Money money money

I work all night, I work all day, to pay the bills I have to pay
Ain’t it sad
And still there never seems to be a single penny left for me

If you have a car, you’ll have noticed your petrol costs have been going up. When you do your shopping, food costs are terrible these days. Everything’s more expensive, money just doesn’t seem to go as far as it did.

Ian Bell wrote on 30th June:

So who still believes that the cost of petrol, food or credit, for nations or individuals, rises or falls because of the pure, dispassionate action of market forces? Speculative attacks, such as “aggressive tax avoidance”, are hardly in the spirit of the thing; the fiddling of interest rates is another malignity entirely. It strikes at the heart of capitalism. When prices cannot be trusted – for such is the effect – there is no free market.

In the case of Barclays, and perhaps 20 other household names trading on the public trust, that was the whole idea. The London interbank offered rate (Libor) and its European equivalent were supposed to act as guarantees that bankers’ claims matched reality, that they described accurately commerce between banks and, by extension, the wider world. For the sake of their bonuses and their bank, traders at Barclays decided to dispense with annoying, unhelpful reality. Time and again, for years, under the alleged instruction of “senior management”, they lied.

You don’t need to understand how Libor is constructed as a global benchmark, with highest and lowest figures discarded and averages compiled, to grasp what was done. Bankers were taken at their word. Instead of regarding this as a solemn responsibility, they took it as an opportunity, offered by suckers. The simple analogy is discovering, after a day at the races, that every nag was doped. Forget the casino economy: these characters were controlling the roulette wheel.

Do you remember the Occupy movement? I don’t know why I say “do you remember”: it’s not so long ago that they were camped out on the steps of St Pauls in London, the small area of the Square Mile that is owned by the Church, not Mammon: not so long since the tents disappeared from Charlotte Square in Edinburgh, where they were a daily reminder of the banks that own so many of the buildings around them. They were wild-eyed radical tent-dwelling hippies, who’d listen to them?

But they were right.

Ian Fraser, writing on 5th December 2011 in QFinance:

What disturbed me the most about the November 1 session was the regulators’ seeming nonchalance about criminality in the UK’s banking sector. At times, using the tortured and obfuscatory phraseology, the financial regulators almost seemed to want to pretend that criminality and fraud didn’t, or couldn’t exist in the domain they are supposed to police. This struck me as very strange.

When I wrote “Helicopter Money and Stephen Hester“, it was meant to be an account of what happened to the rich instigators and their victims – to describe the links between Paula Daly, who became homeless after the bank foreclosed on her business in September 2008, and Jeffrey Verschleiser, head of the sub-prime mortgage operations at Bear Stearns, who had just booked a 93-room luxury hotel for a family weekend.

Despite sub-prime mortgage operations having led to a wave of criminal repossessions across the US (including, quite literally, a special court system so that fraudulent and predatory loans could be resolved in the lenders’ favour and the houses attached to them sold again with clean paperwork) Jeffrey Verschleiser wasn’t worried he might get prosecuted any more than he had money worries. I noted this in passing, citing Why Isn’t Wall Street in Jail?, which opens with Matt Taibbi, of Rolling Stone, and a former Senate investigator in a Washington bar in January 2011:

“Everything’s fucked up, and nobody goes to jail,” he said. “That’s your whole story right there. Hell, you don’t even have to write the rest of it. Just write that.”

I put down my notebook. “Just that?”

“That’s right,” he said, signaling to the waitress for the check. “Everything’s fucked up, and nobody goes to jail. You can end the piece right there.”

A fortnight ago, Matt Taibbi wrote about the conclusion of the first criminal trial which has sent Wall Street staff to jail:

USA v. Carollo involved classic cartel activity: not just one corrupt bank, but many, all acting in careful concert against the public interest. In the years since the economic crash of 2008, we’ve seen numerous hints that such orchestrated corruption exists. The collapses of Bear Stearns and Lehman Brothers, for instance, both pointed to coordi­nated attacks by powerful banks and hedge funds determined to speed the demise of those firms. In the bankruptcy of Jefferson County, Alabama, we learned that Goldman Sachs accepted a $3 million bribe from J.P. Morgan Chase to permit Chase to serve as the sole provider of toxic swap deals to the rubes running metropolitan Birmingham – “an open-and-shut case of anti-competitive behavior,” as one former regulator described it.

