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Now what about Luxembourg and financial supervision?
Three Kaupthing bankers and the bank’s second largest shareholder were recently sentenced in Iceland to 3 to 5 1/2 years in prison for market manipulation and breach of fiduciary duty. The story behind the case is a share purchase in Kaupthing in September 2008. At the time, all four now convicted – then chairman of the board Sigurður Einarsson, CEO Hreiðar Már Sigurðsson, Kaupthing Luxembourg manager Magnús Guðmundsson and investor Ólafur Ólafsson – were interviewed in the Icelandic media where they underlined the strength of Kaupthing by pointing out that a Qatari investor, al Thani, had bought 5.1% in the bank.
What they failed to mention was that al Thani was not so much risking his own money as Kaupthing money: via an intricate scheme based on a few offshore companies the funds for the share acquisition came from Kaupthing itself. And where was the master plan carried out? In Luxembourg.
Kaupthing subsidiary in Luxembourg was at the centre of the al Thani saga. That was were the idea was brought into action, money into one vehicle and out into another. It is a well known fact in Iceland that most of the banks’ most questionable deals were indeed carried out in Luxembourg. It is an intriguing thought that Luxembourg was time and again chosen at the preferred place for these deals.
In early 2011 I was in Luxembourg and had a meeting at the Luxembourg financial services authorities, Commission de Surveillance du Secteur Financier, CSSF.* I met with a few people in a meeting room. I was on one side of a huge table, four or five people on the other side. Already then it was clear that the Icelandic banks had been doing some rather “inventive” banking in Luxembourg. I presented some of the cases I knew of. On the other side of the table there were only expressionless faces and then I was told that rules and regulations were strict in Luxembourg. Nothing contrary to laws could take place in Luxembourg banks.
In the CSSF 2012 Annual Report its Director General Jean Guill writes:
During the year under review, the CSSF focused heavily on the importance of the professionalism, integrity and transparency of the financial players. It urged banks and investment firms to sign the ICMA Charter of Quality on the private portfolio management, so that clients of these institutions as well as their managers and employees realise that a Luxembourg financial professional cannot participate in doubtful matters, on behalf of its clients.
“… cannot participate in doubtful matters…” – If only matters were that simple. Now four people have been sentenced to prison in Iceland for participating in doubtful matters that violate Icelandic laws, according to the Reykjavík District Court, but were carried out in Luxembourg, by using Luxembourg expertise and the so very favourable circumstances created in Luxembourg over decades.
A group of Landsbanki Luxembourg clients have for several years been trying to catch the attention of the Luxembourg authorities, a saga that Icelog has reported on time and again. This group had taken out equity release loans at Landsbanki. These clients have asked 1) serious questions about the dealings of Landsbanki Luxembourg before it went bankrupt – such as evaluation of property, calculations on loans breaching the collateral limit, investments related to the loans and how products were sold; 2) serious questions as to how the estate has been run, its misleading information or lack thereof, numbers that did not add up.
None of this has been addressed by the CSSF or other Luxembourg authorities so far. However, the Luxembourg paper Wort has reported that two cases related to Landsbanki Luxembourg are now being investigated, quoting minister of justice Octavie Modert.
So far, and to great cost and immeasurable emotional distress the bank’s clients – mostly elderly citizens living in France and Spain – have been left to battle on their own. In Luxembourg the State Prosecutor issued a press release in support of the Landsbanki Luxembourg administrator – unthinkable in most other European countries – thereby making it look as if the Landsbanki Luxembourg clients were trying to evade paying their debt. – Through court cases in Spain and France the group has made some advances but none of this is taken into any consideration at all in Luxembourg.
One client has shown me a set of calculations regarding one specific loan portfolio. Landsbanki Luxembourg, prior to its collapse, had claimed that this portfolio no longer covered the loan so the borrower was obliged to pay a certain amount in cash as a cover. As far as I could see, the number from the bank was wrong: the client was not in breach and should not have been obliged to pay. I could of course well be wrong. I sent this calculation to someone from Landsbanki Luxembourg with whom I had been in touch and whom I had told of this. I know for certain that this person got the calculation but I never heard back.
