Wednesday, September 16, 2009

Bankers, bottlers and candy floss

Living wills for banks have been in the news in the past few days, as a way of trying to avoid a repeat of the banking disaster that has unfolded. As Lord Turner put it recently:

“In the past, authorities around the world have tended to be tolerant of the proliferation of complex legal structures designed to maximise regulatory and tax arbitrage,” he said. “Now we may have to demand clarity of legal structure.

Living wills -- plans for winding down banks in an orderly way -- would be what Turner calls "a forcing device for the clarification and simplification of legal structure. And he is not alone in worrying about this:

"Swiss regulators said yesterday that tackling the problem was made harder because many banks had created deliberately complex organisations as part of a tax arbitrage policy."

And Britain's chancellor (finance minister) Alistair Darling weighed in:

“I do worry when an organisation is structured for tax purposes rather than for the efficiency of its business and the strength of its business.”

It is tax arbitrage, and by extension tax havens (as we have long remarked) that drives the complexity of banking structures. The tax abuse doesn't just cause lost taxes - it creates financial instability. So measures to address this directly - so far so good, we say.

Those are the good bits. Now for something else. How about this for a piece of special pleading, from Barclays Bank, uttered the day after Darling's words above about clarity of legal structure?

Chris Lucas, finance director of Barclays, became the first prominent banking executive to outline his objections to the regulator’s plans.

"Mr Lucas said Barclays, known for its tax-efficient corporate make-up, had taken 20 to 30 years to build an “evolving structure of subsidiaries and branches”. It would be “severely complicated” to change that. “To break it up into living will elements is going to be very difficult,” he said."

Let's get this straight. He is saying that we should sacrifice the public interest to cover for the fact that Barclays has worked very hard to build up its structures of abuse. Now that really is breathtaking, especially coming just a few months after this:

"Barclays will escape curbs against its use of offshore tax shelters under any deal to allow the bank access to the government’s toxic asset insurance scheme. Alistair Darling, chancellor, has concluded it would be counter-productive to enforce tougher tax avoidance conditions on banks using the scheme than for those banks seeking no taxpayer support."

not to mention its shenanigans documented in the Guardian. And Darling has been, it has to be said, continues to be exceedingly feeble. Take this recent interview, for instance, in which he says

"London is I think the pre-eminent financial centre now. I want that to remain the case, and that means we are probably more conscious than many countries about the fact that whatever you do here, you’ve got to make sure it is matched by action being taken elsewhere."

This is the classic weasel word "level playing field" tactic we have heard from tax haven after tax haven - a 'we won't do it unless everyone else does' plea which is a recipe for squirming out of necessary action. The message is: capitulate! capitulate! capitulate! And the loss of bottle is, as Darling notes, pervasive:

"there are still more people than I would like who would like to think the whole thing is behind them and they can just carry on as if nothing had happened."

Last of all, let's return to another fine term coined by Gillian Tett of the Financial Times (complementing "social silence", which we blogged recently) The phrase was "candy floss money" which was described like this:

"Financial technology spun available "real" money into an exaggerated bubble that, like its fairground equivalent, collapses ultimately."

Or, as Tett herself put it,

"one asset - such as a mortgage loan - is being used and reused many times over to create new trading and hedging opportunities. It is akin, in a sense, to how a small amount of sugar can be spun up into a huge cone of candy floss."

If all the trades and re-trades that happen can have tax stripped out of them, via a combination of complex structures, tax arbitrage, offshore Euromarkets and tax havens, then the process of spinning can just keep going, tax-free. Which is why we ought to take seriously one other recommendation made by Lord Turner, and reiterated in a slightly different form in today's Financial Times by France's Foreign Minister, Bernard Kouchner:

"The time has come for France, alongside the 58 Leading Group countries, to discuss the feasibility of a voluntary contribution at a low, non-distorting rate of 0.005 per cent. Let the financiers be reassured, this tax is painless: for a €1,000 transaction, 5 euro-cents would be diverted for the common good!"

A tiny tax like this, aside from raising revenue from wealthy investors, would hardly make a dent in ordinary transactions financing trade and real investment, but it would make financial candy floss -- in which the taxes would potentially accumulate in trade after trade -- far more expensive. Martin Wolf seems to buy into the candy floss argument on such a tax:

"The argument for it would have to be . . . that it would be desirable to reduce the liquidity of markets in this way."

Oh, but he has objections to that tax

"Obviously, it would have to operate in all significant financial centres. So the chance of its happening is zero."

Whether or not he is right on the chances of success, he is right to note the problem. Which leads us directly back to . . . . you guessed it . . . the tax havens!


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