Sigrún Davíðsdóttir's Icelog

Icelog has earlier told stories of Landsbanki Luxembourg and equity release loans sold by the bank in France and Spain.

The remarkable thing is that although those who bought the product have good reasons to feel that that Landsbanki Luxembourg missold the loans, mismanaged the accompanying investments and miscalculated the loan cover ratio (in early Sept. 2008, a month before the bank collapse), the administrator has not been willing to discuss these matters with the clients. Since no reports regarding the administrator’s work can be found on-line (contrary to ia the operations of winding-up boards of the collapsed banks in Iceland), it’s not clear how and in what way the administrator has fulfilled normal duties to investigate if the bank took any actions before the collapse that might be either illegal or should be repealed.

In addition, the equity release clients have been frustrated by the wholly opaque and, what has at time, seemed arbitrary operations of the administrator. The clients have ia had varying and inconsistent information as to the status of their loans. Yet, no authority in Luxembourg – such as the Luxembourg financial services, CSSF or the Luxembourg Central Bank – seems to have paid any attention of a) what went on in Landsbanki Luxembourg before its demise b) the operations of the administrator. In this tiny country that lives of banking, the authorities don’t show any interest in knowing what really is going on in Luxembourg banks.

As to the assets, the Landsbanki Winding-up Board has now taken them over. The WuB has not been willing to answer questions regarding what they know about the Landsbanki Luxembourg operations before or after the collapse. The unusual position of the Landsbanki Luxembourg estate is that there are essentially only two creditors: the Landsbanki Iceland estate, now run by the Winding-up board and the Luxembourg Central Bank.

As mentioned earlier on Icelog there are two important events concerning Landsbanki Luxembourg: a court case in Spain and actions taken in France by a French judge.

A court in Spain has ruled in one case that the Landsbanki Luxembourg was illegal, awarded the borrow compensation – but because the case is being appealed these borrowers are still kept in agony.

In France, Judge Van Ruymbeke* is investigating the Landsbanki Luxembourg operations and has seized some properties belonging to Landsbanki Luxembourg clients – in order to prevent the Landsbanki Luxembourg administrator from confiscating the properties against loans she claims are in default.

In spring, the Luxembourg State prosecutor took the extraordinary step to issue a press release in support of the said administrator – although a) the prosecutor had not, judging from the press release, investigated the matter b) had not been asked to investigate it and c) had, as far as could be judged from the press release, nothing to rely on but information from the said administrator. Quite extraordinarily, the prosecutor makes the claim that a small number clients, complaining about the operations of the administrator, are only people who are trying to evade repaying their loans.

The fact that a State prosecutor steps forward to defend in this way an administrator of a private company, is I believe unheard of in any country claiming to be run by the rule of law.

What makes this case particularly poignant is that many of these clients, who now have lived with the threats of being evicted from their homes, are elderly people who thought they were securing their later years in a sensible way by taking out these loans. There are many and various European and domestic schemes to protect consumers and bank clients. So far, none of these seem to have worked for the clients of Landsbanki Luxembourg in Spain and France.

*Judge Renaud van Ruymbeke has a formidable track record in investigating huge and high-profile corruption cases. He worked with Eva Joly – who advised the Icelandic Special Prosecutor when the office was set up – on the Elf case where ministers and politicians were convicted to prison sentences and has run big investigations such as the Clearstream 2 case and French investigations into the Madoff fraud. 

Update to clarify the legal standing of an administrator in Luxembourg: a judge appoints an administrator and all actions have to be accepted by this judge. In the case of the Landsbanki Luxembourg administration the presiding judge is Karin Guillaume. As far as I understand, the judge is therefor also responsible for the actions taken by an administrator appointed by the judge.

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My apologies to Icelog readers. The comments system has been out of order. All comments posted lately have just disappeared into a black void due to a system failure – but now the system should be functioning again. If anyone has posted a comment and it has not appeared on the blog that’s the reason (and not that the unpublished comment has been vetoed by me).