Only Luxembourg authorities can access documents regarding the operations of Landsbanki Luxembourg. Although the bank’s managers have been charged with criminal offenses in Iceland (case pending but due in the new year) by the Icelandic Office of the Special Prosecutor as well as being sued in a civil case by the Landsbanki Winding-up Board for misleading reporting Luxembourg authorities have not been willing to listen to well-founded claims by the Landsbanki Luxembourg clients: unanswered questions about the Landsbanki Luxembourg operations before the bank’s demise in October 2008 – as well as the administrator’s operations.
Noticeably, an administrator has the duty to investigate operations, as indeed the Landsbanki Winding-up Board has done. The administrator, Yvette Hamilius and lawyers working for her, have stated in Luxembourg media that everything the administrator has done is according to the law.
In one case that the Landsbanki Luxembourg administrator took to court, the administrator caused delays of, in total, 200(!) days. And on it goes.
The fact that the numerous authorities in Luxembourg, such as the CSSF and the State Prosecutor have either ignored pleas from clients or outrightly sided with the administrator, without any chance of the claims actually being heard or looked at, shows a horrendous lack of care for clients and a sound protection for the financial industry. And everyone can pretend that it is, as Director General Guill points out: that professionalism and transparency is such in the financial sector in Luxembourg that financial players “cannot participate in doubtful matters.”
One way to supervise financial institutions is by box-ticking: to look at each item in its narrow and isolated meaning, never look at connections or behaviour, never try to understand meaning and context. The institutions know this and prepare their material accordingly. Then there is little to fear. One reason why so little was seen and caught before 2008 was this attitude by regulators. Judging from the lack of interest in claims by Landsbanki Luxembourg clients this still seems to be the attitude among Luxembourg authorities. Authorities in Cyprus have announced that banks in Cyprus will be investigated, a little bit is being done in Ireland and the UK. When will Luxembourg follow suit? From anecdotal evidence there have been things going on in Luxembourg that merit investigations.
* See an earlier Icelog report on Luxembourg and the Icelandic banks. – Here is an earlier Icelog on Landsbanki Luxembourg.
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Iceland: prosecuting alleged major financial fraud means wrestling with tough defence lawyers
In two recent cases brought by the Office of the Special Prosecutor the focus has been on the defence team more than those indicted. The resignation of two defence lawyers from the al Thani case postpones the case until earliest February next year. In a case of alleged market manipulation at Kaupthing, the prosecutor asked that one of these two lawyers should be dismissed in order to prevent a repetition of the al Thani case. In a similar case against Landsbanki managers, the prosecutor asked for dismissal on grounds of conflicts of interest.
Yesterday, as one of the biggest cases, on alleged market manipulation and breach of fiduciary duty, brought so far by the Office of the Special Prosecutor came up in Reykjavík District Court for the first time, prosecutor Björn Þorvaldsson made a startling request: he demanded that Gestur Jónsson, defence lawyer for Sigurður Einarsson ex-chairman of Kaupthing, should be dismissed and Einarsson find a new lawyer.
Also Justice Arngrímur Ísberg seemed to be taken by surprise. Ísberg is famous in Iceland for what many see as a lenient grip on the infamous Baugur case where, incidentally, Gestur Jónsson acted as defence lawyer for Jón Ásgeir Jóhannesson. Ísberg was unsure if prosecutor Þorvaldsson could make this request but Þorvaldsson pointed him to a recent amendment to older law. After a deliberation for fifteen minutes Ísberg returned and refused the dismissal. The prosecutor has appealed Ísberg’s decision to the Supreme Court.
Þorvaldsson’s move was unexpected but there is a story behind it. As reported earlier on Icelog, Gestur Jónsson, also acting for Einarsson in the al Thani case, together with Ragnar Hall, acting for defendant Ólafur Ólafsson, Kaupthing’s second largest shareholder, resigned from the al Thani case just days before the oral hearings were due to start April 11. When Justice Pétur Guðgeirsson refused to accept their resignation, the two lawyers simply refused to follow the Justice’s order. Following a meeting this week with the two new defence lawyers – Ólafur Eiríksson and Þórólfur Jónsson from Logos – the Justice announced that oral hearings will not start until February next year. – In accordance with Icelandic law, the judge will rule on the lawyers’ resignation, which some see as contempt of the court, only at the end of the case.
