Sigrún Davíðsdóttir's Icelog

For three days in February this year the Office of the Special Prosecutor, together with a team of 40 Luxembourg police men, searched the premises of Kaupthing, now Banque Havilland, and other places in Luxembourg in relation to the OSP investigation into Kaupthing. This was one of the biggest actions of this type ever conducted in the Archduchy of Luxembourg. A judge has been ploughing through the documents, believed to be quite a bundle, to certify that the documents retained matched the criteria given by the OSP.

Although the owners of Havilland later claimed that the searches had been unnecessary, the bank would of course have supplied the OSP with all the information it needed, Havilland and 19 others have protested against the handing-over of the documents. A county court in Luxembourg ruled two weeks ago that OSP should have the documents. But that wasn’t the end of story since Havilland e.a. have appealed to the Luxembourg Supreme Court, which is expected to rule on the issue in February.

The OSP investigation will unquestionably move quite a bit forward when and if the boxes from Luxembourg land on their desk. Anyone who has glanced at the Kaupthing loan overview from end of September 2008, leaked via the now so famous Wikileaks, will know that a lot of the seemingly dodgy loans stem from Luxembourg (whereas almost all the loans that look normal come from the Danish FIH). The SIC report confirmed much the same. And it wasn’t only Kaupthing that allegedly made good use of Luxembourg for its apparently shady deals: so did Landsbanki and its former major shareholder Thor Bjorgolfsson still has a wide net of companies there. Glitnir’s operation in Luxembourg wasn’t nearly as big as those of the other two.

Waiting until February is somewhat too long to hold one’s breath but the outcome will be waited with great anticipation. The ruling of the lower court gives hope but Luxembourg is famously a country that guards its secrets well; it’s almost palpable. No doubt, those who want its secrets to stay secret will be pushing hard to convince the authorities that this could jeopardise Luxembourg’s interests in the financial sector since it could set a precedence for others. The Rowlands pere et fils, Havilland’s owners, would like to believe that they are very well connected in Luxembourg. But Luxembourg might also discover that aiding transparency is where the wind is blowing for now.

Follow me on Twitter for running updates.

Today, the EFTA Surveillance Authority, ESA, has published two major decisions regarding Iceland. Firt of all, it closes seven cases regarding the Icelandic Emergency Act, passed in October 2008, that “granted depositors priority ranking in insolvency proceedings over that of other unsecured creditors. The Act also enabled the Icelandic Financial Supervisor to transfer assets and liabilities from the collapsed banks to new banks.” ESA now concludes that the Emergency Act is not in breech with the EEA agreement.

The second decision regards the question of state aid as the operations of three banks, Glitnir, Kaupthing and Landsbanki, were rescued in October 2008. ESA is already investigating state aid in the insurance company Sjova, one of the many companies wrecked by the Viking raiders, in this case the Milestone Group.

Follow me on Twitter for running updates.

Glitnir has lost its attempt to have its charges against Jon Asgeir Johannesson, his wife, Hannes Smarason, Palmi Haraldsson, PwC and others heard at a court in New York. Today, the judge ruled that this case should not be brought in New York since neither the charges nor those charged had enough connection to New York.

To the Icelandic media Johannesson has expressed his relief, claiming that it was always a lost cause for Glitnir to go down this route and that he himself has lost a lot of money because of the charges. He now intends to countersue Glitnir for damages suffered because of the lawsuit. Haraldsson has also talked to the Icelandic media, underlining the huge stress and exorbitant cost brought on him by the lawsuit.

Glitnir chose to file the lawsuit in the Supreme Court of New York state as its case was related to a $1bn bond issue in 2007. Glitnir alleged that US investors were misled and that the major shareholders had ‘robbed the bank from the inside’, i.a. the funds obtained in the bond issue.

Glitnir, assisted by the international corporate intelligence company Kroll, had calculated that a lawsuit in New York would make it possible to involve all those involved in one suit whereas in Iceland it would probably take several lawsuit. Uttering dissappointment, the Winding-up Board has none the less gathered much information via the New York charges that will no doubt prove useful since its fight against those involved is by no means over yet.

Follow me on Twitter for running updates.