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The final nail in the Kaupthing coffin at the SFO: the investigation has been closed, due to “lack of evidence.” However, the SFO states in its press release today that the cooperation with the Icelandic Special Prosecutor will continue.

This has been a long and sorry saga after the fateful SFO house searches in March last year. Although several ex-managers of Kaupthing were investigated the main media focus here in the UK was on the Tchenguiz brothers, Vincent and Robert. The investigation into Vincent’s case was dropped this summer, with a full apology from the SFO.

Now, the whole investigation is dropped but no apology. This means that, amongst others, Robert Tchenguiz and ex-chairman of the Kaupthing board are no longer being investigated.

In Iceland, things are going better for the investigators. The Office of the Special Prosecutor has, ia, charged Kaupthing’s second largest shareholder Olafur Olafsson and the Kaupthing managers Sigurdur Einarsson, Hreidar Mar Sigurdsson and Magnus Gudmundsson in connection to loans to Sheikh Mohammad al Thani – loans that were used to buy a 5.1% share in Kaupthing in September 2001. It’s alleged that since Kaupthing financed the deal but let it be known that the Sheikh had much faith in the bank, it was an alleged case of market manipulation and also alleged breach of fiduciary duty as, according to the charges, the managers did not secure a repayment of the loan. The Sheikh has not repaid the loan and is being sued by the Kaupthing Winding-up board for non-repayment.

The interesting difference between the Icelandic OSP charges and the SFO approach is that the OSP charges relate to alleged misconduct of those in charge of the bank, aided by the shareholder. The failed SFO investigation was aimed at alleged suspect customer relationship. It’s much harder to prove that a client who got a good deal was breaking the law than to prove misconduct in issuing loans.

The al Thani case is now starting its journey through the Icelandic court system. In a report (in Icelandic) that Sigurdsson has lodged with the court he refutes all wrong-doing. He states that yes, there might potentially have been a criminal action relating to the al Thani loan – but the possible criminal action related to deeds done by two other employees – Eggert Hilmarsson and Halldor Bjarkar Ludviksson – whereas everything he himself did was complete in accordance with rules and regulation. – The interesting angle here is that Sigurdsson is pointing finger at two colleagues who have cooperated with the Icelandic investigation.

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The world seems to divide in two as to whether it was a good idea to give the Nobel peace prize to the European Union. With the continent experiencing some hefty dispute right now when some countries are more indebted than others it could be said that now is not a good time. On the other hand, countries in Africa and South America are trying to create something like the European cooperation – and apart from political differences nothing binds countries as well together as trade and common interest.

An organisation that promotes these two issues on a continent where the countries, until 60 years ago, had always been at war has done something right. In the grande scheme of things. Yes, it’s quite right that Nato may have played a part in a peaceful Europe but in terms of binding the countries together in a web of common interests, the EU has definitely been instrumental.

Which doesn’t mean the EU deserves prizes in every matter. At a EU press conference in Brussels after the prize was announced a shrewd journalist posed this question: “When will the EU qualify for the Nobel prize for Economics?” – You can just imagine the laughter that ensued.

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During the 90s I lived in Copenhagen, followed the European debate there, the birth of the Maastricht treaty and the debate in Sweden, Finland and Norway before these countries joined the European Union – or in the Norwegian case didn’t join. Now Iceland is negotiating its membership – and will in the course of time have a referendum, possibly in two years time or so.

In addition to the topics I’m already covering, I’ll be blogging on European matters as well since it’s of great interest and because I’ve been following the European development for over two decades now.

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I had a free morning on Friday and went to Southwark Crown Court, Court 3, to listen to the Adoboli case. Not many people there – a handful of journalists, roughly as many from UBS, two men I reckon were Adoboli’s father and brother, lawyers from both sides and Kweko Adoboli, the UBS trader who lost $2.3bn by trading out of sight of his superiors.

