Too big to fail – too complicated to scrutinise?
‘Too big to fail’ is the crux in how to proceed now that the world’s financial system is slowly slowly being weaned off the life support machine of sovereign cash. But the SEC charges against Goldman Sachs indicate that this is only a part of the problem. Size isn’t the only issue: the big banks aren’t only too big to fail – but they are also too complicated to be scrutnised.
When governments all over the world had to pour the tax-payers’ hard earned money into banks there were whispers here and there that these new bank owners should take a long close look at the companies they were now investing in or taking over. But no, it hasn’t really happened – for many reasons. One is, as James Galbraith and William Black pointed out in their statements before the US Senate and the US House of Representatives recently, that white-collar fraud seems to be an embarrassment and lessons from earlier frauds haven’t been learnt.
The Icelandic banks weren’t involved in terribly sophisticated banking. They didn’t develop complicated products, hardly touched sub-prime loans though they were, as one ex-banker in one of the banks recently told me, ‘suckers for other banks,’ meaning that the Icelandic banks bought some mortgage related securities which the sellers, big banks, probably knew weren’t any terrific products but pushed them to buy by using their market power. But on the whole, the Icelandic banks didn’t practice the kind of banking where physicists and mathematicians were the model makers.
The Icelandic way of banking was mostly about constructing loans that the banks would lose money if the markets went down and the favoured clients would go unscathed. However, the markets went further down than anyone had envisaged, the banks collapsed and most of the big clients went bankrupt when they flow of easy money stopped. A recent casualty is Simon Halabi. Other names are house-hold names in Iceland and abroad such as Jon Asgeir Johannesson, Palmi Haraldsson and Bjorgolfur Gudmundsson. Others, like Robert Tchenguiz and Kevin Stanford, have seen their fortune hugely dented.
Even relatively small banks like the Icelandic ones pose substantial problems when it comes to investigating what exactly went on in them. When it comes to truly big banks, the staggering amount of documents spread over hundreds and even thousands of different system is an exorbitant obstacle. It was incredibly uplifting to read how this had been solved by Anton Valukas and his team working on the Lehman report: they found their way through what they aptly call ‘the Lehman Universe’ of 3 petabytes(!) of date, equivalent to 350bn pages, spread over a patchwork of 2600 different datasystems. (The outlines of how this was done are here, p. 28-35.) What they extracted from the 3 petabytes were emails and other illuminating material to throw light on what went on at Lehman.
Now that the activities of these fairly unsophisticated banks are being poured over by the Office of the Special Prosecutor in Iceland and the Serious Fraud Office in the UK it’s become abundantly clear what a painstaking process it is to trace assets over country borders. It’s difficult to do it even from one European country to another – plenty of legal obstacles to overcome – not to mention the towering summits to climb when it comes to countries like Panama, the British Virgin Islands or the Channel Islands (how shameful it is for the UK to have done so little to put pressure on these islands to cooperate in fraud investigations!)
As has so often been pointed out, the interconnected international markets ease the flow of money and the European market is constructed to facilitate the circulation of money and people. But very little, actually next to nothing, has been done to ease cross-border investigations.
When it comes to the big banks they almost without exception have parts of their operations in Luxembourg, Panama, the BVI and the Channel Islands, often running investment funds through these ‘secrecy jurisdictions.’ In order to fully understand how they operate it’s necessary to scrutinise their cross-border operations. The SEC charges against Goldman Sachs are well-defined and targeted – a clever way of striking but there are vast areas of Goldman Sachs and the other major banks that haven’t been scrutinised because it’s an almost insurmountable task.
These major banks aren’t only possibly too big to fail – they are also quite clearly too complicated to scrutinise. Not that it can’t be done – of course it can – but it takes a clever approach and joint forces of multi-lingual international teams and task forces from the individual countries’ regulators and financial services authorities. By joint efforts, possibly under the auspice of Europol, it would be possible to let information on the gigantic money machines that the banks are flow. – The situation with a borderless financial world and a world full of obstacles for investigations by regulators and financial services authorities is unsustainable and horribly skewed against justice.
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