The Office of Special Prosecutor normally doesn’t confirm what it’s investigating unless people are called in for investigation, something that normally doesn’t happen in the early stages of an investigation. However, the word is now out in Iceland the Landsbanki and Glitnir’s auditors, PwC, are under a criminal investigation in Iceland. Already in October last year the OSP conducted house searches at the PwC in Iceland though it wasn’t clear at the time to what purpose.

The OSP investigation is a criminal investigation. PwC is already being sued by Glitnir, in New York together with the bank’s principal shareholders and managers and Landsbanki has recently made some moves. Both banks are trying to reclaim money thought to have been lost due to PwC misleading auditing.

If investigative reports done at the behest of OSP, showing that the two banks were in reality bankrupt late 2007 but could only keep operating because of PwC’s misleading auditing, prove to be correct it seems that a flood of court cases could follow. Icesave is a case in point: Landsbanki couldn’t have collected the amounts it did if it had ceased to operate late 2007. The two banks couldn’t have run up the debt they did both with the European and the Icelandic Central Bank. And then there are the bondholders, banks such as UBS, Royal Bank of Scotland, Barclays, Deutsche Bank e.a. that stayed in business with the Icelandic banks till their last hour. Certainly some dizzying perspectives here – and pretty great prospects for lawyers.

Reynir Vignir managing partner at PwC Iceland has acknowledged that the allegation brought forward in the two investigative reports are serious but he and his staff have neither had the time nor the opportunity to scrutinise them. He emphasised that neither he nor any of his staff have been called in for questioning and doubts that the those who did the two reports had access to the same data that PwC had when the audits were done. In a statement earlier, PwC underlined that the final responsibility for the accounts lay with the boards of respective banks.

Where does that leave Kaupthing, audited by KPMG? Most likely in a similar situation, if you ask around in Iceland. It seems that the OSP is conducting its own investigation into the Kaupthing audits. Since the banks were run in such similar ways, milling around the same major shareholders and big clients, the feeling is that Kaupthing would be no different.

But questioning the auditing of the banks has much wider ramification than just the auditing itself. In the report of the Althing Special Investigative Commission Sigurjon Arnason ex-CEO of Landsbanki points out that Deutche Bank offered Landsbanki the possibility to put a certain loan line on its books though the bank would never use the facility because the terms and conditions were outrageously unfavourable. These ‘Potemkin-loans’ (my word for these make-believe constructions) were only given to decorate the books – and to make it look as if their liquidity was stronger than it really was. Kaupthing had a similar arrangement with DB, a loan line of €1bn from 9 Nov. 2007, that Kaupthing never used since the terms were really punitive but it served Kaupthing as a ‘Potemkin-loan’. Though Kaupthing never used it the bank had to pay 0,35% fee for the service, in total paying DB €3,5m a year.

Most Icelanders will say that the OSP is taking long to bring out charges. The auditing, both the auditing itself and possibly Potemkin tricks in the books, gives an idea of the complexity of his task – plenty of needles in three gigantic haystacks. Then there is the widespread feeling that the banks engaged in market manipulation. But as one of my sources said: ‘Trying to hook the banks on market manipulation is like charging someone for driving over on red light after he’s robbed a bank.’ The feeling in Iceland is that just as Glitnir has alleged in their charges in New York the three banks were robbed from the inside.

Fictional auditing would be the means to commit the alleged robbery. At some point the OSP must and will make up his mind as to what kind of charges can be pressed and against whom.

*An earlier log on PwC in Iceland is here. And here is an earlier log on Landsbanki and PwC.

Follow me on Twitter for running updates.

The Icesave outcome for Iceland will, in the end, be hugely dependent on the value of the Icelandic krona since the underlying amount is in foreign currency – and with currency regulation it’s difficult to say what the krona’s real value is. There is, for the time being, a noticeable difference between the ISK on- and offshore rate though the two rate have been converging.

How long the currency regulation will be in place is uncertain. There have been indication from the Icelandic Central Bank that the end of the regulation was in sight but there have also been contrary indication.

In connection with Icesave news on Thursday Reuters reported on these issues:

Analysts welcomed the deal, notably in the context of other positive news about the recovery from a crash that came to symbolize the 2008 global crisis.

“If we can get agreement on Icesave that will be positive for investor sentiment then we might begin to see money flowing back into Iceland,” said Danske Bank economist Lars Christensen.

