’s importance has grown with time

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

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

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

Lessons for other countries

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

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

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

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

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

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

Follow me on Twitter for running updates.

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

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

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

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

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

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

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

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

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

DB’s own version

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

Additional evidence: the Icelandic CLN case

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

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

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

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

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

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

The side story in the al Thani case

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

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

The 2008 last minute CBI loan to Kaupthing

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

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

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

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

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

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

When the Deutsche Bank December 2016 agreement surfaced…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A short revision of dodgy Deutsche Bank transactions

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

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

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

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

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

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

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

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

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

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With its 2600 pages report into the banking collapse no nation has better study material to learn from than Iceland. However, with some recent sales in Landsbankinn and uncertainties regarding the sales of the new banks, Icelanders have good reasons to wonder what lessons have indeed been learnt from the 2008 banking collapse. If little or nothing has been learnt it’s worrying that two or three banks will soon be for sale in Iceland.

“During the election campaign I would have liked to hear the candidates form a clear and concise lessons from the 2008 banking collapse,” said one Icelandic voter to me recently. He’s right – there was little or no reference to the banking collapse during the election campaign in October.

The unwillingness to formulate lessons is worrying. So many who needed to learn lessons: bankers, lawyers, accountants, politicians and the media, in addition to every single Icelander.

Also, some recent events would not have happened had any lessons been learnt from this remarkable short time of fully privatised banking, from the beginning of 2003 to October 6 2008. There is a boom in Iceland, reminding many of the heady year 2007 but this time based inter alia tourism and not on casino banking. However, old lessons need to be remembered in order to navigate the good times.

Landsbankinn: six loss-making sales 2010-2016

Landsbankinn was taken over by the Icelandic state in 2011. The largest creditors, the deposit guarantee schemes in Britain and the Netherlands, were unwilling to be associated with the Landsbankinn estate, contrary to creditors in Kaupthing and Glitnir. Consequently, the Icelandic state came to own the new bank, Landsbankinn.

Over the years certain asset sales by Landsbankinn have attracted some attention but each and every time the bank has defended its action. In certain cases it has admitted mistakes but always with the refrain that now lessons have been learnt, time to move on.

Earlier this year, the Icelandic State Financial Investments (Bankasýsla), ISFI, published a report on one of these sales, the one causing the greatest concern – of Landsbanki’s share in a credit card issuer, Borgun. Landsbankinn had undervalued its Borgun share by billions of króna, creating a huge gain for the buyers.

Landsbankinn chose the buyers, nor bidding process etc., this was not a transparent sale. It so happens that some of the buyers happen to be closely related to Bjarni Benediktsson leader of the Independence party and minister of finance. No one is publicly accusing Benediktsson for having influenced the sale.

ISFI concluded that Landsbankinn should have known about the real value of the company and should only have sold via a transparent process, not by handpicking the buyers, some of whom are managers in Borgun. Part of the hidden value was Borgun’s share in Visa Europe, sold in November 2015 after the bank sold its Borgun share. Landsbankinn managers claim they were unaware of the potential windfall that could arise from such a sale.

Following the ISFI report the majority of the Landsbankinn board resigned but not the bank’s CEO, Steinþór Pálsson.

Landsbankinn’s close connections with the Icelandic Enterprise Investment Fund

Now in November the Icelandic National Audit Office, at the behest of the Parliament, investigated six sales by Landsbankinn, conducted in the years 2010 to 2016. It identified six sales, one of them being the Borgun sale, where it concluded that the state’s rules of ownership and asset sale had been broken as well as the bank’s own rules.

The report also points out that some of Landsbankinn’s own staff would have been aware of the potential windfall in Borgun. In a similar sale in another card issuer, Valitor, the sales agreement included a clause giving the bank share in similar gains after the sale.

Landsbankinn CEO Pálsson said he saw no reason to resign since lessons from these sales had already been learnt. However, nine days after the publication of this report Landsbankinn announced that Pálsson would step down with immediate effect.

