There are three things that I really hate. First, getting whacked with a parking ticket (well – don’t most people?). Second, semi-automatic washing machines (they know I hate them, so they eat my clothes). And third, banks. My dislike for banks borders on the irrational. I’ll bridle at paying even a dollar in fees – demand to see the branch manager to argue the toss. Never mind that the dollar I save loses me a much more precious hour of time. Of course there are many routine ways that banks drain my time. Their branch closures and reduced workforces over the last decade have helped banks’ bottom lines, but for me they’ve meant bigger queues. Nevertheless, there I am, still in the queue every month, holding my Visa Card, waiting to make my payment. When I’m still not at the counter after 15 minutes, I’ll start talking to the other people in the line – first normally, then quite loudly – about how the banks wouldn’t keep us waiting this long in one of the nearby richer suburbs. ‘They must think we don’t have anything better to do with our money than stand in line waiting for them to take it!’ It’s a silly statement really. Because that’s exactly what they think.
And I guess, in the case of the overwhelming majority of customers, they’re right. I don’t know about you, but my understanding of how to make money is pretty limited. Sure, I work and get paid a salary for doing so. But other than that, it’s a bit of a blank. It all seems too complex. Reading the stories in the financial pages is hard work. In fact until I started working on this magazine, I had no idea what hedge funds and derivatives did. I thought that ‘parking money’ was what you put in a meter.
The most obvious excuse is that I was never taught. But that’s usually never an impediment to me. The best part about being a journalist is that people don’t think twice when you ask lots of questions. Then again, in many communities, I’d be regarded as rude to ask questions that give a greater understanding about money-making: questions about how someone came by it or what they’ve done with it. It’s simply not my business.
Bankers have stood careful guard in front of such attitudes for decades. After all, if you’re a dealer in money, it’s a great place to be. If people don’t understand, they don’t ask questions. And no questions asked means no dirt exposed. As a consequence, those Swiss bankers – who are portrayed as the epitome of banking professionalism because of their ‘discretion’ and their refusal to divulge any information about the accounts of their clients – have been able to hide the dirty proceeds of Nazi thefts and the syphoned funds of Africa’s corrupt officials for decades. Just last year, $500 million was returned to Nigeria – plunder that military dictator Abacha had stashed away in Swiss accounts. It might now be redirected into the infrastructure and health systems so badly needed in that country. Yet despite the need, the Swiss authorities gave up the money only after a protracted legal fight from Nigeria and only because the way the money got to Switzerland was so clearly criminal.
Under the shroud of secrecy, bankers everywhere – with their crisp white shirts and expensive-looking suits that say ‘you can trust me’ – have been left to get on with the business of making money.
They do it really well. British-based bank HSBC is making a million pounds ($1.84 million) an hour.1 Even the inner circles of banking are surprised by just how much money they are making at the moment. ‘Banks across the globe have not only achieved record levels of profit, yet again,’ trumpets The Banker, ‘but in fiscal 2004 they reached their highest levels ever of profitability’ with the top 1,000 delivering a massive 30 per cent growth in profits and ‘an almost unthinkable’ return on capital of 20 per cent. The Banker’s annual award for Global Bank in 2005 went to HSBC. It got the gong for successfully expanding its networks through 77 countries and territories. Its ‘strong presence in growing emerging markets worldwide’ has made it ‘well placed to take advantage of opportunities’. That’s a polite way of saying that trade liberalization has opened the door for HSBC to stroll in and make mega-bucks in developing countries – a growth in pre-tax profits of a whopping 50 per cent in Argentina, Indonesia, the Middle East and Turkey, and a five-fold increase in China.
So I should be paying more attention to how banks are making their money… and not just because they’re getting away with things that would land us mere mortals in jail. It could be to my personal advantage to do so. On those rare occasions when I’m holding a surplus, I usually put it into a term-deposit. Between 1 April 2005 and 2006, term-deposits with one of my country’s largest banks, the National Australia Bank (NAB), were attracting less than six per-cent interest. During that time NAB shares shot up in value by 31 per cent. Comparing returns on a possible $10,000 investment, the term-deposit would have delivered around $600, and the bank shares $3,100. A shareholding would therefore have delivered more than 500 per cent more profit. No wonder the banks are all investing in each other. Why, then, don’t I engage more with money-making? In a financial sense, I’m the only one who’s losing.
