Dr. Mahathir Mohamad On Surviving The Next Global Financial Crisis.

365-1

Comment:

Dr. Mohamad, former Prime Minister of Malaysia for 22 years, shares his important, profound insights on becoming informed how Malaysia during his leadership became the target of financial speculators/abusers – and the need for governments to tightly regulate systemic risk financial transactions like those that brought down the global economy in 2008.

A university trained practicing medical doctor before entering politics, then attaining the highest office in his native country, Dr. Mohamad shares his intriguing experience where medical training gave him the tools to protect Malaysia’s people and economy from international financial, economy-destroying predators. The lessons he presents are important ones for peoples and nations around the Earth.

Putting  a description to Mahathir Mohamad’s address in another, more astonishing way, what he says about the world’s financial system has never become shared with the American people by any elected representative on the floor of the United States Congress nor by any President of the United States.

**********

Cross-posted on March 25, 2015 from www.perdana.org.my

PERDANA LEADERSHIP FOUNDATION

CEO FORUM 2014 – 24th SEPTEMBER 2014
CLOSING KEYNOTE ADDRESS BY TUN DR. MAHATHIR MOHAMAD
FOURTH PRIME MINISTER OF MALAYSIA and HONORARY PRESIDENT,
PERDANA LEADERSHIP FOUNDATION

*******
I know a little about crisis management before I became a Prime Minister. This is because as a doctor, we come across many crises. Because of our work, people come with very critical conditions. This is when they are in crisis and the duty of a doctor is to handle this critical condition, in other words, to handle this crisis.

A doctor has an advantage in crisis management. This is because our medical course consists of instructions which we should use to handle a medical crisis that comes before us. We have been told that the way to manage a crisis is to be systematic. When a doctor is faced with a crisis, he spends a little bit of time to find out what is actually the crisis. Without knowing what a crisis is all about, you would not know how to handle it. In this matter, he needs to accept the truth and not deny the reality.

The first thing to do is, he needs to understand what the patient is suffering from and to do this, it begins with the history of the sickness. The history holds a lot of information on the sickness. He has to ask the
patient how the problem started, what are his feelings, whether he has a temperature, running nose, diarrhea and such to find out what the problem is about.

This is the preliminary stage of handling a crisis. He has to go through the process of getting the history and once you obtain the history, you cannot deny the facts. You do not kid yourself and say that maybe the illness is not that severe and the patient is in no danger of dying.

In handling a crisis, you must face the facts and get the correct data. Once you have all the data on the crisis, you are well on the way to diagnosing what is ailing the patient, the economy or the country. Get as much data as possible and categorize them if you can.

The next stage is for the doctor to examine the patient. Examination means putting your hands on the body of the patient, listening to his heart and his lungs to determine his illness. Following that, we do a lab test, which involves sending samples to the lab to be analyzed, to grow the bacteria, etc. With the information we have, we come nearer to a diagnosis. Of course, nowadays, we have X-Rays, CAT Scans and all kinds of new appliances which give you more information on what the patient is suffering from. Putting all these information together and maybe consulting with others, we can arrive at a conclusive diagnosis and from then on, the next question is the medication to prescribe.

There will be choices of treatment – a surgical procedure, oral medication or intravenous drugs. This was what I was taught in medical school. When I became a Prime Minister, I found this systematic procedure of gathering information very useful in order to deal with a crisis which is not tangible, and of course, a classic one is the 1997/98 Asian Financial Crisis.

I am neither a finance man nor a banker, so of course, I needed to read up a lot in order to understand the briefings given by the officers concerned. You can be briefed on a lot of things but if you do not understand the subject, it is not going to be very useful. So I read up on banking and finance and I began to understand a little bit about finance. I do not have investments. I do not have a single cent in the stock market nor do I dabble with investments in any company. I therefore had to learn a lot about these things to understand what was happening to the country.

Sure enough, I got the history and the background of the crisis that the country was facing. I gathered as much data as possible about the situation. I had numerous briefings. With this, I can be considered to have thoroughly examined what was happening to the finances and the economy of the country, why we were going through the recession, what were the wrong things we had done or maybe what were the wrong things that other people had done. I was able to reach some conclusions and refined the conclusion further on how the crisis could be managed. You can see that the procedure is akin to a doctor diagnosing a patient.

If you ask me about leadership in crisis management, I cannot advise you to become a doctor because it would be too late. I would advise you to learn the methods of the doctors. They go through a set of procedures which leads to their ability to recognize and diagnose problems, and subsequently prescribe the treatment. The treatment, of course, is another problem to solve.