Interestingly, four of the less-than-rigorous sales involved the Iceland Enterprise Investment Fund (Framtakssjóður), IEIF, set up in 2010 by several Icelandic pension funds. In the first questionable Landsbankinn sale, in 2011, the bank sold a portfolio of assets directly to the IEIF without seeking other buyers. The portfolio was later shown to have been sold at an unreasonably low price.

In relation to the sale Landsbankinn became the IEIF’s biggest owner. The Financial Surveillance Authority, FME, later stipulated that the bank could not hold a IEIF stake above 20%. In 2014 the bank then sold part of its share in the IEIF to the Fund itself, again at an unreasonably low price. In two sales, 2011 and 2014, Landsbankinn sold shares in Promens, producer of plastic containers for the fishing industry, again to the Fund.

As the Audit Office points out all the questionable sales have had two characteristics: a remarkably low price and Landsbankinn has not searched for the highest bidder but conducted a closed sale to a buyer chosen by the bank.

No one is accused of wrongdoing but it smacks of closed circuits of cosy relationships, a chronic disease in the Icelandic business community.

Landsbankinn and the blemished reputation

Landsbankinn claims it has in total sold around 6.000 assets via a transparent process. That may be true but the Audit Office report indicates that the bank chooses at times to be less than transparent, especially when it’s been dealing with the IEIF.

The bank’s management has time and again stated the importance of improving the bank’s reputation – after all, the 2008 collapse utterly bereft Icelandic banking of its reputation. This strife is the topic of statements and stipulations but so far, deeds have not followed words. The Audit Office concludes that inspite of its attempts the bank’s reputation has been blemished by the questionable sales.

How the banks were owned before the collapse

During the years of privatisation of the Icelandic banks, from 1998 to end of 2002, it quickly became clear that wealthy individuals were vying to be large shareholders in the banks. There was some talk of a spread ownership but in the end the thrust was towards having few individuals as main shareholders in the three banks.

Landsbankinn was bought by father and son, Björgólfur Guðmundsson and Björgólfur Thor Björgólfsson who during the 1990s got wealthy in the Soviet Union. A fact that gave rise to articles in the magazine Euromoney in 2002, before the Landsbankinn deal was concluded.

Kaupthing’s largest owners were, intriguingly, businessmen who got wealthy through deals largely funded by Kaupthing. The largest shareholder, Exista, was owned by two brothers, Ágúst og Lýður Guðmundsson and the second largest was Ólafur Ólafsson. The brothers own one of Britain’s largest producers of chilled ready-made food, Bakkavör. Ágúst got a suspended sentence in a collapsed-related criminal case. Ólafsson, together with Kaupthing managers, was sentenced to 4 ½ years in prison in the so-called al Thani case.

Glitnir had a less clear-cut owner profile to begin with. The family of Bjarni Benediktsson were large shareholders in the bank (then called Íslandsbanki, as the new bank is now called) but as the SIC report recounts the Landsbankinn father and son had built up a large stake in the bank. The FME kept pestering the father and son about these shares, the authority claimed the two were not authorised to own, later sold to the Benediktsson’s family and others.

In spring of 2007 Jón Ásgeir Jóhannesson, who had insistently but unsuccessfully tried to buy a bank in 1998, gathered a group to buy around 40% in Glitnir. Involved were Baugur and FL Group, both owned or largely owned by Jóhannesson. One of his partners was Pálmi Haraldsson, a long-time co-investor with Jóhannesson. This graph (from the SIC report) shows Glitnir’s lending to Fons and other Haraldsson’s related companies: the cliff of debt rises after these businessmen bought Glitnir. It could also be called Icelandic banking in a nutshell:

Biggest shareholders = biggest borrowers

The graph above is Icelandic banking a nutshell. It characterises what the word “ownership” meant for the largest shareholders: they were also the banks’ largest borrowers, as well as borrowing in the other two banks. The shareholding of the largest groups in each of the banks was around and above 40% during most of the short run – the six years – of privatised banks.

