Kaupthing loses claim against British government

high-court-londonThe much-talked-about EUR 500 million from the Central Bank of Iceland to Kaupthing shortly before the latter bank collapsed did not (for the most part) go to the UK and into Kaupthing Singer & Friedlander. This is one of the findings of the High Court case in London brought by Kaupthing against the British government. It is interesting to note, according to Visir.is, that the court ruling implies that if the loan had been used to support KS&F, the fall of Kaupthing might have been avoided.

It is clear that the British government’s forced closure of Singer & Friedlander was the last nail in the Kaupthing coffin during the eventful first days of October last year. After this, the company was doomed.

The court ruling pointed out that the UK financial regulator, the FSA and Kaupthing negotiators reached an agreement after exhaustive negotiations on 4-5 October 2008 that Kaupthing would increase Singer & Friedlander’s cash position in stages. The FSA did inform Her Majesty’s Treasury (the UK finance ministry) of this decision.

The EUR 500 million loans from the Central Bank of Iceland came on 6th October. The day before (5th), Kaupthing had promised to pump GBP 186 million into KS&F (around half the loan value) on the 7th October. In reality, only GBP 36 million ended up in London. As previously reported by Visir, the FSA believed that the additional GBP 150 million had been frozen by the Central Bank of Iceland.

But according to other sources, this was not true. Visir.is reports that the entire loan was paid out; but that Kaupthing used the money to shore up its operations elsewhere in Europe. Among others, a portion of the funds went to Sweden and another chunk was used to save Kaupthing Edge in Germany. This comes as a surprise because Kaupthing managers themselves pointed out that Singer & Friedlander would be the key to the bank’s survival.

The nationalisation of Glitnir Bank is also mentioned in the High Court ruling and the strong negative effect it had on trust in the entire Icelandic banking system.

On the day after Glitnir’s nationalisation, on the 30th September, GBP 37 million was taken out of Kaupthing Edge bank accounts in the UK. This massive withdrawal triggered a ‘code red’ on the state of Singer & Friedlander. In response, Singer & Friedlander announced it would increase its funding from Kaupthing by an additional GBP 1.1 billion; but the mother company could not provide such funding.

The FSA later agreed to accept GBP 1.25 billion in smaller chunks, as stated above.

It was at this time that Kaupthing made desperate attempts to sell S&F to JC Flowers. The negotiations failed partly because Kaupthing promised the FSA it would  transfer GBP 175 million “within hours” on the 7th October. The funds, however, never arrived.

On the 8th October, the FSA learned of the failed JC Flowers deal, but accepted Kaupthing’s new promise to send GBP 300 million; but that too never arrived. By this time, the patience of the British government was exhausted and later that day the government decided to take over Singer & Friedlander and transfer all its assets to ING Direct in the Netherlands before it fully collapsed.

This timeline of developments seems to be accurate and is backed up by documentation presented during the High Court hearing. However, during the entire process last autumn, Kaupthing leaders were assuring the world the bank’s overall liquidity was strong and the chances of collapse were extremely remote.

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