This week, more than five years on from the banking crisis, executives of the failed Iceland bank Kaupthing finally saw justice as four former bosses from the Icelandic bank were sentenced to between three and five years in prison for fraud. Whereas Iceland criminally pursed those individuals who took excessive risks, no such prosecution appears likely in the UK.
In October 2008 with news of Iceland’s banks collapsing amidst a bursting property bubble, a quiet scandal unfolded in the UK, as close to £1bn of taxpayer investments was announced to be at risk in failed Icelandic banks, across 123 public authorities.
It transpired that local authorities led by Kent County Council had been lured by obscure financial consultants Butlers, Sector and Stirling to place high stakes punts on Iceland with little regard for taxpayer losses on the downside. Brokers including ICAP run by Michael Spencer, and Tullet Prebbon led by Michael Fallon MP were also involved.
Some councils’ such as the London Borough of Barnet had been outright gambling, with £27.4 million of taxpayer funds earmarked for schools, transferred to Iceland to make a quick quid, ultimately resulting in the dismissal of Treasury Manager Patrick Towey and criticism of former Barclays banker and Council Leader, now Barnet MP, Mike Freer.
Fast forward to 2013, and the sobering reality is many UK councils are yet to be fully repaid the multi-million pound deposits they invested – putting continued strain on council budgets at a time of continued austerity and 35% budget cuts.
The closest we have come to recompense for the people responsible for losing taxpayer money Iceland is an announcement this week from CIPFA (Chartered Institute for Public Finance and Accountancy) that four council officers would be struck off for 12 months for “financial mismanagement” of council Iceland investments, which occurred more than 5 years ago. None of the private financial advisors who promoted Icelandic investments to Councils have been punished.
If we take a look at the 10 biggest local authority losses suffered in Iceland we note that a small number of poorly regulated financial advisors lost the majority share of public money. Those advisors were Butlers (£469.5m) and Sector (£313.5m).
Who are Butlers and Sector? Butlers were a subsidiary firm of ICAP, the inter-dealer broker run, by then Tory Party Treasurer Michael Spencer. During 2011, in a deal referred to the competition commission, Butlers exited the market and was bought out by Sector, itself wholly owned by a company well known to Barnet Council residents, the outsourcing firm Capita. Despite serious concerns including knowledge of ‘kickbacks,’ flagged by the Select Committee, the Competition Commission allowed the merger to proceed, in a deal that deserves further scrutiny given recent ICAP LIBOR rigging admissions.
Butlers and Sector both advised Barnet on Icelandic investments in 2007/08. ICAP, Butlers parent company was then executing trades – generating profits for the firm on both sides of the trades, creating obvious conflicts of interest in the process.
Arlingclose, the only independent advisor in the market in 2007/08 called it right on Iceland, and advised its public clients to pull their funds out 6 months before the banks collapsed. No taxpayer money was lost. Butlers was advising clients to Invest in Iceland just 7 days before the banks crashed. Despite these failures, following a series of mergers, Sector now have 70% market share, and Arlingclose (which merged with Stirling in 2012) 30%. No sense of market discipline or justice here.
The subsequent 2009 Commons Select Committee Inquiry into the Icelandic Banking Crisis called for an urgent inquiry into the Treasury Management Advisors who had instructed local authority clients to chase high-risk returns in Iceland, identifying systemic risks and failures within the industry, including poor FSA regulation and dubious oversight.
The Financial Services Authority failed to act on the Committees instructions to investigate Sector and Butlers, and thus far has failed to answer Freedom of Information requests as to the reasons why?
Tory Party Treasurer Michael Spencer was the leading party donor in 2009, as well as CEO of Butlers and ICAP. Michael Spencer is also the man at the centre of the ‘cash for Cameron’ lobbying scandal, who boasted of killing off a UK Robin Hood (FTT) Tax.
In 2007, Michael Spencer declared: “volatility is good for business.” ICAP specialise in interest rate hedging, so when rates are volatile (such as when LIBOR was manipulated by his own firm) ICAP directly profits as spooked clients seek the refuge of fixed interest rates.
During September 2013, Spencer’s firm ICAP were fined $87 million by US and UK regulators for rigging LIBOR, triggering criminal proceedings against three of the firms former staff.
Given both ICAP and Butlers were major players in serving public sector institutions caught up in the Iceland crisis, a natural question arises as to whether internal knowledge of LIBOR rigging, and the obvious profit motive drove ICAP staff to communicate with their Butlers colleagues, using inside LIBOR information to their advantage, when advising council clients executing deals via ICAP?
This is precisely the information we would have received from an FSA inquiry in 2009 – had they bothered to investigate.
2009 evidence from Martin Hickman, then consumer affairs correspondent at the Independent to the Select Committee states: “together advisers and brokers hold conference calls with local authority finance officers in which they (advisers and brokers) act in concert to give such advice.”
Hickman’s evidence suggests the so-called ‘Chinese walls’ meant to separate Butlers and ICAP staff from conflict of interest claims were effectively non-existent.
A further twist to the Butlers, Sector, ICAP tale emerged in 2013 when Joel Benjamin, local authorities campaigner with Move Your Money received an FOIA response from Barnet Council regarding the impact of LIBOR rigging on Barnet’s finances. Barnet’s response suggested LIBOR had “little or no impact” on council finances, referencing advice from their advisor – Sector.
Remember that in 2011, Sector bought out Butlers – then a subsidiary of ICAP over the period LIBOR was known to be rigged (2005 -2012), in an unravelling scandal described by Matt Taibbi as the “biggest insider trading you could possibly imagine”.
What does this mean?
Sector retains liabilities for any legacy issues associated with Butlers prior conduct. Some would consider it a potential conflict of interest, that Sector is now privately advising councils regarding the impact of LIBOR market rigging, in which its former parent firm ICAP actively participated!
The situation is especially perverse when one considers Barnet’s finance department is being outsourced to Capita (Sectors parent Co), as part of the ‘One Barnet’ outsourcing deal.
Should we trust Sectors advice that Barnet Council and other public authorities it advises lost no money due to LIBOR? Has the potential conflict of interest between Sector, Capita and Butlers advisory roles and ICAP’s involvement in the LIBOR scandal been declared to Council?
A pending FOIA request to Barnet council means we may soon find out the answers…