Sigrún Davíðsdóttir's Icelog

Imagine you were a central banker – or a bank manager – and then you read a series of articles in a leading newspaper about a remarkably audacious scheme of rigging the market, such as rigging the LIBOR rates. What do you do? Do you shrug your head – like ex-CEO of Barclays and just tell yourself this is what other banks do, not your own, so there is no need to ask around? Or, do you do like the Governor of the Bank of England, Mervyn King, and fasten your eyes on this little sentence “no indication of wrongdoing” – this tautological magical sentence all media attach to critical coverage to avoid being sued – and see no reason to ask these troubling questions? Also Lord Turner, chairman of the FSA, read the Wall Street Journal’s articles on LIBOR rigging in spring of 2008 and saw no reason to investigate the matter.

I’m not sure which of these two reactions is worse – thinking it’s the others or just take the statement of no wrong doing for granted – but I rather feel the Governor beats the CEO here. The Governor of the Bank of England felt he could rest assured there was no need to probe the question of rate rigging just because the WSJ assured its readers there was no evidence of any wrongdoing. Does the Governor blindly trust the media to tell him what is right and what is wrong?

Once the topic had come up, it kept popping up in various media and yet, neither the Governor nor the CEO nor the army of those who should have known – or at least asked – did know until June 27 when the US and UK regulators announced they were fining Barclays 290m for the rate rigging. Apparently more fines to follow, for various other banks.

If there isn’t some other explanation as to why this matter wasn’t investigated earlier, it certainly shows a staggering, if not downright scary lack of curiosity that once this subject was the topic of media coverage the leading lights in the financial world never saw a reason for asking around. Erasmus of Rotterdam wrote in praise of folly – I think curiosity is an under-rated virtue.

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Almost four years after the demise of Kaupthing Singer & Friedlander, the Financial Services Authority and Her Majesty’s Treasury have finally chosen to throw light on the final days of KSF. Their reports are poor, do not mention key issues related to the collapse of the bank and do not inspire confidence in these two institutions. True, KSF was only a small player in the UK market but it had £2.5bn in deposits from UK deposit-holders when the bank collapsed.

The Treasury report, Events leading up to the failure of Kaupthing Singer & Friedlander Limited, gives an overview of events. This report cites the report of the Special Investigative Committee, SIC, as a source but is, as far as I can see, a fairly sloppy and imprecise translation from the SIC report, two years after its publication. The Treasury report mentions ia a sum of £98m but it should be, as far as I can see from the SIC report, ISK98bn. Also, the SIC report quotes extensively from witness statements given by UK officials and others in relation to a judicial review Kaupthing brought to question the actions taken against Kaupthing in the UK. Weirdly, the Treasury report doesn’t seem to cite these witness statements or any other documents related to the judicial review, and gives a far less detailed account than the SIC report. (See the SIC report on the fall of KSF vol. 7, p. 161-175.)

The FSA focus is inexplicably narrow – and only refers to the liquidity management of KSF from 29 September 2008 until the bank was placed in administration on 8 October. There is a short overview and a so-called Final Notice. That the liquidity management is investigated only during these few days is rather superficial when the SIC report gives good reasons to wonder how the bank met its liquidity requirement over most of 2008.

The FSA summarises its findings:

The FSA has investigated the liquidity management of the UK-based, FSA-regulated bank KSFL in the period prior to KSFL being put into administration on 8 October 2008. KSFL activated its liquidity contingency process on 29 September 2008 and notified the FSA that it had done so on 30 September 2008. Nevertheless, we have found that between 29 September 2008 and 2 October 2008 KSFL did not give proper consideration to or properly monitor a special financing arrangement with its parent company in Iceland under which it could draw up to £1bn at short notice if it needed to.

The question is how this agreement with Kaupthing was presented in the KSF books.

The Final Notice states: “The existence of the Liquidity Transformation Arrangement had previously been disclosed to the FSA and had been successfully used by KSFL in the past to call on funds from KBHf.”

