‘Amateurish’ and ‘incompetent’ IOM officials allowed KSF (IOM) to become ‘collateral damage’ in UK action
Representatives of the Kaupthing Singer & Friedlander (IOM) Ltd (KSFIOM) depositor action groups were pretty clear in where the blame should lie when they give evidence to the Tynwald Select Committee investigating the reasons for the collapse of the bank.
Dr Angela Downs, a member of the ‘Strategy Team’ of the Depositors Action Group (DAG), and Stephen Thomas, of the ‘Partially Protected Depositors Group’, were fairly forthright in their views; with Mr Thomas giving a virtuoso performance so angry is he about the failure of IOM officials to protect depositors’ money.
Dr Downs, who described herself as an ‘accidental’ KSF (IOM) depositor having, like so many other victims, initially put money into a British building society – the Derbyshire.
She explained, in common with many other expats without a UK address, she had no real option but to put money into an offshore account; and followed the time worn advice by putting her spare cash into a building society.
Regrettably for her and many other depositors they had very little say in the matter when a mysterious ‘northern European bank’ came along and snapped up the offshore part of the Derbyshire; and although she, like others, could have moved the money elsewhere, left it in place to avoid paying a penalty. However, she was pretty adamant she would never have chosen to make a direct deposit in to an Icelandic bank.
As the situation in Iceland became worse, Dr Downs was dismissive of the Financial Supervision Commission’s (FSC) assertion they did all they could to protect depositors, saying she didn’t believe they could be in the dark over the situation. “Either they made the wrong decision or they looked the other way”, she stated; and which ever it was made them “incompetent”.
She added, the fact two of the main players in the fiasco, Donald Gelling and John Cashen, hold senior positions in the IOM makes it all very embarrassing for the IOM.
Furthermore, Dr Downs said she was aghast by the comments of Allan Bell, the Treasury Minister in his budget speech, and his reference to KSF (IOM) being ‘collateral damage’ in the action taken by the UK over the banking crisis.
She pointed out it is only Kaupthing depositors in the IOM and the Channel Islands, in the whole of Europe, who are not being paid back in full; and asked the committee to recommend the Manx Government to recognise its responsibility and bridge the gap in any shortfall.
She put it to the Committee the shortfall is now predicted to be less than the £150m Treasury were planning to put aside for their doomed ‘Scheme of Arrangement’ (SOA); and they should do it now and not in 7-8 years time.
She went on to say it had been accepted in the IOM these were “exceptional times” and, therefore, the depositors “expect an exceptional response”.
Moreover Dr Downs was of the opinion the ‘right’ response would help to restore the IOM’s reputation.
During further questioning of how she ultimately became a KSF (IOM) depositor, Dr Downs implied the information about the takeover given to customers was deliberately vague. She pointed out in a list of all the Nordic countries Kaupthing operated, Iceland appeared in the middle when she thought, as an Icelandic bank it would appear at the start of the list. She had even thought the inclusion of Singer & Friedlander in the name departed a German connection.
Questioned about the parental guarantee, Dr Downs said she hadn’t seen the Derbyshire’s but even if the two were worded similarly she didn’t believe the Kaupthing could ever be considered equal to the guarantee of a British building society.
She said she was shocked by the rejection of the guarantee by the Icelanders but understood the liquidator is intending a vigorous fight: depositors will have to wait and see, she said. (The Manx Herald has been informed the case will centre on ‘ostensible authority’ i.e. even if the person who signed the guarantee wasn’t authorized to sign it, it is still binding on the party for whom the person was working. The only problem is that whilst ‘ostensible authority’ is recognized in Manx and English law it is not necessarily included in Icelandic law.)
Dr Downs suggested the rejection may be a red herring; but if the rejection is upheld then this would be a serious matter as to how the directors of the bank and the regulators accepted something that was not valid; and which was then used to “sell the bank” and “reassure depositors in the Derbyshire Building Society”.
