These reviews of books on financial corruption appeared in the Times Literary Supplement on 13 November, 2018.
Ten years ago, just after the collapse of Lehman’s and as the Great Financial Crisis intensified, I complained in the Guardian about the globally coordinated 0.5% cut in interest rates by central bankers. It was too little too late, and it would not
“necessarily affect the Libor (London interbank offered rate), which has been ratcheting upwards and which, according to Bloomberg, is applied to trillions of dollars of debt, including the mortgages of a million American homeowners.”
I have been known to boast about observing the unusual “ratcheting up” of Libor before most others woke up to that particular scandal. But my article reveals a truly embarrassing lacuna, one that today brings a blush to my cheeks. It is this: the London interbank offer rate is applied to loans by banks to other banks. But at the time of writing interbank lending across Europe and the US had frozen. From the month before the article appeared in September, 2008 inter-bank lending globally had collapsed as the IMF confirmed in International Interbank Borrowing during the Global Crisis.
If banks were not lending to each other, how then could they be “ratcheting upwards” the inter-bank lending rate? If there were no loans, how could there be an interest rate for loans? How could I have missed this very big wood while fixated by the surging Libor ‘trees’?
I relate this awkward tale because it confirms Dan Davies’s thesis in his highly entertaining, historically fascinating but also intellectually rigorous book “Lying for Money: How Legendary Frauds Reveal The Workings of Our World.” For Davies, the more one knew about the LIBOR scandal, the less one understood it. That’s because
“The nature of fraud is that it works outside your field of vision, subverting the normal checks and balances so that the world changes while the picture stays the same. People in financial markets have been missing the wood for the trees for as long as there have been markets.”
This theme of criminal activity “outside your field of vision” is one that pervades all the books reviewed here. The blind spots “are built into the system and only become glaringly apparent once the whole thing has collapsed…” writes Davies. Today a globalised system exists in what Oliver Bullough calls “MoneyLand” – territory beyond the reach of regulatory democracy and deliberately designed to obscure and obfuscate regulators by operating outside society’s “field of vision.” The greater tragedy in 2007-9 was the extent to which the system operated outside the field of vision of the world’s ‘experts’ – economists, central bankers and Treasury officials. Those who could not answer the Queen’s question: why was the crisis not foreseen? “Why did no one notice it?”
In a fascinating chapter Dan Davies compares crooks that took control of the US’s Savings and Loans banks and used it to create fake profits (something known as control fraud) to crooks in Britain’s commercial banks that distributed control fraud. Rather than organising the fraudulent inflation of the corporation, UK bankers simply set up a system of incentives and (non-) checks and balances that enabled others to sell Payment Protection Insurance (PPI) and thereby to inflate the corporation for them. In other words, they created a “massively criminogenic environment in the firm, and let nature take its course.” All of the criminality was carried out by relatively low-level, low-paid and poorly trained employees, most of whom would hardly have profited from selling this expensive and dodgy form of insurance. They were a sad reflection of cost-cutting in a banking industry that had “ended up with roughly the quality and experience of staff that they were prepared to pay for.” For the duration of the scam a top tier of senior bank managers was fantastically enriched by sales of PPI to a captive market of bank borrowers. Yet when it came to bringing the perpetrators to justice “there was no possibility whatsoever of anyone being able to meet criminal standards of evidence of them having done so, because they in fact didn’t know.”
The tragic irony of this case is that in compensating those robbed and deceived by the banks’ massive distributed control fraud, a new form of fraudulent activity replaced it – the PPI refund scams.
Another aspect of Davies’s discussion of fraudulent activity is the complicated, tedious and often prosaic work that has to be undertaken by fraudsters in order to get their hands on Other Peoples’ Money. And it is this careful tedious work that led, in my view, to the global expansion of corruption – forms of corruption that make the ingenuity and persistence of scammers such as the Salad Oil King, Charles Ponzi and the Kray Brothers look like very small crooks indeed.
In his book, MoneyLand – why thieves and crooks now rule the world and how to take it back Oliver Bullough relates the story of how the revolution in global finance – a revolution that led ultimately to the Great Financial Crisis – was triggered by one bank in 1962. The dismantling of the Bretton Woods system, he explains, was down to the determination and ingenuity of a swashbuckling character working for a powerful City of London banker, Siegmund Warburg. Warburg, a German outsider in the City of London was a man who “lived for deals” and who wanted to deal in Eurodollars traded “offshore” beyond the reach of US regulators. The plan was to get hold of three billion US dollars holed up in secret Swiss bank accounts, package them up, and lend them on at a profitable rate of interest. However, his planned new bond issue based on Eurodollars hit a buffer: the Bretton Woods system of checks and balances for the management of cross-border flows of capital. In an illuminating analogy Bullough likens the Bretton Woods system to
“an oil tanker, a ship full of oil. If a tanker has just one huge tank, then the oil that fills it can slosh backwards and forward in every greater waves, until it destabilises the vessel, which overturns and sinks. That was the system after the First World War, when waves of speculative money capsized democracy. At Bretton Woods the delegates designed a new kind of ship, where the oil was divided up between smaller tanks, one for each country. The ship held the same volume of oil, but in different ways. The liquid could slosh back and forth within its little compartments, but would not be able to achieve enough momentum to damage the integrity of the entire vessel.”