But what exactly did FSA see in terms of this agreement KSF had with Kaupthing hf, the Icelandic parent company?

There is good reason to ask because the SIC did look into this matter. According to the report, the KSF did a liquidity swap agreement with Kaupthing hf in March 2008 – or what is called a “Liquidity Transformation Arrangement” in the FSA final notice. When the SIC asked to see the agreement it was told no written agreement could be found. It concludes that most likely, there was no written agreement. The only thing the SIC got were some emails with a rough description of the agreement – and yet, it was an agreement involving £1bn.*

According to the Final Notice, KSF was in breach of FSA rules.

The Final Notice outlines how KSFL did not give proper consideration to, or properly monitor, a special financing arrangement with its parent company in Iceland, under which it could draw up to £1bn at short notice. KSFL assumed it could rely on receiving this £1bn ‘Liquidity Transformation Arrangement’, if needed, without testing that assumption. In addition, when it started to have concerns about this liquidity arrangement, it failed to discuss these concerns with the FSA in a timely manner.

This seems slightly confusing. According to the Final Notice, KSF’s CEO Armann Thorvaldsson notified the FSA on 29 September 2008 that the bank had moved to “code red” in accordance with its liquidity contingency. According to the Treasury report a team from the FSA was actually at the bank during these days. Yet, the FSA deems that KSF did not fully inform the FSA until in the evening of 2 October that it couldn’t make use of the LT Agreement with Kaupthing hf – and that is the failure, according to the FSA.

Again, this raises the question if the FSA had actually seen and evaluated the validity of the LT Agreement. Also, why didn’t the FSA monitor the possible use of the Agreement since the life of the bank depended on it? And since there was an FSA team at the bank, why didn’t they look at the loan book and the bank’s relationship with Kaupthing Luxembourg, where some of the more interesting loans to UK clients were issued? And surely, the relationship between KSF and Kaupthing hf would have been of interest, not least since KSF was so dependent on the mother bank, through the LTA.

The SIC report concludes (p. 173-175) that in the relationship between KSF and Kaupthing hf normal arm’s length principles were not followed: KSF did not make margin calls on Kaupthing hf although there were all the reasons to do so – nor did KSF stop its repo with Kaupthing when it could no longer fund the repos in the UK market. On the contrary, it sent more money to Iceland, thereby weakening its own position.

The Treasury report has only this to say about margin calls:

The Treasury was informed by the FSA that KSF was, prior to 3 October 2008, paying margin calls, estimated at £500-600mn, on behalf of Kaupthing Bank hf, thus providing an effective transfer of funds to its parent company. The FSA agreed a voluntary variation of permission (VvoP) with KSF on 3 October 2008 which prevented this continuing.

The FSA mentions margin calls only as signals of the difficulties Kaupthing hf was experiencing:

On 15 September 2008 Lehman Brothers Holdings Inc filed for bankruptcy protection, which acutely aggravated the global financial crisis. From this date, KSFL received an increasing number of signals which suggested that KBHf was
experiencing significant liquidity difficulties. These included KBHf wishing to accelerate certain transactions and negotiating the timing and method of payment of  margin calls. These signals should have indicated that KBHf needed to improve its cash liquidity.

Consequently, neither the FSA nor the Treasury identify the problematic relationship between the subsidiary and the mother bank in Iceland. These UK authorities seem to ignore the fact that in spite of the flow of money from KSF to Iceland KSF did not treat the mother company as independently as it should have. This was, according to the SIC report, a key factor in the collapse of KSF – and yet, it isn’t mentioned in the FSA’s Final Notice and the Treasury report.

The lack of efficacy on behalf of the FSA is easier to understand now, after two days of Parliamentary hearing where MPs couldn’t get their head around why it took the FSA three years from FSA officials first heard of US LIBOR investigations until they so much as started thinking about investigating the LIBOR rigging. More bark than bites, as one commentator said.

