by Anton Keller, Secretary, Swiss Investors Protection Association - email@example.com
url: www.solami.com/field.htm - related e-books: .../capitalism.html ¦ .../porkbellies.htm ¦ .../bankingblues.htm ¦ .../kingpin.htm
September 7, 2012 - Establishing a level-playing field - vast subject. The more so if we were not to talk about what's probably mainly on your mind and on your daily radar, namely ordinary criminals versus ordinary crime fighters. And if instead we were to open up our vista and concentrate on the macro-economic and macro-social scale. In other words if we were to discuss the still growing imbalance between those causing economic and social havoc - recklessly and usually scotch-free at that, as the recent New York Times editorial "No Crime, No Punishment" (8/25/12) has shown. And on the other hand the surviving visionaries, ivory tower researchers, political guerillas and similar Cassandras and preachers in the desert.
As your recidivist sherpa, I hope to avoid the trap Horace described so well with, "I labour to be brief - become obscure." But the mess all around is obscured and confusing regardless of my speaking ten or 60 minutes. From all sides financial tsunamis have hit us. And they have not stopped shaking us in our core convictions and expectations. So what level-playing field can there be and should we mainly worry about in the face of the LIBOR, the debt and other global scandals?
The Guardian summed it up with "This global financial fraud and its gatekeepers" (www.solami.com/bankingblues.htm#gatekeepers). And two days earlier, on July 12, the New York Times revealed that the current US Treasury Secretary "Geithner Tried to Curb Rate Rigging in 2008" (.../bankingblues.htm#rigging). On July 2, the Swiss daily Tages-Anzeiger pointed not only to stacked cards and a manipulated roulette which globally pervert time-tested institutions and practices. Like others before, it also called for fundamental changes in the training of bankers and for the re-orientation, even a replacement of a whole generation of self-serving market manipulators, marauders and other greed-driven parasites (Gezinkte Karten, manipuliertes Roulette: .../bankingblues.htm#Roulette). Somewhat, but only somewhat, I beg to differ. For I'd like to honor and support the precious few - like the partners of Switzerland's oldest private bank - who have refused to sell out their clients and employees to foreign taxmen. Who have acted in the best traditions of those who - some three generations ago - stood fast on principles in the face of confiscatory practices and even physical dangers for the scapegoats of that time. Who offered them real refuge and even life-saving protection, instead of exploiting them and licking the Nazi boots with inventions like the J passport stamp and other infamous and haunting servilities. And those who, today, still stand out and deservedly carry the mantle and obligations of a noble profession of dedicated fiduciaries and allies of law-abiding clients who see themselves exposed to an - again - ever more confiscatory and over-bearing state here and there.
Let's face it, we've all heard of - and been mystified by - accountancy and statistical tricks and repeated changes in the way we actually measure the real economy's real status and evolution. We've all seen our wizards bending over backwards in order to help our governments to mask their utter failings ever since the currencies, in 1971, were un-moored from disciplining real values. Thus, allegedly for economy reasons, the US Federal Reserve has also blinded us by ceasing publication of M3 figures since March 2006. Moreover, unemployment and inflation rates have been grossly misrepresented (Kevin Phillips, Numbers Racket: Why the economy is worse than we know,Harper's Magazine, 1 May 08). Under the pretext of saving the real economy, a dysfunctional financial system has been kept alive and, preposterously, with uncovered "fiat" money, has even grown into a monster threatening the real economy.
As a result, casino chips and other "Monopoly Monkey Moneys" are flooding and denaturing our markets and sucking life blood and life-sustaining fat reserves from our bodies and the economy (Louise Story, On Wall Street, Bonuses, Not Profits, Were Real, NYT, 18 Dec 08). With hard-working productive citizens being fleeced and seeing their buying power eroded by seemingly untouchable social parasites. And with strictly non-productive and purely self-serving high-speed computers running out of control. Just recently, in the case of Knight Capital, in a mere 45 minutes, 440 million dollars of an alleged market-maker's working capital evaporated and was soaked up by a more sophisticated market robot (Jessica Silver-Greenberg et al., Trading Program Ran Amok, With No ‘Off’ Switch, NYT, 3 Aug 12). On August 3, another New York Times commentator pointedly titled his story with "Frankenstein Takes Over the Market" (.../bankingblues.htm#Frankenstein).