No sooner had the Bretton Woods conference in Hampshire, USA ended in 1944 than bankers applied their wits to a new challenge: how to break down the inner walls of the stable Bretton Woods ‘tanker’ that constituted the new international financial architecture? The daring task of realising the bankers’ vision fell some years later to Warburg’s man: Ian Fraser, a Scottish war hero turned journalist turned banker. It was Fraser, argues Bullough, that went to great lengths to find ways “to defang the taxes and controls designed to prevent hot money flowing across” the inner walls of the international “tanker”.
Drawing on Fraser’s “elegantly written autobiography” The High Road to England, Bullough describes the plan thus: If Warburg’s bonds which he intended to exchange for Swiss cash, had been issued in Britain, there would have been a 4 per cent tax on them, so Fraser formally issued them at Schiphol airport in the Netherlands. If the interest were to be paid in Britain, it would have attracted another tax, so Fraser arranged for it to be paid in Luxembourg. He managed to persuade the London Stock Exchange to list the bonds, despite their not being issued or redeemed in Britain, and talked around the central banks of Frances, the Netherlands, Sweden, Denmark and Britain, all of whom were rightly concerned about the eurobonds’ impact on currency controls (the ‘walls’ of the oil tanker). The final trick was to pretend the borrower was Autostrade – the Italian state motorway company – when really it was IRI, a state holding company. If IRI had been the borrower, it would have had to deduct tax at source, while Autostrade did not have to. (Google Eurobonds and the myth about their launch by Autostrade persists.)
The cumulative impact of this game of ‘jurisdictional Twister” was a ‘eurobond’ that would pay Warburg’s bank a high, real rate of interest, on which no tax of any kind was paid, and which could be turned back into cash anywhere. The ‘walls’ of the international financial ‘vessel’ had been pierced, and from henceforth eurobonds were to become the battering ram that broke down the carefully constructed Bretton Woods international architecture of managed finance. Thanks to Warburg’s ambitions, investors in capital markets had been ‘liberated’ from the oversight and management of regulatory democracy. Today these investors occupy a colonised space – somewhere in the stratosphere – defined by Bullough as MoneyLand “where capital (is) allocated secretly to gain the greatest degree of protection” from tax authorities and representative governments. “This” as Bullough argues “is the dark side of globalisation, and there is no positive case to be made for it, unless you are a thief or a thief’s enabler.”
MoneyLand too is outside society’s “field of vision’. It is
“not an easy place to confront…You can’t send in an army against it, since it doesn’t feature on any maps. Nor can you implement sanctions against it, or send diplomats to talk it round. It has no border guards to stamp your passport, no flag to salute and no foreign minister to talk to on the phone. It has no army to protect it because it doesn’t need one. It exists wherever there is someone who wants to keep their money out of reach of their country’s government, and who can afford the lawyers and financiers required to do so.”
Moneyland begins with a tour of ex-Ukrainian President Viktor Yanukovich’s “temple of tastelessness, a cathedral of kitsch, the epitome of excess.” It is a riveting read and an exhilarating, dizzying world tour of the Aladdin’s Cave of riches held by the biggest beneficiaries of secretive mobile money: the greatest crooks.
No sooner does one good book on globalised finance appear, than it is followed by another. Nicholas Shaxson’s The Finance Curse: How Global Finance is Making Us All Poorer – is a superbly written, and witty overview and update of today’s globalised ‘oil tanker’. The book launches by tracing the progress of the 75 pence fee paid by every traveller for purchasing a ticket through Trainline, the digital rail ticket seller. Trainline, a London-based company is owned by another company, Trainline Holdings Limited. Five companies above Trainline.com your little booking fee would skip out across the English Channel to the tax haven of Jersey, then back again to London where it would pass through five more companies, then hop back out to Jersey once more, before migrating over to the European mainland where it would enter the accounts of two companies in Luxembourg, another tax haven.
All this thanks to the dismantling of the compartmentalised ‘oil tanker’ by Warburg’s Ian Fraser. Neither Bullough nor Shaxson devote space to the role The Finance Curse plays in facilitating the global drug-dealing trade. According to UNDOC – the UN’s office on drugs and crime – there will be a substantial increases in the profits derived from drug trafficking and related illicit financial flows in the year ahead. These may also contribute to the financing of terrorism. Moneyland’s role in hiding illicit gains from a trade that killed roughly 450,000 as a result of drug use in 2015, is an important gap in the story of globalized finance.
