The IoM Financial Supervision Commission called upon the Kaupthing hf bank (the parent bank in Iceland) to give a Parental Guarantee to support its IOM subsidiary.
This Guarantee was given so that when looking at 'risk' a prospective depositor in KSFIOM was assured that savings put into the bank were backed by it.
Depositors had every right to believe that the Guarantee was copper-bottomed, it having been endorsed by the FSC.
Kaupthing hf was nationalised by the Icelandic government, & guess what happened to the Parntal Guarantee? Yes, it went into the bin!
Nevertheless it was right to look at whether binning it was the end of the matter. A parental guarantee must have had some force in law & could not simply be set aside unless there was built into the guarantee that under certain circumstances it could be declared nul & void.
So the depositors' legal beagles asked the FSC for copy of the Kaupthing parental Guarantee. What was the response of the FSC? A letter stating that this document was confidential. Could there be anything more absurd than telling depositors that they could not see the actual guarantee which had been a factor in them depositing in KSFIOM?
After pressure was brought to bear it was released. To the shock & horror of depositors it transpired that it is essentially a letter, comprising only one paragraph, without seals or witnesses, whereby Kaupthing Hf undertakes to pay any liabilities that KSFIOM is unable to meet – i.e. it is a shortfall guarantee, not what most people understand as a “guarantee”, which would mean that Kaupthing Hf fully stood over KSFIOM. The guarantee is said to be unsecured.
The acceptance of such a worthless guarantee is another instance of serious regulatory failure on the part of the FSC.