The Social Scrooge
Maybe my lack of interest in money-making has something to do with the aura surrounding banking’s bread and butter – lending. By reputation it’s always been a bit grubby. On the surface, it hardly seems moral to take one person’s money and temporarily lend it to another, making a profit from the arrangement. But that’s exactly what can happen each time I deposit money with my bank. They loan, they profit, and then they give me a share of their action as ‘interest’. More worrying is where my deposit might end up. For there’s no guarantee that, after I pass the money across the counter, it won’t be financing some environmental vandal or weapons manufacturer. For instance, Belgian-based NGO Netwerk Vlaanderen estimates that just five financial groups2 have invested more than $8 billion in companies that are involved in human rights violations. But when I ask where my deposit is likely to go, the bank employees look at me as if I’m wearing a pink hat with waving white elephants on it (– read more on The bang in the buck).
What I want to hear is that my deposit will perform a critical social function: helping a family to buy a home; providing for an operation or an education; allowing a great business idea to become a reality. For cash-starved people in both the Rich and Poor Worlds, just one loan can pave the path from unending poverty to building a better life.
Ninety per cent of the world’s self-employed poor – more than a billion people – lack access to basic financial services.3 By redistributing money for a profit from those who have it to those who need it, the business of banking can change these people’s lives. It used to be that simple. But these days there isn’t as much profit in doing business at a local level, channelling the community’s savings into loans for small business and homes – at least not when you compare it with what’s on offer in the world of high finance. At a global level, banks have transformed themselves into financial engineers creating a dazzling and ever-changing array of new investment products. Billion-dollar book-runners for transnationals and governments, they float enterprises, launch securities, trade shares and bake bonds.
Now banks call themselves ‘wealth managers’. ‘Live Richly’, commands Citigroup. It’s advice worth following… if you’ve actually got some money. Savings – previously encouraged by banks as a source for their lending – are passé. The conservative bank manager keeping tight rein on the purse strings to ensure that we didn’t over-extend ourselves has been replaced by PR gurus sending us credit cards and urging us to buy! buy! buy! The result is life lived permanently on loan – at rates which, two decades ago, were the sole province of charlatans and loan sharks (see facts and Give them credit).
The simple function of redistributing funds through money transfers is also being neglected. Across Africa, Asia and Latin America immigrants to the Rich World are sending large parts of their wages home to family and friends. This practice – called remittance – is so widespread that the World Bank’s official data holds a startling discovery. Total remittances sent through official channels – $232 billion in 2005 – are now more than double the total size of world aid. Remittances are making a staggering contribution to Majority World economies, accounting for more than a quarter of the GDP of countries like Tonga, Moldova and Lesotho, and more than a fifth of the GDP of Haiti and Bosnia-Herzegovina (read more on Transfer the problem). Yet banks have had to be pressured into transferring them.
By comparison, they’re more than ready, willing and able to send the wealth of the super-rich speeding around the globe like a bullet.
The clout from the castle
World Wealth Reports4 since 1998 estimate that around a third of the wealth of the world’s high net-worth individuals is transferred out of their home countries and held offshore. That amounts to around $11.5 trillion of assets that would – if not hidden away from the hands of tax authorities – accrue a conservative $860 billion in income (from interest and investment), which in turn should produce $255 billion in tax every year. These figures are so large it’s difficult to comprehend them. They mean that an estimated $255 billion – an amount comparable to the Gross National Product of Hong Kong or Greece – is being lost every year to the international community in unpaid tax.