What Adoboli’s defenders have been very good at is to show that far from the UBS version of the story, the trader being racking up losses out of sight from everyone, there were at least – according to the defence version – several people who knew. The evening before Adoboli sent the email to his UBS superiors, resigning and telling them what he had done three collegues met with Adoboli and told him they would burden him with the losses. One of those he allegedly met with, John Hughes, said in court he did not remember that meeting nor does he remember visiting Adoboli’s girlfriend later. A visit the defence team think Hughes made to find out if she knew of his connection to Adoboli.

So good has the defence team been at drawing out this story from the witnesses that witnessed have been reduced to tears when questioned.

The defence team – from Furnival Chambers Barristers – is clearly trying to make it clear to the jury that the story is far more complicated than the charges indicate. Adoboli wasn’t a rogue trader in the sense that he was doing something unhinged and out of bound. His line manager and others around him knew he traded far beyond the bank’s agreed limit but because he was making profit he wasn’t disciplined. The Crown Prosecution is picturing Adoboli as a “master fraudster” who was good enough at fraud to hide it from his superiors.

I watched Paul Garlick questioning John Ossel who said he had not known about the hidden fund, called the “umbrella,” that Adoboli seemed to have used to cover his losses. Ossel was the trader who executed most of Adoboli’s trades.

Today, Garlick has been questioning Darren Bailey, another UBS trader, still working for the bank. In an online chat in March last year Bailey asked Adoboli if he had used the “slush account.” When asked about this comment Bailey said he was shocked to see a transcript of the chat but couldn’t remember what it referred to. – Bailey has been working for UBS for thirteen years. Last week he told the court that he has once been banned for three months from trading futures after he asked Adoboli to book a trade for Bailey and keep it on his book overnight, instead of having the trade on Bailey’s book.

It will be interesting to see the outcome of this case. So far, the defence team has done a good job of painting a picture of a banking culture where things are not what they seem to be. The witness statements indicate that some of Adoboli’s colleagues knew of a hidden fund used to cover losses. As long as Adoboli was making money for the bank it seems his superiors weren’t too worried or upset about his way of trading. The Prosecution argues that Adoboli was a rogue trader – but others at UBS seem to have known of the off-book funds he used to hide losses he didn’t want to appear on the books.

The case offers an interesting insight into banking, such as common spread betting among traders, as practiced in the years following the crunch time in October 2008 – when bankers were expected to have learnt from what happened. That, in addition to Libor fiddling and HSBC cavalier attitude to US anti money-laundering regulation. When will banking again be in the hands of unadventurous clerks who work on behalf of shareholders and clients and not against the interests of these two groups?

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The Office of the Special Prosecutor has charged one of Bakkavor’s owners Lydur Gudmundsson and Bjarnfredur Olafsson, a lawyer at Logos and a previous member of the Kaupthing board. According to Ruv (the State Broadcaster) Gudmundsson is being charged in relation to a move in October 2008 when the ownership of Bakkavor was changed and at the same time an attempt by Kaupthing to recover loans from Exista, either by payment or by taking over Exista shares pledged to Kaupthing, was thwarted. An important part of this move was to secure the ownership of Lydur and his brother Agust over Bakkavoer, the profitable UK food company.

What Gudmundsson planned and Olafsson helped him to execute was to organise a round-about of loans that seemed to be destined for Exista but did indeed not end up there. Gudmundsson, at the time Exista’s director of the board, made it look as if Exista was getting ISK50bn of fresh capital but in reality, on ISK1bn ended in Exista. The money came indeed from a company owned by Exista. What Olafsson did was to send a statement to the tax authorities and the Shareholders’ Directory, claiming that the liquidity had been increased by ISK50bn when that was, according to the OSP, not the case.

Consumers in the UK may not know it but when they buy chilled ready-made food in a UK supermarket it’s pretty likely that the food they buy is produced by Bakkavor, the largest UK producer of chilled ready-made food. Bakkavor isn’t a household name in the UK but its goods are, sold under the brands of various supermarket chains in the UK – and Bakkavoer was owned by Gudmundsson and his brother Agust. These moves in autumn 2008 were made so as to make sure they would hold on to Bakkavoer.

