Opinion: Bailed-out banks facilitate $21tn offshore cash hoard

By Nick Mathiason, Bureau of Investigative Journalism

Investigative economist James Henry exhaustively trawled through financial information held by the IMF, World Bank, Bank for International Settlements, central banks and national treasuries to come up with the most definitive report ever written on the super-rich and offshore wealth.

Henry’s Price of Offshore Revisited report, commissioned by Tax Justice Network (TJN), shows:

• between $21 trillion and $32 trillion of financial assets is owned by High Net Worth Individuals in tax havens. This does not include real estate, art or jewels.
• a conservative 3% return on that $21tn taxed at 30% would generate $189bn – a figure easily eclipsing what OECD industrialised nations spend on overseas development aid.
• the top 50 private banks collectively managed more than $12.1tn in cross-border invested assets for private clients, including their trusts. This is up from $5.4tn in 2005.
• fewer than 10 million members of the global super-rich have amassed a $21tn offshore fortune. Of these, less than 100,000 people worldwide own $9.8tn of wealth held offshore.

Accompanying the Price of Offshore Revisited is a separate paper [co-written by this author]. It reveals that data used by individual countries to assess the gap between rich and poor is inaccurate. And as a result, inequality is far more extreme than policymakers realise.

This is because economists calculating inequality fail to include the vast majority of offshore cash in their findings. So the wealthy are far better off than the studies suggest.

In Inequality: you don’t know the half of it, eight of the world’s leading economists were asked whether offshore wealth was largely excluded from inequality studies. Ranging from the World Bank’s acting chief economist to academics at the Paris School of Economics and the Brookings Institute in the US, they all confirmed this was the case.

This is because the wealthy do not disclose their true incomes. They also rarely participate in surveys. Academics do compensate for non-participation but they admit, official data vastly underestimates the true picture.

Trickle up
Combined, the two papers published by Tax Justice Network end any notion that trickle down economics – the Thatcher/Reagan doctrine that suggests tax breaks for the rich benefits all society – works.

We already know that in the US between 1980 and 2010, incomes of the top 1% doubled and the top 0.1% tripled while the bottom 90% saw their incomes fall 5%. But the TJN studies show this wealth disparity would be statistically even worse if offshore cash is included in official studies.

Perhaps most tellingly, the reports bring into sharp focus how global banks – so-called ‘pirate banks’ – have enabled the super-rich to avoid unimaginable sums of tax while at the same time enjoying taxpayers cash through government bank bailouts. A true double whammy of dark proportions.

Some of these banks have been labelled ‘too big to fail’ following the financial crisis. But after the Libor scandal, HSBC’s key role in laundering Mexican drug cash and the subprime bank disaster, there is compelling evidence to suggest they are also ‘too big to be true’.

Which brings us to an issue that is fast troubling global financial regulators: the so-called ‘London disease’. It has not gone unnoticed that many of the financial scandals in recent years have a Square Mile connection. Never mind Libor, it was the London offices of AIG, Lehman Brothers and Bernie Madoff that helped destroy them. The JP Morgan and UBS rogue traders who lost billions were both London based.

The UK is also arguably the centre of the offshore world. It is one of the biggest private bank centres and Britain’s non-domicile tax rules allow the global super-rich to legally avoid taxes on their overseas income while residing here. In addition, many of the UK’s overseas territories and crown dependencies such as Jersey, Isle of Man, the Cayman Islands and the British Virgin Islands are major offshore centres. This perhaps explains why the British government, for all its rhetoric, has failed to clamp down on the shadow financial system.

It has taken the painstaking work of TJN’s Henry to bring to light the true price of offshore. That the IMF, World Bank or OECD has not done this work is troubling especially as their lack of effective oversight contributed to the economic crisis that has caused significant hardship for hundreds of millions of people.

A good way to atone is to start deploying their thousands of economists to implement measures that will introduce transparency to the financial system instead of policies that facilitate secret offshore hoarding by a tiny elite.

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David Cameron wants to turn the UK into a tax haven

$21 trillion (£13tn) worth of assets are being 'hidden' by a global super-rich to avoid tax. The recent report by the Tax Justice Network, penned by James Henry (a former chief economist at the consultancy McKinsey), got widespread coverage. George Osborne says it’s time to put a stop to it. David Cameron says it’s time we got a slice of that cake (actually, a bigger slice than we already have). We invited Richard Murphy to explain:

By Richard Murphy

Adviser to the Tax Justice Network and the TUC on taxation and economic issues. He is also the director of Tax Research LLP.

David Cameron seems to want to turn the UK into a haven for tax avoiders. At least we now know where we stand. In wooing French tax exiles, Cameron makes a mockery of democracy.