Here some excerpts from the SIC report about the borrowing of the largest shareholders:

The largest owners of all the big banks had abnormally easy access to credit at the banks they owned, apparently in their capacity as owners. The examination conducted by the SIC of the largest exposures at Glitnir, Kaupthing Bank, Landsbankinn and Straumur-Burðarás revealed that in all of the banks, their principal owners were among the largest borrowers.

At Glitnir Bank hf. the largest borrowers were Baugur Group hf. and companies affiliated to Baugur. The accelerated pace of Glitnir’s growth in lending to this group just after mid-year 2007 is of particular interest. At that time, a new Board of Directors had been elected for Glitnir since parties affiliated with Baugur and FL Group had significantly increased their stake in the bank. When the bank collapsed, its outstanding loans to Baugur and affiliated companies amounted to over ISK 250 billion (a little less than EUR 2 billion). This amount was equal to 70% of the bank’s equity base.

The largest shareholder of Kaupthing Bank, Exista hf., was also the bank’s second largest debtor. The largest debtor was Robert Tchenguiz, a shareholder and board member of Exista. When the bank collapsed, Exista’s outstanding debt to Kaupthing Bank amounted to well over ISK 200 billion.

When Landsbankinn collapsed, Björgólfur Thor Björgólfsson and companies affiliated to him were the bank’s largest debtors. Björgólfur Guðmundsson was the bank’s third largest debtor. In total, their obligations to the bank amounted to well over ISK 200 billion. This amount was higher than Landsbankinn Group’s equity.

Mr. Thor Björgólfsson was also the largest shareholder of Straumur-Burðarás and chairman of the Board of Directors of that bank. Mr. Björgólfur Thor Björgólfsson and Mr. Björgólfur Guðmundsson were both, along with affiliated parties, among the largest debtors of the bank and together they constituted the bank’s largest group of borrowers.

The owners of the banks received substantial facilities through the banks’ subsidiaries that operated money market funds. An investigation into the investments of money market funds under the aegis of the management companies of the big banks revealed that the funds invested a great deal in securities connected to the owners of the banks. It is difficult to see how chance alone could have been the reason behind those investment decisions.

During a hearing, an owner of one of the banks (Björgólfur Guðmundsson), who also had been a board member of the bank, said he believed that the bank “had been very happy to have [him] as a borrower”. Generally speaking, bank employees are not in a good position to assess objectively whether the bank’s owner is a good borrower or not.

De facto, the Icelandic banks were “lenders of last resort” for their largest shareholders: when foreign banks called in their loans in 2007 and 2008 the Icelandic banks to a large extent bailed their largest shareholders out with massive loans.

Needless to say, systemically important banks in most European countries are owned by funds and investors, not few large shareholders who are also the banks’ most ardent borrowers. Icelandic banks will hopefully never return to this kind of lending again.

Separating investment banking and retail banking

As very clearly laid out in the SIC report the banks did not only turn their largest shareholders into their largest debtors but the banks’ own investments were usually heavily tied to the interests of their largest shareholders. Therefor, it’s staggering that now eight years after the collapse and three governments later a Bill separating investment banking and retail banking has not yet been passed in the Icelandic Parliament.

This means that most likely the new banks – Landsbankinn, Arion and Íslandsbanki – will be sold without any such limitation on their banking operations.

It is indeed difficult to see that there could be a market in Iceland for three banks. There is speculation that there will be foreign buyers but sadly, the history of foreign investment in Iceland is not a glorious one. Iceland is not an easy country to operate in as heavily biased as it is towards cosy relationships so as not to say cronyism.

Another way to attract foreign buyers is to offer shares for sale at foreign stock exchanges; Norway has been mentioned. Clearly a good option but I’ll believe it when I see it.

Judging from the short span of privatised banks in Iceland it’s also a worrying thought that the banks will again be owned by large shareholders, holding 30-50%.

The fact that state-owned Landsbankinn could over six years conduct six questionable sales with no consequence until much later, raises questions about lessons learnt. And the fact that this potentially simple risk-limiting exercise of splitting up investment and retail banking hasn’t yet been carried out by the Icelandic Parliament makes one again wonder about the lessons learnt. And yet, Iceland has the most thorough report in recent times in the world to learn from.