In the crisis of 1997/98, I had great difficulty in understanding the situation because I knew very little about finance and banking. I was shocked to find out that banking involves lending money that you do not have, and that once the money is lent out, it becomes the banks’ assets. You have nothing, you lend nothing and it becomes your assets. If anyone wants to do business, banking is the best business.

Well, all banks operate this way; I am not blaming them. I think there is a need to create money, because if we depend only on the money issued by the government, it would not be enough. Therefore the banks themselves, in a way, create money.

Of course, when banks lend you money, it is frequently money they do not possess. While they do have some money, such as the capital invested in the bank, deposits in the bank and other assets, the amount of money the bank lends often exceeds the amount of money the bank has. So they need to create money. This is a very powerful instrument. How much money can you create? I read a book that says banks can lend up to 10 times the amount of deposits with the bank. Which means somebody lends you RM1million, you can lend out RM10million. That is good business. But then the banks ask, ‘Why not 11 times, or 20 times?’ So they created a new term called leveraging.

Leveraging is lending money that you do not have. That is the advantage of the banks: they can practically lend an unlimited amount of money. The hedge funds and currency traders then take advantage of the ability to borrow almost unlimited amounts of money from the banks. This is what I learnt. I believe this was the way things were.

Because how can the traders have so much Ringgit (Malaysia’s currency) to sell which previously they did not seem to have? I subsequently discovered that they actually did not have the money. What they did was to borrow Ringgit from the banks to buy or sell. The banks can lend a lot of money to them because the banks can create money. So the hedge funds and currency traders had at their call almost any amount of money.

The idea is this: someone deposits RM1 million with you and you can then lend out RM10 million, RM20 million or RM30 million (30 times more). If you have RM1 million and you want to invest RM1 million directly, your capital is only RM1 million. But if you invest through hedge funds or with currency traders at the banks, the RM1 million becomes RM30 million. Obviously, if you invest RM30 million, you will get 30 times more profits and dividends than you would if you had invested RM1 million. That is why people want to invest through hedge funds and at times, the currency traders, too. They were able to have a lot of money with which to play and when you have a lot of money to play with, the game changes in your favour.

When you buy specific shares repeatedly, the value goes up and when you sell the shares repeatedly, the value goes down. Obviously, you can keep on buying shares to push the price up, and then, when the shares are highly valued, dump the stocks and make a lot of money. When you dump the shares, somebody else will have to carry the burden of shares which have depreciated. The hedge funds stood to gain a lot and the spoils were divided between the funds and their investors. That was how it worked.

The traders had no money. They were creating money to buy or sell the Ringgit. They did not have a cent. Money comes in many forms. It comes as a cheque. When you borrow RM10milllion from a bank, they do not give it to you in cash because you will have difficulty taking the cash out from the bank. They only enter the figure that they lend to you and you can withdraw from your account whenever you like. There is no cash involved. And when you pay the bank, the bank merely writes down a credit that you have paid such an amount. Actual cash is not necessary. You just write cheques. Today we have credit cards and all kinds of new money which is not created or printed by the Government. Money today takes many forms and allows itself to be manipulated.

Currency traders raise money this way. They depress our currency by selling it. When it is at a low enough value, they start buying. The currency will then appreciate and they make money out of the appreciation. It is a very simple system of impoverishing other countries. I learnt about this and I got very annoyed and angry. I thought it was unfair for traders like George Soros to do this to a country that was just coming up. When they devalued our currency by 50 percent, we became poorer. If we had RM1 million, the million became worth only RM500,000 in terms of purchasing power. They were impoverishing us in a way that was grossly unfair.

I needed to understand the mechanism completely. So I read a lot. When we are faced with a sick person and you want to restore him to good health, how do you do it? We have to administer medicine and sometimes chop off a limb or other nasty things, but you have to do it to manage the crisis.

So, how did we manage the crisis? The traders were selling and buying the Ringgit. Obviously if they could not sell or buy our Ringgit, they could not play around with it. How did we stop them? Fortunately our Central Bank is very powerful. It could direct the banks operating in Malaysia that no transaction in our currency would be approved if the money deposited or withdrawn was not for a legal purpose. If the transaction was to suppress the value of the Ringgit, the transfer between the buyer and the seller would not be allowed. Once we stopped that, we could stop them from playing around with our currency.

You have to know what is ailing the economy. By understanding this, we could prescribe the medicine to reverse the situation. If the traders were selling, we stopped them from selling. If they were buying, we stopped them from buying. Once we did that, the disease was practically cured.