He promised to 'roll out the red carpet' to French businesses while attending the G20 summit in Mexico, saying in June 2012,

"If the French go ahead with a 75% top rate of tax we will roll out the red carpet and welcome more French businesses to Britain and they will pay taxes in Britain and that will pay for our health service, and our schools and everything else."

But hang on a minute. His chancellor said in March, "I regard tax evasion and indeed aggressive tax avoidance as morally repugnant". What's more, George Osborne pronounced himself "shocked" at the amount of tax avoidance in the UK. And yet, here's his boss saying the door's open to all and sundry French tax avoiders who want to set up camp in the UK.

As for the businesses these tax exiles own, let me assure Cameron that they will stay put in France, because that's where their markets are and in the days of the internet the business owner does not have to live over the shop – something Cameron and Osborne have not yet noticed. So we won't win there. And that's inevitable – look at the world's tax havens and you'll see that nothing but the pretence of money shuffling occurs in those places.

As a result Cameron's words are on this occasion, as on so many others, literally meaningless. In that case it is what Cameron's words imply that matters. Let me note a few more of them in that case:

"Every country sets its own tax rates, but I think in a world of global capital, in a world where we're competing with each other, in a world where we want to send a message that we want you to build businesses, grow businesses and invest, I think it's wrong to have completely uncompetitive top rates of tax."

Now that's really interesting, because this is the language of tax havens. It's places like Jersey, Cayman and the British Virgin islands who usually talk the language of tax competition that underpins Cameron's comments.

And, of course, it's tax havens such as Switzerland that exist to roll out the red carpet for tax exiles. They all do it by offering low tax rates – something the UK is also capable of doing through its generous tax residence rules and domicile rules. Perhaps it's no surprise that Philip Stevens of the Financial Times recently quoted a German official saying that the UK opting out of a European banking union would turn us into a "Greater Guernsey". Could it be that with these comments Cameron has confirmed that "tax haven UK" is the new plan that he and George are hatching?

Cameron is already trying to pick over the carcass of France. No doubt he'll do the same for Spain and Italy too, while Greek ship owners have always had a special place in British tax planning with their abuse of our domicile rule.

That domicile rule ensures that all those not born in the UK enjoy favourable tax treatment if they live here. It's an unfair prejudice and socially divisive. What more could you do to show how dedicated the UK is to increasing inequality by helping the wealthiest immigrants get richer while the rest head ever closer to the economic misery of poverty? And we know that house price inequality caused by wealthy immigrants to the south-east and London makes housing inaccessible to the vast majority in those areas.

That's what Cameron seems to want for us, speaking on the same day The Times, which has conducted its own investigation into tax avoidance, said:

"The British tax system is unfair. It charges the vast majority of people the basic rate of income tax, and expects them to pay. It asks a minority to pay higher rates of tax, and then invites them to avoid it."

That's right. And The Times has demanded that the tax system be changed. But if Cameron has his way he'll keep all the prejudice, bias, discrimination and abuse in place, and all for the purpose of undermining our international allies and EU partners in their efforts to balance their books and restore economic wellbeing.

Except it's even worse than that. What he's also said is he'll seek to undermine a decision that the people of France have democratically chosen. That's what tax havens do – they hold democracy in contempt. This all bodes ill for equality and for our hopes of diversifying the UK economy away from a finance industry dedicated to servicing transient wealth that holds the long-term residents of the UK in contempt.

All we can say in that case is thanks Dave: at least you've set out your true agenda.

This article first appeared in the Guardian.

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Rip-off News round-up. Our pick of the last week's media (Thu 26th July)

$21trillion (£13tn) worth of assets 'hidden' by tax dodging global super-rich 
A global super-rich elite had at least $21 trillion hidden in secret tax havens by the end of 2010, according to a major study by a former chief economist at the consultancy McKinsey. BBC NEWS

(Taxmen around the world want to know where it's hidden - and so do some former spouses)

UK economy on its knees as shock growth figures show disastrous 0.7% plunge in output
Figures fuel criticism that Chancellor George Osborne's austerity measures are choking off the recovery. The UK's economy is 0.3 per cent smaller than when the coalition came to power in the second quarter of 2010 DAILY MAIL
(We can't afford to see another job lost. Well, maybe one, Mr Osborne)

Four in ten Britons will cut back on food
In the coming months four in ten Britons will be forced to cut their food budget as households experience the tightest squeeze in living standards since the 1920s, says Which? TELEGRAPH

Payday lenders agree new rules, but they are only voluntary
Four trade bodies - representing 90% of the lenders - have committed to make fees and charges clearer and to give more protection to those in difficulty. But the rules are only voluntary, and one consumer group has described the new code as merely rebranding. BBC NEWS
(Meanwhile in some wonderful parallel universe somewhere they've made the repayment of gouging loans voluntary too.)

