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Iceland’s Breaking Bad

In a hodgepodge of squat low slung single storeyed buildings, which were built more for function than for aesthetics, sit some of Iceland’s finest bankers. According to a March 2016 Bloomberg article titled “This Is Where Bad Bankers Go To Prison” by Edward Robinson and Omar Valdimarsson, Kviabryggja Prison is a converted farmhouse nestled in between the frigid North Atlantic ocean on one side and fields of bare, unyielding lava rock on the other. Sigurdur Einarsson who was the chairman of Kaupthing Bank, Iceland’s largest bank before the 2008 financial crisis, and Hreidar Mar Sigurdsson who was the bank’s former chief executive officer were convicted of market manipulation and fraud leading up to the collapse of the former top bank.

The same article highlights that they are kept in the good company of Magnus Gudmundsoon who was the former CEO of Kaupthing’s Luxembourg unit and Olafur Olafsson who was the second largest shareholder in the bank at the time of its demise. The dream team is serving sentences up to five and a half years, which may be low in criminal conviction terms but huge in a global financial industry that saw not a single individual jailed in the United States or the United Kingdom for misdeeds arising out of the greed derived financial crisis. Starting in 2010, the special prosecutor for the Iceland banking cases had successfully prosecuted 26 banking officials by March 2016.

Following deregulation in the early turn of the 21st Century, Iceland’s top 3 banks had accessed European money markets and borrowed €14 billion in 2005 alone, which was double their intake in 2004 and paying 0.2% over benchmark interest rates. The banks lent the funds back out to Icelanders at high interest rates, raking in huge profits. Flush with easy credit, Icelandic households bought flats in London, took shopping trips to Paris and jammed Reykjavik’s streets with Range Rovers. By 2008 the banks’ assets had swollen to ten times the Icelandic $17.5 billion economy. Once the 2008 financial crisis hit, the Icelandic banks lost their short term funding and could no longer service their own debts. The local currency’s value fell, making loans denominated in foreign currencies more expensive and leading to the top 3 banks defaulting on more than $85 billion in debt and households losing more than a fifth of their purchasing power, conclude Robinson and Valdirmasson.

Further south in the Atlantic Ocean, Ireland joined Iceland as the only other country to criminally convict bankers for their pre-financial crisis misdeeds. According to a July 2016 article in the Irish Times by Ruadhan MacCormaic, three former bankers were jailed for terms ranging from 3.5 years to two years for their roles in a €7 billion fraud at the height of the financial crisis. Willie McAteer and John Bowe from Anglo Irish Bank and Denis Casey the former CEO of Irish Life and Permanent (ILP) were involved in setting up a circular scheme where Anglo moved money to ILP and ILP sent the money ban, via their assurance firm Irish Life Assurance, to Anglo. The article describes further that the scheme was designed so that the deposits came from the assurance company and would be treated as customer deposits, which are considered a better measure of a bank’s strength than inter bank loans. The sham transactions were aimed at demonstrating that “Anglo Irish Bank had €7.2 billion more in corporate deposits than it had.”

Kenya stands head and shoulders with its Icelandic and Irish banking counterparts who have had executives accused of market manipulation and fraud. Some shareholders and executives of Imperial Bank and Chase Bank have been taken to court by the Kenya Deposit Insurance Corporation for corporate malfeasance. However, these are civil suits aimed at recovering the money and levying monetary penalties rather than extracting criminal convictions for actions that have caused manifest pain and suffering to both depositors and genuine borrowers. These cases may drag in court for years as history has shown us, rendering very little present value vindication to those suffering today. But for what it’s worth, it’s a good start and a large prick on the conscience of many Kenyan bank boards today.

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Too Big To Fail-A Lesson From Deutsche Bank

[vc_row][vc_column width=”2/3″][vc_column_text]“We enable our clients’ success by constantly seeking suitable solutions to their problems. We will do what is right—not just what is allowed.” That is the classic statement of values from the Deutsche Bank website. In case you missed it, one of the world’s largest and oldest financial institutions has been lurching from scandal to scandal over the last few years and hammering a rusty nail into the coffin that is the “too big to fail” theory. The scandals have occurred largely in the last ten years of its nearly 150 year history and range from artificially propping up housing prices in the 2007-2008 financial crisis to participating in the notorious Libor scandal, to covert spying and espionage of its critics, to doing dollar denominated business with the US sanctioned countries of Burma, Libya, Sudan, Iran and Syria.