The European financial crisis could not be resolved after eight years because the governments in Europe have rejected history; they rejected the information that they received and they remain in a state of denial. When it was pointed out to them that the financial market is being manipulated to the advantage of the manipulators who make tonnes of money, they were not prepared to declare this is wrong or illegal. Some people make a lot of money through manipulation and perhaps this is maintained so that some people can continue to make a lot of money. The financial market does not have many spin-offs or small supporting industries. You do not need even one supporting party for a RM10 million transaction in the financial market if it is just a speculative transaction. You do not need transport, nor insurance, nor workers, nor machines to carry the money. It is done by electronic transfer.

The result is that the financial market does not support the economy and does not create jobs. This is unlike manufacturing or providing service in hotels which need a lot of workers. When you do real business, many people will benefit from it. Financial businesses do not benefit anyone other than the speculator who may make or lose a lot money. It is just a small group of people (in America they are concentrated on Wall Street) that is making tonnes of money. A financial business does not create any jobs and help anyone other than its owners and investors. If you refuse to accept this fact, you would not be able to solve a financial crisis.

If you have a RM10 million manufacturing business, you need to employ a lot of people and create spin-off supporting industries. If you do not have any spin-off industries, you do not create any jobs. But in the financial market, a RM10 million transaction does not create jobs nor does it have supporting industries; it would not help the economy improve. You have to accept that the financial market does not help the economy. You may have a lot of money but only you benefit and other people do not benefit. If the people do not benefit, there will be unhappiness everywhere.

There is book entitled, ‘The Disparity of Income in the United States’ by Paul Krugman which says that 1% owns the economy and 99% do not benefit from the economy. This economy is created by the financial industry. There is a great deal of wealth disparity in the US today and it is causing a lot of social problems.

If you admit that the financial market does not result in job creation for the economy, then you have to admit that the financial market is wrong. The solution is to go back to real business. What is real business? You can borrow money because you have an idea to manufacture something which you think people want to buy. Maybe you take profits of say 5% or 10% at the most. But that is good business because your industry creates jobs and supporting industries. People will have money to buy products and when people have money to buy, your products can be sold and the money turns around in the society and enriches everyone.

That is real business. Real business is a business of producing things and providing services that people need or want so that you make money and in the process, a lot of other people will benefit especially the workers. But in a financial transaction, there are no jobs created and there is no spin-off industry. We must recognise this and to turn around the economy, we need to reduce or stop such activities and regulate the financial industry.

When they were devaluing the Ringgit, we thought it was wrong. They should not play around with our Ringgit and make us poor. We were told that this was freedom, that it was the right thing to do because it made profits. When the same calamity strikes their own country, they readily admit that the financial market contributes much less to the economy than the real business of producing goods and services. When it comes to leadership and crisis management, the first is to examine what caused the crisis. There must be a cause as crises do not happen by themselves.

In the case of the 1997/98 crisis, some people were manipulating money. When you abuse any system, you are going to get bad results. The banking system is good because it creates the capital that you need to make the economy grow. However, if it is abused by allowing banks to create unlimited amounts of money then it leads to a lot of problems faced by the world. We see that happen during this (2008/2009) financial crisis. Banks are very secretive. They do not want to reveal what they are doing and how much money they are making.

During the crisis in England, banks paid bonuses when they were still making losses. Even if they caused the losses, the top executives still got their bonuses. This is not right. Governments must be prepared to step in. You need to abolish this practice. The pressure comes from the very rich who has more influence on the Government than the ordinary man in the street. You need strong leadership to stand up to the pressures coming from these very rich people in order to legislate or limit the abuses. It is not to limit the function of the banks but to limit the abuses of the banking system. By all means create capital and money because we need the money but do not ever go beyond the limit.

If you are a strong leader, you can say that to the banks and the banks will eventually have to agree. You can inform the people that it is the banks that are causing all the problems. The number of bankers is far less than the number of voters in any country and if you pay attention to voters’ needs, you will get more support from the voters than if you play to the tune of the bankers.

For a leader to manage a crisis, he needs to be strong, forceful, willful and determined. He needs to take action even if it is unpopular with certain groups. Leaders who do not want to take action will never be able to handle a crisis.

To take action, the leader need to understand the way a crisis is to be handled. The way to understand is to go through the procedures a doctor goes through in order to reach a diagnosis and eventually provide the medicine. Leaders today cannot be good at politics only but need to also be good in finance and economics, otherwise, the leadership would not be effective. Good leadership can only come from people who are knowledgeable. You cannot have a good leader who is dumb or who is just good at being popular but cannot handle a crisis.

If I had the privilege of being a dictator (and I was accused of being one), it would be easy to solve a crisis. I would just line the men up against the wall and shoot them. Of course I could not do that. I had to find other ways of solving the crisis and this required me to be educated on the subject matter, to understand the ailment and handle it systematically. We have to be educated – not just the leaders but people at large – because otherwise, people may select leaders based on his hairdo or face and then discover that the leader is not able to handle crises.