Renewable energy: Onshore wind subsidy to be cut by 10%
The Treasury is thought to have favoured a larger 25% cut in the taxpayer subsidy of green energy investment. BBC NEWS

(If you are a tree-hugging leftie, the cut is bad news. But a cut in the cut is good news! Yay! Or is it? Confused? The Big Six energy cartel isn't: they'll continue making whopping profits while the taxpayer (subsidy) or the customer (higher bills) bear all the risk and costs of green investment.)

First annual results of Measuring National Wellbeing Programme show teenagers and pensioners have key to happiness 
This is part of the government's attempts to develop an alternative measure of national performance to GDP. The Office for National Statistics published its first report on how happiness and anxiety levels vary according to factors including sex and ethnic group. Ministers deny it's a sneaky way to take people's minds off poor GDP performance. GUARDIAN
(What's the key, we asked the teenagers and pensioners? It's the pleasure of haranguing the rest of us for wrecking the economy and making them pay for it)

Paying a plumber cash in hand morally wrong, says Tory minister Gauke

Cameron, Clegg and Boris Johnson all admit paying tradesmen cash in hand. If it’s proven you’re doing it to dodge the VAT you can be prosecuted. But David Gauke, exchequer secretary, denied having paid cash himself to a tradesman to gain a discount. "I've never said to a tradesman: 'If I pay you cash, can I get a discount?'" he told BBC's Newsnight. GUARDIAN

("...I prefer to use hand signals instead" he added)

Trade minister and former HSBC boss Lord Green admits 'regret' over HSBC being caught by US Senate laundering money for rogue states, terrorists and drug lords.
But he refused to provide details of his involvement. DAILY MAIL

'Lack of evidence' that popular sports products work

Review of Lucozade Sport: "the quality of the evidence is poor, the size of the effect is often miniscule and it certainly doesn't apply to the population at large who are buying these products."

Review of Maxnutrition food supplement: "absolutely fringe evidence and I think that that is almost totally irrelevant, even at the top level of athletics". BBC NEWS
("But we recognise the psychological boost it gives to companies that take real pleasure in selling this rubbish to us")

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Don’t be ripped off by a Parliamentary Inquiry into bankers. Only a full Judicial Inquiry will do

By Ann Pettifor 

Fellow of the New Economics Foundation.

[Click here to sign the e-Petition.]

Power corrupts, and financial market power has corrupted financial and other markets. It has done worse. It has corrupted politics. That is why Britain will be ripped off by a Parliamentary Inquiry into banking. It will go nowhere, lack both credibility and teeth, and will inevitably be discredited. Above all, it is most unlikely to rein in bankers.

That is why we launched our  e-Petition the very day the Barclays LIBOR scandal broke on 27^thJune, and why we are still calling on Britons (and all UK residents) to sign this Peoples’ Petition herefor a full Judicial Inquiry into...  

“the fraud, wrongdoing and ethics of British banks, their management and their staff, and the role of the British Bankers Association. The terms of reference of this inquiry should also include the manipulation of interest rates on about £225 trillion of assets. The inquiry must have full powers to compel witnesses to appear on oath, and to obtain all forms of evidence.”

Within a few days, over 10,000 had already signed the petition, and very soon others – including Ed Miliband and the Labour Party – joined in the call. 

But the last thing the Coalition Government wanted was another Judicial Inquiry - these are ok for stuff like media wrong-doing, but not when trillions of pounds are involved.  Since doing nothing was clearly not an option, given the scale of public outrage, they decided to set up (drumroll)….. a Parliamentary Commission on Banking Standards – and to exclude from its membership those MPs on the Select Committee who had been most incisive in questioning Bob Diamond. A Commission whose members include Lord Lawson, Chancellor during the Big Bang deregulation of the City, alongside several other bank-linked members and pure career politicians.

Why are we asking you to show you reject a Parliamentary Inquiry, and sign our Petition?  Simply because Britain’s political establishment has effectively, over a sustained period, accepted and legitimised bankers’ wrongdoing and fraud, so that its members are precisely the wrong ones to be entrusted with scrutinising and recommending changes to the ethics and culture of banking. 

Our politicians are tasked with overseeing and regulating the banking system in the interests of the British people and the British economy as a whole. Instead they (like their colleagues in many countries) turned a blind eye to the City’s greed and fraud – and allowed the banking system both to fail Britain economically, and to be corrupted.

