Sigrún Davíðsdóttir's Icelog

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.

Follow me on Twitter for running updates.

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

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

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

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

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

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

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

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

Follow me on Twitter for running updates.

‘Iceland was bankrupted by twenty or thirty men.’ That’s how Vilhjalmur Bjarnason lecturer at the University of Iceland and a vocal commentator on finance and business put it a few months after the collapse of the banks in October 2008. At first, many felt that Bjarnason was overstating his case but time – and most clearly the report of the Althingi Investigative Commission – has shown that it did indeed only take ca thirty people (almost all male) to bankrupt Iceland.

Most Icelanders will be able to list these thirty odd names. These are the bank managers, the banks’ chairmen and the banks’ principal shareholders. The understanding is that the Office of the Special Prosecutor will in due course most likely bring criminal charges against these people. The banks’ resolution and winding-up committees are already bringing charges or planning charges against these people to claw back the money extracted from the banks by illegal means.

All these people were extremely prominent and visible in Iceland in the years up to October 2008. They sponsored art, culture, sport and charities and appeared frequently in the media. Some of them gave interviews in the weeks and months after the collapse but as more light was thrown on the operations of the banks and their shareholders they have become increasingly silent. After the report, little is heard from them – there isn’t much to say now that the report has spelled it out so clearly what went on, including verbatim sources such as emails. Some of this material contains phrases that everyone in Iceland now knows by heart such as ‘Thank you, more than enough:-)’ – the succinct answer from Magnus Gudmundsson director of Kaupthing Luxembourg when Kaupthing’s executive chairman informed him, in equally few words, that his bonus for 2007 would be €1m.

From being feted and admired these people are now generally despised in Iceland. There are stories of theatregoers unwilling to stand up to let them to their seats at the theatre, guests at restaurants driving them out, passengers accosting them as they waited for their luggage at Keflavik airport. There are even stories that they have been hit or spat on, on the streets. People threw snowballs at Jon Asgeir Johannesson when he left his wife’s hotel in Reykjavik during the winter following the collapse of the banks.

No wonder that many of them prefer to live abroad. There have been rumours lately that some of them might want to move to Luxembourg but sources close to a well known Luxembourg bank claim that some of the more famous names have already been turned down as clients. And in order to properly settle down in Luxembourg one has to register with the police. People then do have to declare if they have an earlier conviction or if they are under investigation – not a trivial question for some of the Icelanders who might be considering to move to Luxembourg.

For most of these people the yachts and private jets are gone. Some are bankrupt other still hold on to some assets though more might be lost later on. In Iceland, many speculate if and then how much these people have stacked away on in offshore save havens. But where are they now, the bankers and the Viking raiders?

Kaupthing

When Sigurdur Einarsson ex-executive chairman of Kaupthing was summoned to Iceland in May to be interviewed by the OSP in Iceland he refused to go to Iceland since he didn’t want to risk following three Kaupthing ex-top executives into custody. He probably didn’t expect that he would end up on Interpol’s wanted list – but that’s where he’s now. Einarsson isn’t known to have been involved in any business after the collapse of the bank and has been living in London since 2005. According to the AIC report Kaupthing lent Einarsson the £10m needed to buy his house in Chelsea – and then Einarsson rented his house to the bank so he could live in the house, apparently an exceedingly smart way of living for free as the rent paid or didn’t pay off the mortgage.

Kaupthing’s CEO Hreidar Mar Sigurdsson moved to Luxembourg last year to run Consolium, a consultancy staffed by several ex-Kaupthing managers. Sigurdsson was held in custody for ten days in May as the OSP picked through his testimony and some of his colleagues’. Sigurdsson is now back in Luxembourg.

Magnus Gudmundsson was the director of Kaupthing Luxembourg where some think that Kaupthing’s darkest secrets, if there are any, were kept. When David and Jonathan Rowland, father and son, took over Kaupthing Luxembourg last year and turned the good bank into Banque Havilland and put the bad assets into Pillar Securitisation that Havilland administrates, they retained Gudmundsson as a director, much to the surprise of those who thought that the new owners wanted to start with a clean slate and a new business. When however the OSP put Gudmundsson into custody the Rowlands dropped him like a hot potato. Consolium had business ties with Havilland and Pillar and according to my sources these ties are still in place.

