Former IOM Chief Minister, Donald Gelling, and Chairman of Kaupthing Singer & Friedlander (IOM) Ltd, and his fellow Board members finally broke their silence following the collapse, last October, of the subsidiary of the troubled Icelandic bank; and gave their side of the story to the Tynwald Select Committee established to investigate its failure.

Mr Gelling, and fellow non executive director, former Chief Financial Officer of the IOM Treasury and Deputy Chairman of the Financial Supervision Commission (FSC), John Cashen, managing director, Aidan Doherty and former finance director, Andrew Davies (who resigned from the Board in November, 2008) appeared before the Committee on Friday, 13^th November 2009; and all effectively said the collapse was not as a result of any failure on their part as directors.

They all essentially maintained they are innocent of any blame and the fault, for the collapse, lies squarely in London; and to a lesser extent with Kaupthing personnel.

Mr Gelling, in a brief opening statement, stated that in the Board’s opinion, right up to the point the bank was put into provisional liquidation, it was a solvent and viable business.

He said he also wanted to make it clear the amount moved from the ‘mother’ bank in Iceland to the ‘sister’ bank in London was only £360m – substantially less than the amount being alleged in some quarters – and this had, as far as they were concerned, totally removed their exposure to Kaupthing (Hf).

He went on to say, on the 8^th October, 2008, without any warning, the UK authorities had transferred all the retail deposits of KSF (UK) to ING and put the remainder of the bank into administration.

Thus deprived of access to funding from London they had appealed to Iceland for help; but once it became clear they could not get the help they sought they had no choice but to petition for provisional liquidation.

The collapse was, therefore, the result of the “unforeseen and unilateral actions of the UK authorities”.

It seems Mr Gelling is convinced the collapse of KSF (IOM) was deliberately orchestrated by the UK authorities – who he also believes stole the bank’s money; and is part of a conspiracy formulated - by the UK Prime Minister, Gordon Brown and his Chancellor, Alistair Darling - in order to give the IOM a good kicking.

Mr Gelling insisted later he was absolutely sure a gag was applied in the UK in the last few days in the run up to the 8^th October, 2008, in order to prevent then getting wind of what was being planned by the UK authorities. It was at this point he described not being told what was going on as like being on a pedestrian crossing and being run down by a lorry.

Mr Doherty referred to the “cloak of secrecy” that had descended at the beginning of October 2008; and much was made, especially by an incensed Mr Cashen, of the revelation officials at Kaupthing had been in discussions with the FSA for two weeks – but the FSA had not told the FSC.

The Manx Herald doesn’t doubt Mr Darling has probably taken some pleasure in the trouble, and cost, the collapse has caused the government in the IOM; but stops short of believing, in the face of no concrete evidence, so far, of such a conspiracy.

However, from the evidence presented previously by FSC Chief Executive, John Aspden, and now by the bank’s directors, it does appear there was a conscious decision taken in the UK not to keep the IOM authorities in the loop; but for a reason yet to be fully established.

During the nearly three hours of questioning by Committee chairman, Juan Watterson MHK, John Houghton MHK and Eddie Lowey MLC, the witnesses insisted they had not sat back and let the global financial troubles pass them by; but had proactively sought assurances the placings they had made in London were secure. They said they had taken comfort in the fact the FSC had independently corroborated their own findings – and, thereafter, as no adverse reports were ever passed back to them they believed they had no reason to become overly concerned.

Mr Doherty, who answered most of the questions for the four, pointed out nearly all the bank’s lending was of the ‘vanilla’ variety: i.e. residential mortgages to ‘High Nett Worth Individuals’ and nothing ‘exotic’; and refuted any allegations the bank had ventured, even after Kaupthing had taken over, into any areas of high risk banking. He went as far to say nearly the entire loan book was secured and only one was in default at the time of the provisional liquidation.

Mr Houghton pressed Mr Doherty quite hard about the transfer of funds from Iceland to London, and the rational behind the transfer; whilst Mr Lowey said he couldn’t understand how transferring the money from one part of the group to another removed the risk.

Mr Doherty insisted the transfer totally removed the exposure to the parent company, but conceded it did not remove the group risk; but that was not what the FSC had required. In any case, he explained the risk to the group was mitigated by securing £175m of the money by the REPO agreement.

Mr Doherty also explained the Board had been able to satisfy the FSC the risk to Iceland was removed whilst also being able to meet their own business needs, as a group, to keep the deposits taken by KSF (IOM) within the group.

The Committee appeared to be less than convinced by some of the responses.

The subject of the takeover of the Derbyshire was touched upon, with a straight denial being issued that customers were prevented from removing their money – albeit with a penalty; or that customers could not have known who had taken over their accounts.

The witnesses seemed surprised when the Committee said they had received evidence from a former member of the FSC - who had also been a customer of the Derbyshire - who claimed not to have known.

Mr Doherty also denied there had been a large body of complaints lodged at the time, and said customers had not been treated any differently to existing KSF customers.

He also went on to explain the rational for buying the Derbyshire - which he said had been put up for sale and was the subject of other bidders – in that it would have taken KSF (IOM) many years to have built up the £360m - £370m of business acquired through the acquisition of the Derbyshire; and made good business sense at the time.

In defending the actions of the Board, in how and where it chose to place the deposits taken in the IOM, Mr Doherty referred to the recent Foot Review. He pointed to the ‘industry standard’ of 70% of deposits being inter bank but stated KSF (IOM) had been much more prudent and only had 39% at the time of the collapse.

Whilst true, this obviously overlooks the fact it was only because they had more or less been directed by the FSC to reduce the exposure they too would have been nearer to the ‘industry standard’ in October 2008.

