Finance: fiddling, fetish and fiction

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by Michael Roberts

Nothing changes in the finance sector globally, despite the catastrophic impact of the banks on the world capitalist economy in the global financial crash and the ensuing Great Recession. In previous posts, I have highlighted the greed, recklessness and instability of the finance sector and its operational leaders. As Marx said, finance is the epitomy of the fetish of money, increasingly based on investing in fictitious capital, that bears no relation to any value created in an economy, let alone overall social need.  As former Bank of England chief economist Andy Haldane put it, finance is socially unproductive.

Haldane posed the question: “In what sense is increased risk-taking by banks a value-added service for the economy at large?”  He answers, “In short, it is not.”  Echoing Marx’s value theory, Haldane concluded: “The act of investing capital in a risky asset is a fundamental feature of capital markets. For example, a retail investor that purchases bonds issued by a company is bearing risk, but not contributing so much as a cent to measured economic activity. Similarly, a household that decides to use all of its liquid deposits to purchase a house, instead of borrowing some money from the bank and keeping some of its deposits with the bank, is bearing liquidity risk. Neither of these acts could be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape. For that reason, statisticians do not count these activities in capital markets as contributing to activity or welfare. Rightly so.” http://www.voxeu.org/article/what-contribution-financial-sector

More evidence of the criminal nature of global banking is to be found in the news that the Malaysian government has filed charges against 17 current and former executives of three Goldman Sachs subsidiaries, over the multi-billion-dollar 1MDB state fund scandal, where former Malaysian prime minister Najib Razak and his family corruptly siphoned off billions – it seems with the connivance of Goldman Sachs, the world’s largest investment bank.  Goldman’s used to be led by Lloyd Blankfein, who claimed he was doing God’s work.

Well, God’s work in this case appears to have Goldmans arranging bond issues worth $6.5 billion for 1MDB, with large amounts of state funds ($2.7bn) were misappropriated in the process.

Over in Switzerland, the former chief executive officer of HSBC’s Swiss private bank pleaded guilty to helping wealthy clients hide assets worth at least 1.6 billion euros ($1.8 billion). Peter Braunwalder was fined 500,000 euros and given a one-year suspended jail sentence, according to a Paris court ruling on the plea. The 68-year-old admitted that he took part in helping clients evade taxes between 2006 and 2007 by opening clandestine Swiss bank accounts and setting up offshore trusts or providing fake loans.  But no jail for him.

The HSBC case follows the conviction of a former minister and Swiss bank UBS which had to pay a record 4.5 billion-euro fine  for criminal wrongdoings of “an exceptionally serious nature.”  And HSBC has only just paid 300 million euros to resolve allegations in the same case.  Again, in the UBS case all the bank executives involved avoided a prison sentence. French bank Societe Generale also agreed last year to pay 250 million euros to end a bribery case and French fund manager Carmignac Gestion said in June it would pay 30 million euros to settle a tax-fraud case.

But in banking, as in capitalism in general, it’s one rule for the elite and another for the rest of us.  On the day Deutsche Bank began making thousands of employees redundant, some managing directors at the company’s office in the City of London were being fitted for suits that cost at least £1,200. Tailors from Fielding & Nicholson, an upmarket tailor, were pictured walking out of the bank’s UK office with suit bags. Ian Fielding-Calcutt, the tailor’s founder, and Alex Riley were there to fit suits for senior managers in spite of plans to cut 18,000 jobs  worldwide. Deutsche’s chief executive, Christian Sewing, has repeatedly said how much he regretted the decision to scrap a fifth of his global workforce. But it did not stop him paying out E50m in golden handshakes to top executives since 2018.

Over at Standard Chartered, American CEO Bill Winters had no compunction about accepting a pension contribution worth 40% of his annual salary and perks worth £6m, 79 times the average employee salary.  When this was questioned, he said that shareholders of the bank were being ‘immature”.  “I think it’s quite appropriate for the board not to ask me to take a pay cut”, he added. “And they didn’t — I don’t think it ever occurred to them to ask.”

And so it goes on.  Ex-UBS Group AG investment banking head Andrea Orcel is suing Banco Santander SA for about 100 million euros ($113 million) after the Spanish bank reneged on an agreement to hire him as chief executive .  In return, Santander has accused Orcel of “dubious ethical and moral behaviour”. The 56-year-old Italian had been offered the top job at Santander last year and had already quit his post as head of UBS’s investment bank when the bank changed its mind in January, saying it could not meet his exorbitant pay demands.

Meanwhile, in the UK, Britain’s largest mutual society (not even a bank legally) revealed that its former CEO Graham Beale, in addition to his £885,000 salary, got a £292,000 annual pension allowance, a £1 million bonus and £500 a day to cover the cost of travel, security and medical expenses. His benefits from annual expenses alone came to £185,000, covered the cost of travel, security and medical expenses. He was handed almost £400,000 of perks since joining Nationwide. Luke Hildyard, executive director of the High Pay Centre, said: ‘It’s hypocritical for Nationwide to market themselves as a different kind of organisation to the big banks, and then lavish these kinds of sums of money on its executives. It’s hard to believe these payments were critical to the success of the business.’

Then there is reckless drive of profit.  The Bank of England has found widespread weaknesses among the UK’s challenger banks in stress tests that showed new lenders cutting corners in an aggressive pursuit of growth. A senior regulator at the central bank wrote to chief ordering them to tighten standards and correct “overly optimistic” risk modelling. The BoE found that many new lenders displayed an “inability to explain assumptions” in their stress-test models and an “aggressive” focus on growth, even though they tend to make riskier loans. It comes after a scandal at Metro Bank, which had to slash growth plans and turn to investors for a £375m emergency share issue after admitting it had misclassified loans and did not hold sufficient capital.

And as the the world economy slows, for the lower ranks, banking is looking less lucrative. Global investment banks are shedding tens of thousands of jobs as falling interest rates, weak trading volumes and the march of automation create a brutal summer for the sector. Almost 30,000 lay-offs have been announced since April at banks including HSBC, Barclays, Société Générale, Citigroup and Deutsche Bank. Most of the cuts have come in Europe, with Deutsche accounting for more than half the total, while trading desks have been hit hardest.

So nothing has changed at the top of banking globally: big salaries, bonuses, pensions for the top executives, in return for overseeing tax scams, fraud and corruption.  And then there is the real and rising risk of instability and collapse as banks continue to speculate in the ‘fictitious capital’ of ‘exotic’ financial instruments.  More proof that ‘regulation’ will not work and only public ownership of the finance sector under democratic control will deliver a banking service for investment and people’s needs.