A couple of weeks ago, I sent a FOI request to Colchester Borough Council to try and find out some information about the £4m lost somewhere in Reykjavik. Below are the responses:

1. What financial advice was received by Colchester Borough Council on investments from 1st October 2007 until 10th October 2008?

CBC use Sector Treasury Services to inform our treasury management policy and strategy. This takes the form of half yearly meetings, monthly credit updates, ad hoc credit updates, ad hoc updates relating to all forms of treasury management.

2. What companies, individuals or government departments are responsible for advising Colchester Borough Council on financial matters?

CBC use Sector Treasury Services to inform their treasury management policy and strategy. In addition we comply with Government guidance and legislation on treasury management.

3. What councillors were aware of the large investment (or impending investment) made to Landisbanki before the 6th October 2008?

Under Treasury Management Policy documents, the policy and strategy is set by the Council and the implementation of this is delegated to officers. Under the current policy, short-term borrowing and investment is authorised by Council officers.

4. Who was present at meetings when the decision was made to make the investment? Copies of all relevant meeting minutes should be included, if available and possible.

There were no specific meetings relating to this investment, since it formed part of the day to day Treasury Management activity, delegated to officers. Members of the finance team discuss Treasury Management activity on a daily basis.

5. What was the purpose of the money deposited in Landisbanki - was it short term storage (e.g council tax receipts due to be spent) or long term investment/income?

The council has short term surplus cash mainly due to: timing differences as to when Council Tax & NNDR are collected and required to be paid over; S106 monies received but not spent; delays in Capital Programme spending. This investment was a short term cashflow one.

6. What credit rating agencies were used to judge risk associated with investments, particularly those made in Landisbanki.

The council uses data from Fitch (as supplied through Sector) or if no data is available from Fitch, then data from Moodys or Standard and Poors. The agreed Council policy sets out the total amount that can be invested with a counterparty and the maximum length of time that any monies can be invested. At the time of investment, Landsbanki had a Fitch rating of A, F1, B/C, 2. According to our policy, this meant that at the time of the investment we were permitted to invest up to £5M for up to 3 months.

Given these answers, I see two particular issues. Firstly, no Councillor was aware of the officers placement of £4m of tax payers money into an obviously dodgy bank. Secondly, and more importantly, said £4m was placed in the bank due to issues with short term cash-flow - that means that the Council had too much money coming in at once and had to put it aside to pay for future services. The question remains as to what will happen when they theoretically need to dip into the £4m to pay for services…..

When facing the prospect of being responsible for loosing £4m of tax payers money and asked where the money is now, what should the answer be? Should the local councillor, the Lib Dem Portfolio Holder for Finance Cllr Paul Smith, reply

Somewhere in Reykjavik, I suppose?

Is loosing £4m of tax payers money a laughing matter? One should point out that even though £4m sounds less than Kent’s £50 loss, relative to income, this is a critical blow to my new Borough. £4m is about 20% of the annual budget of the Borough Council and corresponds to a Council Tax rise of 3%!

As a result, I have put in my first FIO request to the borough:

To whom it may concern

I am writing to you under the Freedom of Information Act to request the following information with regards to the recent £4m “investment” in Landisbanki or one of its subsidiaries:

1. What financial advice was received by Colchester Borough Council on investments from 1st October 2007 until 10th October 2008?
2. What companies, individuals or government departments are responsible for advising Colchester Borough Council on financial matters?
3. What councillors were aware of the large investment (or impending investment) made to Landisbanki before the 6th October 2008?
4. Who was present at meetings when the decision was made to make the investment? Copies of all relevant meeting minutes should be included, if available and possible.
5. What was the purpose of the money deposited in Landisbanki - was it short term storage (e.g council tax receipts due to be spent) or long term investment/income?
6. What credit rating agencies were used to judge risk associated with investments, particularly those made in Landisbanki.

Whilst there are several requests for information here, these should be treated as individual and independent requests. They were collated into a single email for ease and convenience. If this email is treated as a single request and is above the £450 handling limit, separate emails will be sent containing the same requests.

I can be contacted via:
{my address}
All contact, including copies of the information requested, should be via email unless it is not possible. If you wish any clarification of the points, please do not hesitate to contact me.

Kindest regards,

Alan Drew.