More recently, a major international investigation has been launched into the manipulation of Libor, the interbank lending index that is used to calculate global interest rates for products worth more than $3 trillion a year. If and when that case is presented to the public at trial – there are several major civil suits in the works here in the States – we may yet find out that the world’s most powerful banks have, for years, been fixing the prices of almost every adjustable-rate vehicle on earth, from mortgages and credit cards to interest-rate swaps and even currencies.

On 27th June 2012, Barclays Bank was fined in total £283.06M by two American regulatory bodies, The Commodity Futures Trading Commission, the United States Department of Justice, and by the UK’s Financial Services Authority, for attempted manipulation of the LIBOR and EURIBOR rates. The United States Department of Justice said explicitly

“the manipulation of the submissions affected the fixed rate on some occasions”

The next day, the Royal Bank of Scotland was also fined – and as it is mostly owned by the taxpayer, it’s us who will be paying the fine (£150 million) though the bonuses paid out to the RBS employees during the LIBOR-rigging years are, apparently, untouchable. Sweet deal, yes?

Barclays made £5.88 billion profit in 2011. The FSA only fined Barclays £59million, but even the total fine is the equivalent of a person on JSA, found to be moonlighting in a job, having their benefit stopped for a fortnight and told not to do it again. If the DWP do not regard this kind of fine as sufficient to warn people off moonlighting while claiming benefit, why does the FSA consider this sufficient to warn financiers off committing fraud?

In a ideal world, where everyone is honest, here’s how the banking system works.

• You have an idea for a business. The business will likely make money, but you don’t have the £25,000 you need to get it started.
• You go to your bank, you explain your business plan, and the bank lends you £25,000 – secured against assets, with interest payable.
• You work hard, your business plan was realistic, and you slowly repay the loan and the interest on the loan.
• The bank makes its profit on the interest, you make a profit on your business – you spend money and thus help other businesses make profit, all of you are paying taxes on your income. (In an ideal world.)
• Now, multiply that up by several million people and you have a flourishing economy, friendly to entrepreneurs and small businesses, wealth being created and shared, high employment, solid welfare state.
• In that environment, your business is likely to do well.
• Even if your business doesn’t do as well as expected, but you can still keep repaying the interest on the loan, the bank shouldn’t foreclose: they would rather you were helping them long-term by keeping your business going, than failing completely so that they then have to take the value of your assets.

Now, there’s no such thing as an ideal world. I know that.

But you can have an close approximation of an ideal world by assuming that everyone will be greedy and dishonest if given the opportunity, and regulating the hell out of financial services and taxation so that nobody gets the opportunity.

The problem begins whenever lending money becomes a profitable business in itself without any concern for the businesses who are the proper recipients of loans. The sub-prime mortgage business (pioneered in the UK by John Ritblat, former chair of British Land, who retired in 2006 with an estimated net worth of £100M) was a classic example of turning mortgages, a safe but not particularly profitable lending business, into a casino oppportunity for spivs.

Other profit sources, oil and food, explain why your petrol costs and your food costs have been going up and up since 2008: Goldman Sachs and other Wall Street investors have turned to “commodities” for their casino games since the UK and US, under pressure from the finance industry, softened up the rules in the 1990s and investors first began to speculate.

“We first became aware of this [food speculation] in 2006. It didn’t seem like a big factor then. But in 2007/8 it really spiked up,” said Mike Masters, fund manager at Masters Capital Management, who testified to the US Senate in 2008 that speculation was driving up global food prices. “When you looked at the flows there was strong evidence. I know a lot of traders and they confirmed what was happening. Most of the business is now speculation – I would say 70-80%.”

Why not? Who’s going to stop them?