In their letter (in Icelandic), Hall and Jónsson write that though they are convinced of their clients’ innocence they fear that the treatment of their clients so far is i.a. in breach of the European Human Rights Act. But instead of using these arguments on behalf of their clients in Court the two lawyers chose to resign. Before resigning, Jónsson and Hall had exhausted all possibilities for having the case thrown out or postponed. Ultimately, their resignation obtained just what they had failed to do through the courts: a major postponement.
As Þorvaldsson pointed out yesterday when he argued his case for the dismissal, the grounds Jónsson and Hall cited for their highly unusual move could also be invoked in the market manipulation case, which is why the prosecutor made this request. In Court, Jónsson protested that Þorvaldsson cited their letter, since it had not been presented earlier. Þorvaldsson said the letter was an open-source document, already published in the internet and did not need to be presented.
In the market manipulation case against the Kaupthing managers and employees nine are charged: chairman of the board Sigurður Einarsson, CEO Hreiðar Már Sigurðsson, director of Kaupthing Iceland Ingólfur Helgason, director of Kaupthing Luxembourg Magnús Guðmundsson, director of corporate banking Bjarki Diego, credit committee member and Kaupthing corporate employee Björk Þórarinsdóttir, director of prop trading Einar Pálmi Sigmundsson and two private business brokers Birnir Sær Björnsson and Pétur Kristinn Guðmarsson. – All nine were present in Court yesterday. All deny any wrongdoing.
In a similar case, against managers and employees of Landsbanki, which was also brought up in Reykjavík District Court yesterday, prosecutor Arnþrúður Þórarinsdóttir also asked that one of the defence team should be dismissed. Until one and a half year ago Lárentsínus Kristjánsson, acting for ex-director of brokerage Steinþór Gunnarsson, was the chairman of Landsbanki resolution committee. Þórarinsdóttir argued that this could imply conflict of interest and asked for Kristjánsson’s dismissal. Neither Gunnarsson nor Kristjánsson accepted. The Justice will rule on this at a later time. Other defendants are CEO Sigurjón Árnason, Director of Corporate Accounts Elín Sigfússdóttir, director of proprietary trading Ívar Guðjónsson and brokers Júlíus Steinar Hreiðarsson and Sindri Sveinsson. All of those charged deny any wrongdoing.
These latest events show that as elsewhere in big white-collar fraud cases, Icelandic defence lawyers know a trick or two to delay and thwart the path for the prosecutor when it comes to defending former high-flyers. The latest move by the prosecutor indicates that the OSP is prepared to play it tough. Or, as we say in Icelandic, “to converse with two rams’ horn” – not a sweet conversation.
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The latest on the al Thani case
Instead of starting the oral hearings in the al Thani case – where the Office of the Special Prosecutor in Iceland has charged three former Kaupthing managers and the bank’s second largest shareholder – as planned Thursday morning, April 11, the hearings were postponed until further notice. This happened after the defense lawyers of Sigurdur Einarsson and Olafur Olafsson took the unprecedented step not to heed the judge who refused to accept their resignation of the case. In court, prosecutor Bjorn Thorvaldsson pleaded that the two lawyers would receive penalties for willfully causing delays to the case. The judge will consider any such step after the case had finally been heard.
The defendants have now appointed new lawyers who need to read up on the case. The two lawyers who resigned – Gestur Jonsson and Ragnar Hall – are two of the most experienced lawyers in Iceland. Jonsson was i.a. lawyer for Baugur’s main shareholder Jon Asgeir Johannesson in the so-called Baugur case and is also Johannesson’s defense lawyer in a case brought against Johannesson by the Office of the Special Prosecutor, the so-called Aurum case.
