The fate of £954m deposited by more than 100 councils and other public bodies in Icelandic banks remains uncertain. Seven of those councils have been accused of investing £33 into the banks just days before they collapsed, despite warnings about their solvency. Whilst the councils are being pilloried for their apparent incompetence, two things should be taken into account. Firstly, the Audit Commission, the countries spending watchdog, who announced lessons had to be learnt, had themselves invested £10m into these same banks. This led to one council rejecting the criticism and claiming it was a case of the 'pot calling the kettle black'. Secondly, the Conservatives claim that the Treasury was aware of concerns about the stability of the Icelandic banking system early in 2008, but failed to pass the information on to local councils. As long ago as 30 September the credit ratings of Glitnir and Landsbanki, two of Iceland's biggest banks, were downgraded to 'adequate', below the deemed acceptable under guidance to Town Halls. Despite the alarm bells already ringing several councils continued to invest millions of pounds during early October, a week before the two banks went bust. All this suggests mistakes were made by the councils, the government and the Audit Commission. Why did all these authorities invest in the banks of one of the smallest countries in the world, after all, they are hardly recognised as one of the great financial institutions of the global economy. The simple reason was, they offered higher interest rates to investors than any one else in the financial sector. In reality, the root cause of the problem arose because none of the investing authorities took into account the wisdom behind an old adage that says "if something looks too good to be true.....it usually is."