Today’s world is very complicated. We not only have to manage our own country but also our relationships with our neighbours and even people who are far away. Previously it was very simple: Malaysia was like an island. Today, everybody is looking at Malaysia. Even detaining people under the ISA is regarded as bad. We only detain people, we don’t kill them. Today people are passing judgment on absentee criminals and sending drones to kill the criminal. This is worse than our record of just detaining people. At least the detainees are still alive. For a leader to deal with a crisis, whether financial, economic or political, the process is similar to how a doctor treats his patients. Know what the crisis is about, gather data, have a proper assessment of strengths and weaknesses, use your strengths to counter your weaknesses and you have solved the crisis.

QUESTION AND ANSWER SESSION
Question 1 (Peter)
I have been in Malaysia since 1997 and I know exactly what happened at that time. I had watched you for a long time and admired you for your ability to stay focused and for sticking to your guns. You have always done things your way. Whenever I hear the song ‘My Way’ by Frank Sinatra, I always think of you, Tun Mahathir.

The question is ‘How do you, in the face of adversity, make the ultimate decision?’ All your decisions are highly visible. When you get it right or wrong everybody sees it. There were also many experts around. How did you arrive at your decisions? Was it all analysis or were there intuition and gut-feel involved?

Answer:
A person who leads must accept that he has no monopoly on wisdom. He needs people around him to inform him of the real situation and he must check on the information given because sometimes the information is not necessarily good for the leader but good for the informant. You must find out if the information is true or an attempt to seek endorsement. Listen to a lot of people and read a lot. Maybe there is some intuition involved, but mostly it is because of the careful weighing of facts in a situation.

In a short period of 20 years, I had to handle many crises. For some of them, I failed. I was trained as a doctor. When I was in Alor Star, I handled an ectopic pregnancy in which the mother and the baby died. The husband thanked me anyway. I had to make a choice and I decided to operate. It turned out to be a bad decision. You cannot always make good decisions. Some decisions are good, some are bad. I learnt from my own bad decision and also the bad decisions made by other people. A Japanese asked if Malaysia still has the ‘Look East’ policy. I said “Yes, we still do because we want to learn from the wrong decisions you made!”

I got through 22 years and I did not get kicked out, but I kicked myself out. (smiles)

Question 2 (Dr Ghazali (Islamic Development Bank))
Since the crises of 1997/98 and 2008, many people do not seem to acknowledge that the rules of the game have changed. People want a new sense of domination or control be it political, economic, technical or even cultural domination. How much do our leaders want to understand that either they are contributing to human civilisation or they are destroying human civilization? For 22 years you tried very hard to tell the world that ‘Prosper thy neighbour’ is a fundamental value, that humanity is premier to our own longevity. Today’s crisis is, in a way, due to competitiveness but it destroys humanity in the long run.

My question is, do we want to survive, be secure or succeed?

Answer:
On the slogan ‘Prosper thy neighbour’, well, normally it is ‘Beggar thy neighbor’ but we discovered that if you make your neighbours rich, you become richer. It is better to prosper our neighbours than to make them poor. When our neighbours become rich, we become richer. As a trading nation, when you make people prosperous, they can buy more from you. Therefore, when you prosper your neighbours, you become more prosperous. When your neighbor is having some trouble, that trouble can spill over to you. That is why we adopted this slogan of ‘Prosper thy neighbor’ and we had benefitted much from the implementation of this philosophy.

There are people who think about domination and control because they are not able to manage the problems they face in their own country. If a country is a great producer of weapons, one of the ways to get
prosperous is to sell weapons. But if you sell weapons that people are not using, then they would not renew their orders. You are coming up with new versions of weapons that are more efficacious and you want people to use the weapon so that they will need to replenish. If you instigate wars between them and they use the weapons, then the weapon industry will grow.

Just imagine a peaceful world with no war, that would be dull. There would be no need for weapons. Weapons inventors and manufacturers will have no jobs. So, they need to stimulate crises and wars so that they can prosper by selling weapons. We wish for wars to end so that we do not waste money buying weapons. Despite the financial crisis, the world is still spending trillions of dollars buying weapons. It is a waste of money to buy weapons that we do not use; weapons do not give returns. In our case, we want to see our world at peace and prosperous.

At one time China was isolated because it was regarded as an aggressive country. They became very poor. Once they realised they needed to be at peace with their neighbours, they derived a lot of benefit from the peace. Look at China today. It has become prosperous because the Chinese do not need to produce things that kill people but instead produce things for people to enjoy at cheap prices.

Malaysia does not need to control anything outside our country. We only need to control things in our own country because if we don’t, some of us will go to Syria to join ISIS.