“What happens when you remove the capital controls? I am getting more and more inclined to think that (the ensuing fall in the crown) might not be as big as feared,” he added.

Iceland imposed capital controls to protect the crown, a move which also locked in foreign investors who had crown assets after several years of high-yielding glacier bond issuance.

The central bank has said it will not make any moves to lift the controls on outflows this year and that no fundamental changes would be made before March 2011.

SEB emerging markets strategist Mats Olausson said there were opportunities for investors.

“I think that solving (Icesave) brings deregulation one step closer and once that happens the onshore and offshore rates are set to converge. Our view has been that convergence will happen closer to the onshore rate,” he said.

He said Icelandic bond yields had already fallen, but that a currency play could bring benefit if there was an appreciation of the crown from its current offshore rate of 240.50 to the euro, toward the onshore rate of 151.80.

“For investors the thing to watch is the timing of deregulation and the opportunity to get into the offshore market. Investors should be very wary about the possible risks, but we think there is potential for a good return when deregulation happens,” he said.

It’s interesting that the two analysts, Christensen and Olausson, think that the krona rate in an unrestricted environment would most likely be closer to the onshore rather than the offshore rate, i.e. there wouldn’t be the crash of the krona as some fear. One of the reasons might be that the adjustment has already happened, that those holding Icelandic assets such as glazier bonds are patient owners, content with the interest rates in Iceland. Although interest rates in Iceland have come steeply down since October 2008 rates are still high compared to Eurozone. The ICB overnight interest rate is now, since December 8, 5,5%.

Lars Christensen became a celebrity in Iceland, or rather a hate figure, in March 2006 when Danske Bank published a research paper titled Iceland: Geyser Crisis. Its negative outlook caused a furore in Iceland with accusations flying of the Danes, who ruled Iceland for centuries until Iceland left the union in 1944, being envious of Iceland’s success and more in that vein. It’s still an interesting read:*

There was indeed a dip in 2006 since Danske Bank wasn’t the only one to spot the warning signs; it was just one of many though Icelanders picked on Danske. Most analysts gave these warnings and the Icelandic banks got into trouble with their refinancing. The European market was closed to them but the US market proved a fresh ground. If that hadn’t happened things might have turned out differently.

The first half of 2007 was yet another boom time in Iceland but it’s a question how much of a helping hands the banks and the main players gave themselves. Allegations of market manipulation are being investigated in Iceland although they seem to be only a part of a general enriching scheme for major shareholders and favoured clients in all the banks. Later, the Icelandic banks got incomprehensibly positive ratings since it seems that analysts, for some reason, started to believe, or wanted to believe, that the Icelandic high wire act wasn’t defying gravity but was sound. They were as wrong as Danske Bank was right in 2006.

*Funnily, the Geyser paper from 2006 doesn’t seem to be available on Danske Bank’s website any longer but I found it on an Icelandic website.

Follow me on Twitter for running updates.

Lee Buchheit who lead the Icelandic Icesave negotiation team was on Ruv, the Icelandic State Broadcaster, on Thursday, introducing the Icesave agreement. You can watch it here. (After a short introduction in Icelandic the interview starts and is in English.)

Follow me on Twitter for running updates.

Ruv, the Icelandic State Broadcaster, has over the past two evenings given an overview of two recent reports on the two banks, Glitnir and Landsbanki, that collapsed in October 2008. The reports were done at the behest of Eva Joly for the Office of the Special Prosecutor, respectively by a team of French and Norwegian expert.

The findings deepen the picture already abundantly clear from the SIC report of spectacularly dubious lending to main shareholders, both in respective banks and in Kaupthing. But the most damming conclusions regard the auditor of these two banks, PwC. According to the reports both banks would have been bankrupt well before October 2008, probably a year earlier, if it hadn’t been for the willingness of PwC to do what the banks wanted and help them keep the illusion going. If that had happened the liabilities that these two banks left behind would have been a lot lower. The fact that they could operate longer has been very damaging for Iceland and everyone who did business with these two banks and, one would suspect, with Kaupthing as well.

PwC hasn’t responded yet. One would assume that it’s not only PwC Iceland that has some explanation to make but also the mother company PwC.