Asked by Committee Chairman, Juan Watterson MHK what she thought could have been done, or was not done, by the directors and regulators to prevent the collapse of KSF (IOM); Dr Downs replied the bank she never have been in the position to become “collateral damage”. She believed this could have been avoided if the regulators had followed their recommendation to remove all exposure to Iceland.
Mr Watterson put it to Dr Downs there had been accusations of wrong doing, failure to act and/or negligence in the lead up to the collapse; but she replied she wasn’t “qualified to say in a legal sense”. However, it appeared to her they had recognised a risk, made a decision on how to avoid it but for some reason it had not been implemented.
Asked for a comment on whether there is anything wrong with the IOM banking business model; Dr Downs said she understood it is normal to ‘upstream’ deposits to the ‘parent company’; most of whom are in the UK. Therefore, she thought “more thought should have been given to the change to an Icelandic parent”.
She went on to say if enough attention had been paid to the suitability of Kaupthing as a ‘parent’ bank, knowing concerns had been expressed by S&F staff at the time of the takeover, things may have been different.
Moving on, the issue of bond holders being prevented from withdrawing funds from the 2nd October, 2008 was discussed. Dr Downs put to the Committee the fact this happened indicates the directors did know there was problem; and thus it conflicted with their evidence that they didn’t know of a problem.
John Houghton, MHK, inquired of Dr Downs if she had any view on the representation made by the IOM or UK authorities, on behalf of depositors, to the Icelandic authorities. Dr Downs replied she certainly did. She stated it looked as though the IOM Government had done very little other than “politely ask the Ministry of Justice” (MOJ) to represent them. They had then delegated responsibility to the Treasury who also seem to have done very little. She was critical of the fact the IOM Government had “not seen fit to make any protestations to the UK” over the lack of action; and expects the government to press the MOJ harder if it isn’t doing its job.
Asked for her views on the UK ‘seizing’ assets in the way it did; Dr Downs replied she was initially very angry. However, on reflection she now appreciated they did what was necessary to protect UK taxpayers; and hadn’t thought about the consequences elsewhere – not that they had now done anything to put right the collateral damage they had caused.
Towards the final part of the questioning the Committee returned to the issue of whether anything could have been done to save the bank; and whether the REPO agreement was sufficient protection for deposits made by KSF (IOM) to KSF (UK). Dr Downs pointed out if all had been ok KSF (IOM) wouldn’t now be a creditor of the UK bank.
As for MLC, Eddie Lowey’s question if the UK FSA or the FSC bore the main responsibility for the situation, Dr Downs rightly pointed out the FSC is the IOM’s regulator; and it would be an “abdication of their responsibility to say the FSA had said everything was okay”. She said this maybe “a bit hard” on the FSC but they had to make sure everything was okay; and after all, she stated, “the buck stopped there”.
Mr Lowey thought this a “good answer”.
In conclusion, Mr Watterson inquired of Dr Downs if she thought a predicted recovery rate of over 90% was high enough, and wondered if she thought every business involves a level of risk, and it was it just one of those of things, and 90% wasn’t too bad.
An indignant Dr Downs made her feelings very clear: stating no she did not; not that she thought they would expect her to say anything else. She pointed out it will take up to 2017 recover the 90%, the interest on the money will be lost, and having deposited money in an institution she hadn’t considered risky, or at least very low risk, it wasn’t acceptable. It wasn’t as though she had been “investing in shares” or the like, she said.
Before leaving Dr Downs was offered the opportunity for the strategy team to submit questions for the Committee to consider putting to the directors and regulators when they are recalled. She accepted the invitation and said she would send them in.
Mr Thomas then took over in the hot seat, and launched into his ‘presentation’.
He had unfortunately deposited over 700,000 dollars into the bank in September 2008; prior to moving back to Britain from Russia where he had been living and working.
As he had a Russian wife, and wanted the account in joint names, he had been unable to deposit the money in an onshore account and hunted around for a ‘safe’ offshore home for the money instead. Owing to the uncertainty in the British banking system at the time he had sought to avoid putting the money into a British bank and, as the options were some what limited, this is how he ended up with KSF (IOM).