Peace brings much more dividends than war. War does not bring any profit or dividend.

During the last war, victors became poor and losers became rich. Look at Germany and Japan, they became very rich. I think it may be better to lose a war than to win a war.

Question : Rizal (MTEM)
This morning we were told very convincingly by a panel of experts that a crisis will happen as soon as two to five years from now. Do you think that the current leadership is equipped to survive the next crisis? If not, what is your recommendation?

Answer:
This is what I would call a loaded question! I do not want to comment on this. Otherwise, people will say, “This guy thinks he is the only one who knows how to deal with a crisis!”

Managing a country now needs more skills and knowledge than in the past. In the past, you only had to deal with politics, but now you need to deal with finances, economy and many other things. Unless you can handle all these things properly, you are going to mess up. I think we have a good chance that the present leadership in five years’ time will tell the whole world that we are not going your way.

THE END

**********

Advertisements

Elizabeth Warren Denies Janet Yellen Obfuscation.

by Jerry Alatalo

Alphabet C-SPAN televised part of the U.S. Senate committee meeting with Federal Reserve Chair Janet Yellen today. The topic of a possible Government Accountability Office (GAO) audit of the Fed came up, and Chair Yellen produced an audit recently conducted on the Fed’s books by Deloitte & Touche, one of the “Big Four” accounting firms. It is worth noting that the “Big Four” accounting firms have for decades been heavily involved in the global tax haven/evasion industry.

Ms. Yellen held the Deloitte audit binder up more than once when the topic of a GAO audit came up, and her response was that an audit by the GAO would not be good because it would “politicize” the Fed’s operations and prevent Fed actions to meet its mandates of increasing employment and controlling inflation. She used the example of Fed Chair Paul Volcker in the 1970’s, and how he would have been somehow unable to take the steps he did to fight 20% inflation if such a GAO audit occurred during that time.

One has to wonder how a GAO audit would get “in the way” of any Federal Reserve operations whatsoever, or “politicize” the central bank with negative consequences. Ms. Yellen’s opening statement to the committee was typical of former Fed chairs Ben Bernanke, Alan Greenspan and the rest going back to 1913 when the Federal Reserve system began with passage of the Federal Reserve Act signed into law by President Woodrow Wilson. Trillions of dollars in quantitative easing is part of the “accommodative” mode chosen by Fed top management after the economic crash of 2007-8. The Fed chair assures senators she still focuses on its mandate from the government: increased employment and 2% inflation targets.

Those two mandates were referenced time and again in Ms. Yellen’s opening remarks and in answers to questions posed by senators on the committee. The discussion back and forth between her and senators seemed like people asking softball questions and receiving softball answers. No senator asked if the Federal Reserve should become nationalized as a government (people) owned public utility, and if that wasn’t more beneficial for the nation’s economy and its citizens. No senator asked Ms. Yellen “who actually owns the Federal Reserve?”, or “who are its major shareholders?”

Watching Fed chairs address lawmakers has become an experience in continuing disappointment upon seeing elected leaders basically kneeling before the “financial wizards” running the monetary affairs of the United States. One wonders if those elected leaders are aware that the founders of the country fought the British solely to escape from financial tyranny, and that the founders fought to control monetary creation power on behalf of the people – against the King of England.

A significant number of states, counties and cities are looking seriously into establishing public banks to keep money inside their regions and locales instead of giving it in large quantities to Wall Street banks in the form of high interest payments, fees, and questionable, often-complex, losing investments. As states come to entertain the idea of public banking, it is worth remembering that nations can also establish a public bank. The late British political leader Tony Benn was integral in establishing public banking in that nation; the banks were operational and successful until Margaret Thatcher came to power and abolished them. A number of countries around the world operate large public banks.

So, the idea of public banking never received any attention during today’s senate meeting with Ms. Yellen. This is understandable when one considers the enormous amount of campaign contributions going to politicians from the financial industry and Wall Street too-big-to-fail/prosecute banks. Senator Elizabeth Warren of Massachusetts pressed Ms. Yellen on the issue of leaks which allow people to profit greatly on market transactions, and the Fed’s opinion of Dodd-Frank provisions. What is refreshing about Ms. Warren’s interaction and questioning of Ms. Yellen is her disciplined intent to not allow the Fed chair to go off on evasive, distractive tangents of obfuscation.

In the over hundred years since the creation of the Federal Reserve in 1913, unfortunately the American people have become the financial victims of people who believe that furtherance of their own interests and maintaining immeasurable power and control over the nation’s monetary system relies to a large extent on the concept: “baffle them with bullshit”. Thankfully, leaders like Elizabeth Warren fight for the people against those who use all the tricks in the legal, accounting, public relations and finance books to maintain enormous power and privilege.