As criticised also in said NYT editorial "No Crime, No Punishment" and in its accompanying piece "Where the Mob Keeps Its Money" (.../bankingblues.htm#mob), our legal system seems to be stacked in favor of institutions, while it systematically disfavors citizens. This has become glaringly evident with the recent Goldman Sachs, the Libor and other cases. It's what I call an epicier or grocery store law. By that I dont want to denigrate grocers. I merely want to point out the systemic imbalance and disproportionality of our current system. To illustrate, take the expiry date of perishable food and the employee who gets caught - and punished - for changing the expiry-dates by a few days. And compare that to the socially and penally non-sanctioned wide-spread damage, even havoc on the macro-scale caused by higher-ups who manipulate basic interest rates and issue inflationary QEs (quantitative easings) - in effect pumping up less the real economy than the casino, as the Bank of England's recent report showed unmistakably (Larry Elliott, Britain's richest 5% gained most from quantitative easing, Guardian, 23 Aug 12: .../bankingblues.htm).
So where is the level-playing field on that superior level? Where are the cops stopping the myopic and reckless profit- and bonus-maximizers here and there. And where are the judges and politicians to call the IRS to task for introducing - behind the constitutional lawmakers' back - the "backup withholding tax" which used to be called protection money? Indeed, at 28% - not on dividends and interest, mind you, but on capital - the IRS guarantees the drug lords and kingpins here and there anonymity (.../kingpin.htm#SS). You don't have to take my word for it; just read what the congressional watchdog, the General Accounting Office, has stated in its report: "One of the principal incentives for foreign financial institutions to become QIs is their ability to retain the anonymity of their client list." (Qualified Intermediary Program Provides Some Assurance That Taxes on Foreign Investors Are Withheld and Reported, but Can Be Improved, GAO-08-99 of Dec 07, p.11).
As discussed in previous years at our Cambridge Symposium (2008, 2010, 2011: .../porkbellies.htm#bolts), it is understood that over the past 11 years, in collusion with the UBS and Credit Suisse, the IRS set up a world-wide network of some 7000 QI banks. This system of qualified intermediary banks or QIs is seen as the world's biggest money laundering system. In the persistent absence of official figures, estimates vary widely, but the IRS never either confirmed or contested the accusation that it illegally rakes in what not-so-blue-eyed observers have estimated conservatively to be $500 bn/y. Apparently, these slush funds are being collected totally out of any democratic control and accountabiliy, serving to feed a myriad of agencies and secret operations. And its complementary structure, the FATCA system is expected to be no better - even though it was smuggled into the HIRE Act in 2010 in order to give a figleaf-wide appearance of congressional approval. Now you may rightly wonder why the IRS seems able to hide these Orwellian creatures behind a thick smoke screen. Revealingly, so far not even the GAO has been able to check out these democracy-eroding super-greased monsters, and even quizzitive lawmakers have been unable to stop this maverick train in its track (.../irsquery.htm ¦ Thomas Donlan, Pyrrhic Victory: IRS turns foreign banks into tax agents, Barrons, editorial, 4 Dec 00). The yet uncognised upside of all this is that the QI system provides for almost all accusations by US authorities against Swiss banks and employees to be unfounded. But so far only one Geneva private bank finally mustered the courage to assert and make this clear publicly (.../bankingblues.htm#Pictet).
