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A Mars bar from Tommy Chocolate


In August 2015, jurors at London’s Southwark Crown Court were drawn into the murky world of Pete the Greek, Fast Eddie, Golum, Pooks and Tommy Chocolate – nicknames for traders implicated in a vast financial conspiracy. In the event it was Tommy who spilled the beans and took the fall – sentenced to 14 years for manipulating a key financial indicator, the London Interbank Offer Rate, or Libor.

Most people do not know or care about Libor. But it matters.

Libor is the average interest rate at which banks are prepared to lend money to each other. Libor is also used, though, as a benchmark for other rates, such as mortgages, in which you might have an interest. As an individual, you might have lost just a couple of pence or cents. However, those at the centre of the conspiracy, who were effectively betting in a rigged market, were able to rake off appetizing profits.

In the three years he worked at UBS, Tommy, aka 35-year-old British trader Tom Hayes, scooped up around $260 million for the bank. There were costs and payoffs along the way: in some cases he would offer his fellow conspirators deals worth up to $100,000, though in others he secured co-operation for rather less – a bottle of Bollinger champagne or even a Mars bar.

The Libor scandal has already cost the banking industry in London and New York around $9 billion in fines. And 11 more trials have been scheduled in London. But it is unlikely that the chief executives of the banks, who either knew about all this or turned a blind eye, will get their collars felt.

Tommy’s mistake was to leave an incriminating trail of emails and chat-room messages. Financial trails are usually more difficult to track. The money flows are so complex that no-one knows everything that is going on. The bosses of financial institutions in particular are conveniently ignorant about what their underlings get up to.

Finance in all its forms, from banking to insurance to foreign-exchange trading, employs hundreds of thousands of such people, who earn substantial wages for just exchanging information.

In the financial-services industry worldwide they manage around $100 trillion. Nothing wrong with being paid to work with information, of course. Journalists do it all the time. Regrettably, journalism is less lucrative. Tommy earned around £400,000 per year at UBS, and then clocked up £3.5 million for just nine months at Citigroup. The New Internationalist, I can assure you, is less generous.

Wizards of debt

What exactly are these wizards doing?

You might visualize them juggling pounds or dollars or euros, or their electronic equivalents. Indeed, you could leave the answer at ‘moving money around’. But if you are curious about what money is, you might hesitate.

Check an economics textbook and you may find it is a substitute for barter, a medium of exchange, a store of value, or a unit of account. But that disguises the underlying reality that all money is essentially debt.

If you have cash in your wallet or money in the bank, this is something that the government or the bank owes you. In the case of the government this may not amount to much.

On a £20 note, for example, the Bank of England says ‘I promise to pay the bearer on demand the sum of twenty pounds’. In other words it will cheerfully exchange one £20 note for another. In the US, the Secretary to the Treasury makes a more realistic promise on a dollar bill: ‘This note is legal tender for all debts, public and private’ – but hedges this with a prominent statement on the reverse: ‘In God we trust’.

Nowadays almost all money is created out of thin air by banks when they make loans

Where does all this money/debt come from? You might visualize a printing press. One of the more advanced is the government-owned enterprise, Note Printing Australia in Craigieburn, Melbourne, which has been one of the pioneers of printing notes on polymer rather than paper. But focusing on physical money, plastic or otherwise, will lead you astray. Nowadays almost all money is created out of thin air by banks when they make loans.

Surprisingly, it was only in 2014 that this was acknowledged in the Bank of England’s Quarterly Bulletin.

It pointed out that many statements in the textbooks are wrong. ‘Where does money come from? In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood. The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money.’

In other words, the bank does not wait for anyone to save money that might be lent to a borrower. If the borrower looks a safe bet, then through the magic of double-entry book-keeping it creates the necessary funds by making two new entries in its books.

One is a new account on the debit side for the borrower; the other is a credit to the bank’s accounts where the corresponding loan appears as an asset. The money has thus been conjured up from nothing. Indeed, if the borrower immediately changed her mind and paid it back, it would disappear again just as quickly in a puff of virtual smoke.

In the UK, more than 90 per cent of all the money in the economy has been created in this way by banks. Globally, outstanding bank loans are around $64 trillion.

Slippery operators

If banks could be trusted to manage all this new money well, we could leave it in their safe hands.

But the incompetence and greed that led to the 2008 crisis, and a succession of scandals, of which Libor is just one, have left the reputation of the banking industry in tatters. Formerly viewed as solid pillars of society, bankers nowadays are suspected of being slippery operators who will recklessly gamble with our money, siphon off huge salaries and bonuses, and expect the government to bail them out when it looks as though their business is about to implode.

To avoid having to rescue banks, governments around the world have sought to control them more tightly.

The US has adopted a whole raft of new regulations, one of which has just come into force – the Volcker rule – that prevents banks from trading – that is, gambling – with their own funds. As a result, US banks are no longer looking so profitable, and cities like New York are now looking beyond finance and seeing their future more in entertainment and technology.

The UK is generally more sympathetic to banks. The new Conservative government, for example, when faced with the prospect of HSBC shifting its headquarters from London to Hong Kong, offered a sweetener by reducing the banking levy. HSBC, you may remember, has been laundering money for drug traffickers and terrorists, violating US sanctions against Iran and helping its customers with massive tax evasion in Switzerland.

Tommy Chocolate also knew that the UK was a softer touch for dodgy dealing. Had he been extradited to the US, he could have been behind bars for many decades – hence his decision to come clean in Britain.

These shenanigans may be seen as just the work of a few bad apples who have been attracted to work in the banks because that’s where the money is made, meaning that we just need to jail the odd rogue and introduce a few more banking regulations.

Unfortunately, the problems in the financial sector run much deeper. Furthermore, the way modern money is created is fundamentally flawed and no longer serves the public interest – we need to take back control of this from the banks.

Read more about how we could do this in the new book The Money Crisis: How the bankers grabbed our money and how we can get it back.

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