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On October 6 the Supreme Court in Iceland ruled in one of the largest collapse cases so car where nine Kaupthing managers were charged for market manipulation (see an earlier Icelog). As in a similar case against Landsbanki managers the Kaupthing bankers were found guilty. The Reykjavík District Court had already ruled in the Kaupthing market manipulation case in June 2015.

This is how Rúv presented the Supreme Court judgement in October. Kaupthing’s CEO Hreiðar Már Sigurðsson was sentenced to six months in prison, in addition to the 5 1/5 years in the so-called al Thani case where the bank’s executive chairman had received a four year sentence. The market manipulation case added a year to that case. Magnús Guðmundsson managing director of Kaupthing Luxembourg was found guilty but did not receive a further sentence, having been sentenced to 4 1/2 years in the al Thani case.

Other sentenced in October were Ingólfur Helgason managing director of Kaupthing Iceland, 4 1/2 years and Bjarki Diego head of lending 2 1/2 years. Four employees were found guilty: three of them got suspended sentences. The fourth, Björk Þórarinsdóttir was found guilty but not sentenced.

The investigations by the Office of the Special Prosecutor, now the District Prosecutor, have so far resulted in finding guilty around thirty bankers and others related to the banks. As I have often pointed out: the penal code in Iceland is mostly similar to the code in other neighbouring European countries but the difference was the will of the Prosecutor to investigate very complex cases, taking on a huge task undaunted. That’s the difference – no case was seen as being too complicated to investigate.

Last week, the following article was in one of the Greek papers. From the photos I can see that this article is about the above case. Something for the Greeks to ponder on: what’s done in Iceland, less in Greece.

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Last year, Kaupthing’s second largest shareholder Ólafur Ólafsson was sentenced in February 2015 to 4 1/2 years in prison in the so-called al Thani case. After a change in the law on imprisonment shortened the time prisoners have to spend in prison under certain circumstances, Ólafsson was recently released to a half-way house in Reykjavík. He is now electronically tagged but can go to work – he is still one of the wealthiest men in Iceland and owns inter alia a large shipping company, Samskip.

Yesterday, a helicopter accident drew some attention to Ólafsson: it turned out he was on a sightseeing flight together with three foreign business partners and a pilot when the helicopter came down. All on board were injured but none of them suffered life-threatening injuries.

The helicopter, owned by Ólafsson and registered in Switzerland, according the Stundin, though a Danish and a Swiss company. Allegedly, the helicopter has been used a lot lately, allegedly twice turning off the device that allows the helicopter to be tracked.

According to Stundin a group of hikers saw a helicopter eight hours before the crash, flying in a dangerously daring way, close to the scene of the accident. It’s not been confirmed if the helicopter observed was the one owned by Ólafsson.

The accident has also drawn the attention of authorities to the fact that tagged prisoners can in theory travel abroad – it’s not banned – as long as they are back at 9pm. The reason foreign travel isn’t forbidden is only because it’s not until now that there have been prisoners wealthy enough to own their own planes. This will now be taken up.

The Icelandic magasine Séð og heart has now pointed at a weird coincidence. Ólafsson has a very close business partner, Hjörleifur Jakobsson, who like Ólafsson moved to Switzerland, has in general been closely involved in Ólafsson’s business ventures for decades and has often been called Ólafsson’s right hand in Icelandic media.

It turns out that as the Icelandic Prison Service is starved for funds it has outsourced the electronic tagging and the surveillance involved to a company called “Öryggismiðstöðin,” which is owned by no  other than Ólafsson’s right hand man, Jakobsson. The magasine is not alleging that Jakobson’s company is granting Ólafsson any favours, merely pointing out that such coincidences can happen in little Iceland.

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Thirteen people, mostly ex-bankers, have now been sent to prison in cases connected to the banking collapse brought by the Office of Special Prosecutor. Four of these prisoners keep giving rise to media coverage in Iceland: earlier in November it turned out that they had applied for a riding course, organised by the Agricultural University of Iceland. In the end, the director of the Prison Service refused to accept that this expensive course fulfilled the set criteria for prisoners’ rehabilitation. It also ensued that these prisoners have allegedly made use of PR firms.