Bankers’ greed, dishonesty and ineptitude led to the disastrous financial crisis of 2007-9 when banks had to be nationalised, and more than £1 trillion of taxpayer-backed funds pumped into the banking system to maintain its solvency. And taxpayer generosity did not stop at that point.  Yet despite the City’s catastrophic failures, Westminster’s politicians – from all parties with just a few notable exceptions – have behaved with embarrassing timidity or grovelling deference towards Britain’s bankers.

Until that is, the American Department of Justice revealed its investigations into Barclays on 27^th June.

Neither Labour’s Alastair Darling nor Conservative George Osborne nor Danny Alexander of the LibDems dared rein in the bankers after the Great Contraction. Instead Westminster appointed the Vickers’ Commission with a limited remit. Vickers’ weak advice to ‘ring-fence’ bank activities was promptly rejected and watered down by our parliamentary representatives – thanks to bank lobbying.

If they could not be trusted to rein in British bankers then, then how can we trust them now that the Barclays and HSBC frauds have finally surfaced, to be followed by many others as the LIBOR and other scandals unfold?  

They think that we, the people, are foolish enough to believe they have changed their stripes, and stiffened their spines.

They think we’re too blind to the arcane proceedings of a Parliamentary Inquiry to know a) the difference and b) that we’re being fobbed and ripped off.

 

We’re not. We want an independent, tough Judicial Inquiryinto the misconduct and ethics of Britain’s banks, precisely to ensure that it is not caught in the sticky web of mutual self-interest woven by the politicians and bankers.

For too long, our politicians have been heavily lobbied and seduced by bankers. Moreover, many influential MPs, ex-Ministers and Peers, whether Conservative, LibDem or Labour Party,  are either ex-bankers, have links to bankers and are, or have been backed by bankers. The Conservative Party received half of its 2010 election year funding from City financiers.

The £93million City lobbying machine has ensured over time that the major political parties turned a blind eye to City wrongdoing, and backed a consensus for ‘light touch regulation’.

The Conservative Party launched the era of de-regulation way back in 1971. ‘Liberalising’ finance was led by Conservative Chancellor Anthony Barber (later, Chairman of Standard Chartered Bank) who introduced de-regulatory measures as “Competition and Credit Control” (dubbed ‘all competition and no control’ by many economists). Competition and Credit Control began the long process of de-regulating the City of London, symbolized in the “Big Bang” when Nigel Lawson was Chancellor.

De-regulation was, alas, warmly embraced by New Labour.  Chancellor Gordon Brown in a 2005 speech to the CBI on 27^th November 2005 argued in favour of:

“ not just a light touch but a limited touch.  ….a new model of regulation (the risk based approach) ..(for)  financial services and.. the administration of tax. And more than that, we should not only apply the concept of risk to the enforcement of regulation, but also to the design and indeed to the decision as to whether to regulate at all.” (Our emphasis)

Political decisions to de-regulate finance loosened official control over the sector to such an extent that officials of the FSA, the Bank of England and the Treasury have proved impotent in countermanding the arrogance of the bankers’ cartel – the British Bankers Association – and the wrongdoing of individual banks and bankers. 

The overseers and regulators of the system likewise – jointly and severally – failed the British people.  They declined to set or to uphold rigorous regulatory standards; and acted with undue obeisance towards politicians effectively seduced by the lures of the finance sector.

The financial services industry became bloated, corrupt, appallingly led and managed, and devoid of any ethical values or principle, or of any concept of social purpose. In consequence, the industry has severely damaged Britain’s economy. 

To ascertain the truth, to assign responsibility and recommend serious far-reaching reforms, we still need an independent, Judicial Inquiry, free from the sticky links that bind bankers and Parliamentarians. Nothing less will do. A Parliamentary whitewash won’t wash.

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US Senate catches HSBC laundering money for rogue states, terrorists.. and drug lords

Chris should be proud of another world beating British bank

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Corporate culture - are we culturally a nation of looters?

The summer of 2011 saw the London riots in full view of local, national, and closed circuit television. Heedless of their audience ordinary Britons smashed and grabbed. Over the ensuing months thousands of convictions and punishments were handed out to citizens who had never faced a magistrate before and will probably never do so again. It takes an extreme hooligan to kick in a shop window. But once the window has been kicked in, it seems there are thousands of us who would step through and snatch stuff.

Corporate Britain saw the windows kicked in back in the 1980s when financial services were de-regulated. We quickly saw what well bred city gents turn into when nanny isn’t around. Bankers and traders leading the scramble for loot were followed over the years by the other professions. Some dashed through immediately while others waited a decade or so to see if anything would be done to stop the looting. Eventually, finding that lawmakers, regulators and public opinion were indolent and impotent, they too stepped over the line. Financial Services were joined in the looting by Energy, Insurance, Transport, Telecommunications and others. It wasn’t just the direct looting of us ripped-off Britons individually. The looters stepped into public services. Defence procurement, IT projects, the outsourcing to the private sector of policing, health, education and infrastructure build. The looting continued through decades of Conservative and Labour governments. Successive politicians, many of whom grew mightily wealthy, have a simple question to answer:

Please Tick:     Were you a Fool or a Knave?