The Gudmundsson brothers have fought ferociously to keep their ownership of Bakkavor. When it seemed, after the collapse, that the brothers were losing their hold on Bakkavoer, the company’s foreign creditors insisted that the brothers would keep on running the company. That was very much against the will of  some of the Icelandic creditors, partly because they felt the brothers had been a bit too clever safeguarding their own interests in Bakkavoer. Recently, one of the Icelandic pension funds sold its shares in Bakkavor in frustration over the brothers’ continued influence there and overt effort to gain control over Bakkavoer again.

It’s interesting to notice that the events in question happened after the collapse of the banks. These events did at the time raise eyebrows, the media claimed that something had been wrong with this transaction and this action has continuously been questioned. The OSP charges will to many confirm a lingering suspicion connected to this action.

This is the eight case brought by the OSP and the first that includes no banker but a major shareholder, in this case in Kaupthing. Exista was the bank’s largest shareholder. Robert Tchenguiz was on the board of Exista but he is in no way connected to this case.

The charges are here, in Icelandic.

*UPDATE: Gudmundsson and Olafsson are charged for breaking laws on shareholding companies. The maximum punishment is two years imprisonment. The OSP also demands that Olafsson will permanently be stripped of his licence to practice law. – The latest additions regard the brothers’ influence on Bakkavoer and their interests there.

UPDATE March 13 2014: Today, Lýður Guðmundsson was sentenced at the Icelandic Supreme Court to eight months in prison five of which are suspended. Ólafsson was sentenced to six months prison, three of which are suspended. See ruling here, in Icelandic.

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Yet another example of the rotten heart of banking is being exposed at a court in London where the case of the USB trader Kweku Adoboli is ongoing. Adoboli is accused of “fraudulently gambling” away $2.3bn of UBS own money. Adoboli was a trader working on ‘proprietary trades,’ ie trading for the bank itself.

From witness statements so far it’s clear that as early as 2008 Adoboli started hiding losses, starting with a loss of $400,000. The losses went up and down, as far down as ‘only’ $2m in July last year. Only briefly because by September 14 the figure had climbed up over $2bn. That day, Adoboli gave up and sent an email to his bosses, stating what he had done and what the situation was.

Ron Greenidge, Adoboli’s line manager who lost his job at UBS for alleged gross misconduct in supervising Adoboli, was questioned this week. During the cross examination defence barrister Charles Sherrard convincingly showed that although there were limits posed on the trades, in reality these limits were ignored. “… risk actually didn’t matter as long as you were making money,” Sherrard claimed. “That’s not true,” answered Greenidge. (As reported in the FT, subscription required.)

Whether Sherrard’s interpretation is correct or not the witness statements show quite clearly that for some reason the limits imposed were continuously ignored. Adoboli was time and again far beyond the limits in his trades. Adoboli is now being sued and his colleagues lost their jobs for a behaviour the bank did nothing to stop. There is nothing to indicate that Adoboli’s colleagues and his superiors knew he hid his losses but they sure did know that he was trading way out of line with the bank’s own rules.

This case makes it very clear that yes, there were rules as to how to carry out trades but no, these rules were not followed. The rules looked like something the bank could point at in case FSA inquired about them, in other words pure window dressing. There was more money to be made by not following the rules than by keeping them. Compliance to these rules wasn’t an issue at the bank. Traders like Adoboli weren’t supposed to follow the rules. So long they made money disobeying the rules was accepted, even condoned. On a day where Adoboli held a position of $200m – the limit was $100m – another supervisor, John DiBacco, complimented Adoboli. He made $6m on that position, and DiBacco wrote to him “well done” though later reminding Adoboli that he should tell him before and not after the trade.

In these trades USB’s own money was at stake. If USB were a private company, gambling with its own money, this wouldn’t matter. The unfortunate thing is that the bank, indeed a private company, is a retail bank, ia putting at risk deposits covered by deposit guarantee schemes.

Two measures would possibly help to counteract the rot: splitting apart retail banks and investment banks – and use the penal code more aggressively when there are justifiable grounds to do so.

