15 October 2008

Cornwall county council has about £5 million in the troubled Icelandic bank Landsbanki and is putting a brave face on this: it is only a small part of the council’s £360 million invested money and the council has a sound policy of spreading its funds around different institutions to minimise the risk. The council’s 9 October 2008 statement is here .

The statement says that Cornwall’s investment in Landsbanki was made “in June 2008” after a “comprehensive check on the credit rating” of the bank; that is, Cornwall county council made a thorough assessment of the risk of investing in it. The council says that at that time the bank had a “high credit rating.”

This sounds most responsible.

Now read these reports which suggest that there had been warnings, including from the credit rating organisations, about the Icelandic banks for some time before June 2008 though none deals specifically with Cornwall:

Times 21 November 2007.

Financial Mail/ 16 March 2008 (with a follow up the next week which gave the credit default swap score – the market’s view of riskiness – for Landsbanki, though credit default swap scores are volatile).

Daily Telegraph 9 October 2008.

Sky News 11 October 2008.

Note the date of the Times comment: November 2007, well before the county council’s investment. It says that Standard and Poor’s agency downgraded the outlook for Iceland from stable to negative.

Note too that the Financial Mail says of Landsbanki and Kaupthing “these banks are now seen as the most unsafe in the developed world.” Note too when it was said: 16 March 2008, several weeks before the county council invested in Landsbanki. This is especially concerning.

This month Sky News says that Fitch, a credit rating organisation, highlighted the risk of investing in Icelandic banks in April 2008; the Daily Telegraph says that some local authorities did heed warnings about investing with Icelandic banks and that Moody’s downgraded Landsbanki in February 2008 and that Standard and Poor’s had highlighted since February 2007 (sic) “a growing risk about the Icelandic banking system.” Two other financial advisory organisations warned their clients about the Icelandic banks.

Tellingly, this summer in the House of Lords Matthew Oakeshott asked about the “solvency and stability” of the Icelandic banks that were taking deposits in Britain (Lords Hansard 15 July 2008 column WA131).

In contrast, however, to these signs this report of 14 October 2008 by the Local Government Association (LGA), defending local authorities, carries a summary of the reports of the credit rating agencies about the Icelandic banks which suggests that the banks were receiving acceptable ratings, though, as I have shown, there were general warnings too. On 30 September Fitch downrated Landsbanki, which I see as an absolutely clear warning to get out unless tied in by a fixed-term arrangement.

The LGA has called for an inquiry into how the agencies gave the high ratings they did to the Icelandic banks up to a few days before the collapse. This is right; there should be an inquiry and it is in the interests of public authorities and the agencies themselves that this issue is fully explored and explained.

This is a tangled tale with apparently contrary views about the banks. To my lay eyes there were warnings and acceptable credit ratings and I would expect an expert to fathom the apparent dissonance.

The county council should now give detailed and transparent information about the exact basis for its investment in Landsbanki and here are some questions that will help sort out what happened:

1 From whom did Cornwall county council seek and receive views about Landsbanki and other banks before investing in Landsbanki in June 2008?
2 What specifically and fully were those views it received about Landsbanki?
3 Was the council aware of the warnings about Icelandic banks, including Landsbanki, before it invested in Landsbanki?
4 If so, why did it ignore them?
5 If it was not aware, why wasn’t it?
6 Did Cornwall try to withdraw its investment from Landsbanki after the bank was downrated on 30 September? If not, why not? If so, what happened?