Olafur Olafsson has a longer business record than most of the other high-flying Icelandic bankers and businessmen since he’s older than most of them. He grew up when political ties were essential and his fortune was tied to the Progressive Party and the co-op movement, part of the Progressive sphere of influence. From Kaupthing’s first ventures during the late 90s he was close to them, underlining that bank’s connection to this party.

The softly spoken cultivated Olafsson wasn’t much seen in Iceland during the noughties but he had and still has a charity there. He used to have an office in Knightsbridge and lived close by. Last year he moved to Lausanne. According to a Swiss source he lives modestly. The SIC report is full of juicy stories of Olafsson – there’s his connection to the Qatari investor al Thani who seemed to have the greatest trust and belief in Olafsson’s two main undertakings in Iceland, Alfesca and Kaupthing. But according to the report there was less trust and more loans from Kaupthing. Through Kjalar Olafsson owned 10% in Kauphting but still holds on to companies in Iceland, most notably the shipping company Samskip. The Kaupthing loan overview from end of September 2008 indicates that Olafsson’s personal loans from Kaupthing Luxembourg were €49m.

Until shortly before the collapse of Kaupthing brothers Lydur and Agust Gudmundsson, the bank’s biggest shareholders, were seen as being of a different breed from Viking raiders such as Jon Asgeir Johannesson and Thor Bjorgulfsson. The brothers started in fish manufacturing during the 90s, seemed to have built their wealth up out of concrete things and not only financial acrobatics. But the report throws a different light on their activities, their close if not incestuous connections with Kaupthing and equally close ties to many of the bulging Icelandic pension funds. Robert Tchenguiz sat on the board of Exista.

Lydur owns a beautiful house in Reykjvik where he hasn’t been much seen lately and a grand house on Cadogan Place that Pillar now wants to take over due to unpaid mortage of £12,8m. It seems that Agust might suffer the same fate – Pillar isn’t showing any mercy and according to the loan overview Agust had a mortage of €9m with Kaupthing Luxembourg. As Olafsson the brothers still hold on to companies in Iceland, most notably the investment company Exista and the food company Bakkvor UK – but the final outcome is still unclear.

Landsbanki

Father and son, Bjorgolfur Gudmundsson and Thor Bjorgolfsson, shot to fame in Iceland when they managed to set up a brewery in St Petersburg in the 90s. The story of that venture is most fully told in a front-page article in Euromoney November 2002, ‘Is this man fit to be at the helm (of Landsbanki)?’ and in documents on Wikileaks: the short version is that father and son were working for two investors running a bottling plant in St Petersburg in the early 90s. One day in 1995 the investors found out they no longer owned the bottling plant though they couldn’t remember ever having sold the plant father and son and their co-worker Magnus Thorsteinsson. The venture took off and the St Petersburg power elite, i.a. Vladimir Putin, was friendly. Deutsche Bank started financing other Bjorgolfsson’s ventures in Easter Europe in the late 90s. When the trio sold the brewery to Heineken in 2002 they had the money to buy 40% of Landsbanki, then already partly privatised.

The distinguished-looking Gudmundsson is now bankrupt, having not only lost his share of Landsbanki but also his ultimate trophy asset West Ham and lives in Iceland. His son, with the body of a body builder and the square jaws to go with it, still lives in Holland Park though there might be fewer vintage cars in the garage now. It’s not clear if he still owns his country house in Oxfordshire but he is holding on to Novator, his investment company with ties to Luxembourg, the Cayman, Cyprus and other offshore havens. The fate of his biggest asset, Actavis, depends on what Deutsche Bank intends to do about the loan against Actavis, said to the single biggest loan on DB’s loanbook. The question is if DB turns the debt into equity, practically taking Actavis over, or if Bjorgolfsson manages to turn things to his benefit. Thorsteinsson was declared bankrupt in Iceland last year, used to have a large country estate in the UK but is now said to live where it all started, St Petersburg.