            _            Fool

            _            Knave

            _            Fool and Knave

The ‘Big Bang’of 1986 was the sound of kicked glass shattering, and the echoes continue to reverberate today.

Like rioters in a court, the summer months of 2012 exposed a great deal about corporate culture.

• Barclays became the first of many big banks to have its Libor tricks declared by the Governor of the Bank of England and the Chairman of the US Federal Reserve to be fraudulent, exposed and punished.
• British banks, censured by the FSA, faced paying billions in restitution for scamming businesses into Interest Rate Swaps.
• HSBC was forced to apologise to the US government for laundering drug money, putting profit before probity.
• GlaxoSmithKline was fined US$3billion for selling dodgy drugs and bribing doctors to prescribe them.
• Traders were caught out rigging the market for oil and petrol.
• G4S left the Olympics inadequately guarded because they were more focussed on counting their profits than accounting for their guards.

Dies mirabilis, the British Bankers Association, arch apologist and denier, cancelled its 2012 summer party having recognised that “our industry needs to think long and hard about its collective behaviour”. Deprived of their Pimms and champagne the bankers skulked off to collect their thoughts over stronger stuff in their boardrooms.

Much was exposed, but was anything learned? The following exchange between the MP Jesse Norman and Bob Diamond, when Diamond was giving evidence to the Treasury Committee, suggests not:

Jesse Norman: -they will see it in the context of the [interest rate] swap scam [ripping off business customers], PPI [ripping off retail customers], Protium [ripping off investors], this Brontos tax evasion transaction [ripping off the taxman] that was undertaken in Italy last year with UniCredit. That is the context. They are going to say, "This is a culture that was deeply flawed, deeply corrupted, and that is where it went wrong."

Bob Diamond: I hope we’ll look at this in the context of the decisive action that was taken, as a sign of the culture and the willingness that when there is a problem, we are going to get to the bottom of it; and within the context that there is a broader industry issue; and, lastly, I do hope, Jesse, that we will look at this as having been a number of years ago, not today.

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/uc481/uc48101.htm

The assertions rolled out repeatedly by rogues and scoundrels over the decades to excuse all sorts of atrocities don’t change much:

• “It happened years ago.” As it takes years for an offence to get to court it is generally true that the offences happened "years ago".
• “It was just a few rogues.” I don’t know who said this first, but I quote: “add a pint of sewage to ninety nine pints of milk and you have one hundred pints of sewage”. It is for the good of those ninety nine pints that the one pint must be eradicated.

The “culture at HSBC was pervasively polluted for a long time”, said the chairman of the US Senate subcommittee on investigations. It has indeed been a long time since companies learned the formula for continuing business as usual:

When caught, do the following:

a)      Co-operate fully with the investigation

b)      Pay large sounding fines (which are actually tiny fractions of profits)

c)      Send a few executives into the wilderness with a thick wad of banknotes for consolation

Bob Diamond (former CEO of Barclays) reckons culture is about “what we do when nobody is looking”. Diamond missed the point. Culture is what we do whether people are looking or not. It is what we do without worrying whether we are being watched or whether we are hidden. Culture is what we do because it is what we are.

So are we all culturally looters? Do we just need the opportunity to be high and the cost to be low before we too will snatch something?

The answer is perhaps “yes”. It happened in the London riots of 2011 ago, but it’s not just us 21st century Britons. In the past it has happened on a scale far more vile and more widespread. The 20th century saw apartheid in South Africa, and extermination camps in Nazi Germany. The 19^thcentury saw the extermination of American Indian populations and thriving slave plantations in the USA. It happened in the British Empire where across centuries the sun never set on British commercial abuses of the natives.

The point is not that these examples were evidently terrible. The point is that whole civilised populations participated. If someone else would just kick in the window, many of us will march through and take the loot while most of the rest of us stand by acquiescing.

Are we proud of this cultural trait? Well, in hindsight we are not. But at the time was empire not glorious? Culturally we may be looters, even though most of us don’t want to be. When the window is broken we find the temptation to reach through and grab something irresistible. Some do resist through fear of punishment, some because it’s just not right. But we don’t only do the things we think are right. Chickens don’t deserve to be slaughtered in their billions for our food, but I still eat chickens because they taste so delicious when properly prepared.