Mr Thomas, with a life time of experience in the risk management business, said he was not a “sophisticated investor” but explained he had conducted some research and, having done so, satisfied himself KSF (IOM) seemed safe enough. However, he had “beaten himself up ever since” as, although he had recognised there was some potential risk, he had made all the right moves, in making his plans to return home, except “choose the right bank”.
He said if he could, towards the end, spot a problem from thousands of miles away how was it the FSC and directors couldn’t “smell it”.
He questioned the now orthodox assertion the UK authorities are to blame for the failure of KSF (UK) and the knock on effect on KSF (IOM). In his view KSF (UK), plain and simply, was going bust and that was the issue not the freezing of assets. He wanted to know why KSF (IOM) hadn’t recalled all its funds on the 2nd October, 2008; and, if no other option, to spread the risk, was available, stuck it all in a safe. After all, he said, they were supposed to be “professional bankers” who should have known they needed to spread the risk to the unsecured £175m; and remove the 17% overnight exposure to Iceland.
In his view John Aspden, CEO of the FSC misunderstood the resolution passed by the Board; and he reiterated he had “little tolerance for poor management”.
He stated that in March 2008 the UK bank had £1.8b at risk with Iceland and with the ‘swap’ arrangement the IOM had a 17% exposure to that risk. Therefore, for the FSC to suggest there was no exposure to Iceland was “fatuous”.
He bluntly stated KSF (UK) breached the conditions it was set and went bankrupt.
So why was it allowed to happen he asked rhetorically.
He claimed the exposure was well known, and it was untrue for Mr Dougherty, the MD of KSF (IOM), to say there was no exposure; and the FSC knew as well.
Not for the only time he described the management as “amateurish” and added it was “really unacceptable”.
He said he called the bank and was assured his money was 100% safe, but a couple of days later, still unhappy with the situation, he drove to the Island to look someone in the eye when they told him the position.
If he was prepared to do that to protect his money and family, why didn’t someone from the IOM get on a plane and fly to London to do the same. Instead they relied on “a silly piece of paper”; as he referred to the MOU between the FSC and FSA.
He was really critical of the FSC, saying they should have had proper structures and a legal agreement in place. He said he wouldn’t put up a £1b building based on a MOU.
“Amateurish, very amateur” he repeated, saying they just waited for a phone call.
He put to the Committee the IOM part of Kaupthing was a very small part of the empire, a part which was expendable, and if the directors had not understood that, then they shouldn’t have been in their jobs. In his view they should have known they were expendable and planned a strategy to deal with it.
As for the “questionable” parental guarantee, based on what he knew now, it didn’t surprise him; but he still wanted to know who checked the legitimacy of it. He suggested there should be a paper trail that could be checked; and if no ‘due diligence’ was carried he wanted to now why not.
He said he had plenty of experience of being sent to investigate issues when they had gone wrong and 80% of the time the problem was due to “dysfunctional behaviour”; people trying to ingratiate themselves with the boss, or protecting their position etc. In his opinion this is the situation with the failure of KSF (IOM).
“Castigation is needed of the directors and the FSC”, he stated, adding it is implausible that they didn’t know of the problems; as after all a crisis was going on.
He referred to a “panicky email from a lady” saying they didn’t know what was going on but the management was in with the lawyers. He thought it meant everything was okay; they are getting the problems sorted, perhaps negotiating a loan from the Treasury. After all the IOM has a £150b financial services industry and it was only a “tiddly bank”, but a successful one, they needed to save – although he sarcastically added his cat could probably have been just as successful in the boom conditions that had previously prevailed.
Whatever, in his mind the management should have been able to do something as that was what they were getting paid for. They should have controlled the situation.
He compared the FSC with the FSA in the UK, who he claimed acted when necessary in a ruthless fashion, but it didn’t seem to matter that the FSC is also independent and could also have sought a ‘marriage’ or some other scheme to save the bank before it failed.