Landsbanki had two CEOs, Sigurjon Arnason and Halldor Kristjansson. Kristjansson was a civil servant before becoming the CEO of Landsbanki as it was being privatised. Arnason was the CEO of Bunadarbanki but when Kaupthing bought the bank he and a whole team from Bunadarbanki defected over to Landsbanki. Kristjansson kept the quiet demeanour of a civil servant, Arnason was the aggressive banker known to empty bowls of chocolate is within his reach. It’s interesting to note that Kristjansson kept his post after the privatisation, possibly underlining that the change wasn’t as fundamental as one might have thought – the political ties were still important. Kristjansson now lives in Canada, working for a financial company. Arnason lives in Iceland and is, as far as is known, not involved in any business.

Glitnir

While Landsbanki and Kaupthing were involved with high-flyers abroad Islandsbanki, later Glitnir, seemed more down-to-earth expanding in Norway. Bjarni Armannsson ran the bank with experience from the investment bank FBA in the late 90s. The AIC report shows that Armannsson was very deft at trading for his own companies along running the bank leading the report to advice clearer regulation of CEO’s personal dealings. Armannsson left the bank when Jon Asgeir Johannesson and the FL Group gang became the bank’s largest shareholder in early 2007. He moved to Norway for a while but has recently returned to Iceland and runs his own business there.

Earlier on, two brothers were among Glitnir’s major shareholder, Karl and Steingrimur Wernersson. Their father was a wealthy pharmacist and they, mainly Karl, built on that wealth which mushroomed into companies at home and abroad under their investment fund Milestone. Milestone bought into the Swedish financial sector, bought a bank in Macedonia and an Icelandic insurance company, Sjova, in Iceland. The crudeness and excesses of it all, i.a. a villa in Italy and a vinyard in Macedonia, have been masterly documented by the daily DV in Iceland. Milestone is bankrupt and the brothers are no longer on speaking terms as Steingrimur, who now lives in North London, has accused his brother of bullying him into business ventures. Karl lives in Iceland and spends most of his time on his farm in Southern Iceland where he tames and breeds horses.

The group that came to power and ownership in Glitnir was headed by Jon Asgeir Johannesson, famous his UK retail partners such as Sir Philip Green, Tom Hunter, Kevin Stanford and Don McCarthy. Johannesson started his business ventures by opening a supermarket with his father Johannes Jonsson who now lives in Akureyri. Jonsson is still involved in business though there a now more debts than assets to care for.

Johannesson has for years invested together with a small group of Icelandic businessmen, most notably Palmi Haraldsson, Magnus Armann and his wife Ingibjorg Palmadottir, herself the daughter of the man who built up the biggest retail empire until Johannesson arrived on the scene, bought the empire and later got the princess as well. These shareholders brought in a new CEO, Larus Welding who ran the bank for just over a year. Welding now lives in Northern London and doesn’t seem to be involved in banking anymore. Johannesson still owns the biggest private media company in Iceland. His ownership is the source of some speculation in Iceland since Baugur, also Baugur UK, and so many other investments of his have failed.

On the sideline in this group but for a while extremely powerful was Hannes Smarason, much admired as the McKinsey man who turned biotech to gold at deCode and later built up the investment fund FL Group that outshone everyone in excesses and, in the end, losses. Smarason lives in Notthing Hill, London and documents at Companies House show a string of failed business ventures of his.

The connection between Johannesson, Armann and Haraldsson goes roughly a decade back and though his Icelandic partners were less famous than some of his UK partners they stayed with him. Now they all and Palmadottir are charged by the Glitnir Winding Up Committee that wants $2bn dollars back. Haraldsson has two major investment companies, one is bankrupt the other is in operation and he still owns Iceland Express. Haraldsson has been living in Iceland but has a flat in Chelsea, London.

Johannesson allegedly lives with his wife in Surrey on the same road as Armann, yet again underlining not only the closeness of these two but also the Icelandic tendency to stay with one’s own countrymen. A clan mentality that also characterised the now failed Icelandic banks and businesses.

Follow me on Twitter for running updates.