One of the few unsolved mysteries of what went on in Iceland these early days in October 2008 are loans from the Central Bank of Iceland to Kaupthing, in total ca €600m. The largest loan, €500m, was issued after-hours 6 October when it was clear that Kaupthing, just like Glitnir and Landsbanki, was beyond salvation. Smaller loans were issued on 2 October and then on 8 October. The only reason for issuing these loans would have been if they could have saved Kaupthing – but that was far from being the case as should have been clear to everyone late in the afternoon of 6 October. Funds would have been most needed at KSF, in order to prevent cross default being triggered, but it’s clear both from the SIC report and the two UK reports that the money never reached UK shores. The mystery is where this money ended up – and why, according to Icelandic parliamentary sources, there doesn’t seem to be a proper documentation for the €500m loan at the CBI.

A part of the KSF saga, told in the Treasury report, relates to KSF in the Isle of Man, which was a direct subsidiary of Kaupthing Iceland and not of KSF UK. As early as Spring 2008 KSFIOM was required by the FSC (IOM Financial regulator) to zero its exposure to the Kaupthing Group, and yet the directors continued to forward deposits to KSF UK, where they remained exposed to the Group. KSFIOM’s accounts (September 2008) show £557 million with KSF UK. Had the regulator enforced its requirement and the directors adhered to it then KSFIOM would in all probability still be trading today. Again, broken promises on behalf of a Kaupthing bank and no stringency on behalf of its regulator.

The close connection between KSFIOM and the island’s regulator is of interest. One of the KSFIOM’s non-exec directors was also vice-chairman of the FSC. What seems normal in the Isle of Man would not be acceptable in London.*

All three reports – the two UK reports and the SIC report – show clearly how during the last days the Kaupthing management day after day made promises, which were  never fulfilled. That is in accordance with the banks’ behaviour towards regulators in Iceland and their unwillingness to supply full information until the very end. As an explanation of what went wrong in KSF, the Final Notice and the Treasury report definitely don’t tell the whole story of why KSF collapsed, which transferred the burden of KSF-related deposit guarantees to the UK tax payers.

*In 2010, the KSFIOM Depositor Action Group sent a response to the Tynvald’s (the Parliament in IOM) Select Committee on KSFIOM, with valuable insight into the Isle of Man operation. Another valuable source of material re the KSFIOM is the website of the Depositor Action Group. 

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Readers of Icelog already know some of the answer to this question. Luxembourg is a gateway to the offshore world. The offshore world is a hide-away heaven for money that needs to be visible only to the owners and not to others. It’s a popular place for big corporations and wealthy individuals in search of good tax schemes and by shadowy elements who need to move money, quickly and efficiently, out of sight. It’s no coincidence that the Icelandic banks, allegedly, ran all their most dubious loan deals through Luxembourg. It’s also worth keeping in mind that all European – and many international – banks, which want to be something more than a little local bank, operate in Luxembourg.

An interesting view on Luxembourg – and Icelandic – operations can be gauged through the operations of Landsbanki Luxembourg. The bank’s equity release scheme leaves some questions to be answered, as pointed out earlier on Icelog. Also, how the bank bought Landsbanki and Kaupthing bonds as investment for clients in mid and late 2008, in some cases directly against written agreement with clients. (At this time, there were literally no buyers for bonds of these two banks. Landsbanki did at this time set up a company in the Netherlands, Avens BV, stuffed it with all sorts of Icelandic bonds and used it to repo with the European Central Bank, an interesting story in itself, with the aid of Crédit Suisse.)

In addition to the bank’s own operations, before the collapse, the actions of the administrator, Yvette Hamilius, have been brought into question.

The administrators of the Icelandic banks, in Iceland, have all scrutinised the banks’ operations prior to the collapse. This is always done in a bankrupt company. A bankruptcy is the outcome of a long process and an administrator always looks at all dealings some months prior to the bankruptcy to make sure that managers, owners or others haven’t made anything that could be seen as unfavourable to creditors.