The defense in the Aurum case shows a similar trend to the al Thani case. – The oral hearings were due to start in January, got postponed until early April when it was again postponed, this time because documents that the defense team wanted to present were not ready. After the events in the al Thani case Special Prosecutor Olafur Hauksson expressed his worries that similar things might start to happen in other cases brought by the OSP.
The two lawyers replacing Jonsson and Hall – Olafur Eiriksson and Thorolfur Jonsson– are not at all big names in the Icelandic legal profession. The are both from Logos, the largest Icelandic law firm.
The two lawyers who resigned claim they felt forced to resign because of the way their clients have been treated. Still, they have neither filed any complaints nor taken any action. Earlier, they had made several attempts to have the case thrown out or postponed, taking their cases all the way to the Supreme Court, which has rejected their attempts. In its last ruling re the case the Supreme Court reprimanded the two lawyers, saying their case was without merit.
The strong feeling in Iceland is that the two lawyers resigned in order to gain the postponements they could not obtain via the courts. It is well known in big white-collare cases that highly paid lawyers often try all possible tricks to thwart and delay going to court. Both lawyers strongly deny any such tactics.
The judge will meet with the new defense lawyers on April 22, after which it might be clear when the oral hearings will start. Given the complexity of the case, it is quite likely that the next chapter in the case will not commence until autumn.
*Here are earlier blogs where the al Thani case is mentioned – and here is the story behind the charges in the al Thani case.
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Two big market manipulation cases coming up in Iceland – updated
The Office of Special Prosecutor in Iceland has brought charges in two large market manipulation cases – one against Kaupthing managers, another against Landsbanki managers. Those charged re Kaupthing are, according to Icelandic media, are Kaupthing’s chairman Sigurdur Einarsson, CEO Hreidar Mar Sigurdsson, Ingolfur Helgason director of Kaupthing Iceland, Magnus Gudmundsson director of Kaupthing Luxembourg, Bjarki Diego head of lending, three so far unnamed employees in prop trading and one in retail banking.
From Landsbanki there are CEO Sigurjon Arnason, Elin Sigfussdottir and four traders. The charges have not been published yet.
Allegedly, these cases centre on how the banks themselves, through various channels, owned a large part of the banks’ shares, meaning that market movements did not at all reflect the reality. I expect the charges to come out later this week and will then write about these cases in detail.
So far, no large case has surfaced regarding Landsbanki although the SIC report mentions many interesting transactions related to that bank, as well as the other banks. Icelog has earlier reported on another large Kaupthing case, the so-called al Thani case (here is a link to earlier Icelogs on that case).
According to the SIC report, 74-80% of trades on the Icelandic Stock Exchange were generated by the three banks. According to Icelandic media, some well known cases are connected to the new charges, such as a company called Imon, allegedly used to influence Landsbanki shares. Here is an earlier Icelog where Imon is part of the story and gives an idea what has been investigated.
An interesting aspect of these cases is that the alleged manipulation started well before 2008. This is made very clear in the SIC report.
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The al Thani Kaupthing case on the horizon
The case that the Icelandic Office of the Special Prosecutor is bringing against three Kaupthing managers and Olafur Olafsson, at the time Kaupthing’s second largest shareholder, is coming up in the Reykjavik County Court today. It seems that now all legal quibbles the defendants brought up have been dealt with – all of them brushed aside – which means that the case can now take its course. Not quite now though, that will happen in mid April when the main proceedings are due to start. The Kaupthing managers charged are Sigurdur Einarsson, Hreidar Mar Sigurdsson and Magnus Gudmundsson.
This is by far the largest case brought so far by the OSP. There are fifty names on the witness list. One of them is the man who has given the case its name, Sheikh Mohammed bin Khalifa al Thani. The Sheikh is not accused of any wrongdoing and has not been charged but the OSP would like him to bear witness. It is not known if he will answer the request.
This case has been extensively dealt with on Icelog, i.a. here. The interesting UK angle to the story is that there are striking parallels of this loan story – a Middle Eastern investor being lent money by a bank to invest in that same bank, which then uses that investment as a sign of its rude health – in the Barclay story, also from 2008, now being investigated by the SFO, also covered earlier on Icelog.