Paul Mason, the economics editor of Newsnight, pointed out today:

Barclays is the biggest lender to small and medium-sized businesses in Britain.

Right now its regional offices will be making decisions that can kill or cure the companies that form the backbone of the UK economy.
…
Four years ago, Barclays was lending £52bn to non-finance, non-property businesses in the UK, 27% of all loans.

Now the figure is £38bn, and just 16% of business loans. In the process the bank – single handedly – has taken £3bn of capital out of manufacturing, more than £3bn out of retail/wholesale, while ploughing an extra £10bn into home loans and £6bn into property.

One blog called this mess dislocation of Capitalism from itself, a much more memorable turn of phrase than the anonymous Barclays whistleblower who told the Telegraph yesterday that Libor was dislocated from itself – Barclays could not afford to lend at Libor rates, so they were setting their own rates, and according to our anonybanker, without any feeling that they were doing so illegally.

A sizable chunk of the world’s adjustable-rate investment vehicles are pegged to Libor, and here we have evidence that banks were tweaking the rate downward to massage their own derivatives positions. The consequences for this boggle the mind. For instance, almost every city and town in America has investment holdings tied to Libor. If banks were artificially lowering the rates to beef up their trading profiles, that means communities all over the world were cheated out of ungodly amounts of money.

Matt Taibbi reported the same presumption that “everybody’s doing it”, among the fraudsters in USA v Carollo:

the Defense counsel even made an issue of this at trial, implying to the jury that nobody would be dumb enough to commit a crime by phone when “there was a big sticker on the phones that said all calls are being recorded,” as Grimm’s counsel, Mark Racanelli, put it. In fact, Racanelli argued, the conversations on the tapes hardly suggested a secret conspiracy, because “no one was whispering.”

But the reason no one was whispering isn’t that their actions weren’t illegal – it’s because the bid rigging was so incredibly common the defendants simply forgot to be ashamed of it. “The tapes illustrate the cavalier attitude which the financial community brought toward this behavior,” says Michael Hausfeld, a renowned class-action attorney whose firm is leading a major civil suit against Bank of America, Wells Fargo, Chase and others for this same bid-rigging scam. “It became the predominant mode of transacting business.”

Bob Diamond has released information suggesting strongly that the Bank of England was involved in the LIBOR rigging. Yesterday respected civil servant turned dragon fairy was pointing out the reasons why a Parliamentary inquiry wouldn’t be enough to resolve the LIBOR scandal, though it could well be the limit of what George Osborne would agree to.

There should be a public inquiry into wrongdoing and ethics of bankers (sign the petition at the link) but there also needs to be a commitment to arrests, prosecutions, and jail time for people at a senior level. We have seen with Leveson that a judicial inquiry can uncover all manner of unpleasant secrets that the rich and powerful would rather stay buried: we have yet to see that convictions follow. Taibbi notes that despite strong evidence on fraud, only the juniors are going on trial:

The extreme youth of some of the conspirators was an obvious subtext of the trial, underscoring the fact that far more senior executives from bigger banks like Chase and Bank of America had been permitted by the government to evade testifying.

The billions that can be made from a deregulated financial sector make any possible fine a slap on the wrist: jail time is the only deterrent, and I say this as a person who does not normally believe in jail for non-violent offences.

Faisal Islam, economics editor at Channel 4 News, politely took Bob Diamond’s word for it that he didn’t know about the illegal tampering with LIBOR rates, but notes today:

Remember, this is two scandals in one. The first occurred in Bob Diamond’s Barclay’s Capital. Traders enriched themselves, though apparently not Barclays’ top-line profits. Diamond did not know, which is a failure of sorts.

The second scandal is more excusable in a way, but directly involves Mr Diamond. There were industry-wide attempts to lower Libor submissions as a strategy to calm fears about financial stability. Other banks were at it. The question: was it tacitly sanctioned by authorities? That is a conversation that could pit Barclays’ explanation directly against the Bank of England, its lender of last resort, in the public forum of the Treasury select committee.