From his knowledge and experience in business all the real work and deals are struck over a “beer or a dinner”; so why didn’t they get on the phone and arrange for people to come to dinner.
He said some of the depositors, including some pretty high flyers, had themselves put a workable proposition together to save the bank in a matter of weeks, and it had been put to Allan Bell; and he felt it hadn’t gone through because someone didn’t want it to. In fact he had been so angry at one point he nearly chucked a chair through a window at the Sefton Hotel.
He said the SOA proposed by the Treasury was simply “liquidation with a fat fee attached”, but he didn’t blame Mr Bell as he didn’t think he had thought that was what he had in mind.
Concluding his tirade, Mr Thomas said he didn’t want “vengeance but accountability, above board accountability”, and added in his experience he had never seen anything so bad anywhere else.
Mr Houghton thanked him for his “very helpful contribution” and commenced his questioning of what went wrong and what could have been done differently.
Mr Thomas felt if there had been political will a rescue could have been agreed by Tynwald in 24 hours; and that when things started unwinding the FSC should have been on the phone to the bank: “Aidan get down the pub” and got the matter sorted.
Mr Lowey put it to Mr Thomas that he didn’t think much of the FSC; to which Mr Thomas responded, “Not a lot”, and added they should not have been making statements like the one about “no exposure”.
Mr Lowey wondered if it was necessary to check every document for validity.
Mr Thomas responded by saying it was a matter of ‘due diligence’ and it was something the directors should have made sure of; and possibly even the FSC, the Treasury and the Attorney General’s chambers. In particular, the parental guarantee should have been checked he impressed upon the Committee.
In respect of the agreement between regulators, although Mr Thomas was of the opinion a legally binding agreement should be in place, ultimately he felt it is up to the FSC to make its own mind up about a matter and not just rely on what it is being told by another regulator – as they don’t always tell the truth. He believed that this is part of the regulator’s duty.
Committee secretary, Roger Philips put it to Mr Thomas the arrangements between the regulators had worked before; but Mr Thomas said he “didn’t care as it didn’t work here”.
Mr Philips, perhaps trying to offer a fig leaf of a defence for the FSC, suggested the matters may have been unforeseen; but Mr Thomas was having none of it. He again was dismissive of the reliance on a MOU and once more said they “should have got on a plane”.
Mr Watterson wondered if Mr Thomas was levelling an accusation of incompetence against the officials involved in the affair; but Mr Thomas rebuffed this by saying he hadn’t said that yet. He pointed out people were being a paid a lot to do their job, but the simple fact was the bank failed and it has caused a lot of people a lot of distress.
Asked about when the directors should have moved the money, Mr Thomas should have moved it when the credit rating were down graded; and went on to say “when the markets sniff blood they go for it”. He admitted he had overlooked this when he later made his deposit; and having learnt from the experience he would now be much more diligent in deciding where to put his money.
He guessed they may ask him if he would put money in the IOM again, so pre-empted the question by saying he would if the Island did the right things; i.e. learns lessons from the experience and puts better systems in place.
Now nearing the end of the session Mr Watterson inquired of Mr Thomas if he had any suggestions for the Committee.
He indeed did, constructively saying they should be “more alive to what is going on around you, use the people you have, look round corners, it has been a bad situation – learn from it”.
Mr Watterson said he would make the same offer as he had to Dr Downs and asked if he had any questions for the directors and the FSC to send them to the Committee.
Waving a sheaf of paper Mr Thomas thanked Mr Watterson and said “here have some”.
In concluding his evidence, Mr Thomas said he too is human but what he is asking for is “openness and accountability”. He wasn’t expecting a “hanging” but if nobody owned up to their mistakes if would not be good enough. In his opinion it is easier to admit to mistakes than to live with the guilt.
The Manx Herald wonders if it will be a cathartic experience for the directors and officials of the FSC when they next appear before the Committee. Some how we doubt it.