Financial Sector Reform – Democracy Vs Financial Markets and Cat Bonds

May 26, 2013

Famine sculpture in front of the International...

Famine sculpture in front of the International Financial Services Centre, Dublin (Photo credit: Wikipedia)

Part 1 Corporation Tax Scams and the IFSC

As the US finger points the tax avoidance measures of MNC’s in Ireland – bringing Ireland under the spotlight -already denials from Ireland fill the air. ‘Apple pays its corporation tax liabilities incurred in Ireland on manufacturing services carried out in Ireland. It’s a function of American Taxation policy that allows eg Apple to reroute profits made globally excluding Ireland through companies in Ireland so that other countries lose out. Even if the US reformed its taxation system, Ireland would not gain as those tax profits would go elsewhere.

Here’s a list of tax rates in EMU

EMU itself has turned to the topic of tax fraud and tax avoidance and is looking for a global initiative(4):

“Council conclusions on tax evasion and tax fraud
3238th ECO
CIAL AFFAIRS Council meeting
Brussels, 14 May 2013”

Ireland is being used to launder profits made in other countries, eg France/Germany and the rest of the EMU and globally in Africa, Asia, Australia, South America and the US. We need a transparent auditing of all of these profits to assess what the loss amounts to each country.

The US Senate committee looking into this is not too happy at this. Humorous take on this by Jon Daly who is sceptical of reform:

Tax revenue in the billions if not trillions is being lost to taxpayers throughout the world. What we need is a global system not of global tax avoidance for MNC’s but of global tax compliance. A simple global 10% formula free from tax allowances should be imposed on MNC’s required to pay the Corporation Tax in whatever country that executes business for the company by way of retail sales and/or manufacturing. There simply needs to be a global system of tax reform put in place of a global system of exploiting tax loopholes.

The topic of Financial reform brings about a state of Selective amnesia and blindness. This blog has campaigned for reform of the financial sector as its main theme. Financial scams in the financial services sector are not limited to Corporation Tax.

“In his research, Sutherland discovered that the ‘white collar’ criminal has no real fear of regulators ,and that actions by the regulators were considered to be an unfortunate interlude, but had little ability to exclude malefactors from continuing to trade. Sutherland found that the actions of regulators were seen as a bureaucratic part of a governmental process, and not considered to possess a status which would diminish the perpetrator in the eyes of his social peers. He said:-”

““white collar criminals customarily feel and express contempt for law, government and regulators in a way similar to that in which professional thieves express contempt for policemen and judges. Businessmen characteristically believe that the least amount of government is the most desirable state.”

The above was written by an American criminologist, Edwin Sutherland, and is quoted in by a good cop, Rowan Bosworth-Davies, author of Fraud in the City: Too Good To Be True(2)

This week many commentators within Ireland have sought to defend Ireland against any charges that it is a tax haven. Most ignore another aspect of corporate tax avoidance, the IFSC, also covered in earlier blogs here: A prescient choice the IFSC choosing famine figures on front of its headquarters in photo caption above?

“(1) Corporation Tax and Jurisdictional arbitrage
“German banks set up subsidiaries in Ireland. These subsidiaries were often registered as completely Irish companies. Back in Germany the German regulator (BaFin) had strict and enforced rules. Very good rules for the most part. Far, far better than Britain or Ireland. But these good rules, properly enforced meant German banks could not do many of the most lucrative and in hind sight reckless kinds of deals.

So the German banks would do the figures and work it all out in Frankfurt, then send a banker over to Ireland, get them to sit at ‘their’ desk in Ireland, in the Irish bank, and do the deal there. The legal registration of the deal and the ‘oversight’ were all Irish. This is known in the financial world as jurisdictional arbitrage. You and I would call it cheating if we were feeling charitable and lying if we weren’t.

The Banker flies back to Germany, where the German bank hasn’t done any deal, and therefore has done nothing wrong. The deal was properly overseen and approved by the appropriate Irish financial authorities and the profits would be banked at a very happy Irish bank. If any management of the ‘deal’ was required an Irish company would be hired, there are many, and an Irish manager often living not far from Cork, would ‘manage’ the money in and out. I have spoken to such people. Usually I can hear the sweat coming off them as they ask how I got their number and where did I get my information. To which I would reply that the Internet is a very large place and never, never forgets.”

So we have IFSC doing almost €2 trillion in business with loose regulation such as the above mostly around CDO derivative trading and it would appear loose Bermuda style regulation. The CDO/CDS trading that brought the Landesbanks under the microscope vis a vis Hypo transaction losses see link above.

Was it not therefore less than unusual to see the troika of Clown, Suds of Giant Squid and Bruton head of the IFSC suddenly appear all over the media
telling us every penny had to be repaid to Anglo senior bondholders (to protect the CDS exposure of GS and the whole of the IFSC) plus to ensure the scams around Corporation Tax eg Double Irish CT scam similar to ‘jurisdictional arbitrage’ scam above.

Perhaps Primetime would like to take a look at IFSC and activities such as the above. They might be encouraged to do so in the wake of future shortfalls from the state in funding because of our ‘rescue’ torpedo aimed at the Irish economy from IMF/EFSF.