It is worth noting that C-SPAN cut to the floor of the Senate approximately thirty seconds into Senator Warren’s time for questioning of Janet Yellen. Was it just a coincidence?

Perhaps.

****

(Thank you to Lord Rothschild ( 🙂 ) at YouTube)

Global Tax Haven Industry: World Leaders Still ‘Working On It.’

(Cross-posted from www.taxjustice.net on February 23, 2015 / Comment: Surely, governments have the resources/expertise to shut down the global tax evasion industry. So, after that trillion-dollar/year industry has been humming along and operational for decades, why hasn’t global tax evasion been shut down?)

*****

Settling accounts: what happens after SwissLeaks?

   

From Koen Roovers, re-posted from Open Democracy:

Settling accounts: what happens after SwissLeaks?

By Koen Roovers, Financial Transparency Coalition

ocean77A major leak of incriminating HSBC records last week resulted in print and television news coverage around the globe, trended on Twitter for several days and prompted several governments to start long-anticipated investigations. Through its Swiss entity, the British banking juggernaut helped customers from around the world to hide their money for tax evasion or other nefarious purposes without any questions asked. In fact, in several of the ‘scripts’ which accompany the accounts, banking personnel are seen to be very willing to accommodate dubious requests—from allowing cash withdrawals worth millions of dollars to setting up sham legal entities to obscure the ownership of the funds.

The ‘Lagarde list’, as the files have come to be known, has been around for a couple of years and so many have been asking: ‘Why do we only see government action once a group of reporters put the spotlight on this?’ Another frequent question has been whether the bank has really (as it claims) cleaned up its act.

Relatively few commentators have asked: how do we prevent this in the first place?

Information exchange

Last year, the Organisation for Economic Co-operation and Development (OECD)—a rich nations’ think tank—proclaimed the death of banking secrecy when it launched its new ‘Common Reporting Standard’, a global system intended to enable automatic information exchange (AEoI) between governments on the deposits of residents, for tax purposes. The Financial Transparency Coalition (FTC) has been following this closely and questions whether the plan, in its current shape, will prevent the next global tax-evasion scandal.  The poorest countries suffer most from tax evasion and other illicit financial flows, and they may be left out of the plan.

The idea behind AEoI is simple: financial institutions everywhere will determine which of their clients are foreign tax residents. Each institution will provide information about them to its ‘home government’, which will forward this ‘automatically’ at set intervals to the government whose citizens it concerns. Essentially, instead of governments relying on their own tax residents to disclose their foreign accounts, a tax resident’s foreign bank will let its government know about them.

A good idea in principle, but the way it is intended to be put into practice is controversial. OECD members have made participation dependent on confidentiality standards yet to be defined. And some states—including Switzerland—have added further reservations, wanting to exchange only with countries with which they have political and economic ties.

To illustrate why such a requirement would be disingenuous, look at offshore holding around the world. Residents of Africa and Latin America are estimated to hold over a quarter of their assets offshore, whereas the volume of offshore assets from other countries held in the poorest countries is negligible. Nigeria, with one of the most developed financial sectors in Africa, holds less than 1% of its bank assets in the UK, for example. In other words, wealthier states generally have little to gain economically from exchanging information with poorer countries, whereas the latter have a great deal to gain. If the criteria for exchange include whether wealthier countries obtain a substantial economic benefit, the intended global development benefits of the plan will be lost before the first bytes of data are exchanged.

It is in everyone’s interest that automatic information exchange becomes a global standard, with all jurisdictions participating as soon as possible. But it is widely accepted that developing countries will face challenges in joining the AEoI system and fully benefiting. Both for OECD members and developing countries the stakes are high, as potential loopholes in the global system could be devastating. Creating a system where developing countries are effectively excluded risks the creation of new tax havens outside of the exchange, as well as depriving developing countries of the necessary information for them to enforce their tax systems effectively.

Significant challenge

Capacity in developing countries will need to be increased, so that any technical barriers to taking part in the global system can be overcome sooner rather than later. The scale of the challenge is significant: the UK-based charity Christian Aid has estimated that sub-Saharan Africa would need around 650,000 more tax officials to reach the world average. Inadequate information technology represents another barrier.

A good idea in principle, but the way it is intended to be put into practice is controversial.

Through the G8, the G20 and the Global Forum—a platform hosted by the OECD with 125 participating governments—rich states have promised help to poor countries to build the capacity they need, but these commitments have yet to be honoured. Investing in AEoI is one of many pressing issues facing developing countries, so if and when they make a commitment to it they should be ensured that support will be there.