All the administrators in Iceland have brought cases against managers – and in some cases against the large shareholders – for causing the creditors of the bank in question damages. Apart from that, there are the ongoing investigations of the Office of the Special Prosecutor in Iceland.

If the Landsbanki Luxembourg administrator has questioned any of the dealings in Landsbanki prior to its fall or brought any cases against the managers such moves have not been communicated. – Instead, the Luxembourg Prosecutor has issued a statement where he declares his support for the administrator’s actions. Just his statement makes one wonder what sort of a country Luxembourg is. Why isn’t the Luxembourg Prosecutor doing what is Icelandic colleague is doing, investigating banks, which have shown ample reasons for suspicion? Is that because Luxembourg bases its wealth on the flow-through of international funds and doesn’t want to do anything to disturb the smooth flow?

I have had the opportunity to look at, in detail, documents related to certain clients of Landsbanki Luxembourg. A perfectly normal part of the equity release contract is that if the value of the assets underlying the contract – in Landbanki case normally a property in France or Spain – falls below a certain limit, here 90%, the bank can call for cash or further valuables to cover itself.

A closer look at the realities in portfolios related to some clients Icelog has seen, indicates some rather remarkable movements. According to overviews, not only from one but several clients, the bank re-evaluated the portfolios just before its collapse – and miraculously the valuation turns out to be 89.9%. A tiny fall, allowing the bank to call in further payment.

At least in one case, an Icelog source who is familiar with the property in question is pretty sure the house is under-valued. One French real-estate agent who operates in the South of France, where some of these properties are, has commented on Icelog that she is unaware of any changes at the time the bank was claiming there was a falling value. – A banker, familiar with type of deals, says that the bank might have envisaged an imminent decline in its re-evaluation but there should have been some documentation to prove it. Otherwise, a bank can forecast whatever it wishes.

There are clients who are now just about to lose their houses to bailiffs because of this tiny fall. The administrator has offered them a deal, which means that they either pay – in cases that Icelog has seen they are supposed to pay much more than they took out of the scheme because they are deemed to be in default. The remarkable thing is that the administrator doesn’t seem to be paying any notice to these weird movements in valuation: if the valuation hadn’t fallen down below the 90% many of these borrowers wouldn’t have the bailiff at the door.

In the UK, equity release scheme don’t create havoc to lenders and make them lose their homes anymore – as was common some 20-30 years ago – because banks in the UK are bound by strict rules in this field. This doesn’t seem to be the case in France and Spain.

Now back to the original question: what sort of a country is Luxembourg? It seems to be ia a country where the State Prosecutor comes to the aid of an administrator who hasn’t provided lenders with numbers that make sense when their houses, the roof over the head, is being taken away from them. It’s not a country where banks are questioned. It’s also a country where bank clients are completely unprotected when a bank loses clients’ money by investing directly against written agreements. Why the Luxembourg regulator, the CSSF, hasn’t investigated the serious allegations of mismanagement of clients’ funds and breach of MiFID rules in Landsbanki indicates that the reputation of Luxembourg as a good country for banks means more than Luxembourg being a good country for bank clients.

These are not just theoretical issues. These issues mean that in France and Spain some real people of flesh and blood, mostly elderly people, are losing their houses after a harrowing fight against forces in Luxembourg that seem to protect banks and bankers, not ordinary people.

*Earlier logs on Landsbanki Luxembourg are here and here, where I go more in detail through some of the topics related to Landsbanki Luxembourg and the equity release scheme.

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Icelog has earlier drawn attention to Bankia, the Spanish bank at the heart of the banking crisis in Spain, as an example of the interplay of the financial crisis and corruption. Interestingly, the Spain’s National Court has now opened a criminal investigation against former chairman of Bankia Rodrigo Rato, together with 32 top managers at Bankia. Most of them quit following Bankia’s recent nationalisation. None of them is currently working at Bankia.

