Small financial centres: new IMF report

The IMF has published a new paper on small financial centres. These include a number of secrecy jurisdictions but takes arbitrary measures of size to exclude many other ones - including the monster havens such as Switzerland, Luxembourg, and of course the City of London and the United States.

It is good that the IMF is starting to bring out new data and take an interest in these issues, of course, and in this context it notes that:

"Our data sources are not only incomplete but often indirect. . . . The academic literature on small financial centers is relatively small."

You can say that again. There is some useful material here, particularly on things like assets and liabilities, but much more is needed (you will find some very useful things in this recent book too, as well as in our Mapping the Faultlines project and Financial Secrecy Index.) One thing that this new IMF paper notes it that

"According to the June 2007 and June 2008 surveys of U.S. portfolio liabilities, the Cayman Islands were the largest foreign holder of private-label U.S. mortgage-backed securities. More information on the ultimate holders of these securities could clearly provide valuable insights on the transmission of the ―sub-prime shock and the financial crisis more generally."

"More information" on secrecy jurisdictions is one of TJN's core demands - one of our very raisons d'être. The IMF paper adds:

"Many banks have also used small financial centers for ―off balance sheet activities. For instance, onshore banks established conduits and structured investment vehicles in offshore centers during the 2003-2007 securitization boom. These vehicles were typically funded in onshore financial markets and purchased onshore assets."

Once again, we find the secrecy jurisdictions at the centre of the crisis. So much nonsense has spewed out from the secrecy jurisdictions and the centres of which they are satellites about this: the standard response from Cayman and elsewhere is to point the finger back onshore and say "it is their fault." Journalists and other analysts have been all too ready to take them at their word, partly because part of the trick with these entities has been to mix up "onshore" with "offshore" (as with the above IMF paragraph involving offshore vehicles being funded onshore, and buying onshore assets.) This double game always gives the tax havens the chance to point elsewhere, and cover up their own, central roles. But the point of the secrecy jurisdictions is that they are quick and flexible to produce whatever legal structures the abusive financiers require - they are key to the whole mess.

And here is a reminder of another reason why the havens have been able to point elsewhere. Take this September 2009 Report on Special Purpose Entities from the Bank for International Settlements.

"The most common jurisdictions for US securitisations are the Cayman Islands and the state of Delaware. The onshore (Delaware) versus offshore (Cayman) decision will generally be driven by factors outlined in the previous section."

The Bank for International Settlements needs to understand what offshore is. Delaware is very much a corporate haven, secrecy jurisdiction, tax havens - call it what you will. It is offshore. By making another arbitrary distinction - deciding to call certain offshore jurisdictions onshore, they provide fodder for those who would absolve the havens.

Hat tip: Mark Herkenrath