Such technical assistance should engage developing-country tax authorities and investigative and prosecutorial personnel, to demonstrate how AEoI information can be mined for specific data or used to identify trends. For this to happen, developing countries need to be receiving data. The FTC strongly recommends a phased approach for the poorest countries (those with gross national income per capita of less than $4,125), to prepare them for full co-operation in a global system of information exchange.

Identifying assets

Meanwhile, potential benefits for developing countries can also be assessed by identifying the assets of their residents held overseas, for example using data collected by the Bank of International Settlements. As sufficiently disaggregated data are not available publicly, only government-led research is currently possible here. Governments are encouraged to publish the volume of data being exchanged, the number of individuals involved and the extent of the assets concerned.

These statistics would give citizens, journalists, politicians and organisations an idea about the potential impact of AEoI. Research on the deterrent effect—which may be the main impact—would very likely prompt countries to prioritise participation. And what, other than such a deterrent of tax evasion, would prevent the next big scandal?

But even if all the loopholes in global information exchange are fixed, this is a solution to today’s problems, not tomorrow’s. Criminals and their enablers are creative, so the only way to prevent future scandals is to shed light on what criminals and tax dodgers are trying to hide. This is why online registers of assets for all legal persons and arrangements are necessary and should be publicly available. And law-enforcement bodies around the world should have access to information about other stores of wealth, such as gold and art held in freeports.

If we turn a blind eye to these loopholes, economic development for all will continue to be undermined by illicit actors looking to exploit them.

*******

Casino Politics.

Wall Street’s Investments in Deregulation 

(Cross-posted from opensecrets.org on January 16, 2015)

8125030177_e785d66309_o

Wall Street did its part to make 2014 the most expensive midterm election ever, outpacing its 2010 total and once again putting the bulk of its financial muscle behind GOP candidates and groups.

Donors from the securities and investment industry, otherwise known as Wall Street, contributed a total of $184 million to candidates, parties and outside spending groups during the 2014 midterms — a $75 million increase over the last comparable election.

That figure pales in comparison to 2012’s $288 million, but that was a presidential year in which one of the White House candidates came from the world of finance and the other had been critical of the industry’s role in triggering the Great Recession.

Despite the large overall spending discrepancy between 2012 and 2014, though, the difference in contributions to outside spending groups was only about $22 million. Donations to outside spending organizations accounted for 39 percent of Wall Street’s total in 2014, jumping from $7 million in the 2010 cycle to $93 million in 2012 and dropping just a bit to $71 million in this last cycle.

Wall Street spending favored Republicans 62 percent of the time in the 2014 cycle, the second highest rate in more than two decades and just behind 2012’s 69 percent level.

With the GOP in charge in both the House and Senate, Wall Street’s investments are likely to show good returns. Already the industry has begun to chip away at the main law passed in the wake of the 2008 financial crisis that curtailed some of its riskier activities.

Wall Street’s Darlings

Despite its right-leaning partisan split overall, though, the financial industry’s preference for the GOP didn’t reign across the board. Democratic senator took in more campaign cash from Wall Street than their GOP colleagues, totaling nearly $10 million.

It was a different story in the House, where Republican members raked in $16.5 million in campaign donations compared to $10.3 million for Democrats.

Wall Street’s favorite Senate candidate in the past cycle was Sen. Cory Booker (D-N.J.). Booker took in nearly $2 million from Wall Street in his pair of Senate races in the past two years. The former Newark mayor is considered a friend to the bankers across the Hudson.

The noted defender of private equity garnered support from multiple hedge funds. Wall Street is just $34,000 short of being Booker’s top donor group, just after lawyers and law firms.

Goldman Sachs is sixth on Booker’s list of career donors, having contributed $59,600 to his campaigns.

Freshly crowned Senate Majority Leader Mitch McConnell cashed Wall Street checks worth $1.6 million over the past two years. Fellow Republican Sen. Tom Cotton (Ark.) received $1 million and Democratic Sens. Mark Warner (Va.) and Charles Schumer (N.Y.) both took in more than $900,000.

Wall Street also favored leadership in its House giving, donating $1.2 million to Speaker John Boehner‘s (R-Ohio) campaign. Former Majority Leader Eric Cantor (R-Va.) followed Boehner in Wall Street contributions with nearly $700,000 but failed to defeat upstart opponent Rep. Dave Brat (R-Va.) in the primary. (Cantor is still cashing checks from Wall Street, though now they come biweekly.)

Former vice presidential candidate Rep. Paul Ryan (R-Wis.) received $560,503 from Wall Street, and Goldman Sachs alum Rep. Jim Himes (D-Conn.) took in $485,788.