The investigation centers on Bankia’s chairman Rodrigo Rato and the bank’s IPO last year. More than 300,000 investors, mostly small investors who also were Bankia clients, allowed the bank to raise €3.1bn. The Bankia managers are suspected of having lured investors with false information of the state of Bankia – the bank was apparently far from being an attractive investment object.

There are already other similar investigations ongoing regarding Bankia. Most likely, these investigations will be bundled into one. There is also an ongoing investigation into the merger of seven cajas in 2010, given the name of Bankia.

Bankia is now part of a financial system that needs a €100bn bailout. With Bankia’s management and whole existence being closely connected to Spain’s ruling Popular Party, the Bankia investigations test the soundness and effectiveness of the Spanish legal system and its ability to deal with financial crimes and political corruption.

Barclays was recently fined $450m both in the UK and the US for fixing interest rates – and is apparently also under a criminal investigation for interest rate-fixing. Other banks are expected to be named for similar illegalities in the coming weeks and months. It is about time that politicians and others in authority open their eyes to the corrupt side of the financial crisis.

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The recovery – or not – in Iceland has become a hugely popular topic for modern day learned querelles of economists. Is Iceland doing better than Ireland is a question that’s already been floating around for some time. And now, how does Iceland compare with the Baltic countries, which themselves have been branded as a miracle, especially Latvia. The latest ground for miracle contest – Iceland vs Ireland/Baltic states – is the Maurice Greenberg Center for Geo-economic Studies blog, on the Council on Foreign Relations website.

Back in July 2010 the question on the CFR website was Post-Crisis Iceland: Miracle or Illusion? The question was prompted after Paul Krugman had been writing on Iceland as the perfect solution for indebted EU countries. Krugman got his outcome by a clever choice of period to analyse. Now, CFR has revisited the question and conclude there is no miracle (with links to some articles on Iceland’s economic recovery).

Miracle or not, Iceland is doing pretty well. Here is the latest overview on Iceland from the IMF. The conclusion is:

Iceland is gradually emerging from its severe post-crisis recession. Domestic demand is driving growth and unemployment is declining, but inflation remains high. Imbalances are unwinding, but all sectors of the economy remain highly leveraged. The outlook is for a moderate recovery, but risks emanate from both external and domestic sources.

In a recent interview on Ruv, Gylfi Zoega professor of economics at the University of Iceland pointed out that the crisis in Iceland had come to an end. Icelanders may not quite notice it yet – and a crisis in euroland may derail it – but on the whole, economic key data in Iceland points firmly in this direction of “crisis over” – and growth has returned.

*Here is a recent Icelog from March on Ireland and Iceland.

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Over several years, Barclays provided wrong numbers to rig Libor and Euribor rate. It didn’t do it alone, we are just waiting for other banks to be named. The banks didn’t do this to lose money. On the contrary, they ultimately profited from the rigging. It means that the profit obtained over years have been based on wrongdoing.

The corrosive damage of fraud is that results, obtained by fraudulent methods, turns into a benchmark. In comparison, results, obtained in an honest way, looks very poor. It’s well known among those who fight organised crime that this skewed comparison is one of the lasting damages caused by fraud.

Bankers, willing to improve their results by fraudulent methods, have shown themselves immune to the thought that getting results in an illegal way is in any way wrong. A CEO who hasn’t been able to incorporate in the company culture the simple difference between right and wrong shouldn’t be leading a company.

It may be difficult to calculate the numbers, how much the results – and ultimately the profit – have been influenced by the rate-rigging but this activity was carried out to mislead. If this isn’t market manipulation then I don’t know what would be. Market manipulation is a seriously criminal offense. Something for the SFO to investigate – and with the investigations already done, they wouldn’t need to start from scratch.

