THE GREAT FINANCIAL CRISIS

What the people need to know but must not be allowed to find out.

By Michael Faulkner – April 05, 2009

The last column in this series, which appeared on March 22^nd, concluded with an extract from a book entitled “Equality” by the Fabian socialist, R.H,Tawney.  The extract was mistakenly attributed to a lecture delivered in 1929.  The book was actually an expanded version of the lecture but was not published until 1931 and revised in 1938. The extract   was taken from the final chapter of the later edition. This in no way diminishes the impact of Tawney’s words and their relevance to the current financial crisis. He was writing in the late 1930s when the impact of the Crash of 1929 had resulted in mass unemployment and brought Europe to the brink of World War Two. Referring to the Labour Party’s failure while in office (1929-31) to fulfil the hopes invested in it, he wrote: “But it would be fatal for it once more to evade the task of effecting a real transference of economic power, on a substantial scale, from private to public hands.” 

The extract which concluded the last column bears repeating here as it stands as a fitting introduction to the subject matter of this week’s column. The economic system that had broken down, Tawney wrote:

 There is wide agreement that the present financial crisis which is now rapidly becoming an economic crisis, is the worst since 1929. Is there any evidence that the British government can offer reasonable hope of attacking with courage the causes which have produced it? That seems highly unlikely. For the last three decades successive governments, Tory and Labour, have extolled the neoliberal theory and practice that  were  responsible for getting us into this mess.  Gordon Brown as Chancellor of the Exchequer and Prime minister has, since 1997 been insisting that there would be no return to “boom and bust” and that Britain’s continued prosperity depended on light touch regulation of the financial system.  Needless to say, the Tory opposition had no serious quarrel with this assessment.  Ironically Brown is shortly to host in London a meeting of leaders of the G.8. countries, who will try to reach agreement on the best way to deal with the global crisis. In 1931 Brown’s predecessor, James Ramsay MacDonald hosted a World Economic Conference in London which, it was hoped, would find a way out of the Depression. It broke up after 45 days having achieved nothing, and done nothing to enhance MacDonald’s reputation.

R.H. Tawney, who was no Marxist, understood that the crisis of the 1930s was systemic. There are those today, such as Warren Buffet, hardly a leftist, who have said as much about the financial crisis. But, more often than not attempts to explain what has happened resort to heavily personalised attacks on bankers. Although understandable, much of this populist response misses the point. The term “banksters” is appropriate to describe those whose egregious excesses and gross insensitivity to the suffering caused by the breakdown of their system, have provoked public outrage. But they behave as they do and have done what they did because the system allows them to. The sickness goes to its heart and, unless the system is radically transformed, it will not be eradicated. It is disingenuous of the government now to pretend that they were unaware of the way the banks and corporations were operating when they engaged in aggressive take-overs, sought £billion profits through deliberately complex and devious tax evasion schemes and accumulated unknown billions in toxic assets through involvement in the sub-prime mortgage market. All this was legal and many of its most prominent practitioners and beneficiaries were ennobled by the government for their patriotic activities.    

Occasionally the curtain is lifted on some of the more murky activities of the great and the good in the world of high finance. When this happens, every effort to avoid exposure – including resort to law - is made by those who wish to hide their activities from the public gaze. Such was the case recently when a whistleblower exposed such activities at the heart of one of the world’s biggest banks – Barclays.

