Who’s to blame for Daventry’s £8 million Icelandic investment blunder?

A recent government Audit commission did not include Daventry Council in the list of local authorities singled out for special criticism over their timing of making large investments into Icelandic offshore banks.

Steve Bundred, of the Audit Commission, said when referring to seven authorities in particular, “More care should have been taken when warnings were issued. It was widely known by the end of September 2008 that the Icelandic banking system was in crisis. This was several weeks after the collapse of Lehmann Brothers that triggered the global banking crisis, and councils should have been much more cautious at that point.”

Local Government chief executive, Tony Hunter, said, “The banking crash in Iceland had been a salutary lesson for the council. What the Audit Commission’s report does is rightfully and helpfully draw attention to what we and a number of other councils across the country need to get right.”

Any hope of Daventry’s council leaders recovering the £8 million pounds they invested into four banks, Landsbanki, Heritable, Glitnir and Kaupthing Singer Friedlander, still rests firmly on actions taken by our government.

Eva Joly hired as special advisor to the Icelandic Government who is trying to trace where money from Daventry and other UK investors has gone, claims the investigating team is a joke with only four people actually working on the investigation. Icelandic newspaper Morgunbladid,says it has loan books from Kaupthing Bank, one of the banks used by Daventry Council, and over 400 million dollars were loaned to companies located in Holland and the Tortola island, part of the British virgin islands. Some of the loans are directly to the owners and/or relatives of the owners.

Unforseen changes in global banking

In their statement released last month Daventry Council confirmed the towns £8 million remains frozen and at risk – pending the outcome of legal recovery action. “Following the unforeseen and unprecedented changes in the global banking market and sudden collapse of the Icelandic banks in October 2008, a comprehensive review of the Council’s investments and treasury management practices was called for by Council management from its internal auditors. The findings were reported to the Council on Thursday, February 26, 2009.”

Three breaches of councils own rules

In the report they acknowledge three of the loans amounting to £4 million had not met the Councils own credit rating criteria saying, “At the time of the investments in June 2007 and June 2008 the banks had been assessed by independent experts as having credit worthiness ratings of at least ‘high credit quality’ or ‘good credit quality’.” Council leaders and senior managers were not told of the three breaches of the Council’s own investment criteria until after media briefings had been given in October 2008, following the collapse of the Icelandic banks. In these briefings, public assurances were given that all investments had been made in accordance with the Council’s criteria.

Councillor Chris Millar, Leader of the Council, said: “We have scrutinised the handling of Council investments in the aftermath of the global financial chaos. The credit ratings of the Icelandic banks, given by independent experts, were of high or good credit quality when all Council transactions were made and can therefore not be interpreted as bad investments at the time. However, three transactions did not meet the Council’s strict criteria when they should have done and a significant sum of public money is now exposed to unnecessary risk of non-recovery. Whilst we already had some of the strictest criteria, we have tightened up further. I apologise on behalf of the Council for the fact that policies and procedures were not complied with – this is now subject to separate investigations.

“Like the other 122 councils affected, lessons have been learned from the Icelandic banks collapse and recommendations from the review have already been acted upon and implemented. Our review has identified that breaches arose from mainly administrative and supervisory management errors when applying the Council’s investment criteria. The Council’s Managing Director and Chief Financial Officer continue to address these.”

Full apology

Daventry District Council’s Managing Director Simon Bovey said: “I must apologise for the fact that Councillors and Directors were not advised about known breaches of the Council’s criteria before we informed the public, via the media, of our position in the immediate aftermath of the collapse of Icelandic banks. The internal review left no stone unturned and we believe that the recommendations made, which have been acted upon, will ensure more robust and effective procedures are in place in these difficult unpredictable times. I have also appointed internal and external investigators to advise if it is appropriate to pursue any formal disciplinary action in respect of the breaches.” The Council is continuing to work with the Local Government Association, which is supporting and co-ordinating the recovery actions of all affected councils with the Icelandic banks’ receivers and administrators. (See idaventry Comment page)