For the time being, three former top managers of Kaupthing – Hreiðar Már Sigurðsson, Magnús Guðmundsson and Sigurður Einarsson – and the bank’s second largest shareholder Ólafur Ólafsson are in prison, serving sentences from four to six years. The prison that houses them, Kvíabryggja, is on the Northern side of Snæfellsnes, close to the tip of the peninsula that can be seen from Reykjavík on a clear day.

These four prisoners, sentenced in the so-called al Thani case, are not the first sentenced in relation to the banking collapse but they are the first to continuously making media headlines. In 2003 a member of Alþingi was sentenced to prison for embezzlement from public funds. Also staying at Kvíabryggja he procured new mattresses for the prison.

Shortly after the four were imprisoned there were news that also they wanted to pay for some improvements at Kvíabryggja but this is no longer legal: prisoners can’t use their funds things at Kvíabryggja at their own will.

An exclusive course for wealthy prisoners

In early November the Icelandic media covered a story regarding a riding course these four prisoners allegedly wanted to take part in. The Agricultural University offers riding courses, intended for A level students and was willing to offer it to the four prisoners at Kvíabryggja. The course was to run on weekends this winter, starting early November, in a riding hall at a farm next to but not belonging to the prison.

The cost was €3.800 per participant. The course only included the teaching, which meant the prisoners had to provide a horse, saddle and other things needed, apparently not a problem. Ólafsson who for years has owned a grand summerhouse close by the prison is known in Icelandic equestrian circles as the owner of some of the most expensive and outstanding horses in Iceland.

It seems that when the director of the Prison Service Páll Winkler heard about this he inquired if the course was offered to all prisoners. Apparently that was not the case. Though being part of the curriculum offered by the Agricultural University in this case it was allegedly tailor-made for these four prisoners, at a price only very few prisoners will be able to afford. Consequently, Winkler interfered and the course was called off.

Prisoners, a riding course and human rights

Following Winkler’s comments to the media that the riding course did not fit rules on courses acceptable for prisoners the wife of Ólafsson, Ingibjörg Kristjánsdóttir, wrote an article in one of the Icelandic papers, Fréttablaðið, accusing Winkler of inappropriate comments and breaching the prisoners’ human rights. Interestingly, the paper is owned by Ingibjörg Pálmadóttir, the wife of Jón Ásgeir Jóhannesson; Jóhannesson is charged by the OSP in a pending case.

Kristjánsdóttir claims that Winkler’s comment breached the prisoners’ human rights, made at the cost of people he should be protecting, “prisoners who have few to speak for them in a society of hate and revengefulness, prisoners that Páll knows are not allowed to speak to the media. Thus the prisoners are defenceless against the attack by the director of the Prison Service.”

Winkler answered, claiming that talking about “breach of human rights” showed Kristjánsdóttir’s “lack of understanding and utter lack of respect for people who have really suffered breach of human rights from public institutions, either in this country or abroad.” Rules had been followed and he had no further comments to this case.

Prisoners with PR people

In relation to the riding course Winkler said to Rúv that a very small group of prisoners has access to millions of króna and even makes use of public relation firms to contact him and the prison service. “PR firms have contacted me, asking me to say a, b or c or not to say a, b or c. I found this utterly preposterous and was left speechless.”

Winkler also says that wealthy prisoners have tried to buy services that are not offered to prisoners in general. “This is a delicate balance because if this is something offered to all prisoners I am of course only glad when the situation can be improved.” However, services for only a select group of prisoners is unacceptable.

As an example Winkler mentions a new association, “Friends of Kvíabryggja” set up to improve life at Kvíabryggja, offering funds for improvements but this is, according to Winkler, unacceptable. He has i.a. refused requests for a yoga course and more tv channels. “If you are powerful and want to improve the situation for prisoners you turn to Alþingi and do it through the Budget.”

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