“Both through its role in Corporation Tax avoidance and its lack of regulatory control of the IFSC, Ireland is indeed a tax haven that needs to be sterilised in a global financial recovery reform programme.

Many banks located in IFSC are handing back licenses and leaving the IFSC I believe because of the new levels of scrutiny coming from such operations from within Europe and the US.

We need greater accountability and transparency to capture an out of control financial sector causing global financial havoc.

Part 11 Derivatives and Banks Too Big to Succeed

If you don’t quite grasp derivatives, here’s a humorous intro:

Not quite so humorous, Borne, the Warning:

Suffice it to say we need to know more about the derivatives black box. In order to sanitise derivatives we need to sterilise and bleach this trade with regulation on global exchanges that will take toxic trading into the open and authenticate and verify and separate out the good from the bad.

However, it may already be too late. Recent efforts to regulate derivatives have failed. Bill Black reflects on issues arising here arising from failure to rein in the derivatives market:

About 700 trillion in derivative trading is done by a handful of the largest banks in the US with little regulation and even less transparency.

QE stimulus across the world from Japan to US to EMU (LTRO and bond buying programme) has been counterproductive. Instead of stimulating companies to invest in new products and technology and national infrastructural development through health and education and business development, a new virtual market of incentives to invest in financial products giving a quick return through financial monopoly is the new norm. Companies now put their money into paper rather than into productive development through labour and enterprise.

Combine this with austerity starving spending/investment and debt at default levels in the EMU with new countries joining the zombie economy profile by the day and disaster beckons.

This paradigm is doomed to failure.

Instead of reining in the worst excess of the financial markets expressed in the toxic derivatives sector, eg the largest 20 banks in the US are succeeding in stopping and preventing regulation and sanitising of their financial dealings. Such banks systemically too big to fail have become too big to succeed and need to be systematically broken down into smaller units under regulatory oversight.

Bill Black points out the large banks, 5 largest who control/operate the market, in the US have succeeded in defeating a vote to force them to more openness/transparency, a compromise solution requiring them to get bids on derivative transactions from other bidders other than their preferred bidder. This was a result of agencies in the US in a weakened and watered down Dodd Frank being asked to regulate themselves rather than under compulsion by Dodd Frank.

Derivatives are investment vehicles that insure against risk. A large company could purchase a bond to raise capital for investment purposes. But if the company trades badly it may not be able to repay the bond. enter derivatives, a form of local insurance. Pay X  on top of the bond and costs of repaying the bond may go down or the creditor can be assured if default on the bond occurs, the company has insurance to trigger repayment through the derivative.

The problem is on a large-scale this is a Zeppelin balloon. Derivatives to insure massive debt repayments could bring down a ‘too big to fail bank’ eg JP Morgan massively exposed to default in Greece.

On the surface derivatives look benign enough eg Catastrophe Bonds: its conceivable the residents of Moore, Idaho may wish to take out insurance their town will not be hit again by a tornado. It might be a good bet for a large bank to make a good profit and insure against this risk. The bank might issue this insurance and later get butterflies it’s a bit risky, a bit toxic. So the bank decides to hedge the bet and wrap into some financial paper and sell it into a portfolio of other risky securities, to another bank. Welcome to the global casino.

Opportunities for unregulated shenanigans abound. If danger emerges, the 5 major global player banks in this trade dump everything into one bank and they emerge scot-free? Oops, this already happened with AIG? But, overall, this is benign risk but for 2 issues: 1) lack of regulation (you know where that leads) and 2) 700 trillion dollars floating around the derivative casino, enough to topple the world financial system.

I wont go into all the permutations and combinations of possible Enron type scams available through lack of regulation.

Commodities Futures Trading Commission


(2)

Right now, the zombie economies of the EMU show the EMU monetary system is broken, it’s being kept alive to prop up the financial services industry that broke the EMU in the first place.

It’s really dead as a financial model for development of the EU. Default for Ireland and Europe’s broken zombie economies is the only option. This must take place and is contingent upon radical reform of the financial services industry.

The reform will happen anyway. The only question is how much pain will have to be endured before it eventually comes about. The financial services industry, the banks,those who profit most under this failed system are out to ensure that your loss will not be their loss.

Absconditus scelerato of the financial fraternity in the financial services, banking, political arena through lack of a banking inquiry duely noted; so don’t expect reform of the unreformable, but do expect further deterioration with bad medicine.

But building better new out of the ashes of a collapsed Zeppelin, of an unfit for purpose financial system, is not impossible.

One immediate much needed reform immediately required is the banning of all OTC’s (exchange traded derivatives). This market needs to be capped and sterilised, all OTC’s need sterilisation into Exchange Traded Derivatives and posted on exchanges so we can audit these in an open and transparent way.

The sooner financial markets return to  real market driven economy instead of hyped up financial market driven, bubble economics fit for lemmings, the better.

If this does not happen soon, pretty soon the only thing being produced in this world of ours will be pieces of paper they called derivatives driving a tyranny of financial markets that promise  mass unemployment and a dismal future for the young.

Interview for Head Derivatives Trader



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