A petition, on the UK Prime Minister’s website, is calling on the authorities in the UK to open up for public scrutiny the papers submitted to the court prior to Kaupthing Singer Friedlander (KSF UK) going into administration.

Depositors in the IOM sister company, KSF IOM, which has been placed in provisional administration as a result, want to know if the UK authorities acted rashly or are hiding something from the public.

The Manx Herald supports the petitioners in wanting to know what is contained in those papers and whether public utterances by UK officials, subsequent to KSF UK being placed in administration, are consistent with the evidence submitted to the court.

Owing to the secrecy surrounding what took place in early October, it has allowed the usual conspiracy theories to abound: that the UK authorities used the situation to damage the reputation of the Isle of Man.

Although the Manx Herald has partly adopted the view that the Island’s authorities, and financial service providers, are generally the architects of their own misfortune, if it is shown that the UK has illegally exploited the situation then the Herald agrees, with the depositors of KSF IOM, the UK should be made to put Humpty Dumpty together again; and pay any appropriate compensation.

On 8^th October 2008 the UK Government set aside normal rules on the laying of Statutory Instruments before Parliament for 21 days, before they become law; and made SI No 2674 at 12.05pm, laid it before Parliament at 4.00pm with it coming to force at 12.15pm - nearly 4 hours earlier.

The Order, made under the Banking (Special Provisions) Act 2008, entitled ‘The Kaupthing Singer & Friedlander Limited Transfer of Certain Rights and Liabilities Order 2008’ was made because the UK Treasury believed it to be “desirable”.

Its purpose was described as: “maintaining the stability of the UK financial system in circumstances where the Treasury consider that there would be a serious threat to its stability if the Order were not made”.

Strong claims indeed as it is amazing to think the collapse of this one, relatively small Icelandic bank would have such financial repercussions for the UK.

The Order effectively allowed the transfer of a part of the KSF UK business, the holders of Edge accounts, to a government company for forward transfer to ING Direct NV; along with a pile of UK taxpayers’ money in the form of depositors’ compensation money.

In addition it made provision so that, if the remainder of the business was insolvent and went into administration, payments could not be made, without prior Treasury consent, to related parts of the bank; i.e KSF IOM.

This action triggered the decision by the Directors of KSF (IOM) to call in the Financial Supervision Commission, who suspended their Banking Licence, and agreed that the bank would have to go to Court for an Order to determine its future.

The reason for this decision was due to the Directors knowing that without access to funds, held in London, and no support forthcoming from the parent company in Iceland, they could not meet their liabilities and continue to trade.

It is now understood by the Manx Herald that rather than one lump sum of circa £550million pounds being put on deposit with the sister company in London, KSF IOM had for some time being making regular deposits of money, received from its customers, into KSF UK (rather than ‘up-streaming’ to the parent comapny in Iceland); and at the time of the UK bank going into administration the cumulative total of the deposits was over £500million.

Calls on the money, to meet the flood of withdrawals by KSF IOM customers was apparently being met until 6^th October when UK Treasury concerns about the Icelandic banks resulted in a ‘stop’ on payments being made through the UK clearing system. KSF IOM was not made aware of this owing to UK ‘tipping-off’ legislation preventing this information from being made known to parties who could benefit from its knowledge.

Thus, on 8^th October, KSF IOM became one of the largest creditors of KSF UK in administration; albeit with insufficient voting power to get itself voted on to the creditors’ committee established by the UK banks administrators. Incredibly it came way behind, in the vote, to a cats’ charity - which probably reflects how many people have far more sympathy with animals than fellow humans.

Accusations have since followed that the UK Government has essentially ‘nicked’ money from the IOM’s banking customers by ‘freezing’ the £550million through the use of anti-terrorism legislation.

However, the reply given by Ian Pearson to a UK Parliamentary Question from Austin Mitchell, on 26^th November 2008, paints a different picture.

Part of the exchange reads as follows:

Mr. Austin Mitchell: To ask the Chancellor of the Exchequer what proportion of the assets of Kaupthing Bank that were frozen in the UK belonged to Kaupthing, Singer and Friedlander (Isle of Man).

Ian Pearson: On 8 October, the Treasury made Landsbanki Freezing Order 2008 in order to freeze funds and financial assets relating to Landsbanki. Landsbanki is the only Icelandic bank which has been made the subject of a freezing order.

On the same day, 8 October, the FSA decided that Kaupthing Singer and Friedlander Ltd no longer met the FSA's threshold conditions and the firm went into administration.

Under UK insolvency law, KSF IoM ranks like any other creditor of KSF-KSF IoM will have been fully aware of this. It could have chosen to put its money elsewhere and to have diversified the deposits made rather than making a single large deposit, which concentrated the credit risk to which it was exposed.

The Landsbanki Freezing Order was indeed made under the provisions of the ‘Anti-terrorism, Crime and Security Act 2001’ and was made to prevent the stated intent of the Icelandic authorities to use the assets of the bank to protect only the interests of Icelandic depositors; a situation vastly different to that pertaining to the Kaupthing Bank collapse.

Regardless of what legislation was used to prevent the flow of funds from London to Douglas, the IOM Government has requested the assistance of the UK Government, through the UK Justice Department, to get the Icelandic Government, who effectively owns Kaupthing Bank Hf, the Icelandic ‘parent’ of KSF IOM, to honour their guarantee and make up the shortfall in funds.

As most people in the IOM are now well aware the UK Chancellor of the Exchequer, Alistair Darling, announced a review into the Crown Dependencies in his ‘Pre-Budget Report’; particularly into their ability to withstand the global financial turbulence in which the World now finds itself.

Lord Bach, who is the Justice Department’s, Minister with responsibilities for the Crown Dependencies, has recently appeared before the UK House of Commons, Justice Committee to answer questions on what the Justice Department has done to ‘represent’ the Crown Dependencies’ interests in the KSF ‘affair’.

Essentially he and a colleague, Patrick Bourke, Head of European and International Division, said they had handed over negotiations to the Treasury; notwithstanding the fact that the Committee Chairman, Sir Alan Beith suggested that this is being perceived by some observers in the Dependencies, and creditors of KSF IOM, as a conflict of interest.

Lord Bach maintained that the interests of the IOM, and the KSF IOM depositors, are being looked after; even if he did trot out again the UK Treasury line that KSF IOM could have, and perhaps should have, spread the risk about rather than deposit the £500million plus with KSF UK. He also added that despite one dependency in particular (can you guess which one he was alluding to) was unhappy with the turn of events, KSF IOM would not be treated “preferentially” in respect of KSF UK’s insolvency.

Whilst this line with KSF IOM may not be new it is interesting to compare this to the UK Government’s approach when USA banking ‘giant’, Lehman Brothers went belly-up.

In September, during the Labour Party Conference, UK Prime Minister, Gordon Brown was reported as saying he was pressing for Lehman USA to return $8billion to Lehman Europe, which had a large branch, employing 4500 people, in London, so they could get paid.

But the Manx Herald presumes that was different wasn’t it Mr Brown.