Light touch regulation assumes the regulated are people of good will. They have proved not to be. The Free Market requires strong consumers as well as strong companies. Companies are well organised, consumers are not. Adam Smith, the capitalists’ icon, realised this:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." 

Adam Smith (Wealth of Nations [1776], Vol. I, Ch. 10, pt. 2.)

Ordinary Britons in particular, being culturally a solitary breed, seldom meet together at all except to drink beer. Organising us is a feat for titans. Individual Britons separately withdrawing their custom and swapping suppliers is just a case of jumping from one frying pan to another frying pan. Britons, being determined democrats, hope to exert their strength by their votes. Sadly, British politicians only fight for Britons when they are in opposition. Knowing that while in opposition they can’t be expected to do what they promise they flex their rhetorical muscles: “With no responsibility comes great power”.

People loot because the incentives are higher than the disincentives. The answer to looting is not stronger windows. If the incentive is high enough looters will always find away through or around the windows.

We have been gulled for decades with the idea that high pay brings high performance. Perhaps so, but the high performance is not in our interests. The figures show it doesn’t make us all better off, it just enriches the ‘high performers’.

The key to control the inclination to loot is to weaken the incentives and strengthen the disincentives.

a)      Excessive pay encourages the looters to try for one big heist. One heist big enough to put them in clover. If they can get away with that then they can retire in comfort. On the other hand, if they get away with it then they can try for another heist knowing their nest is already feathered if they get fired. If companies' management are not inclined and companies' shareholders are not empowered to restrain pay, then perhaps it is down to the taxman to confiscate it.

b)      Penalties on firms need to be extended to penalties on individuals that actually hurt. Taking £1million in fines from a man who has £100million means nothing. The one thing all individuals have to the same measure is time. Individual penalties need to include jail time.

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Rip-off News round-up. Our pick of the last week's media (Thu 19th July)

NHS pays £1,600 a day for nurses as agency use soars to cope with rising staff shortages

Experts said the disclosures show how hospitals' attempts to improve their efficiency have backfired. Jobs are being cut, only for temporary staff to be hired at vastly inflated rates - with private agencies receiving more than seven times the rate paid to nurses on the pay roll. TELEGRAPH

Miliband slams pension fees 'rip-off'

At present, some people are paying up to 4% or 5% in fees and charges on their pension schemes, which could swallow up as much as £50,000 of every £100,000 they pay in over the course of their working life, he said. INDEPENDENT
("We decided to do nothing about this during our 13 years in government, and then bring it up in opposition. Genius!" he didn't say)

Was the petrol price rigged too?

Motorists may have been paying too much for their petrol because traders may have manipulated oil prices in the same way they rigged LIBOR interest rates. TELEGRAPH

("What else do you expect us to do in our lunch breaks?" said a LIBOR trader)

Labour attacks lettings agencies who 'rip off' landlords and tenants

Labour will look at how to cap rising rents in the private sector, said Hilary Benn, the shadow secretary of state for communities and local government. He also admitted that Labour made a mistake in office by not building enough "social homes", thereby creating problems for the current housing market. GUARDIAN

Mobile Firms Accused Of £90m Price Hike

Mobile phone companies have been accused of making £90m a year by legally using "hidden" contract clauses to raise the cost of fixed-rate tariffs during customers' contracts. SKY NEWS

("When we said we'd 'fix' the rate, we meant it literally" said their spokesman through puffs of cigar smoke)

Cops Drafted In After G4S Staff Fail To Show for Olympics Security Duty

First 3,500 soldiers are drafted in to fill the G4S shortfall. Days later less than 10 G4S guards reported for duty out of an expected 58 staff, as Northumbria Police Federation called the security firm's blunder "shambolic". SKY NEWS
(A growing number of stand up comedians are finding themselves out of work as G4S issues another press release.)

HSBC slammed by US as 'Pervasively Polluted' and accused of turning a blind eye to billions in laundered drug money

"The culture at HSBC was pervasively polluted for a long time," said the chairman of the Senate Permanent Subcommittee on Investigations. HSBC Bank Mexico transported $7bn (£4.5bn) in cash in armoured vehicles to the bank in 2007 to 2008 - judging the client to be "low risk".  SKY NEWS

("We don't use HSBC 'cos they're corrupt, but 'cos they've got fantastic rates on their savings accounts" said all the local drug lords)

Barclays repeatedly sailed close to the wind, Bank of England governor says

Sir Mervyn King told MPs: "They [Barclays] have been sailing too close to the wind across a wide number of areas." King denied he was out of touch, but then admitted he only heard of the resignation of the Barclays chairman by reading it on the BBC website. BBC NEWS
(And in other news, Mrs Mervyn King speaks to the BBC: "Please tell my husband I've put his dinner in the oven. He'll no doubt hear this from you before he works out what that hot metal box in the kitchen is doing")

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Record numbers of shops have started their sales early

KJ sticks to the oldest sales trick in the book...