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

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

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

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

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

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

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

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

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

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

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

Follow me on Twitter for running updates.

Of the known unknowns of the Icelandic banking collapse in early October 2008, the most intriguing story is the €500m emergency loan issued to Kaupthing by the Icelandic Central Bank. In the early hours of 6 October 2008, the prime minister and other leading ministers had realised that the only thing to do was to put in place the Emergency Act, enabling the authorities to take over the banks. Yet, on that same day, the CBI shovelled €500m from the fast depleting foreign currency reserve into Kaupthing although the governor of the CBI at the time did not believe Kaupthing would ever be able to repay the loan. The CBI has now published a much delayed report on the loan: it leaves all the fundamental questions unanswered and adds one question to the sorry saga: is it ever a good idea to let an organisation investigate itself?

“What are we doing? We are deciding we’re not paying the debt of spendthrifts… We are not going to pay other people’s debts. We are not going to pay debt of the banks that have been somewhat reckless.’ This is how the then governor of the Central Bank, Davíð Oddsson, explained in an interview 7 October 2008 the drastic measures Icelandic authorities had taken with the Emergency Act the day before.

The governor was also asked about a certain loan to Kaupthing. He explained that the information had been made public by mistake the previous day; a so-called bridge loan amounting to €500m to be repaid in a few days. In the unlikely circumstances that the bank would default on the loan, the CBI had a good collateral, the Danish FIH Bank, a Kaupthing subsidiary.

The day before appearing on television, the governor had described this loan rather differently. In a telephone conversation with then prime minster Geir Haarde, Oddsson sought the agreement of the prime minister for the loan, which they had apparently discussed earlier.

Intriguingly, Oddsson made the call not from his office but the office of another employee, where Oddsson knew the call could be recorded. That recording remained a mystery for years as the CBI refused to release it, claiming it contained sensitive information. In November 2011, Morgunblaðið, where the editor is a certain Davíð Oddsson, published a transcript of the call. Haarde expressed his annoyance but no measures were taken against the paper for the publication of material it could not explain how it had obtained.

In the phone call 6 October 2008, Oddsson emphasised that the loan was risky and would most likely be of some relief for Kaupthing for only four or five days, adding: “I don’t expect we will get this money back. They say they will repay us in four or five days but I think that’s untrue or let’s say wishful thinking.”

That inkling proved to be correct – less than 48 hours after receiving the loan, Kaupthing was in default. Neither Oddsson nor Haarde have ever explained why the loan was issued.

Now a report (only in Icelandic) on the loan saga, published by the CBI 27 May shows that there is no documentation to be found at the CBI on the loan: nothing that explains why the loan was issued, what it was intended for nor properly how Kaupthing made use of it. Worse is, that the new report fails standards set in other reports, most recently a report on how Kaupthing was bought in 2003 on false premises. The obvious question is: was it ever justified that the CBI would write a report on its own deeds?

The unannounced report and its unclear goal

In the new report, CBI governor Már Guðmundsson says in his preface that the work on the report started four years ago. As far as I can see, there is no press release on the CBI website to announce that the CBI is now embarking clarifying its €500m loan to Kaupthing nor has this ever been mentioned in the bank’s annual reports.

When I checked my emails, I can see that I first heard about the report in late 2016: I wrote to the bank’s spokesman in November 2016 asking him about the report I had then just heard Guðmundsson mention in the media, also when it could be expected. The answer was that the bank was waiting for the final results of the sale of the FIH. I mentioned that the sale, which was obviously going to incur losses for the bank, was the result of the loan – the interesting bit was why the loan was issued.

Over the years, my inquiries into the report-in-making have usually been answered by pointing out that the final result of the FIH sale – which happened in 2010 – was still due.

In his preface, governor Guðmundsson writes that since the collapse, the bank has been focused on the present and the future, rather than the past. Also, that the FIH sale had been a complicated issue and those working on it had been very busy doing other things. I have to say that I find it beneath the dignity of the bank to explain the long conception time by saying that CBI employees have been busy. It just gives the sense that this report was far from any priority at the CBI.