FSA’s chairman Lord Turner said in the summer of 2009 that the City was too big for the good of society. “”I think some of it is socially useless activity,” Turner said in a debate organised by the Prospect magazine. What an outcry from the banking industry these words caused. Now that we have a much clearer notion of this activity not only being socially non-useful and indeed directly harmful but in some cases against the law – keep in mind the LIBOR rigging, banks such as HSBC ignoring money-laundering rules – there is a good case for splitting permanently apart retail banking and investment banking. Two years ago a banker said to me that bankers wouldn’t understand anything but having retail and investment banking split apart. The momentum in that direction, on both sides of the Atlantic, is woefully anaemic.

The Adoboli case is yet another exposure of the rotten culture in modern banking. Some soft reprimand won’t do away with the thinking demonstrated in the Adoboli case – that rules aren’t to be obeyed as long as more money can be made be disobeying them rather than obeying them. This culture applauds any way to make money in spite of all rules, making it all the more galling to think that a case after case is being closed by the authorities on both sides of the Atlantic where shareholders shoulder losses incurred by managers who think nothing of breaking the bank rules or indeed the law.

The only way to change the culture is to make managers – and every single bank employee – realise that violating rules and laws will be dealt with in the same way as any offense. Anyone using a crowbar to rob a bank can be pretty sure that the police will spare no means to catch the offender. If a group of bankers, lawyers and accountants conspire to ia ignore laws on money laundering they can rely on the HSBC case and rest assured that the people they are working for, the shareholders, will be asked to pay eventual fines.

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Yesterday, the oral hearing in the action (Case E-16/11) brought by the EFTA Surveillance Authority, ESA, was held at the EFTA Court. ESA is requesting the EFTA Court to declare that Iceland was in breach of the EU directive on deposit-guarantee schemes (Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes) since it didn’t pay the Icesave (set up as a branch of Landsbanki) deposit holders in the UK and the Netherlands – and secondly, ‘that Iceland has breached the prohibition on discrimination on grounds of nationality under Article 4 EEA.’

What the Directive stipulates is that a EU/EEA state has to set up a DGS – and that’s what Iceland did: it did set up an insurance guarantee fund, TIF and thus fulfilled the Directive on exactly this point – but when needed the scheme was underfunded. Iceland then chose another way: domestic deposits were moved from the old banks in Iceland to the new banks – but no similar salvation was done in the Landsbanki Icesave branches abroad.

Consequently, Iceland asked the Dutch to pay out the Dutch ‘Icesavers’ and indicated to the Brits if they could do the same. Which is why the Dutch and the Brits think that Iceland owes them money for this – both the Directive stipulated amount, up to €20.000 on every account – and the cost accrued by the Dutch and the Brits in funding this action.

ESA’s lawyer Xavier Lewis said yesterday that it’s never happened before in the EU/EEA that deposit holders haven’t been paid. That’s the ESA view – that ‘Icesavers’ weren’t paid. That’s not entirely correct. The Dutch and the British ‘Icesavers’ were indeed paid – but not by the Icelandic TIF or by Iceland. Authorities in these countries did pay, which is why these two countries feel that Iceland still owes them both the sums stipulated by the Directive and the cost. The EFTA Court verdict will not end the Icesave dispute between Iceland and the Brits and the Dutch.

ESA isn’t taking action on behalf of the Dutch and the Brits, and it’s certainly not asking the EFTA Court to rule on fair interest rates. The ESA is only asking the EFTA Court to rule on the alleged breach of the Directive – and discrimination.

In court yesterday, Xavier Lewis referred to this Channel 4 reporting (a masterly piece by Faisal Islam) from February 2008 – on how safe deposits in Icelandic banks would be in case of failure – where David Oddsson then the Governor of the Central Bank of Iceland says the following: “These banks are so sound that nothing like that (ie banking failure) is likely to ever happen. And if something would happen you would never be talking about the whole amount of money because it’s never like that. But even so the Icelandic economy, the state being debtless this would not be too much for the state to swallow if it would like to swallow it (my emphasis).” – In the autumn of 2008 the state did indeed swallow a lot for deposit-holders in Iceland and promised to pay the Dutch and the Brits for compensating deposit-holders in these countries.

