Kaupthing Freezes Over

Javier Espinoza, 10.09.08, 9:20 AM ET

LONDON –

Another one bites the dust. Kaupthing Bank, Iceland’s only major independent financial firm, is the country’s latest bank to fall into government hands as the nation’s banking industry crumbles under the weight of massive debts.

Iceland’s Financial Supervisory Authority said in press release Thursday that the takeover of Kaupthing was “a necessary first step in achieving the objectives of the Icelandic Government and Parliament to ensure the continued orderly operation of domestic banking and the safety of domestic deposits.”

“Kaupthing Bank has now requested that the Icelandic Financial Supervisory Authority … assume the power of Kaupthing Bank shareholders’ meeting,” the bank said in a press release on its Web site. “Furthermore, the entire board of directors of the bank has resigned.”

Kaupthing’s failure triggered a payment under its credit default swap contracts, said the International Swaps and Derivatives Association on Thursday. That means investors who bought protection against a default on Kaupthing debt will be paid out a cash sum determined by an auction process.

This is the third time the Icelandic government has taken over a large bank in the last week. On Tuesday, Landsbanki went into receivership and the government stepped in to dismiss the board and protect the bank’s domestic operations. (See “A Bank Falls Through Iceland’s Cracks.”) On Wednesday, regulators took control of Glitnir.

“I am not surprised. Following the collapse of other two banks it must have been extremely difficult for Kaupthing to remain the only big private bank,” Andreas Hakansson, an analyst with UBS, told Forbes.com. “They must have experienced a big capital outflow not only in their retail business but also other counterparties must have been very reluctant to make business with the bank. It was unavoidable.”

Meanwhile, the Swedish arm of Kaupthing said it had more than enough liquid assets to cover deposits and would pay back savers’ money plus the interest due. Kaupthing Bank Sverige said separately it was not included in the takeover by the Icelandic authorities.

Kaupthing’s Finnish operations are continuing as usual, a spokeswoman said. “We are looking after our clients as well as we can. We believe that the clients in Finland will not face any losses due to this,” the spokeswoman said.

The Icelandic krona fell to an all-time low against the euro on Monday, prompting the country’s financial shares to be suspended from trading since then. (See “Iceland In Hot Water.”) Iceland’s central bank then tried and failed to peg the krona to 131 euros, finding that it could not sell the krona at that price on the interbank market for foreign currency. On Wednesday, Iceland’s currency fell 26.8% against the euro, with the single European currency buying 172.16 krona at the close of trade.

Iceland, with a population of 320,000 people on a territory the size of Kentucky, is a key component of the global financial system as its outsized banking operations have a far reach in other larger economies, including the United Kingdom. Thousands of Britons have opened bank accounts with Icesave, the online arm of Landsbanki, which has frozen its accounts since last Tuesday.

Iceland’s prime minister, Geir H. Haarde, recently warned that his country was at risk of “national bankruptcy.” (See “Iceland Teeters On Bankruptcy.”)

The chairman of Kaupthing, Sigurdur Einarsson, said the Icelandic government was responsible for ruining the country’s financial system. Its decision to buy a 75.00 pence stake in the third-largest bank, Glitnir, had a negative ripple effect for Kaupthing. “This triggered a series of events which nobody predicted or was able to control,” Einarsson said.

Reuters contributed to this article.