In his conclusion Shaxson helpfully explains how some of the walls of the international financial system can be rebuilt – through ‘smart capital controls’. Indeed without capital controls it will be impossible to oblige global corporations to pay taxes where they make profits. Capital mobility enables companies to move their gains out of the country at the press of a computer button. But it’s Shaxson’s chapters detailing the corruption and inevitable impoverishment of societies that are the most gripping, and surprisingly, entertaining. In The Celtic Tiger Shaxson helps us understand the nature of the financial beast unleashed on the emerald isle by sharing more about the man that dominated Irish politics for a decade: Charles Haughey. Like Viktor Yanukovich, Haughey was
“a practitioner of Vatican-level crookery who on his death in 2006 had amassed a mansion and a 280 acre estate near Dublin, a string of racehorses, a yacht, an island retreat off the south coast, lavish gifts from Saudi princes and a complex financial web of personal account and assets scattered across several tax havens.”
Haughey’s tastes were a little less vulgar than those of Yanukovich. He paid thousands for bespoke silk shirts and dressing gowns from the exclusive Charvet outfitters in Paris. Despite this thin veil of gentility, this
“ducking and diving interloper, dogged by rumours of shenanigans in Irish real estate, was about as welcome to the establishment as flatulence in a packed hotel lift. They’d call Haughey and his associates ‘men in mohair suits’ or ‘gombeen men’. The nearest English equivalent is perhaps ‘shyster’ explained political historian Conor McCabe. “The fucking gombeens, you know? The spivs.”
By shining a light on Haughey’s popularity with his voters, Shaxson illuminates an aspect of crookery well known to anyone who has worked for any length of time in Nigeria, or in Berlusconi’s Italy or Donald Trump’s America: “a taint of corruption can sometimes help politicians”. Fintan O’Toole of the Irish Times explains: ‘As a reaction to the idea of faceless, fluid forces shaping one’s destiny, an extreme of local loyalty and of personal intimacy is an act of defiance against Them – whoever They are. Doing the last thing you’re supposed to do may be the final assertion of power against a feeling of powerlessness. The real wonder was not that fraudsters got elected but that more politicians did not claim to be crooks in order to get elected.’
Haughey’s long and openly corrupt political career is testament to the sense of powerlessness felt by the Irish people as financial forces beyond their control took hold, enriched some, but burdened most with losses, stripping them of decent living standards, of security, and of the hope of a future for their children. A ‘strong man’ – no matter how crudely crooked – that promises protection from these forces, and deigns to scatter crumbs from the taxpayers’ table into their laps – is increasingly popular with disillusioned voters not just in Ireland, but also Hungary, Turkey, Russia, Brazil and India.
James Crabtree, for five years the Financial Times’s bureau chief in Mumbai also undertakes an investigative journey – this one confined to India and documented in his sweeping overview of modern day India, The Billionaire Raj. Like both Shaxson and Bullough, he is diligent in his research and brutally fair to his interviewees – India’s growing band of billionaires. In the mid-1990s just two of these tycoons featured in the annual Forbes list of the world’s wealthiest, racking up a $3 billion between them. Today that exclusive club – the bollygarchs – has ballooned to over one hundred, more than in any other country bar the US, China and Russia. Together its members owned assets worth $479 billion in 2017. Like Bullough, Crabtree is regularly confronted by the vulgarity of the newly rich, who with few exceptions, flaunt their often stolen wealth conspicuously before the resentful eyes of the public.
Crabtree’s stylish, sweeping survey of modern day India locates these billionaires in a larger global story – “the twin impact of liberalisation and hyper-globalisation.” Pumped up by mobile, foreign money and domestic bank loans the bollygarchs corrupted politicians and grabbed and then drained rent from valuable public assets. “Before liberalisation” writes Crabtree “Indian democracy was a cheap, low-tech affair. But money began flooding into politics after 1991…This placed India not far behind the United States as the world’s most expensive democracy, except that in India’s case most of the money was unaccounted for”.
Crabtree gets something that others miss: the House of globalised Debt that is both the source of bollygarch wealth, but also its downfall. A 2012 Credit Suisse report “laid bare the huge financial mess” that many tycoons had created: the result of a “serious borrowing binge, vacuuming up bank loans, layering on leverage and using the resulting funds to fire up bold new projects from power stations and toll roads to ports and bauxite mines” – on the flawed premise that demand for these services and commodities would rise, forever. The consequences for India’s banking system – but also its political system – were, and are dire. This story will not end happily.
All these authors document the impact of the ‘sloshing oil tanker’ of mobile, cross-border capital on societies. Crabtree offers only the vain hope that “India’s ‘Gilded Age’ will blossom into a Progressive Era”. Shaxson argues persuasively that the Finance Curse, like the Oil Curse infects whole societies with corruption and impoverishment, and threatens disruption and destabilisation. After the latest election of a far-right, authoritarian leader in Brazil, the fear is that Warburg’s cunning 1992 scheme has built up so much momentum that it threatens once again to capsize democracy in just the same way mobile cross-border capital flows upended democracy in the 1930s.