Disastrous council blunders in the Icelandic bank saga

October 09, 2008 7:17 PM

The news has been all over the media today about the tens - and potentially hundreds - of millions of pounds that local councils may have lost in Icelandic banks. As you might expect, the TPA has been out and about representing the taxpayers' point of view.


There are a number of serious questions about what councils have done here.


1) Why do they have this money salted away in savings accounts in the first place?


2) Why did they ignore all the warning signs about Icelandic banks?


With regard to the first question, we have yet to discover the full details of councils' exposure in Iceland, and their savings elsewhere, but there seems to be a real possibility that some of this money was set aside taxpayers' money, i.e. not pension funds, current outgoings and so on. A lot of the councils involved have said that these losses will not impact on frontline services, which suggests that at least some of the money is stashed away surplus. If that is the case then it's shocking that while they have been pleading poverty and pushing up tax they have had spare funds salted away behind the scenes.


Any extra, spare money they have in their other bank accounts should be given back to taxpayers immediately - they need the money to keep their family finances afloat.


The second question is also highly pertinent. Many of the councils involved have been dragging out the defence that they could not possible have known what was going to happen. Not so. The financial problems in Iceland's banking system were raised in Parliament in July and the issue had appeared in the media well before that. The mathematics of Iceland's vast over-exposure were there for all to see.


Whenever the TPA has called into question the large salaries and fees paid to finance directors and consultants at councils the response has always been "we pay top whack to get the best advice". That advice seems now to have been rather less spiffing than they thought.


The idea that no-one foresaw this disaster is also flawed. Brighton and Hove council were sufficiently concerned a whole year ago to pull out of the Icelandic banks, and more recently South Norfolk council got their £2 million out promptly ten days ago. The reason the spokesmen for the councils who have been caught short are getting so angry today is that they messed this up badly. Particularly given the range and expense of their financial advisors, they should have seen this coming - some did, and all credit to them.


Finally, there's the argument being hawked about that they were living up to their responsibility to taxpayers by trying to turn a profit. Frankly, the last thing anyone wants in the current economic situation is a load of councils trying to act like hedge fund managers. As the finance councillor at Brighton and Hove said today:   

"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. We have no deposits with Icelandic banks."

Precisely - deciding where to place other people's money in a really hazardous market, they should have been playing safe.


UPDATE: Earlier this afternoon, I did a head to head interview with the Leader of Kent County Council, who tried to make out like their £50 million investment in Icelandic banks was actually a smart move. He said that much of the money had been in stocks and shares until the spring (by which time concerns were already being voiced about Iceland) when they decided to sell and put it in the bank. Talk about out of the frying pan into the fire - out of the FTSE and into Landesbanki is perhaps even worse. It's such a bad call that he may be one of the few people who would have lost less money by keeping it in shares!

The news has been all over the media today about the tens - and potentially hundreds - of millions of pounds that local councils may have lost in Icelandic banks. As you might expect, the TPA has been out and about representing the taxpayers' point of view.


There are a number of serious questions about what councils have done here.


1) Why do they have this money salted away in savings accounts in the first place?


2) Why did they ignore all the warning signs about Icelandic banks?


With regard to the first question, we have yet to discover the full details of councils' exposure in Iceland, and their savings elsewhere, but there seems to be a real possibility that some of this money was set aside taxpayers' money, i.e. not pension funds, current outgoings and so on. A lot of the councils involved have said that these losses will not impact on frontline services, which suggests that at least some of the money is stashed away surplus. If that is the case then it's shocking that while they have been pleading poverty and pushing up tax they have had spare funds salted away behind the scenes.


Any extra, spare money they have in their other bank accounts should be given back to taxpayers immediately - they need the money to keep their family finances afloat.


The second question is also highly pertinent. Many of the councils involved have been dragging out the defence that they could not possible have known what was going to happen. Not so. The financial problems in Iceland's banking system were raised in Parliament in July and the issue had appeared in the media well before that. The mathematics of Iceland's vast over-exposure were there for all to see.


Whenever the TPA has called into question the large salaries and fees paid to finance directors and consultants at councils the response has always been "we pay top whack to get the best advice". That advice seems now to have been rather less spiffing than they thought.


The idea that no-one foresaw this disaster is also flawed. Brighton and Hove council were sufficiently concerned a whole year ago to pull out of the Icelandic banks, and more recently South Norfolk council got their £2 million out promptly ten days ago. The reason the spokesmen for the councils who have been caught short are getting so angry today is that they messed this up badly. Particularly given the range and expense of their financial advisors, they should have seen this coming - some did, and all credit to them.


Finally, there's the argument being hawked about that they were living up to their responsibility to taxpayers by trying to turn a profit. Frankly, the last thing anyone wants in the current economic situation is a load of councils trying to act like hedge fund managers. As the finance councillor at Brighton and Hove said today:   

"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. We have no deposits with Icelandic banks."

Precisely - deciding where to place other people's money in a really hazardous market, they should have been playing safe.


UPDATE: Earlier this afternoon, I did a head to head interview with the Leader of Kent County Council, who tried to make out like their £50 million investment in Icelandic banks was actually a smart move. He said that much of the money had been in stocks and shares until the spring (by which time concerns were already being voiced about Iceland) when they decided to sell and put it in the bank. Talk about out of the frying pan into the fire - out of the FTSE and into Landesbanki is perhaps even worse. It's such a bad call that he may be one of the few people who would have lost less money by keeping it in shares!

Latest Blogs:

TaxPayers' Alliance Icon

The sugar tax and the public finances

6:00 AM 05, Dec 2016 Harry Fairhead

TaxPayers' Alliance Icon

Working for the taxman

6:00 AM 26, Nov 2016 Harry Fairhead

TaxPayers' Alliance Icon

Further thoughts on the Autumn Statement

4:56 PM 24, Nov 2016 James Price

TaxPayers' Alliance Icon

Have we had too much austerity?

10:57 AM 23, Nov 2016 Alex Wild