From the preface, it is clear that to begin with the report was meant to focus on the loss-incurring FIH sale. Only after receiving a query from prime minister Katrín Jakobsdóttir as late as November 2018 on how Kaupthing made use of the loan, i.e. where the funds flowed, the bank had set about to make inquiries to clarify this issue.

This indicates that there was no proper plan to begin with but to focus on the FIH sale, not on the real issue: why did the CBI lend Kaupthing €500m when the governor was clear the loan was a risk and would not be repaid?

No paper trail, no documentation at the CBI

As pointed out in the CBI report there is indeed no paper trail of the loan, no documentation, nothing, at the bank. The report emphasises that everything regarding the loan seems to have been planned outside the bank. Therefore, the report has nothing to add on why the loan was issued, why the loan figure was €500m, what it was intended to do etc.

There have been indications earlier, that the documentation regarding the loan, the collateral, interest rates etc. was only made some days after the loan was issued, i.e. that the loan document was back-dated. Again, this is not mentioned in the CBI report and what exactly is on paper is not clear. It is however clear that there is no paper trail as to how the loan came into being, i.e. there is a lacuna at the bank regarding this loan, which the governor at the time suspected, so as not to say knew, would not be repaid.

The report states that decisions regarding the Kaupthing loan were taken outside of the bank, explaining the lack of documentation at the bank. However, it does not make it entirely clear if ever there was a documentation, which then has disappeared or if there really never were any documents at all in the bank.

Since the lacuna must have been clear from early on, the CBI knew from early on that by only focusing on documents in the bank, nothing much would come out of its investigation. Why it did not try to turn to other sources, such as the FME, which took a back-up of all the banks right after they failed or the Kaupthing estate, indicates that publishing a report with nothing in it, did not feel too disturbing.

Where did the loan end up?

Already in earlier criminal cases against Kaupthing managers, notably the CLN case, evidence emerged as to how some of the €500m were used, or rather how funds were allocated on 6 October 2008 as the collapse of Kaupthing was imminent. There has however not been any comprehensive overview of transactions in Kaupthing these days, i.e. how did Kaupthing allocate funds from 6 October 2008, when the loan was issued.

Interestingly, we know that as the bank was stumbling to default, the Kaupthing managers had their eyes on making payments to fulfil the bank’s obligations in the CLN transactions, in total €50m. Also, Kaupthing issued a loan to a company called Lindsor Holding Corporation, a total of €171m. Lindsor was owned by some Kaupthing employees and amongst other things used to buy bonds from Skúli Þorvaldsson, an Icelandic businessman living in Luxembourg, with strong ties to Kaupthing. This diminished Þorvaldsson’s losses but increased Kaupthing’s losses.

Lindsor is the only Icelandic entity being investigated by Luxembourg authorities. Over two years ago it seemed that criminal charges might soon be brought in that case but since then, total silence. Yet another example of the extreme lethargy in the Duchy when it comes to investigating banks (see here blogs related to Lindsor).

The CBI report mentions these two loans but in its overview of outgoings it does not list the Lindsor loan, only the CLN transactions. This, in addition to the single highest payment €225m to deposit holders in Kaupthing Edge, €170m to Nordic central banks, €42m REPO payments to two European banks, €203m in foreign currency transactions – and then, the only novelty in the CBI report: 400-500 “small transactions” according to the CBI report, i.e. lower than €10m, in total €114,5m.

It is not clear why the Lindsor loan is mentioned but not added to the list. Also, there is no further information regarding the “small transactions” – who were the beneficiaries, individuals or companies, who owned the companies, how many transactions at around €8 to €10m etc.?

A bank is rarely a good collateral

In his preface, governor Már Guðmundsson concludes that in hindsight, the lending was miscalculated. However, the lending was not miscalculated only in hindsight: the governor at the time did not believe the loan would ever be repaid.

Governor Guðmundsson also claims that one lesson from the Kaupthing loan saga is that shares in a foreign bank do not constitute a good collateral. In my opinion, this is too limited a lesson: a bank, domestic or foreign, is not a good collateral.