Middle Eastern and Russian money is famously finding its way into many London-based investments and investment companies, adding glamour and building cranes to the city. The question is how sparkling clean and healthy all this money is – but as we know from the HSBC money laundering case even major banks are not too squeamish when it comes to the choosing their customers.
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More on Barclays and Kaupthing Middle East investors
Tonight, BBC’s Panorama shed further light on the investment in Barclays, made by Middle Eastern investors in autumn 2008 – an investment that has some striking similarities with the investment from the same part of the world in Kaupthing in September 2008. At that time, Kaupthing managers proudly announced that a Qatari investor, Sheihk Mohammed bin Khalifa al Thani, had so much faith in the bank that he had bought 5.1% of the bank’s shares.
Only later did it transpire that the faith in Kaupthing wasn’t quite as strong as the statements indicated. Kaupthing lent money to companies connected to the Sheikh and allegedly channeled $50m, an in-advance profit, to a company controlled by the Sheikh. As reported earlier on Icelog the Office of the Special Prosecutor in Iceland has charged ex Kaupthing managers – Sigurdur Einarsson, Hreidar Mar Sigurdsson and Magnus Gudmundsson – and the bank’s second largest shareholder at the time Olafur Olafsson – for alleged misdoings related to this investment. The Sheikh has not been charged in this loan saga.
Interestingly, the Panorama programme indicated that allegedly and as far as it could be gauged from Barclays public documents the Abu Dhabi sovereign investment fund made the investment whereas profit went into an offshore company controlled by Sheikh Mansour bin Zayed al-Nahyan.
An FT article on Qatari debt illustrates Qatar’s toughness in squeezing as much as possible out of every deal and the global power they derive from their financial strength. According to the FT “Qatar is notorious for trying to get something for nothing,” says one observer of the region’s financial institutions. “You have to almost pay them to do the deal.” Indeed an interesting statement in view of the Kaupthing Qatari deal. The Panorama programme indicates this toughness might apply to some of their neighours as well.
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Kaupthing Winding-Up Board settles with Sheikh al Thani
Kaupthing hf – the Winding-up Board of Kaupthing bank – has announced it has reached “an agreement concerning the settlement of all claims and liabilities between them. This agreement has been reached on a commercial basis with no admission of liability by any party. As a result of the settlement, the proceedings commenced in Iceland by Kaupthing against Sheikh Mohammed Bin Khalifa Bin Hamad Al Thani have been discontinued and all other claims and liabilities have been released. All other terms of the settlement remain confidential.”
According the SIC report Kaupthing loaned companies owned by Sheikh al Thani to buy shares in Kaupthing. This loan was allegedly behind the purchase of Kaupthing shares in September 2008. As reported earlier on Icelog the Office of the Special Prosecutor has charged three former Kaupthing managers and Kaupthing’s second largest shareholder in relation to this loan in a case similar to Barclays and the Qatari investors: neither bank declared it had allegedly loaned the investors money to buy the shares. In addition, Kaupthing lent the Sheikh against future profits. The Sheikh has not been charged of any wrong doing in Iceland but according to Icelandic media the OSP has indicated it might want to call him in as a witness in this case.
So what is Kaupthing hf settling? The SIC report and the OSP charges indicate that as well as issuing two loans in ISK, now around €157m, one of the Sheikh’s companies got a loan of $50m. This loan was “parts of the profits from the transaction” according to a Kaupthing overview of loans issued or discussed in one of the bank’s credit committees just before it collapsed. According to the writ, these three loans have never been repaid.
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Barclays, Kaupthing and the Qatari investors – updated
I have earlier pointed out the similarities between the Kaupthing connections with the Qatari investor Sheikh Mohammed bin Khalifa al Thani and Barclays contacts with another al Thani and Qatari investors. As recounted in some details here, with Kaupthing documents, the Kaupthing saga with the Qatari investor, who bought shares in Kaupthing in September 2008 publicised at the time as showing the Qatari faith in Kaupthing, was indeed a saga of a very favourable Kaupthing loan to the Qatari investor.