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After much talk about a multi-countries investigation into LIBOR rigging, authorities in the US and the UK have fined Barclays for  “attempted manipulation of and false reporting of LIBOR and Euribor Benchmark rates,” in total $360m and £59.5m – the biggest FSA fine ever. In perspective, this isn’t much more than a cup of coffee for ordinary mortals. This lenience – no criminal charges and only minor personal consequences for Barclays managers – is the death knell for free competition.

“I am sorry that some people acted in a manner not consistent with our culture and values,” said Barclays CEO Bob Diamond, in reaction to the fine. No Mr Diamond, this isn’t “some people” – the bank’s email system is flowing with emails from traders who saw nothing wrong with this, for many years. Diamond and three senior managers have agreed to waive potential bonus for this year “to reflect our collective responsibility as leaders”. – Why don’t they pay back their bonuses for the years that this was going on? A year’s bonus for alleged rigging for 5-6 years – and that’s only the time investigated.

For all those who believe in free markets and competiton this is a sad day. It is impossible to have a free market, when those at the heart of that market don’t know any other game than to rig it. Today, they have found out  that they can just pay their way out of an investigation. Why was this matter being investigated? To put an end to this odious and market-destructive practice? Or to collect a bit of money for the authorities?

This practice, in addition to widespread interest rate rigging by banks lending to US public authorities, shows a horrible malaise at the heart of the market. It is devastating if the authorities fining Barclays think this is enough to cure the malaise. How ironic, that bankers, happy to talk about free markets on festive occasions, have shown themselves to be no better than the Mafiosi who shun free competition whenever they can.

The LIBOR manipulation and the rate rigging show that big banks have long ago lost sight of “let the best ideas win.” Their way is the way of dirty dealing. And this way of thinking is what Europe and the US are drowning themselves in debt to save. Yes, this is a sad day for those who believe that growth and wellbeing spring from free competition to stimulate ideas and new solutions to old problems.

*Here are the statements from the relevant authorities, from the UK FSA, the US CFTC and DoJ.

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In a statement out today, following the FSA final notice, ending its investigation on Kaupthing Singer & Friedlander,  action is taken against the Kaupthing managers:

Following the conclusion of the investigation, Sigurdur Einarsson the former non-executive Chairman of KSFL, Hreidar Mar Sigurdsson former non-executive Director of KSFL and Armann Thorvaldsson the former CEO of KSFL have provided undertakings to the FSA that they will not perform any significant influence functions requiring the approval of the FSA at any UK authorised firms for a period of five years from 8 October 2008, the date KSFL was placed into administration. The FSA has not made any findings of regulatory breach against them and they have not made any admissions.

Einarsson was the chairman of Kaupthing and Sigurdsson the bank’s CEO. Einarsson still lives in London where he has lived since ca 2005. Interestingly, Sigurdsson moved from Iceland to Luxembourg after the collapse of Kaupthing. The FSA statement means that in 16 months the Kaupthing managers could again be working in the UK financial sector. They would however need to reapply for the proper license.

More on the FSA final notice re KSF here.

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Three and a half year after the demise of Kaupthing Singer & Friedlander, the Financial Services Authority, FSA, has come to the conclusion that KSF breached liquidity rules. It has served the bank, now in liquidation, a so-called final notice.

The FSA finds that KSF had stated it had a £1bn it could draw on at short notice from the mother company. That proved not to be the case. This money wasn’t in hand at all and indeed not available:

“By 29 September 2008 KSFL should have realised that there was a risk that the £1bn value of the Liquidity Transformation Arrangement might not be recoverable in full on an overnight basis, or within 0-8 days.”

Under normal circumstances, KSF would have been fined – and probably fined heavily. But since the bank is in administration there is no functioning body to fine:

“KSFL’s financing arrangement with its parent was an important element of the firm’s survival in times of crisis and this failure alone would have led the FSA to impose a significant financial penalty were it not for the fact that KSFL is in administration.”