As far as I can gauge, the discrimination part is the real danger and threat to Iceland. If Iceland is seen to have discriminated between domestic and foreign deposit-holders the ruling might oblige Iceland not only to pay the foreign deposit-holders, ie the ‘Icesavers,’ up to €20.000 on every deposit but to pay the deposits in full – because that’s what was done in Iceland. Then Iceland doesn’t need to pay out ISK650bn to the ‘Icesavers’ but ISK1150bn or ca 66% of Icelandic GDP (adjusted for growth and inflation) this year.

Iceland is claiming force majeur – the Directive doesn’t cover such catastrophic events as the collapse of a whole banking system, claim the Icelanders. ESA refutes this, pointing out that the Directive does allow for “exceptional circumstances” (when deposit-holders can be paid out over a longer period). In addition, ESA points out that it can’t be the meaning of the Directive that the greater the shock the less the coverage for deposit-holders. The report for the hearing yesterday, going through the various aspects and opinions, can be found here.

The verdict is expected in December and it can’t be appealed. – It couldn’t come at a more delicate time for the eurozone.

In today’s Europe of heavily indebted eurozone countries struggling to convince the world that they can manage, think Italy and Spain, the breach of the DGS leads the thoughts to whether there actually is a state guarantee on deposits in the EU countries. Xavier Lewis and the EU lawyer, Enrico Traversa, seemed to indicate that this was the case – and yet not quite. The message was that whatever happened, depositors in the EU/EEA should rest assured that their deposits are guaranteed and safe. Safe, because the states guarantee that yes, deposit holders will be compensated, but it doesn’t mean that there is an outright automatic state guarantee.

Now, the Directive doesn’t explicitly say there is a state guarantee – so the question is, if the deposits are and should be as safe as ESA and EU claim, why this isn’t said more loud and clearly in the Directive. The answer is, no doubt, that when the Directive was in the making, everyone could agree there should be a trustworthy system – but there was no agreement as to how it should be financed so the financing was left to the individual countries. The US DGSs were an inspiration, but they don’t imply an automatic state guarantee. (A state guarantee can be a moral hazard, tempting banks to be more reckless – an intriguing topic these days).

The understanding was that the banks should finance the DGS – but some states treated their banking systems with kid gloves, didn’t want to burden them and well, in a good old tradition, raced to the bottom in order to enhance their competitive stance. How the countries go about financing their schemes still varies widely as can bee seen here in this report from 2010 by the European Commission to the EU Parliament on the Impact Assessment… on Deposit Guarantee Schemes.

The discrimination part doesn’t touch anyone but Iceland – but the interpretation of the Directive is an explosive item right now. To my understanding, there is no automatic state guarantee implied in the Directive but that doesn’t mean states don’t have some obligations. They do, ia, have the obligations to regulate and supervise their banking systems in such a way as to hinder banking failure, thus hindering that a DGS needs to be used.

Since both ESA and the EU have put some emphasis on Iceland’s shortcomings in this respect, what was said and done, the EFTA judges might focus on this, instead of referring to some sort of a state guarantee on the deposits. A breach of the Directive doesn’t necessarily incur any financial cost on Iceland. Countries are found to be in breach of some Directives all the time, do sometimes get fines but often they are just told to put their house in order.

Those of us impatient to know the outcome will do doubt ponder on different outcomes. It seems that there are already those who have toyed with a possible verdict. As in a folk tale, I found the following yesterday and thought I would share it with Icelog readers, no doubt amused and impressed by the learning and understanding shown:

Justice Nurgis’s EFTA decision

Having considered the submissions of all parties, I, Chief Justice Nurgis, rule as follows in the matter of the ESA’s complaint against Iceland concerning the Icesave deposits (Case E-16/11):

1. Iceland argues that the relevant Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes requires states to put in place a deposit insurance scheme but it does not require, or even imply, a state responsibility for all claims that may be made against such a scheme. Iceland further argues that it established a deposit guarantee scheme and capitalised the scheme in accordance with EU norms (roughly 1% of the insured deposit base).

