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Collapsed Icelandic Bank Loses Legal Challenge over Trades

The bank says the ruling will reduce “expected recoveries” and will also result in additional expenses for the group, which is winding up.

  • Joe McGrath

A British high court judge has thrown out a legal bid by the group rebranded from the failed Icelandic banking group Landsbanki Íslands HF to recoup cash from trading positions it claimed were incorrectly valued when a trading partner sold them after it collapsed.

Landsbanki is one of three Icelandic banks that defaulted during the global financial crisis due to an inability to refinance short-term debt and a run on deposits in the Netherlands and in the UK. The scale of the Icelandic banking collapses, relative to the economy, was the largest experienced by any country in economic history.

The group — rebranded as LBI after it became insolvent and taken over by the Icelandic regulator — challenged the valuation of open positions in repurchase agreements and securities lending trades made between it and Austrian banking group Raiffeisen.

LBI claimed the valuations were not representative of market value. In the court judgment, the overall value of trades was said to be in the region of €74.6 million ($80 million). The claim pertained to trades made between the two parties in October 2008, when LBI collapsed.

On October 7, 2008 — the date LBI collapsed — Raiffeisen made the decision to terminate the trades after LBI said it was “unable to make any payments today.”

Benjamin Pilling and Edward Jones, legal representatives for LBI, argued that a standard valuation process of assets should take place, “regardless of counterparty impairment.” They went on to outline several legal and financial contexts which, they contested, should have informed the interpretation of the phrase “fair market value.”

However, Raiffeisen’s legal representatives, Guy Phillips and Richard Power, argued that the collapse of Lehman Brothers a month earlier had informed how Raiffeisen’s team considered the valuation.

Raiffeisen said that the algorithm-based prices shown at the time on Bloomberg

BGN could not be considered to “represent a practical and commercial realisable value.” Bloomberg did not respond to a request for comment.

In his ruling, Mr. Justice Knowles said this “was a rational view,” adding, “The expert called by LBI favoured the use of Bloomberg or BGN prices but he was prepared to recognise that it was ‘questionable’ or ‘difficult’ to execute at these prices in the market circumstances prevailing. He also ventured... it would be rational for Raiffeisen ‘to put a haircut on the securities.’” (So-called haircuts in the repo market are used to impose a margin on the collateral seller.)

“The conclusion of the ruling is that LBI does not have a claim,” a spokesman for LBI told Institutional Investor in a statement. “The judgement will reduce previously reported expected recoveries under other assets and will also result in expenses for LBI due to costs awarded to the defendants.”

A spokeswoman for Stewarts Law LLP, acting for LBI, declined to comment. Raiffeisen Bank International and Stephenson Harwood declined to comment.

The judgment came on the same day as Goldman Sachs and several hedge funds acquired a stake in a surviving Icelandic Bank, Arion Banki.