This adds a bit to the story of Kaupthing’s last days. KSF said it had £1bn – but it hadn’t. Was the money never there, ia was this just a statement on paper – or had the money gone somewhere else? Sadly, this FSA move leaves some unanswered questions.

The whole saga of Kaupthing’s inter-group transfers is of great interest, such as money going from Iceland to Luxembourg. And then the Kaupthing clients in Isle of Man, left high and dry, would no doubt like to know a bit more how their money was moved to Iceland and where it ended.

Right now, the two brothers, who were the largest owners of Exista, Kaupthing’s largest shareholder, Lydur and Agust Gudmundsson, have suddenly shown up in Iceland with coffers full of money. At least coffers with ISK20bn, £101m, with which they now want to buy back Bakkavor, the food processing company that they lost to creditors post-collapse. Apart from not having money at the time to hold on to Bakkavor they had personal loans for their houses with Kaupthing Luxembourg, now Banque Havilland.

The return of the Bakkavor brothers to the Icelandic business community will be a test case. Are the pension funds, who lost a great deal on bonds from the companies of the two brothers and other raiders, willing once again to do business with those who caused them and the whole nation, some severe harm?

It may come as a surprise that the brothers and other big debtors still have the money to do business. However, both the SIC report, court cases and other investigative material shows clearly that behind the favoured clients, who got loans against weak or no collateral, there was a clever machinery. Loans to buy shares were never paid. Instead, the dividend was for free use – and has no doubt been taken good care of – but the debt migrated to asset-poor companies, which then went bankrupt in due time.

This careful splitting-up of debt and asset isn’t an Icelandic invention but Icelandic bankers and their favoured clients mastered it to perfection. That’s why the post-collapse sequel is about the return of the raiders.

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Today, the Spanish Government formally asked for aid to recapitalise its banks – the word “bailout” isn’t mentioned but that’s what this aid is – and no numbers mentioned either. Even €100bn might only offer the briefest relief. Cyprus’ bid today for the same mostly goes unnoticed. Apparently Russia’s aid to the island isn’t enough. Will the EU keep on throwing good money after bad, without digging out the roots of corrupt banking practices?

Do you remember in 2008 when some British, Irish and American banks were below sea-level and people pointed at Spain and Spanish banks as the example to follow? Those were the days – days of Spanish clever accounting, not of their banks’ rude health. That’s a point made in a clear and insightful article, “The EU Smiled While Spanish Banks Cooked Their Books,” by Bloomberg’s Jonathan Weil.

At the core of the Spanish loan debacle are local banks, the cajas, heavily connected to the construction sector and local politicians, just like in Ireland. The Mahon report uncovers the unhealthy relationship in Ireland in the 80s and the 90s between these two elements: the building sector and politics. A relationship that has a lot to do with the escalating debt of the Irish financial sector, which the EU then forced the Irish state to shoulder. The cajas saga seems to mirror the Irish state of things completely, even down to brown envelopes.

Spain now needs billions to save its banks – €65-100bn, depending on the calculation – the official Spanish bid for a bailout today doesn’t come with a number. At the centre of this salvage project is Bankia – a bank created in 2010 out of several of the worst cajas, with – as is now turning out to be the classic way – far too little write-downs. As if pooling together the worst cases would create a bank in brilliant health.

In the best tradition of the marriage between finance and politics, the role of a chairman was given to a politician, Rodrigo Rato. Rato had an apparent merit, having been the director of the IMF 2004-2007. Why did he resign after only three years, before the end of his term? Apparently, he wanted more time with his family. Quite often, when people in power resign to be with their families, it’s because no one else wants them but dares not say it aloud. The Spanish press is overflowing with stories about corrupt lending to political pet projects like airports that have yet to see an airplane and exorbitant salaries of cajas managers.