While this might not be illegal, in moral terms it is international theft on a grand scale. Developing countries can’t stand on their own two feet unless they have a viable tax system to pay for their roads, hospitals and schools. Yet in 2003 more than half of Latin America’s cash deposits and securities was estimated to be held offshore, away from the reach of tax authorities.4 From 1970 to 1996 an estimated 30 per cent of sub-Saharan Africa’s potential GDP has been sucked out of the region through capital flight – most of it to offshore centres and tax havens.5 The $255 billion lost to the international community in tax each year should be enough to pay for the implementation of the Millennium Goals four times over.6 These goals include halving the number of people who suffer from hunger and have no access to water; reducing the under-five mortality rate by two-thirds; and ensuring that children everywhere have a primary-school education. International banks are at the centre of this scandal. They advise the clients. They arrange the transfers. They hold the money offshore. And – most importantly – they give the practice respectability and a legitimacy that is not deserved. But what’s to stop them? After all, they pretty much regulate themselves. One of the main standard setters for international banking, the Bank for International Settlements (BIS), is made up of international bankers meeting behind closed doors – unaccountable and unexposed. You’ve heard of the World Bank and the International Monetary Fund, but when was the last time you read about the Bank for International Settlements? Yet they make crucial decisions about the business of banking.7
As banks’ sphere of influence grows, so does their influence. A string of mergers means that banks now hold more assets and capital than entire countries. They are now so big that governments cannot afford to ignore their wishes. In the US, the ten biggest commercial banks control 49 per cent of the country’s banking assets. The biggest Dutch bank, ING, has capital equivalent to 6.5 per cent of Dutch GDP, while Swiss banks UBS and Credit Suisse each have about 13 per cent of Swiss GDP. Even conservative magazines like The Economist are asking whether there should be a cap on their size past which mergers should not be allowed.8 Add to this the fact that all over the world the main shareholders in the major banks are other major banks, and – voilà! – you’ve got an unaccountable industry that’s closed to outsiders. The National Australia Bank in my country is typical. Its top five shareholders in 2005 – holding nearly 40 per cent of total shares7 – were all nominee companies for other large banks from Australia and overseas. While it may be an act of incest, it isn’t criminal. It means that when these banks say that they’re trading in the best interest of their shareholders, what they really mean is that they’re acting in the best interest of themselves. Never mind if a bank makes a series of imprudent speculative loans that jeopardize the savings of its small depositors; if present industry standards encourage it, then it’s the right thing to do.
When it turns out not to be, governments must pick up the pieces. After all, when tens of thousands of bank customers can’t withdraw their money, the angst rubs off on a non-responsive government. The Korean Government has spent nearly $4 billion on bailing out a single credit card company (see Plastic smiles). For 20 years the Malaysian Government has been rescuing banks that are owned by the well-connected and used by the well-heeled: making loans for speculative ventures that they’d laugh at us for suggesting (see Banks against the wall).
The Emperor’s new clothes
Then there’s that secrecy thing. Only last year the Swiss agreed to tax income earned on accounts held by overseas residents and send most of this tax back to the residents’ country (see Confessions of a banker). On its surface it’s a positive move. However, it was done to evade the alternative, which was to hand over to other countries information about the offshore accounts within its borders. Never mind the inconvenience and expense. Secrecy is the gold card worth protecting. It’s these systems of secrecy that need to be challenged. But while I’m standing at the counter of my bank – asking where the money in my hand is about to go as the bank staff still look at me as if I’m from outer space – questioning systems seems like an uncomfortable thing to be doing. As the queue of customers behind me continues to grow, I become patently aware of how little I truly know about how this place operates. I start to apologize, feeling embarrassed. Then I realize that the staff don’t know either – people who work within the system every day. Neither does the branch manager. Nor do the politicians. And suddenly it feels like asking questions is a very political thing to be doing. By asking questions, the right to answers is claimed – answers that reveal how systems operate and what can be changed. In each international banking transaction, how much money is being transferred? Where is it going, and why? These kinds of questions can help expose the lenders to human rights and environmental abusers; the assistants and advisors to tax avoiders and evaders – and dispel the appearance in international banking that there is anything like a code of honour among thieves.Chris Richards
- BBC, 28 February 2005.
- AXA, ING, Fortis, Dexia and KBC.
- G Howe, Chief Development Strategist, International Fund for Agricultural Development in a press release dated 16 November 2004.
- Prepared by Merrill Lynch/Cap Gemini, and analysed in Tax Research Ltd’s Briefing Paper – The Price of Offshore, Tax Justice Network, http://www.taxjustice.net, March 2005.
- JK Boyce & L Ndikumana, ‘Africa’s Debt: Who Owes Whom?’ in Political Economy Research Institute Working Paper no. 48, University of Massachusetts, 2002.
- The World Bank estimates that even if countries improve their aid, between $40 and $60 billion will still be needed each year until 2015 to achieve the Millennium Goals.
- For instance, a major international agreement that the BIS has drafted – called the International Convergence of Capital Measurement and Capital Standards (or Basel 2) – will relax the rules about capital reserves: the cash that banks must keep in reserve to meet their obligations to us depositors. This accord – which is now being implemented internationally – will allow big banks to decide for themselves how much money to put aside based on their own assessments of risk.
- R Cottrell, ‘Thinking big: A survey of international banking’ in The Economist, 20-26 May 2006.
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