uti.is 03 May 12: Tchenguiz, Kaupthing and the SFO

The SFO’s troubled investigation into the Tchenguiz brothers and their relationship to Kaupthing has been getting some attention in the UK press recently. Last Sunday, Simon Bowers at the Guardian wrote an excellent and well-informed article on SFO’s trouble. Yesterday, the FT took up the same topic, explaining in detail what it was that the SFO had messed up.

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It’s necessary to keep in mind that Kaupthing (as well as Glitnir and Landsbanki) did, time and again, issue loans to their favoured clients with insufficient or no collaterals. That was the rule, rather than the exception when lending to favoured clients with whom the bank frequently also co-invested.

It’s more than unfortunate if the SFO has spoiled its own case by tackling it from the wrong end. It may be hard to understand that Kaupthing knew of the inadequacy of the collaterals because it beggars belief that a bank would lend on these terms – but then, that’s no excuse because an investigation is about doing things properly and not let beliefs and suppositions get in the way.

However, the question that the FT doesn’t ask, quite amazingly, is: if Kaupthing knew the collaterals were pretty much useless and worthless to Kaupthing, why did it ever accept these collaterals and issue the loan to Vincent?* Though the SFO misunderstood or mishandled some relevant material to begin with it might still be asking the right questions – the central questions regarding the nature of the relationship Kaupthing had with its clients.

* This is also an issue for Kaupthing’s auditors to contemplate – were they aware of the loan covenants in this loan and other similar loans? – The FT has seen an SFO statement presented to the courts against the Tchenguiz brothers. The statement is not in the public domain but I would be very interested in reading it, in case anyone has a copy.

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