Today, in defense of their claim that the Bank of England approved the fixing of LIBOR rates, Barclays released an email from October 2008 that records a conversation Bob Diamond had with Paul Tucker, the deputy governor of the Bank of England.

The sequence of events unleashed by the email in the darkest days of the banking crisis also forced the departure of Jerry del Missier, who was Diamond’s closest colleague at the bank.

Del Missier, a Canadian, was promoted to chief operating officer a fortnight ago, but was named as the top executive who instructed more junior staff to lower the bank’s submissions to the key benchmark rate, the London interbank offered rate (Libor), at the centre of the current scandal.

But MPs will be keen not to let the controversy over the potential involvement of the Bank of England – and unnamed Whitehall officials – to detract from regulatory evidence that prior to the 2008 crisis Barclays traders were attempting to manipulate Libor to help boost the bank’s profits. Emails showing “this one’s for you big boy” and references of bottles of Bollinger champagne are hard for the bank to explain.

On 12th June, Ian Fraser of QFinance gave a speech in the Institute of Directors on “whether greed and corruption are endemic in the City of London”, and he noted in his blog that

Extrapolating from [evidence given by William K Black to the Federal Crisis Inquiry Commission in September 2010], the ‘Big Four’ accountancy firms Deloitte, Ernst & Young, KPMG and PWC, whose duties as auditors are supposed to be to the shareholders not to the management of a company, have been behind the creation of a “Gresham’s” dynamic.

By this, I mean they have provided a cover for ‘white collar’ crime, in exchange for inflated audit fees (or what are increasingly being termed by the accountancy professor Prem Sikka and others as “bungs for silence”). If true this makes them dangerous institutions, whose imprimatur should increasingly be seen as a negative rather than a positive by investment management firms with a genuine interest in safeguarding their investors money.

Deloitte, Ernst & Young, KPMG and PWC are limited liability partnerships (LLP). This is a special form of partnership created in the UK by the Limited Liability Partnerships Act 2000.

Partnerships traditionally have unlimited joint liability. Firms of lawyers and accountants were, before the idea of LLP was invented, partnerships with shared and unlimited responsibility for each other’s mistakes or worse. In effect, a partnership should be a self-policing organisation because each partner can be held legally responsible for the entire firm, and could lose far more than they had ever put into it if any partner makes an expensive mistake.

But in a limited liability partnership, unless fraud or wrongful trading can be proved, no member can lose more than they invest. The self-policing aspect of watching for each other’s mistakes is gone: so long as the LLP can’t be proved to have committed a crime, the partners needn’t worry about “mistakes”.

[On 30th May in Gogarburn, RBS shareholder] Neil Mitchell accused the Royal Bank of Scotland board – some of whom were visibly squirming in their seats in as he spoke – of turning a blind eye to, and even sanctioning, a rash of “corporate governance infringements, regulatory breaches and systemic institutionalised fraud” inside the division.

Mitchell said that the alleged malpractice, which included conspiring to defraud corporate customers, had been signed off at the highest level in RBS and he alleged it had been aided and abetted by the ‘Big Four’ accountancy firm KPMG. He said the bank had refused to either to meet him or to take receipt of “crates and crates of evidence” detailing the alleged crime wave.

A situation where those who are supposed to guard against mistakes, or “mistakes”, know they need have no fear of any significant consequences so long as outright fraud is not proved against them, is not a situation calculated to fill anyone with confidence in the guardians.

I note without further comment that Edinburgh Council paid Deloitte, one of the “Big Four”, £1.5 million to investigate and report into the Council’s property repair schemes and the Statutory Notice Scandal. A FOI request to see the unredacted report has been refused. Fifteen council employees were recently arrested for offenses that came to light as a result of the police investigation of the statutory repairs scandal.

Now at the moment, the chief concern of all the parties in government or opposition, in Westminster and in Holyrood too, seems to be to make political capital out of it. The New Statesman called Bob Diamond’s resignation Ed Miliband’s victory and the decision by Labour to veto Osborne’s proposal for a joint parliamentary inquiry suggests that Miliband thinks he can force a second judicial inquiry in the heat of extreme public annoyance at the bankers. (He may be right: Ann Pettifor’s petition has gone up by 300 signatures in the past three hours.)