2. 85% of the Icelandic financial system collapsed and the Icelandic deposit insurance scheme was obviously unable to cover those losses. The same result, Iceland argues, would be true in any country that experienced such a massive collapse of its banking sector.

3. I hold that Iceland is correct in saying that an implicit sovereign guarantee cannot be read into the Directive. It would have been childishly easy for the authors of the Directive to require such a guarantee; they did not do so because the resulting liabilities on the balance sheets of member states would have been politically and financially intolerable. Reading a matter of such enormous import between the lines of a Directive violates every norm of statutory construction.

4. Iceland’s argument breaks down, however, on the question of whether the Icelandic deposit insurance scheme was adequately capitalised. An insufficiently capitalised scheme would fail to comply with the Directive.

5. Although Iceland is correct that its scheme was capitalised in accordance with EU norms, the depth of that capitalisation must be assessed against the background of the strength of the insured institutions. It is an inverse relationship. The stronger the financial position of the insured institutions (and thus the lower the likelihood of a bank failure and call upon the deposit insurance scheme), the less the scheme needs to be capitalised in order to be in compliance with the Directive. Conversely, the weaker the financial system, the higher the required level of the capitalisation of the scheme.

 6. 85% of Iceland’s financial sector collapsed because that sector was woefully unsupervised and regulated. This much Iceland, in its own candid evaluation of the crisis, has admitted in its SIC report.

7. Iceland therefore had two honourable choices – it could either have reined in its banks and capitalised its deposit insurance scheme in accordance with the norms of other countries that similarly curb the congenitally high spirits of bankers, or it could have let its banking sector run wild but insured that when the bubble inevitably burst the deposit insurance scheme would be robustly capitalised to bear the loss. Instead, Iceland opted to abdicate its supervisory responsibilities while instituting a deposit insurance scheme capitalised at a level appropriate for a country that did engage in prudent supervision of its banking sector.

8. Accordingly, I hold there has been a breach of the Directive – not because the Directive implies a sovereign guarantee of all deposit guarantee schemes – but because Iceland’s scheme was appallingly undercapitalised in light of the bloated and unregulated nature of its financial sector.

                                         * * * *

So ordered, this 18^th day of September 2012,

Chief Justice Nurgis.

– – –

With this ruling, no delicate feathers in the eurozone are ruffled.

As the readers can see, Chief Justice Nurgis has not ruled on the alleged breach of discrimination. The wise Chief Justice is obviously fully aware that this part of the case is a tricky one and needs further contemplation. This is the part that could possibly cost Iceland dear. A propos folk tales: there is an Icelandic version of the Faust story. Sæmundur the wise is the Icelandic Faust – but unlike the German, Sæmundur actually did beat the devil, inspiring Icelanders to fight against all odds. Remains to be seen if Sæmundur’s reckless luck will prevail at the EFTA Court.

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The news is out over the weekend that the Serious Fraud Office has withdrawn bail conditions regarding Robert Tchenguiz, Kaupthing’s largest borrower who at the collapse of the bank owed the bank over €2bn. The FT (subscription needed) quotes a lawyer who thinks this might mean that no further action will follow. However, it’s difficult to make sense of the SFO actions if, after losing judicial review to Robert and declaring a continued investigation against Robert, the SFO would now be retreating on that. My understanding is that bail is deemed to be of no practical use. That  view is taken up in the Guardian coverage of this latest move in the SFO Tchenguiz saga.

In Iceland the Office of the Special Prosecutor is prosecuting Kaupthing managers regarding the Qatari investment of 5.1% in Kaupthing in September 2008 (which has an interesting parallel in the Qatari investment in Barclays in 2008; another story for another day). It is also understood that the OSP could well sue Kaupthing managers for other actions.

The main difference between what the SFO is doing and the OSP is that OSP has, so far, only charged bank managers, not the big borrowers.

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