This saga had surfaced in the Icelandic media but was fully documented in the SIC report in April 2010 and more recently in charges brought by the Office of the Special Prosecutor against three Kaupthing managers – Sigurdur Einarsson, Hreidar Mar Sigurdsson and Magnus Gudmundsson and Kaupthing’s second largest shareholder at the time, Olafur Olafsson. It did more than strife my mind if the Qatari share-buying in Barclays mirrored the Kaupthing story: that Barclays had lent them the money. Now the FT (subscription) is writing that this is indeed being investigated.
A recent Bloomberg article on the Libor probe refers to an investigation against Barclays chief financial officer Chris Lucas related to “payments made to Qatar’s sovereign wealth fund, the bank revealed last year.” Lucas, who had sought anonymity in the Libor investigations, is also mentioned in the FT article.
As the rumours about alleged fraud started surfacing after the Icelandic bank collapse in 2008 I heard various Icelandic bankers maintain, rather miffed, that they had not done anything differently from bankers in other banks. These words are now taking on a new meaning as we get more insight into what was actually going on in other banks, especially in the UK.
The Icelandic banking saga was laid open in the Icelandic SIC report. Unfortunately, no similar work has been done in the UK or elsewhere, with one exception: the only work comparable to the SIC report, that I am aware of, is Anton Valukas report on Lehman (earlier Icelog on Valukas’ Lehman report here), which was both extensive and thorough and a fantastic read. Recently, Valukas, in his first interview (CBS 60 Minutes) on the Lehman report, has expressed his surprise that no action has been taken against Lehman managers on the basis of his report.
The alleged Barclays deal with the Qatari is yet another addition to an ever more extensive saga of widespread questionable dealings within banks, showing a staggering lack of morality and integrity. These men were not only handsomely remunerated but in some cases knighted – and so far, the bill has been passed on to shareholders whereas none of the doers has been held accountable. That could be changing now with the Libor probe but it is still too early to say if charges will be more successfully pressed than in the SFO case against Kaupthing.
*Feb 3: Chris Lucas, Barclays finance officer for almost six years, is stepping down later this year, according to Sky News. It is unclear what sort of a leaving pay-packet he takes with him. – FT reports that Barclays general counsel Mark Harding is also leaving.
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OSP charges Jon Asgeir Johannesson, Larus Welding and two Glitnir employees
The Office of the Special Prosecutor in Iceland has charged Jon Asgeir Johannesson former CEO of Baugur and a major UK retail investor for his role in a Glitnir loan of ISK6bn (now £40m) in summer 2008. Johannesson is charged for exerting undue influence on Glitnir CEO Larus Welding and Bjarni Johannesson who was in charge of connection to Johannesson’s companies. A third Glitnir employee, Magnus Arnar Arngrimsson is also being charged. The charges related to the three Glitnir employee regard breach of fiduciary duty.
This case, called the Aurum case because the collaterals for the loan were shares in Aurum, formerly Goldsmith, the UK jewelry chain. This was essentially a series of transactions, which in the end brought ISK1bn in cash onto Johannesson’s account with Glitnir and the same amount to his business partner Palmi Haraldsson, who is not charged. According to the charges, the purpose of the loan was to find a way to settle Johannesson’s overdraft with Glitnir, in addition to cash and to enable Haraldsson to get money as well. The OSP is asking for the maximum sentence, a six year prison. Johannesson denies all wrong-doing. In the charges it is stated that both Johannesson and Welding live in the UK.
The tendency here, according to the OSP, is the same as in so many other questionable loans to the major shareholders: the loans were very favorable to the borrower and equally unfavorable to the lender.
The Aurum case has long been known to the Icelandic public, ia from the SIC report and from loan agreements, which had landed in the public domain. Earlier Icelogs on this case can be found here. A link to the charges, in Icelandic, is here. Oral hearing is scheduled to start January 7.
In addition to this case, the OSP has brought charges against Kaupthing managers in the so-called al Thani case. So far, Landsbanki managers or major shareholders of Landsbanki have not been charged.
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Deutsche Bank and its (alleged) failure to recognise up to $12bn losses
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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