But then again, you shouldn't be surprised either when you take into account how easily previously principled and steadfast Swiss banks, Swiss lawmakers and even the Swiss Government have lost their way in recent years when faced with unelected, yet arrogant, determined and out-of-control foreign bureaucrats. I am, of course, referring notably to some top IRS officials, but also to OECD, EU, FATF and now even mere private Egmont Group "blackmailers". In all of that I can't see anything coming close to a level-playing field either. Yet, all of you know that international stability and, in particular, balanced relations between sovereign countries are crucially dependent on respect for treaties, the rule of law and mutual respect. All nations share some common values - all the while they have to cope with their own cultural and other backgrounds which often provide for divergent national interests. However, due to their formal sovereignty, these interests can and must be defended competently and effectively by those entrusted with the mantle of power.
In the case of my own country, Switzerland, I am saddened, even revolted by the fact that we see more and more national entities dismally failing to stand up against marauding bureaucrats from other countries. This entails disastrous consequences for individual privacy, the rule of law and sovereign rights. And this is the more so when a private interest group can blackmail a government - as has happened when the privately organised money laundering specialists sought to impose their allegedly binding automatic data transmission world standard on the Swiss Government (.../egmont.htm). Like the members of the IRS, FATF, OECD and EU brotherhood, these entities are noteworthy particularly for their lack of effective surveillance by democratically legitimised institutions. Indeed, they have been shown to operate outside of the law, issuing ultimatums and setting up black lists of allegedly non-cooperating countries. In the infamous case of the IRS bullies' unrelenting pursuit of UBS and other Swiss banks, we have even seen them able and willing to blackmail the government of a sovereign country into unbalanced agreements and law changes. Did they have a mandate from their own government for creating such havoc? No, they didn't as far as I could determine!
In military doctrine, you have the often sucessful excape tactic called "Flucht nach vorn", i.e. flight straight ahead. It is used mostly in desparate situations. For it is always - and in the political arena no less - a risky proposition which can be applied only within limits. Time, of course, is fast running out on the fast-buck players facing the inevitable consequences of financial tsunamis hitting the productive, the real economy everwhere. This is due to both the still unrestrained production and putting into circulation of casino chips and "Monopoly Monkey Money". Indeed, since the un-mooring of the world's currencies in 1971, the world's gross domestic product rose from some $3 trillion to currently some $70 trillion, while the currencies in circulation rose globally from some $0.2 trillion to currently some $5 trillion to an unfathomable $600 trillion. Already on March 19 2009, E.L. Andrews reported in the New York Times on the available options of hyperinflation, war and/or monetary reform under the alarming title: "Fed creates $1 Trillion out of thin air" (.../brink.htm#thinair). So, it's really your choice which figure to use. It is not a science, it depends on your sources. And on whether you include in the devastating and no longer separable mix of fiat, giral and other confidence-based but essentially uncovered moneys, debt certificates, derivatives and other instruments the hopelessly corrupted financial market still manages to fool its players with.
So instead of preserving the world's remaining islands of sanity and stability as possible refuges from the financial tsunamis, as recovery and regeneration platforms for the future, the myopic and self-serving flat earth IRS and other casino players continue to be allowed to exploit and destroy these islands while the music is still playing. They use the old trick of "preaching water and drinking wine". Deftly, they have occupied the moral high ground of fighting real and made-believe criminals. Yes, the IRS grandstanders who seek to hunt down without mercy alleged US tax dodgers may have a case not unlike that of the Prohibition enforcers, and of those who, infamously, tried to deny US citizens the right to possess physical gold. Yes, they may "legally" pursue unpaid tax claims abroad for some $500 mio/y - if the principle of territoriality is ignored, that is. But as in the case of the Prohibition, we should not ignore the social and other costs involved. We should put into the balance the damage associated with these campaigns to other US interests and the havoc and costs inflicted on the world banking community. And if we take into consideration that all this state-supported Pharisaism essentially serves to cover up the some 1000 times more important IRS money laundering machine, we are in fact facing yet another category of apparent untouchables who cause immeasurable economic, social and political damage. Having arrogated themselves the mantle of globally operating "policemen", they recklessly but effectively risk to bring about their own sorry no-future sort of level-playing field. The question is: why should we let them jeopardise any further our all future?