In evaluating collateral, not only its monetary value is of importance but also how quickly and easily it can be sold. A bank makes a bad collateral as it can hardly ever be a quick sale and it is also costly to sell. For good reasons, central banks do not normally accept a bank as a collateral; they prefer assets that can be sold easily and quickly at not too high a cost.

I have not scrutinised that part of the report, which deals with the loss-incurring sale of the FIH bank as I have very little insight into that story. The sale itself turned into quite a saga in Denmark, covered by the Danish media.

Poorly planned and sloppily executed work

To my mind, it is beneath the dignity of the bank to publish this report as so much is lacking. The long time it took to write it cannot be excused by CBI employees being busy; it just shows that writing the report was never a priority.

If the CBI concluded it did not have the authority to ask for further information, it should have turned to the Prime Minister Office to suggest the report should be written by someone with the proper authority to do so. Indeed, it is a fundamental question why the CBI was allowed to handle this investigation, an untrustworthy move from the beginning.

Almost eleven years after the banking collapse in early October 2008, one key story of these days is still untold. The CBI is clearly uninterested in the story. The question is if the political powers in Iceland are equally uninterested.

*I have long been interested in this loan, see here a blog from 2013 on the CBI loan to Kaupthing.

Follow me on Twitter for running updates.

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

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

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

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

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

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

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

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

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

Follow me on Twitter for running updates.

The Office of the Special Prosecutor in Iceland has only stated in general terms the offences under investigation in the Kaupthing case. It’s thought that the starting point in the investigation were deals connected to a Qatari investor, His Highness Sheikh Mohammed Bin Khalifa Al-Thani. When the bank announced in September 2008 that the investor had bought 5% shares in Kaupthing this was taken as a sign of confidence in the bank. Olafur Olafsson, now living in Lausanne and a major shareholder in the bank knew Al-Thani and was instrumental in bringing the Qatari on board. It later turned out that Kaupthing had lent Al-Thani the money to buy the shares, arranging the buying in such a way that Al-Thani couldn’t lose – a typical characteristic of so many of the dealings in the Icelandic banks: only the banks could lose, not the favoured clients.

Olafur Hauksson from the OSP said last night that information from the report of the Investigative Commission had also been crucial. Magnus Gudmundsson’s name only appears four times in the report, in connection to a share deal that Gudmundsson and Sigurdsson planned together with Armann Thorvaldsson (author of ‘Frozen Assets’, on his life at Kaupthing) ex-CEO of Kaupthing Singer & Friedlander and Kaupthing’s chairman Sigurdur Einarsson.

The report publishes an email where the discussion is on how to arrange Kauthing share ownership for the managers so that their personal risk will be limited. On Dec. 12 2006 Gudmundsson and Thorvaldsson sent an email to Einarsson and Sigurdsson as to how this could be arranged:

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

In the report this is taken as an example of a certain attitude among Kaupthing’s managers showing how they gave themselves the possibility of pocketing a personal gain by putting more risk on the bank and its shareholders.

Another speculation relates to sub-prime loans, bought through Kaupthing Singer & Friedlander. When the loans incurred heavy losses they were bundled together in Black Sunshine, a SPV set up. When Black Sunshine surfaced Sigurdsson said that this hadn’t been an attempt to hide losses. The losses had been properly accounted for in the accounts.

These are only speculation from the Icelandic media. A Kaupthing insider tells me that as far as he knows there is nothing new in the cases under investigation. Most likely, the case against Kaupthing is more extensive than these examples indicates. The Icelandic Financial Services Authority, FME, has been conducting an extensive investigation into market manipulation related to all the banks. The FME investigation relating to Kaupthing is probably part of the OSP investigation. It is now highly likely that other top managers from Kaupthing will be drawn into the investigation. It’s also interesting to see if the Serious Fraud Office will make any moves soon though the SFO’s investigations tend to take a very long time.

According to Icelandic news, both Sigurdsson and Gudmundsson spent the night in prison. Whether they will be kept in custody is still unclear. The Reykjavik County Court is expected to rule on their custody now around lunch time. It’s also unclear if the two will fight the investigation with an army of lawyers or if they will choose to cooperate with the OSP.

Follow me on Twitter for running updates.