This kind of lending beyond all rhyme and reason, against no guarantees and with bullet loans being rolled on indefinitely went on in all the Icelandic banks. It didn’t start in 2008, it had been going on a lot longer. The question is what sort of banking had been going on in the Icelandic banks. And these banks didn’t operate in a vacuum, they were closely connected to international banks.

The Icelandic banks will provide an interesting peephole on international banking though the Icelandic way of banking was no doubt a lot more crude than in any other Western European country. Though, having just returned from Dublin, I would be interested to see similar reports on i.a. Allied Irish and Anglo Irish. Considering the fact that RBS got into trouble, it lent heavily to Icelandic businesses and had to be saved by the UK tax payers it would also be interested to see RBS scrutinised like the Icelandic banks.

Follow me on Twitter for running updates.

Those who have followed the Wikileaks saga know that Julian Assange spent time in Iceland as the Iraq war logs were being prepared for publication. Now that Assange is fighting Swedish rape accusations an Icelandic journalist, Kristinn Hrafnsson, is more or less in charge of Wikileaks.

The Swedish TV has made a documentary on Wikleaks, their story, how they work and the controversies, also controversies related to Assange’s person. You can watch the documentary here. It’s available until December 13.

The next big thing from Wikileaks is allegedly documents relating to one of the big banks, thought to be Goldman Sachs since Assange mentioned Goldman when he announced the coming leak. Judging from previous leaks, that could be revealing. Icelanders got their first insight into the Icelandic banks when an overview of Kaupthing’s big exposures was leaked. The bank tried to gag the Icelandic media but eventually couldn’t prevent the leak.

Follow me on Twitter for running updates.

Tonight, the Icelandic Icesave-negotiation team, led by the American lawyer Lee Buchheit, introduced the new Icesave-agreement at a press conference in Reykjavik. Buchheit pointed out that the fundamental assumption was that the Landsbanki assets will cover the Icesave-payment, the first €20.000 on each Icesave-account, that the Dutch and the British government paid to the deposit holders. The total amount is $5bn. Consequently, the amount may change in ISK but the currency risk is offset by the fact that most of the assets are foreign.

Early next year, Iceland has to pay ISK25bn, interests for 2009-2010. The Icelandic deposit guarantee fund already has ISK20bn. Iceland will start to pay its Icesave bill in six years, in June 2016, quite some time to prepare. If the government at that time will have to pay less than ISK45bn, £246.7m it will pay the whole amount and that ends the matter. Buchheit seems to think this is likely since the Landsbanki assets will cover majority of the payments. This unavoidably means that other creditors than Icesave depositors won’t get much.

If the amount due for the Icelandic government will be more than ISK45bn the payments will be stretched out, at most to 2046(!) – Icesave will hardly cause Iceland to default as some Icelanders have feared.

The interest rates are of great interest: 3,3% to the UK, 3% to the Dutch government, reflecting the different cost of borrowing for the two countries. The Icesave-negotiation team underlined that the outstanding money to be paid isn’t a proper loan. It’s a distressed situation, not a loan. It’s acknowledged that all countries bear some responsibility and this agreement, i.e. the interest rates, can’t be compared to the bail-out loans to Greece and Ireland. Famously, Greece is paying 5,3% on its bail-out package and the average interest rates for Ireland is 5,8%.

Now that the negotiation has ended it seems that the opposition in Althing, the Icelandic parliament, is positive towards the agreement. The opposition suggested Lee Buchheit for the job and also nominated another team-member. Now parliament has to pass an Icesave-bill – and then it remains to be seen what the president does. A year ago, the parliament did indeed pass a bill but the president refused to sign the law and sent it out for a referendum. Before that referendum was held it was already clear that it would be renegotiated.

*An English outline of the deal is here.

Follow me on Twitter for running updates.

The Dutch government has just announced that a new Icesave-deal has been finalised. The interests on the loan to the Dutch will be 3% and 3,3% to the UK, reflecting the interest rates in the Eurozone vs the UK. The Icelandic government will have a press conference at 6pm GMT today.

There will be those who say that this is a huge victory for Iceland since the interest rates in the previous deal was 5,5%. However, the fact that it’s 2 years since the UK and the Dutch paid the Icesave deposit-holders and that this matter has been harmful to Icelandic businesses abroad the cost of waiting is probably high though difficult to calculate.

Follow me on Twitter for running updates.