There’s not enough space or regulator imposed penalty dollar signs that can efficiently cover those malfeasances on this page, so I’ll focus on just one that makes short shrift of their statement of values. In the early days of 2015, an internal investigation dubbed Project Square that was looking into Deutsche Bank’s Moscow office trades revealed that a 36-year-old American trader Tim Wiswell had overseen over $10 billion of mirror trades that helped siphon cash out of Russia and mainly into London.

The concept was beautiful in its simplicity. An online article on Bloomberg titled “The Rise and Fall of Deutsche Bank’s ‘Wiz’ Kid” outlines the grab-a-bag-of-popcorn-for-the-drama narrative of how Tim Wiswell – Wiz to his friends – brought down the Moscow investment banking unit of Deutsche Bank. Wiswell’s desk, which never had more than a dozen or so employees, carried out thousands of mirror trades over a four year period. The size of the trades would be not too high as to raise an inordinate amount of eyebrows, somewhere in the range of $10-15 million per transaction.
Wiswell, who was promptly fired once Project Square was released, sued the bank for wrongful dismissal and lost. He claimed that at least 20 of his bossed and colleagues, including two supervisors in London, knew about the trades because they were carried out openly. The counterparties were also taken through “strict vetting” by the sales team using a compliance framework that was reviewed in both Moscow and London if any issues were identified. They all passed muster.
But how long had the compliance teams within Deutsche Bank been sticking their heads in the sand? The August 29, 2016 issue of The New Yorker magazine provides a well-written investigative piece on the $10 billion scandal. According to the article, on one day in 2011, the Russian side of a mirror trade, for about $10 million, could not be completed as the counterparty, Westminster Capital Management, had just lost its trading license. The Federal Financial Markets Service in Russia had barred two mirror trade counterparties, namely Westminster and Financial Bridge, for improperly using the stock market to send money overseas. The failed trade was a problem for Deutsche Bank, the New Yorker argues. It had paid several million dollars for stocks without receiving a cent from Westminster. The episode should have raised serious suspicions – especially given the revoking of Westminster’s license – but apparently it did not. The failed trade was resolved over a year later in November 2012 when Westminster repaid Deutsche Bank and the mirror trades continued.

But the patterns of suspicious activity were wagging their tails for the average compliance eye to pick up. Clients of the mirror trade scheme consistently lost small amounts of money: the differences between Moscow and London prices of a stock often worked against them and clients had to pay Deutsche Bank a commission for every transaction. The apparent willingness of counterparties to lose money again and again should have sounded an air raid alarm that the true purpose of the trades was to facilitate capital flight. The counterparties for the mirror trades were not owned by Russian oligarchs. They were brokerages run by Russian middlemen who took commissions for initiating mirror trades on behalf of rich people and business eager to send their money offshore, the New Yorker reveals further. A businessman who wanted to expatriate money in this way would invest in a Russian fund like Westminster, which would then use mirror trades to move that money into an offshore fund. The offshore fund then wired the money, in dollars, into the businessman’s private offshore account. An internal research report by Deutsche Bank titled Dark Matter, and which was totally unrelated to the unraveling scandal in Russia, revealed that Britain had significant unrecorded capital inflows. Since 2010, wrote the research duo of Harvey and Winkler, about a billion and a half dollars arrived in London every month and a good chunk of it was from Russia. “At its most extreme, the unrecorded capital flight from Moscow included criminal activity such as tax evasion and money laundering.” A month after this research report was released to much media debate, the $10 billion scandal broke out, revealing exactly how another department within Deutsche Bank played a big role in that economic anomaly. Of the eighteen billion dollars that the researched had estimated was flowing into the UK each year, about 20% had arrived there as a result of the trades made at their own bank. Deutsche Bank is now facing billions of dollars in penalties, at the last count they were fighting off a $14 billion penalty from the Department of Justice in the United States for mis-selling mortgage securities in the run up to the 2008 financial crisis. This is against a provision that they have made for $5.6 billion for legal costs related to all the scandals they are currently facing. The share price has of course tanked and analysts are concerned about its viability as a going concern if these penalties are exacted, as they’d have to go back to shareholders to raise the cash for making the penalty payments.
I’ve written about Deutsche Bank’s value statements today, and Wells Fargo value statements a few weeks ago. I’m sure if we dug deep within the bowels of Imperial, Chase and Dubai Banks locally, we would find a value statement or two posted proudly at the head office reception. I’m starting to build a healthy cynicism for value statements of any kind. If anything, banks should have a uniform statement globally: “We’re here to take your money, use it, make our money and hopefully give you a return. Someday”

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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]