Leaked internal documents have revealed that $9 billion in loans were given out to a small group of clients including major shareholders of the Icelandic bank, who pledged little-to-no collateral.
Kaupthing was one of three Icelandic banks that collapsed last October.
The papers appear to cast light on Kaupthing's highly unusual lending practices just two weeks before the Icelandic system failed last October, wiping out millions of pounds of savings deposited by UK local authorities and charities.
More after the flip:
It reveals that its highest loans, totalling more than €6.4bn (£5.45bn), was given to companies connected to just six clients, four of whom were major shareholders in the company. Kaupthing granted some of these loans with partial or no collateral, the largest of which was given to Exista, its biggest shareholder with a 22pc stake.
The bank, which had a huge retail depositor base in the UK, was also lending millions of pounds to individuals and holding companies so that they could buy shares in Kaupthing itself – effectively propping up its own share price.
In 2007, a documentary was released called The Money Geyser where financial journalist Max Keiser looked into the role which countries such as Iceland, who had a high-yield currency, played in the carry trade with countries who have a low-yield currency.
Money Geyser explained, respectively...the structural weakness of the global currency grid and in particular the currency and economy of Iceland. A year later, the Icelandic krona and the economy evaporated in a cloud of currency 'carry trade' ice and dust exactly as we predicted it would.
Because of the country’s high interest rate, Icelandic banks were able to create leverage by swapping its currency with nations who had a lower interest rate.
Kaupthing's profit jumped more than 50-fold from 2000 to 2005 after it borrowed money abroad to expand outside Iceland's $16 billion economy. The bank bought the U.K.'s Singer & Friedlander in 2005 and Denmark's FIH Erhvervsbank A/S a year earlier and now operates in all the Nordic countries, the U.K., the U.S., Luxembourg and Switzerland.
However, when the value of mortgage-backed securities collapsed last year Kaupthing was unable to cover its losses.
Clients of Icelandic bank Kaupthing have been told to put up more cash or close their leveraged positions.
...London brokers reported a "mad scramble" among Kaupthing clients to move positions held via Contract for Differences (CFD) following the move by the Icelandic bank.
The bank defaulted in October.
Kaupthing Bank, Iceland's only major independent financial firm, has become the country's latest bank to fall into government hands as the nation's banking industry crumbles under the weight of massive debts.
...The Icelandic krona fell to an all-time low against the euro, prompting the country's financial shares to be suspended from trading since then. (See "Iceland In Hot Water.") Iceland's central bank then tried and failed to peg the krona to 131 euros, finding that it could not sell the krona at that price on the interbank market for foreign currency. Iceland's currency fell 26.8% against the euro, with the single European currency buying 172.16 krona at the close of trade.
Iceland, with a population of 320,000 people on a territory the size of Kentucky, is a key component of the global financial system as its outsized banking operations have a far reach in other larger economies, including the United Kingdom.
The bank failure was a ‘credit event’, which triggered CDS payments.
Kaupthing became the third Icelandic bank in the past two days to trigger a payment under its credit default swap contracts, the International Swaps and Derivatives Association said on Thursday.
That means investors who bought protection against a default on Kaupthing debt will be paid out a cash sum determined by an auction process.
A report issued in March by Kaarlo Jännäri, former head of the Finnish financial regulator, exposed some of the practices which lead to Kaupthing’s collapse.
Commissioned by the Icelandic government and International Monetary Fund, the report highlighted a series of concerns about the conduct of the banks, including large exposures to individual clients and business conducted with related parties, such as those with an interest in bank shares.
Jännäri noted that at the end of June 2008, Iceland's big three banks – Kaupthing, Glitnir and Landsbanki – had a total of 23 loan exposures to individuals or corporate groups that were equivalent to more than 10% of the respective bank's funds."What is striking about these exposures is that the majority of them are to holding companies, or other institutions, or individuals whose main activity is investing in shares or other venture-capital or speculative activities," he said.
"In most cases, the assets pledged as collateral for these loans are shares in the companies in which these customers had invested the funds borrowed... My judgment is that their behaviour in this regard has been very imprudent."
A document leaked this week detailed loans which a former British regulator called ‘appalling’.
- Lydur Gudmundsson, who founded the Bakkavor food empire that employs 20,000, many in the UK. Mr Gudmundsson, who sat on the board of Kaupthing and Exista, was granted loans worth €1.86bn for companies linked to him and his brother, Agust. One note detailing a €791.2m loan to Exista itself admits that "bulk of the loans are unsecured and with no covenants".
- Robert Tchenguiz, the London-based property entrepreneur and board member of Exista, was loaned €1.74bn to finance his private investments. Last night, Mr Tchenguiz confirmed that he had been the bank's biggest client, but declined to comment further.
- Kevin Stanford, the retail entrepreneur and director of House of Fraser, who emerges in the document as Kaupthing's fourth largest shareholder. He was given a €519m loan to buy shares – of which €181m were in Kaupthing itself, using those same shares as collateral.
Update: Link added to Vanity Fair’s April article on the Icelandic financial meltdown. (h/t to taonow)
Demonstrators in front of Iceland’s parliament building, in Reykjavík’s Austurvollur Square, on January 31. Photographs by Jonas Fredwall Karlsson.
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