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What's the difference between a banker and Rumpelstiltskin?

Having explained how 'interest rate swaps' work in a previous post, we asked Honestly Banking to explain why they were sold.

The best fairytales are not just empty whimsies. The best ones seek to educate us about the hazards of greed, gluttony, pride, lust and all the other stuff we’d really like to do but probably oughtn’t. The Bully-Banks guest post on this blog compared their ripped-off situation to Little Red Riding Hood in the clutches of the wolf. Their situation also brought to our mind another salutary fairytale: Rumpelstiltskin. 


In the Rumpelstiltskin story a king decided the way to save his finances was to put the burden on a young girl, threatening her with death unless she turned straw into gold. The desperate girl takes a deal from a malevolent demon that provided her with gold for the king but as part of the deal she must give him her firstborn child. The demon guessed the unsophisticated girl, needing to avoid impending death, would not appreciate what she had promised. The trouble started when the demon came to collect.

In Ripped-Off Britain the government decided the way to save its finances was to put the burden on small and medium businesses (which make up 60% of the private sector), to turn the recession back into growth and employ all those sacked public sector workers. The desperate businesses took deals from malevolent bankers who provided them with the gold, but as part of the deal required the businesses to sign an “interest rate swap agreement”. The bankers guessed the unsophisticated businesses, needing to avoid impending ruin, would not appreciate what they had promised. The trouble started when the banks came to collect.

The demon gives the girl a chance to get out of the deal if she can discover his name. The FSA has given the businesses a chance to get out of the deal if they can explain the scam and get public opinion on their side.

Explaining the scam is not as easy as it sounds. Even Ed Miliband, leader of the Labour Party, with two degrees in economics (Oxford University & London School of Economics) conceded he didn’t understand it. In a Sky report, Ed said:

"I visited a guy called Alan who runs a signage company in Putney. He was in tears. It's a chilling story about what the banks are doing to people.

He has lost about a £1m because of the banks. He got sold a 'dual interest rate swap'. I have a master’s degree in economics and I can’t understand it."

The only person who knew Rumplestiltskin’s name was the scamp himself. Perhaps the only people who understand Interest Rates Swaps are bankers. So we asked a banker, our occasional guest blogger from Honestly Banking to explain a bit more how and why banks managed to get businesses to take this product. He responded thus:

Interest Rate Hedges fall basically into two categories; Swaps that effectively fix a rate and Caps that give you a ‘no higher than’ rate. All the other structures, such as collars are generally methods of hiding premiums and increasing bank profits.

When these structures are priced and sold the bank will make use of the ‘Yield Curve’, which shows the market’s expectation of future interest rates. If the curve is dropping away in the future, i.e. the market expects interest rates to fall, the bank makes more profit with a longer-term hedge that keeps the interest rate they receive up when market rates fall. Interpreting Yield Curves is fraught with danger. An example yield curve is given below.

Casino banks like to enter into bets with clients. Just like in real casinos, the house usually wins. They have the knowledge and information to out-manoeuvre clients into structures that will make the bank money.

Imagine the Cap the bank has sold has a ‘clean’ cost (i.e with no profit in) of £100,000 (this is what it costs the bank to buy the Cap in the market to give to the client). To make some money on this the bank might need to add say a 50% margin, but a £150,000 premium is unacceptable to the client who would walk away at this price. The bank has to find a way of generating a value of £150,000 without charging the client a premium. To do this, the bank shows the client a collar whereby the client is ‘tricked’ into selling the bank an Interest Rate Floor. If the bank bought this ‘floor’ in the market it may have cost it £150,000 – but it takes it for free from the uncomprehending client. The bank just subtracts the cost of the Cap from the Floor and makes an immediate profit of £50,000.

Bank gives Client a cap for free     =          cost to bank, £100,000

Bank ‘buys’ floor from client          =          value to bank, £150,000

(client takes on the falling rate risk without getting paid)

Nett Profit to Bank                       =          £50,0000

The client has become a derivatives trader unknowingly by selling a floor to the bank. The bank doesn't pay the client for the derivative it has unknowingly sold, but just trousers the profit. Sure the client has a Cap for free, but has just taken on two onerous risks: that of falling Interest Rates and the substantial break costs.

• Impact on client of different LIBOR rates, with Cap = 6%; Floor = 4%;    
• LIBOR = 5%               Business pays bank 5%
• LIBOR = 7%               Business pays bank 6% (cap invoked)
• LIBOR = 0.5%            Business pays bank 4%. However the bank will often trick the client with a 'Value' feature to give the client a 'better' or 'cheaper' rate, meaning they could pay an extra 3.5% on top of the 4%. 7.5% in total - bonuses all round!