Power Players

The top of the list of Wall Street spending on the 2014 elections is dominated by a handful of mega-donors born out of Citizens United.

Wall Street’s highest spender in the 2014 cycle was Elliott Management. The hedge fund firm donated $12.3 million — the majority of which went to outside spending groups.

Elliott Management CEO Paul Singer accounted for nearly $10 million of that total, meaning he alone contributed more than any other Wall Street firm. Singer is a noted conservative donor who has given large sums to outside spending groups.

Paul Singer is Wall Street's biggest single donor.(Flickr/World Economic Forum)

Singer contributed nearly $3 million to American Unity PAC in 2014, a conservative gay rights group he helped found. He also made multiple seven-figure donations to Karl Rove’s American Crossroads super PAC. Singer was the top individual conservative donor in 2014; only liberal donors Tom Steyer and Michael Bloomberg spent more.

Renaissance Technologies, another hedge fund, ranked second in 2014-cycle donations with $8.8 million. As with Elliott Management, most of that total can be attributed to one individual, co-CEO Robert Mercer. Mercer and his wife combined to contribute $8.4 million to conservative candidates and causes this cycle.

Mercer personally donated $2.5 million to Freedom Partners Action Fund, a Koch brothers group founded for the 2014 midterms. David and Charles Koch each managed $2 million donations. Mercer also made $1 million dollar contributions to Club for Growth Action and Ending Spending Action Fund — the super PAC wing of the group started by Ameritrade founder Joe Ricketts.

TD Ameritrade, the Omaha-based online broker founded by Ricketts, came in third in contributions at $4.9 million.

Renaissance Technologies’ founder James Simons is also a major donor, although along with wife Marilyn he favors liberal groups and candidates. No longer running Renaissance, Simons’ 2014 donations are not included in the hedge fund’s total.

Simons’ biggest 2014 contributions of $5 and $2 million went to the Senate Majority PAC and House Majority PAC respectively. The pair of super PACs have close ties to now Senate Minority Leader Harry Reid (D-Nev.) and House Minority Leader Nancy Pelosi (D-Calif.).

Ricketts and his wife Marlene donated $6.7 million to conservative groups and candidates during the 2014 cycle. The pair combined to contribute nearly $6 million to Ending Spending Action Fund.

Goldman Sachs contributed more to candidates than any other firm — $2.1 million. Goldman’s employees and PAC contributed an additional $1.3 million to the parties, nearly $900,000 of which went to the three major Republican bodies. McConnell received more money from Goldman than any other candidate, taking home a shade less than $100,000. Goldman Sachs ranked sixth in total contributions among Wall Street firms.

UBS and Blackstone Group were also among the biggest donors to candidates, donating more than $1.5 million directly to campaigns.

Lobbying

Wall Street’s lobbying total for 2014 is again headed toward the $100 million range. Fourth quarter reports are due to be filed next week, but through the third quarter, Wall Street firms had spent $74 million on more than 700 guns for hire. In 2013 Wall Street’s lobbying total fell just short of nine figures, coming in at $99.1 million. Lobbying by the securities and investment industry peaked in 2010 (as it did for many industries) at $105.6 million.

Industry trade groups Security Industry and Financial Markets Association and the Investment Company Institute combined to spend nearly $10 million on lobbying in the first three quarters of this year.

Morgan Stanley and Goldman Sachs spent more on lobbying than any other Wall Street firms, shelling out $3.2 and $2.9 million respectively through Sept. 30.

The common thread in Wall Street lobbying reports for 2014 was overwhelmingly Dodd-Frank, the 2010 law passed in response to the financial crisis. It has remained a hotly debated topic for bankers, politicians and regulators since its passage.

And in that sense, Wall Street’s GOP spending spree makes perfect sense; Republicans have made it clear that they oppose much of Dodd-Frank, favoring a return to the deregulation that led to record profits for financial firms and bankers — despite at least some consensus that those freewheeling days contributed to the financial meltdown.

Wall Street and its lobbyists claimed a victory against the law late last year when one of Dodd-Frank’s provisions was repealed in an eleventh-hour spending bill using language written by Citigroup lobbyists themselves.

Known as section 716, the provision required banks to conduct certain types of derivatives trading separately from the portions of their operations that are federally insured. Wall Street critics argue this provision — and much of Dodd-Frank — is needed because bankers will risk more when they know the federal government will rescue them should their wagers go bad.

Another bill often listed on Wall Street lobbying filings was Sen. Sherrod Brown‘s (D-Ohio) Terminating Bailouts for Taxpayer Fairness Act (TBTF for short, an abbreviation which most commonly refers to “too big to fail”). The bill, which is opposed by the financial houses, would set new capital requirements for banks, mandating they keep more cash on hand.