Mary Riddell wrote in the Telegraph yesterday:

The Miliband demand for wholesale reform of the role and culture of banking could backfire, since he was at the Treasury when the light-touch regulation extolled by Gordon Brown prevailed. But as Mr Balls, who has apologised, has pointed out, “burdensome regulation” had no greater opponents than David Cameron and Mr Osborne.

Mr Miliband’s problem lies less in the past than in the detail (or lack of it) in his latest made-to-measure moral crusade. Britain has an abominable record of prosecuting white-collar crime. To shoplift groceries worth £50 is, as he has pointed out, a ticket to jail. To purloin £50 million of other people’s savings is a ticket to a peerage.

The Serious Fraud Office (SFO), dogged by charges of political interference and botched investigations, has generated more scandal than it has uncovered. Desultory efforts to beef it up have achieved little, and a budget cut of £14 million since 2008 scarcely betokens a major effort to nail corporate crime.

Meanwhile Dan Hodges, self-described Blairite, feeling sympathy to Bob Diamond and bankers in general due to their being so harshly judged, blogged from the Daily Telegraph that Bob Diamond deserved more consideration than the small businesses and entrepreneurs who would like the banks to start lending to them again, proving to me at least that while Hodges may be a Tory, he’s no capitalist.

The confusion expressed by Dan Hodges in his blog at the Daily Telegraph (Lending? But isn’t lending bad?) is a direct result of George Osborne and other Conservatives quite deliberately confusing national debt, with business loans, with personal credit card debt. It’s possible that Hodges is genuinely confused: indeed, looking at Osbornomics, I wonder if the Chancellor is really confused too, and doesn’t understand that the UK’s National Debt is different from his American Express Unlimited card.

Just a month ago, Jeff at Better Nation said:

However, the SNP really has to think through its insistence that it wants to hold on to Sterling and seriously consider embracing a Scottish pound. There are stark differences between Greece being part of Eurozone and an independent Scotland being part of Sterling, but it is precisely the wrong time to hope that you’ll get a fair hearing over how a currency union without a political union will work from a particularly risk-averse Scottish public.

A Scottish currency itself wouldn’t be risk free of course, but it sits happily and more persuasively alongside the very notion of Scottish independence and boosts the SNP’s radical credentials at the same time.

As far as I know, the SNP is still on the position that they want Scotland to stay in sterling after independence. While this may have seemed the safest course – no Scottish pound, no worrying euro – it leaves the Yes Scotland campaign now open to the problem of the Bank of England and Scotland’s dependent currency (and the Better Together campaign with the familiar problems of the UK not looking too appealling right now).

But it also leaves the proposal for devomax, which is primarily the proposal that the Scottish Government should be able to borrow money as well as vary the tax rate – wide, wide open to sensible people asking: Who exactly came up with the idea that Scotland didn’t need independence, just the ability to have its own financial sector?

Burdzeyeview writes, in unusual despair:

Everyone, it would appear, is on the make and on the take. There are as many individuals in our ken guilty of petty and not so petty pilfering, in so many different ways that it is difficult not to conclude that our whole polity, our collective and individual values base, is rotten to the core.

The bankers at Barclays, and those soon to be exposed at other banks, as well as the likes of Jimmy Carr and Gary Barlow with their breath-taking tax avoidance schemes, simply expose greed, graft, recklessness and disrespect for the common currency of societal engagement on a larcenous scale. And it tends to result less in self-reflection among we lesser beings of our own standards of behaviour in order to raise them, but more a determination to get in on the action too. Individualism is incestuous.

What’s the answer? Darned if I know. But change is needed and soon.

“We, who inhabit this country, want to create a fair society, where everyone is equal. Our different origins enriches all of us as a whole and together we have the responsibility for the legacy of the generations, land and history, nature, language and culture.”

Just a thought.