With this extra money made from the client in addition to the loan margin when rates fall and the substantial breakage costs (typically 30%-50% of the amount hedged), the smug banker is ready to open a bottle of Bollinger. Of course the client has been duped. They will pay far more under this ‘free’ arrangement.

As Libor Rates have fallen, banks have taken the opportunity to do two things to increase their profits. Firstly they have started to increase the margins they are charging on loans. This means as Interest Rates have fallen, some debt has actually become more expensive! Banks will argue about risk and cost of capital, but the reality is they are in an oligopoly so they can do what they like!

The second change is more subtle and pernicious. Where they can, banks have started to shift borrowers from Base Rate to Libor (Libor is higher). Clients are usually strong-armed into this as part of a package of new reforms. Banks claim the clients’ costs reflect more what the bank is paying for its debt. The bank is of course being disingenuous, as when the debt was granted they would have bought the money using a hedge so their position is protected.

Additionally this often introduces a new risk to clients who are already hedged - “Basis Risk”.

Basis Risk is where the hedge is in one index and the debt in another, For example you borrow in Base Rate, but the hedge is in Libor. Libor is more volatile than Base Rate, so the chance of the hedge's barriers being breached is higher. This mismatch can be dangerous as the hedge may contain nasty ‘trigger’ type elements as well. Additionally the bank will have carefully set the calculation criteria in its favour, so that Libor may only need to breach a barrier for a day, but you pay a penal rate for a quarter. Nice!

Banks are Casinos. Remember, when you are dealing with them, the house always wins!

www.honestlybanking.co.uk

@Honestlybanking

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Rip-off News round-up. Our pick of the last week's media (Thu 12th July)

 

SHOCK NEWS! British Bankers Association summer party is cancelled!!!!!

Their statement said “We regret the short notice but our industry needs to think long and hard about its collective behaviour” BLOOMBERG 

Original details were:
Date & Time: 4th July 2012, 18:30 - 20:30
Venue: College Garden, Westminster Abbey, London, SW1P 3PA
Dress Code: Business Wear
(They forgot to add... Ethical Code: Optional)


UK Government departments cut spending by £6.7bn more than they had planned in the year to March
The government cut 270,000 public sector jobs last year. Some of those have been replaced by new jobs in the private sector but not enough to make a significant impact on high unemployment levels. BBC NEWS

One in six Lords have paid links to financial services industry

Research shows bankers and financiers hold many seats on key committees scrutinising the City. GUARDIAN and BUREAU OF INVESTIGATIVE JOURNALISM

("On the 10th day of Christmas my truelove sent to me... One-in-six Lords a-leaping with fistfuls of banker moolah...")


Revealed: why Gordon Brown sold Britain's gold at a knock-down price

Facing a global collapse in the banking system, the Chancellor bailed out the banks by dumping Britain’s gold, forcing the price down and allowing the banks to buy back gold at a profit, thus meeting their borrowing obligations. TELEGRAPH

Half of graduates will be paying off loans in their 50s
Some 56 per cent of all graduates will take so long to repay their loan that they will qualify for it to be written off after 30 years. DAILY MAIL

Libor Rate-Rigging Scandal: MP Admits Select Committee Were Useless In Uncovering Truth
Andrea Leadsom, a Conservative member of the Commons Treasury Select Committee that grilled Barclays' chief executive Bob Diamond last week said "I don't think we did a fantastic job either. It's a fair criticism to say 'You guys were useless'. PRESS ASSOCIATION
(...she forgot to add "are and always will be useless")

Libor Unveiled A London ‘Cesspit,’ says Bank Of England’s Tucker
Bank of England Deputy Governor Paul Tucker said the Libor investigation unveiled a “cesspit” in the City of London and called for regulators to scrutinise all benchmarks that aren’t based on real transactions. BLOOMBERG
(Archaeologist working in the City says "I had barely pulled on my wellies and then I saw it. A cesspit, circa 2012, perfectly preserved, untouched by human regulator, etc. etc.)

Banking regulator, the FSA, worked with banking groups to protect City interests

Minutes reveal independent watchdog in talks with lobbyists on staving off financial transaction tax and regulatory reforms. GUARDIAN and BUREAU OF INVESTIGATIVE JOURNALISM
(And in other news, the Pope's secret diaries reveal Catholic leanings; a bear's secret diaries confess urinating in the forest, etc. etc.)

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An elected House of Lords? That's just not fair!

Chris, Fee and KJ on the consequences of House of Lords reform

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