KSF holding company non Exec Director was shocked by collapse of bank
Trevor Foster, Former Head of Banking at Kaupthing Singer & Friedlander (UK), and non Executive Director of the IOM Holding Company, has told the Tynwald select committee, investigating the bank’s demise, of the shock he felt when he learned the bank was effectively gone.
In a similar vain to the evidence given by KSF (IOM) directors, Donald Gelling, John Cashen and Aidan Dougherty, Mr Foster seemed to think, right up to the last moment, KSF was going to ride out the difficulties being experienced by other Icelandic banks; and that business would more-or-less continue as normal.
Mr Foster explained he had even gone home on the Tuesday evening expecting to come in on the Wednesday morning and carry on planning for the future of the bank.
Therefore, he said, it came as complete shock to learn the UK Treasury had “assigned the deposit base to ING” and had thus become a creditor of the bank.
When asked later, as a final question by committee Chairman, Juan Watterson MHK, what lessons could be learned from the collapse, or what could have been done differently; Mr Foster replied, KSF (UK) had become “collateral damage” as a result of issue between the UK Treasury and another Icelandic bank (Landsbanki).
He also suggested it was really for the committee to answer the question; but still inferred a lot of the blame for the collapse resulted from the loss of confidence in the banks. He acknowledged his response did not contain much wisdom.
Mr Foster had commenced his evidence by saying, after 33 years in banking - the final 3 at KSF - he had been saddened by being made redundant by the London administrators a year ago; and as a result had decided to take a break from banking. However, he said he wanted to give whatever help he could to the committee.
He gave a brief résumé of his career and qualifications and explained his role at KSF; which included responsibility for the banking book, risk management of lending approvals and being a member of the credit committee.
He told the committee KSF (IOM) had been a small, but important part of the Kaupthing Group (more of which later) and was mainly a deposit taker rather than a lending business. However, he said lending had grown through the development of the private banking business. One of his key roles was to help support the development of the business under Kaupthing; and he said he had taken over further responsibilities for some of the assets when a colleague resigned - apparently only a short time before the bank collapsed.
However, he travelled to the Island infrequently and, although he was a link to Mr Dougherty, most of the day-to-day contact with the IOM was conducted by the bank’s London and Iceland treasurers.
Asked about the change in legal structure, with KSF (IOM) becoming a direct subsidiary of Kaupthing, Mr Foster thought it was for taxation reasons; but not for the only time said he wasn’t involved in the detail.
Mr Watterson wanted to know what discussions bank officials had held when the Financial Supervision Commission (FSC) had become “jittery” about the bank’s exposure to Iceland.
Mr Foster replied the executive directors had been “vigorous and robust” in their desire to reduce the exposure and he understood, as he hadn’t been involved in the detail, they had discussed how to achieve this aim.
He suggested by transferring the assets to London, whilst the liability had switched within the group, the group’s liquidity had not been affected.
This seems to have been the crux of the matter, and it soon started to become clear as to why the directors were so keen to keep the money within the group rather than place it elsewhere.
Mr Foster said it was important for the committee to understand what the reasoning had been for the decision in May 2008.
He said from September 2007 the financial situation had been “tightening” in London with “liquidity coming under pressure” so a balancing act was having to be performed. So in May 2008, from the perspective of the group, who were trying to ensure liquidity was kept under control, getting an agreement with the IOM authorities that didn’t reduce group liquidity was very important to them.
So this was where the REPO came in, Mr Watterson interjected.
Eddie Lowey MLC, explained to Mr Foster what he may have to say may seem unsophisticated and banal, although it seemed he was hitting the nail on the head, when he said the London bank appeared to be using the cash from the IOM to prop up its liquidity. He wondered how the ‘up-streaming’ could have been allowed to another subsidiary and how this could have reduced the IOM subsidiary’s exposure to Iceland.