Barclays Banksters

In mid-March a whistleblower employed by the Structured Capital Markets department of Barclays (SCM), passed documents detailing complex tax avoiding schemes to Vince Cable MP, the Liberal Democrats’ economic spokesman. Cable, believing that the documents should be made public, passed them to The Guardian newspaper. On March the 17^th The Guardian ran a front page article, a double page spread and an editorial on the secret documents. They were posted on the paper’s website at www.guardian.co.uk 

At 2.10. that morning a representative of Freshfields, lawyers for the bank, woke a judge and persuaded him to impose a temporary injunction on The Guardian, forcing the removal of the documents from the website. The case went to the High Court the following day, where, in defence of the public’s right to know, the paper fought to have the injunction lifted. The court ruled in Barclay’s favour and the documents were removed. Ludicrously, given the fact that they were already in the public domain, the judge ruled that The Guardian be banned from providing information about the documents, and from “inciting” or “encouraging” others to view publicly available evidence claiming massive tax avoidance schemes by the bank. A few days later The Guardian published copies of seven documents with the text blacked –out. Beneath each was a summary of its contents followed by comments from the paper’s tax expert. On March 26^th the Lib Dem Treasury spokesman, Lord Oakeshott, taking advantage of the parliamentary privilege of freedom of speech, told the House of Lords that  “these documents are widely available on the internet from sites such as Twitter, wikileaks.org, docstoc.com and gabbr.com”  There you have it. But in this Alice in Wonderland world the Guardian may not draw attention to them. It may, however, report speeches made in parliament!

So, what do the documents reveal?  The whistleblower provides evidence of a scheme codenamed Project Knight. In summary it shows that the SCM sought to put about $16billion into US loans. Via a complex scheme involving companies in the Cayman Islands, US partnerships and Luxembourg subsidiaries, tax benefits would be generated through a $4bn deal with North Carolina Branch Banking and Trust co. Two larger schemes were identified by The Guardian involving loans of $6bn and $7bn. The whistleblowers claim that the sole purpose of SCM is to make profits from “tax trades.” Apparently in one year “the SCM made between £900m and $1bn profit from tax avoidance.”  All this is legal. So why is the bank so desperate to hide these activities from the public?

Barclays has so far avoided seeking assistance from the government, thus avoiding part nationalization. Instead, it has sought loans from Middle Eastern banks. But now, it has applied to participate in a government insurance scheme which would provide taxpayer protection against losses on about £80bn of toxic assets.  The bank needs to cover up its massive tax avoidance at a time when it is claiming taxpayer support. It employs extremely highly paid lawyers to devise tax avoidance schemes that will remain undetected by the government’s revenue office – the HMRC. Lord Oakeshott commented that HMRC’s attempts to detect the bank’s tax avoidance were like “a fat policeman chasing a speeding Ferrari.”

The Management Style at SMC

A final word is in order about the modus operandi of SMC. The whistleblowers describe a hierarchical, macho culture of bullying and callous insensitivity.  Those at the top of the pile display all the worst characteristics associated with power and extreme wealth – arrogance, contempt bordering on sadism for subordinates, and megalomania. Everything is driven by avarice and obsession with success.  Perceived failure is not tolerated.  The avoidance of tax by means of exploiting loopholes is seen as the raison d’etre of the unit. “There’s such a macho culture  at SMC and the deals are so big you never say billion or million, you just say 16 bucks or 16 quid which meant billion”, reported the informant.

Most intriguing is the study of megalomania in the person of SMC chief executive, Roger Jenkins. His title tells us much. He is CEO of Barclays private equity, principal investments and structured capital markets at Barclays Capital and executive chairman of Barclays’ investment banking and investment management, Middle East. Revelations from the whistleblower about Jenkins’ “management style” are too numerous to detail here, but mention may be made of a few.

Members of SMC could be fired for nothing more than failure to understand the hierarchy, and this meant being frog-marched off the premises by security guards.  Sometimes staff would arrive at work to find an email from Jenkins simply saying that a colleague no longer worked there. According to one report “a managing director who bought a Bentley was told by Jenkins that it was a very nice car, too nice in fact for Jenkins to want to see it outside the office. Thereafter the executive chauffeur would drop him out of sight round the corner.”  One whistleblower reports that another executive fired his secretary for booking a taxi that was a Volvo instead of an S class Mercedes.

So that's the way it is. That’s the life they lead. What they do is not illegal and they see nothing wrong with it.