This paper was written in response to Barry Rider's invitation. It reflects the Symposium organisers' growing doubts as to "whether economic crime, as it is understood today, really is a major threat to the integrity and stability of the financial system; or whether in fact there are far greater threats and consequently whether we have perhaps responded disproportionately to such issues as money laundering, corruption and insider abuse." And it draws on critics and inputs kindly offered by: Eric Delissy, Jürg Egli, Bodo Elbert, Hans Geiger, Jean Hulliger, Peter B. Kalff, Johann Keller. Jean-René Mermoud, Patrick Martin, Patrick Masters, Eric Reyhl, René Scheidegger, Andreas Schweizer, Gian Trepp, David Zollinger a.o. The author is alone responsible for eventual errors.
Economic Crime really matter in the world of today?
Prof. Hans Geiger, Zurich
Monday, 3rd September 2012 - First, I would like to thank Barry Rider for again inviting me to this year’s symposium. I always enjoy these stimulating days at Jesus College and the contact with so many good friends.
In his invitational letter Barry asked a very Barry-like and thought-provoking question, which he implicitly answered himself indirectly.
“This initial session seeks to address whether economic crime, as it is understood today, really is a major threat to the integrity and stability of the financial system; or whether in fact there are far greater threats and consequently whether we have perhaps responded disproportionately to such issues as money laundering, corruption and insider abuse.“My answers are, very briefly: NO, YES.
Let me elaborate on my second
YES, there are far greater threats to financial stability than money laundering, corruption and insider abuse.
Here is a list of these other threats:
- Surprisingly, the biggest threat came and still comes from the regulators of the banks, i.e. from those authorities which are mandated to promote financial stability. The first objective of the Basel Committee is “to promote safety and soundness in the financial system“.There is one common denominator behind the three institutions Banks, Central Banks and Governments that a colleague calls the “trio infernale”. I prefer the French expression “ménage à trois” (love triangle). This common denominator that is responsible for the instability of the financial system is indebtedness or leverage.
- Another big threat comes from the central banks that print money like crazy. They flood the financial system with what they call “liquidity”, which is a synonym for “central bank debt”. The central banks are encouraged or forced to do so by their governments.
- The third big threat, you will not be surprised, are the governments, which on their part, accumulate large amounts of debt which they will be unable to service at market conditions in the future.
- The regulators introduced capital adequacy rules – the key words are Basel II and Basel III – which allowed the banks to overleverage their balance sheets. They allowed the banks to apply their own internal methods of measuring risk, and they accepted the most dangerous and misleading measure of risk in the capital adequacy rules: Value at Risk (VaR). VaR is a measure for the maximum loss which will occur with a probability of 99 %. The crisis – the phase of instability – is a rare and extreme situation, i.e. it is always outside the 99 % probability range. So for the purpose of our argument, we should redefine the VaR as the “minimum loss in the case of crisis or instability”. The regulators and supervisors made a big mistake when they accepted the proposal of the big international banks to apply this risk metric for the purpose of prudential regulation. The regulators are still under the influence of the big international banks and financial institutions, which are organized in the IIF, Institute of International Finance.How will this end? Barry Rider did not ask that question. I will nevertheless answer it: In the end, the debt will be reduced by high inflation and devaluation. Over many centuries, this has been the most successful option for governments. And if they cannot achieve the necessary high inflation, they will simply default on their debt.
- The governments are the 3rd threat to financial stability. Over the last 40 years, the governments of the western world have accumulated large debt burdens on their balance sheets and even bigger ones off-balance sheet, i.e. for the welfare and social security commitments. When the financial crisis and the following economic crisis hit the world the public finances got completely out of control. Today, the financial commitments of most western countries exceed their financial capacity. This is not only true for Greece or Spain, but for Great Britain, the US and Germany as well.
- The third party in the “ménage à a trois” is the central bank. Since the financial crisis central banks have blown up their balance sheets enormously, printing money which they invested in banks, which in turn they invested it in government bonds. The banks use the government bonds as collateral to borrow more money from the central bank, and so it goes on.