In response he was informed the London bank had its own balance sheet, therefore, in terms of the UK bank’s liquidity position and the pressure it was under, he thought the balance sheet position and liquidity had become stronger. Effectively what the bank was doing was using the retail deposits to ‘replace’ the money they would normally have acquired from the commercial markets - but which had dried up.
Mr Frost went on to say he couldn’t provide an answer as to why the FSC thought this arrangement was okay but from KSF (UK)’s point of view is was important for them to have a basket of deposits, of which the IOM’s formed part; and, as of the end September 2008, he thought the bank’s cash position was strong.
This didn’t totally satisfy Mr Lowey, who pointed out the London operation was still part of the group, and inquired if Mr Foster thought it “out of the ordinary” for the IOM’s cash to be used in this way.
Mr Foster maintained from the London bank’s perspective it was a good move because they were trying to “stand alone” from the parent bank; but conceded that sometimes when the ‘child’ suffers the parent does too, and vice versa.
Questioned about the size of the exposure, whether it was around £120m-£150m and if a guarantee was in place; Mr Foster said he wasn’t sure, but whatever the amount was it would only have been a small part of the balance sheet.
John Houghton MHK joined in with the questioning and inquired about the movements of money. Mr Foster replied the IOM’s was controlled from the Island, the UK’s from London and he had been involved at the London end when his colleague resigned.
Mr Houghton suggested his resignation was “timely” and asked what the reason was.
Mr Frost thought it was stretching it a bit to suggest the resignation was carefully timed and said he believed it may have more to do with the fact his colleague had moved from the position of Head of Wealth at a significantly larger organization and perhaps the more “hands-on” nature of his role at KSF had “not suited him”.
In his opinion had the bank been well run, inquired Mr Houghton; to which Mr Foster replied he thought it was.
Asked about any involvement in the ‘rebooking’ of funds back to Iceland; Mr Foster said he was not.
Mr Houghton then asked if he thought he had been adequately involved; and Mr Foster thought he was.
But should he have been involved more, was Mr Houghton’s next question; and again Mr Foster thought his involvement had been adequate; and even if he had been he didn’t think he “would have asked any harder questions”.
When asked by Mr Watterson if he had seen the REPO agreement as part of his responsibilities, Mr Foster replied he hadn’t but he knew what it was.
“We have been told all was going well until dramatically it wasn’t”, said Mr Watterson and put to Mr Foster an “away day” had been arranged for the 29th September - so was the bank planning for “business as usual”.
Mr Foster explained it wasn’t so much a meeting to plan for future growth as discuss the fact it was a “tough world” out there and how they had done a “good job in London”. Profit was good, he said, the liquidity position was better and they had a sizeable amount of cash on deposit with the Bank of England.
“£1billion”, suggested Mr Watterson; maybe higher, replied Mr Foster. He went on to say the meeting was more about where the bank’s priorities lay; and he personally was looking at taking on greater responsibilities which was the key point for him. However, the day didn’t last as long as expected as they were interrupted to be given the news about Glitnir being part nationalized; and so the meeting concluded early.
The next day was all about the impact of this news, with 15 minute up dates being put out on Sky etc, and the airplay being given to other banks.
“The 29th September to the 8th October was not a long time in life but it seemed a long time at the time”, he told the committee. By the end of that week, he said, they were reflecting on the fact they got through it; but the weekend press is “always interesting” he added.
So they came back after the weekend believing their position wasn’t too bad, even if the press coverage had been “difficult”. He had a meeting scheduled regarding asset management for the 6th October and thought by the end of the day concern was rising about the Edge deposits. Furthermore, Landsbanki was coming under greater pressure and he recalled “the general feeling was it would not last the week”. In fact the Chief Executive had remarked Kaupthing would be the only Icelandic bank left.
Mr Watterson put it to Mr Foster that there was a leakage of funds from the bank and inquired what was being done to monitor the situation.
Mr Foster, starting slightly off track, explained the Icelandic PM had been on TV appealing for help, and there had been the suggestion help may be on the way from Russia. So from an IOM and London perspective, he went on to say, the Treasurer had observed the day had been difficult, but they got through it, and Tuesday was a new day.