Mr Doherty also reiterated they had inquired about KSF (UK)’s exposure to Iceland and had been reassured it was minimal; acknowledging they had taken the assurance at “face value” as they had no other reason for not believing the information. They also wanted to be sure their placing was ‘round-tripping’ and ending up back in Iceland; and got the comfort they sought. He said this was the message they were getting right up to the 7^th October 2008 and so they believed there was sufficient liquidity to ensure the repayment of the 39% if needed.

Mr Doherty also explained they had taken steps to secure certain assets but without their knowledge and agreement some of this was removed, and funds were moved on the 6^th/7^th October 2008, and now forms the basis of legal action.

Mr Houghton became a bit agitated at this point as he felt the Board should had covered this issue in their submission to the Committee, but Mr Doherty said, although he was sorry, it was information already in the public domain.

Mr Watterson wondered if the Board thought, with hindsight, the FSC had made “the right call” in allowing the transfer of assets from one part of the group in Iceland to another part in London; to which Mr Doherty replied that he thought the REPO deal spoke for itself – but yes he did think it was.

It was clarified the deal and been signed off correctly in accordance with the ‘four eyes’ principle and that all parties, bank and regulatory, were involved in the process.

A short while later Mr Watterson sought to put the amount of assets transferred by KSF (IOM) to KSF (UK) in to context – and was effectively told it was insignificant compared to the £5b-£6b size of the sister company; and because of the netting out of the risk to Iceland the only exposure KSF (IOM) had was to the UK.

Mr Houghton put it to Mr Doherty it was his responsibility to look after the IOM and that he was under pressure from the FSC to keep his eye on the ball. He inquired if he had taken his eye of the ball; and whether this was the reason why the bank failed?

Mr Doherty denied he had done so; and again reiterated the information they were receiving lead them to believe the group was in a good position.

Mr Houghton wouldn’t accept this answer and wondered if had read the press reports; but Mr Doherty responded by saying they had no exposure to Iceland.

Mr Houghton persisted and suggested everybody else was aware of the problems except the directors of KSF (IOM).

Not so, replied Mr Doherty, and he again stated that almost up to the moment the bank failed they had been told the bank was stable - with substantial amounts of liquidity in the form of £1.5b in UK Treasury Bills – and no evidence, to the contrary, for them to act upon. He also added they had been receiving some of these assurances from the highest echelons of Kaupthing and had no reason to doubt what they were being informed.

Mr Watterson wondered about the run on the bank, but Mr Doherty said it was just a matter of confidence, and as the Icelandic authorities had stated they would stand behind Kaupthing the Board had thought things would settle down and they would be ok.

It became apparent through further questioning that the Board had not even, officially, been told there was a problem with the clearing system; and because they believed things would work out they had continued to take deposits until everything ground to a halt at lunchtime on the final day.

The Committee then raised the issue of when the last payments were made and whether any of the directors had money in the bank and if they had got it out before the collapse.

Mr Gelling said he had none in the bank, Mr Cashen said he had an account and his money was still locked in; whilst Mr Doherty said a relative had withdrawn money to purchase a house on the Island having moved from Malta. However, the potentially most embarrassing withdrawal was by Mr Davies who managed to withdraw money on the 6^th October 2008. His explanation was that he was in the process of restructuring his finances and withdrew the funds to pay down his mortgage. He said his request for a withdrawal had not received any preferential treatment; but Mr Watterson - in the likelihood that the withdrawal would spark a level of public interest - still asked him to write to the Committee and provide more details.

Returning to the closing of the doors, Mr Watterson wondered if there had been an “aha moment”: this is the end.

Mr Doherty said they had attempted to obtain funding of £300m from Iceland, and initially they had been led to believe their request would be honoured – but as the day progressed it became apparent this would not happen; and by 7.50pm it was more or less game over.

However, Mr Doherty maintained if the timing had been a few days later some of their funds would have matured and could have been recovered; and potentially saved the bank.

Moving on, Mr Watterson wondered what lessons could be learned about regulation in the IOM as a result of their experience.

Mr Doherty could only really point to the failure of communication, and pointed the finger of blame for this at the FSA. He maintained the banking business model used in the IOM works (which beggars’ belief in the view of the Manx Herald) and said Foot and the IMF held the same opinion; and it was only a lack of “truth” on the part of the UK that created the problem – but they had just protected themselves, and he didn’t know why.

Bringing matters more-or-less to a close Mr Watterson asked what banking qualifications each of them held.

Mr Cashen answered he is a Chartered Public Finance Accountant, Mr Gelling said he has none but pointed out he is the Captain of the Parish of Santon, Mr Davies replied he is a Chartered Accountant who trained with KPMG which involved quite a bit of banking work. Perhaps surprisingly of all, Mr Doherty who has been working since he was 16 in the banking sector, and had risen to the position of MD, has apparently acquired no banking qualifications, whatsoever, in his 32 years in the business.

In response to a further question from Mr Watterson, Mr Doherty explained that although three of them remain as directors, and are being paid, they no longer have any powers as they are now all vested in the liquidator. In Mr Doherty case, he said he is being employed to help manage the recovery of the banks assets.

In bringing the session to a close, Mr Gelling said no one has more sympathy for the depositors than the directors. He said they had tried their best and the failure had come as a great shock to them, and they desperately hoped things could be sorted out as soon as possible if that could be a long time.

Mr Doherty added to this by saying they had done everything in their power up to the 8^th October 2008, and since then to recover the assets. He very much hopes they will be able to recover, and pay out to depositors, far in excess of what is expected.

The next programmed session is 4^th December 2009, when Treasury Minister Allan Bell will be appearing.