There are also cajas in Iceland, small local saving banks, originally set up to serve individuals and small enterprises in the local community, based on small is beautiful in a closely-knit community where the directors are pillars of society. Last year, PriceWaterhouseCooper did a report on one of these local institutions in Iceland – the local saving society in the village of Keflavik, on the Reykjanes peninsula, right in the shadow of the now defunct US base. This report has now been leaked – and it provides a grotesquely clear image of small-town corruption with no small money.

The methods aren’t new –it doesn’t come as any surprise that there were plenty of loans with no or weak collaterals – but the methods are really crude. The CEO lent and then wrote-off loans to his son, not to mention the bank’s staff, local politicians and entrepreneurs with the odd bank CEO among favoured borrowers. And as with the banks: what were the accountants doing?

Like in the cajas, this is the story of how the vision of community service turned to the vision of greedy self-service.

SpKef has now been thrown under the wings of the state-owned Landsbanki, as if Landsbanki were the best place to keep toxic waste, no questions asked. That said, the Office of the Special Prosecutor is no doubt looking at the SpKef operations. SpKef managers seem sitting ducks for a criminal case of breach of fiduciary duties, comparable to the Byr case. But so far, the Government isn’t asking any questions and yet it is putting ISK25bn, €197m, to fill the empty SpKef coffers in an unexplained bailout (and in Icelandic terms, the bailout amounts to the budget contribution to the University of Iceland for two years).

But how come that banks, costing governments in the UK, the US, in Ireland, Greece, Portugal, little Cyprus and now in Spain the earth and the sky aren’t being properly investigated? Is it too complicated? Of course it isn’t. It’s a question of picking and choosing the right topics – such as breach of fiduciary duty, possibly market manipulation and in the small local banks corrupt lending.

A recent court case, studied by Matt Taibbi in a Rolling Stones article, uncovers how major US banks, over a decade, have used tried and tested Mafia methods to rig bond auctions by public authorities, universities and other institutions. It’s an article that merits reading more than once just to fathom the banks’ dizzying arrogance and pure will to cheat. The defense argued ia that the rigged price was just as fair as any other price. Yes, why bother with free competition when only monopoly is deemed to assure the satisfying gains?

Banks in the US and the EU are all profiting from abnormally low interest rates though they aren’t lending. How ironic: it was the unwillingness to lend that triggered the credit crunch in 2007, thought at the time to be a tiny naughtiness by the banks. In the UK, the subsidy to banks has been estimated to amount to £220bn over the last few years. Now, this seems more like a good plan to get capital.

And in case you haven’t noticed: the banks are still not lending but hoarding money against the losses they seem to suspect are looming out there. Understandable, in the light of the latest, from the WSJ:

Regulators and investors are concerned that some European banks are artificially boosting a key measure of their financial health, a worry that is further eroding market confidence in the Continent’s banks.

Such concerns have been building up for more than a year. But they have intensified lately, with a parade of banks announcing that they intend to increase their capital ratios—a key gauge of their abilities to absorb future losses—partly by tinkering with the way they assess the riskiness of their assets. Spanish banks, including Banco Santander SA, are among those that have announced plans to boost their capital ratios …

Does it come as a surprise that in spite of repeated stress tests, the banks might actually not be showing their true colours? No, it doesn’t. In an unnamed central bank a stress test was recently being discussed. Some innocent soul asked why the test didn’t test more severe and realistic circumstances. There was a troubled silence before someone muttered: “Because then they would all fail.”

In Iceland – an interesting measure because of the thorough overview of the banks, the SIC report – it’s clear that bank auditors have questions to answer. Some will be answered in court: Glitnir and Landsbanki have sued their auditors, PwC, for misrepresenting the health of these banks. The rapid expansion of Kaupthing is worryingly similar to Santander’s growth.

Modern society undoubtedly needs banks – but we need banks that do not just serve themselves but society as a whole. We are still waiting and it’s costing us all a lot. It’s not just a euro crisis but a crisis of Western banking under the long, dark shadows of corrupt business practices.

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