It transpires that Colchester Borough Council has lost £4m, because of the many problems at the many Iceland banks. What’s more, according to Cllr Paul Smith, who is supposedly responsible for the finances, this money was only invested on the “1st or 2nd September”. Not only does he not know when he threw £4m of council payers money down the pan, it was obvious from as early as April there was a problem with the banks. There are several councils that withdrew money from the Icelandic banks, just as he made the decision to invest it! 

Just take a look at the following graph:

It shows you two things:

This councillor, the finance department that he is nominally in charge of and the incompetent administration that he represents, needs to be held to account. Yet when asked where the money is now, he jokes that it is somewhere in Iceland.

Just for the record, here is something that I have managed to dig up in the last hour of googling:

1. The Lib Dems (and Conservatives) knew about Iceland’s problem back in July:
Lord Oakeshott of Seagrove Bay here:
http://www.theyworkforyou.com/search/?s=Lord+Oakeshott+of+Seagrove+Bay+iceland

2. Some councils already acted and saved tax payers cash (this is a Conservative administration, although we should be careful as we have not been through the full list and idenified how many Conservative councils have lost out):
Brighton and Hove City Council, said it suspended transactions with one Icelandic bank - Kaupthing Singer & Friedlander - about a year ago amid concerns about the country’s banks expanding too rapidly.
“Our watchword is caution. We’re very aware of our responsibilities in managing taxpayers’ money, and are very careful both about who we invest with and how much we invest,” finance councillor Jan Young said. “We have no deposits with Icelandic banks.”

3. As far back as April, the cost of insuring the bank’s bonds against default rocketed:
http://www.ft.com/cms/s/0/162ac164-fb6a-11dc-8c3e-000077b07658.html

4. For the last decade, Iceland was deeply involved in the carry trade - meaning people would borrow in areas with low interest rates  to purchase assets in areas with high gain (Iceland). When the credit dried up, the investors had to unwind their positions, forcing Iceland (and their banks) into a slide. The carry trade was flagged up as dangerous when the credit crisis began a year ago. It was obvious that the banks were part of it:

“this decade [Iceland's] banking assets have grown at a speed rarely seen in the modern world. In 2000, the combined assets of Icelandic banks – mostly centred on Glitnir,Kaupthing and Landsbanki – were just below a year’s GDP. By 2006 they had risen to eight times GDP and the ratio i[n March was] thought to be near 10 times.”

5. The bank’s tier 1 capital (a measure of risk on the banks book, the lower the riskier) fell from 11.7% in 2006 to 10.1% in 2007 to 8.3% in July 2008.

6. Moody’s, the credit rating agency, in January 2008 made the following statement:
“Moody’s has concerns with regard to the Icelandic banks’ market-sensitive business model, in which the
majority of income is derived from investment banking- and corporate banking-related activities. Given the
difficult market conditions going forward, this could bring additional volatility to the bank’s earnings in 2008.
Indeed, the banks’ Q4 2007 results were already significantly affected by adverse market conditions,”

“In addition to the above-mentioned rating drivers, Moody’s decision to place the ratings of Landsbanki on
review for possible downgrade reflects the bank’s growing reliance on short-term Internet-based deposits
(Icesave) from overseas sources for funding the bank’s loan book. Landsbanki’s short-term Internet-based
customer deposits grew rapidly in 2007 and account for nearly 20% of total funding. Although growth in retail
deposits is in general viewed positively, Moody’s has some concerns related to the “stickiness” of overseas
deposits due to their relatively short history. ”

from http://www.glitnirbank.com/servlet/file/Moodys_30-01-2008.pdf?ITEM_ENT_ID=6860&COLLSPEC_ENT_ID=156

Fitch and Moody (credit rating agencies) have made the following changes to Landsbanki:
8.10.08 Fitch downgrade
8.10.08 Moody downgrade
7.10.08 Fitch downgrade
30.9.08 Fitch downgrade
30.9.08 Moody downgrade
21.5.08 Moody stable
9.5.08 Fitch stable
1.4.08 put on Fitch negative watch
3.08 put on Moody negative watch
28.2.08 Moody downgrade
30.1.08 Moody downgrade
22.11.07 Fitch stable
22.5.07 Moody stable

from http://www.landsbanki.is/english/aboutlandsbanki/pressreleases/?NewsID=13221

In March 2008 Moody’s, the rating agency, placed the Icelandic banking sector on negative watch and the banks’ credit default swaps, which measure the cost of insuring against default, have soared.