They were still focusing on asset management and during Tuesday they believed the support of the UK’s Treasury and FSA had seen them through again. So he was going in on the Wednesday to carry on but everything changed with the decision over Landsbanki; and the process that followed.
Mr Watterson wondered if Mr Foster felt there had been a breakdown in internal communication as to what had been going on; to which he said, on reflection, the communication between him and the Board had been “pretty low”. However, he thought that the management and Board had probably wanted to keep confidence up by keeping “communication tight” and as he had not been part of the “inner circle” he wasn’t kept in the loop in regards to what was happening.
So as an IOM non-exec director, had he done an effective job, inquired Mr Watterson.
He obviously thought he had, and put it to the Board even if KSF (IOM) had asked for its money back on the Monday, not that he knew if they had tried, it would have been difficult to achieve.
Mr Watterson said he believed they had tried; but Mr Foster replied if they had he didn’t recall having a conversation with anybody from the IOM about it.
Mr Lowey put it to Mr Foster that, among other things, the bank had been under pressure, as well as being used as an instrument to help Iceland through the crisis, but taking all this into account the directors of the bank in the IOM seemed unaware of the turmoil in London and inquired if they had even asked any questions.
Mr Foster said he wasn’t aware on any communication between 29th September and 8th October, but stood to be corrected. In terms of a run on deposits, he was well aware a compensation scheme was in place on the Island and it had been increased to £50k. He even believed a lot of depositors with over £50k at stake had spread the risk across several banks.
So would it have been unreasonable, asked Mr Lowey, for the ‘local boys’ to have asked London about their money.
Mr Foster replied that “to the best of my knowledge the local management treated their responsibilities very, very seriously”. He said the information the IOM management would have been privy to would have been current up to the end of September; so if they had asked London he anticipated what they would have been told would have been positive.
So had he been unaware of the special account set up by the UK authorities prior to the knowledge of it becoming public, inquired Mr Watterson; and, if so, would he have expected to be informed?
No he hadn’t known and he was very disappointed when he found out, was the response of Mr Foster.
There are had been two weeks of talks between Iceland and the FSA, said Mr Watterson, so it came as a surprise to you.
Mr Foster replied that he had been thinking about this as well. If he was being generous he thought one week was the week prior to the 29th September, and the second being the week the bank collapsed; so perhaps they had been attempting to keep communications limited to help keep confidence up. Certainly he hadn’t been party to any of the discussions.
Reverting to the matter of the parental guarantee, Mr Watterson put it to Mr Foster it was limited to being between Iceland and the IOM.
Mr Foster said he did not really recall as his focus was on matters between the IOM and London so he did not know the relevance of the guarantee to Iceland.
Asked about the level of due diligence that may have been applied to the taking of the guarantee; Mr Foster it was difficult to comment as it had been before his time.
Mr Houghton inquired if he had thought the directors had failed to fulfil some or all of their statutory duties; but Mr Foster replied that he had always found they took their responsibilities very seriously, and everything had been conducted in a formal manner. As far as he was concerned they had carried out their duties to the standard expected.
Bringing matters almost to a conclusion, Mr Watterson’s final question brought about Mr Foster’s ‘collateral damage’ comment; and it was left to Mr Lowey to make the last comment by the committee.
He wryly put it to Mr Foster was it now a case for him of “don’t put your daughter on the financial stage”.
Mr Foster responded by saying the events had had a “dramatic and devastating impact on depositors” but at least there is hope of a 95% recovery of deposits, a figure, to his knowledge, never previously achieved in the UK.
In affect he seemed to be suggesting this expectation of a ‘record’ recovery underlined the underlying strength of KSF and why it was so shocking and unexpected when the bank collapsed.
In conclusion he thanked the committee and reiterated he had wanted to come to the IOM, offer whatever help he could and have his say.