How the City of London invented offshore banking(theguardian.com)
theguardian.com
How the City of London invented offshore banking
https://www.theguardian.com/news/2018/sep/07/the-real-goldfinger-the-london-banker-who-broke-the-world
42 comments
I'm skeptical offshore banking started with the brits in the 1940s. Wikipedia has banking starting around 2000 BC in Assyria and later ancient Greece. They also had islands with shores and I'm sure someone figured they might avoid hassle from the local rulers by taking their money to another island.
The article covers all that.
Warburg missed the freedom, and excitement, of the German markets in the 20s and 30s. So created an instrument, Eurobonds, in the 1960s to escape the carefully constructed international limitations of Bretton Woods. Add further desire to be outside the system from the US not being a neutral arbiter of the postwar international currency. That led to the inspiration for Eurobonds: the Eurodollar market.
Thus course was set on the race to the bottom. The US came off the Gold Standard, Bretton Woods was deconstructed and most national regulations that responded to the depression and war were repealed along the way.
That Warburg managed to get away with something so artificially constructed to evade laws is, to say the least, disappointing.
Warburg missed the freedom, and excitement, of the German markets in the 20s and 30s. So created an instrument, Eurobonds, in the 1960s to escape the carefully constructed international limitations of Bretton Woods. Add further desire to be outside the system from the US not being a neutral arbiter of the postwar international currency. That led to the inspiration for Eurobonds: the Eurodollar market.
Thus course was set on the race to the bottom. The US came off the Gold Standard, Bretton Woods was deconstructed and most national regulations that responded to the depression and war were repealed along the way.
That Warburg managed to get away with something so artificially constructed to evade laws is, to say the least, disappointing.
>That Warburg managed to get away with something so artificially constructed to evade laws is, to say the least, disappointing.
Why should a person in London be bound by laws in the US? Warburg did nothing illegal.
I’m all for the rule of law in general, but it’s unreasonable to try to use laws to distort fundamental economic reality, while also actually acting in such a way to undermine the economic system those laws were supposed to create. That’s what the US was doing. They were trying to cheat the markets for political purposes.
Why should a person in London be bound by laws in the US? Warburg did nothing illegal.
I’m all for the rule of law in general, but it’s unreasonable to try to use laws to distort fundamental economic reality, while also actually acting in such a way to undermine the economic system those laws were supposed to create. That’s what the US was doing. They were trying to cheat the markets for political purposes.
The UK was an enthusiastic participant to Bretton Woods and the Bank of England was not yet an independent body.
I would have assumed that UK laws and regulations were updated similarly to facilitate Bretton Woods, not just the US. In fact I was under the impression they had been resulting in the dullness of City banking, and the unprecedented period of stable growth etc, postwar through to the 60s.
Even had they not BoE should have been able, or been required, to step in and regulate it out of existence - or at least out of the UK.
> trying to cheat the markets for political purposes
Fundamentally disagree here. Markets need strong regulation for purposes that need not be political at all.
I would have assumed that UK laws and regulations were updated similarly to facilitate Bretton Woods, not just the US. In fact I was under the impression they had been resulting in the dullness of City banking, and the unprecedented period of stable growth etc, postwar through to the 60s.
Even had they not BoE should have been able, or been required, to step in and regulate it out of existence - or at least out of the UK.
> trying to cheat the markets for political purposes
Fundamentally disagree here. Markets need strong regulation for purposes that need not be political at all.
Interesting that they try to pin the failure of the Bretton Woods system on some shadowy backroom figures instead of 1) the US inflating the dollar well past the amount of gold backing it, 2) governments cashing in their dollars for gold @ $35/oz and making a profit by selling it on the international market for its true market value and 3) the French calling for a return to a true gold standard...because who doesn't like to blame the French?
My understanding of the main argument put forth in the article is that capital controls are the answer to global inequality?
My understanding of the main argument put forth in the article is that capital controls are the answer to global inequality?
Yeah. Netting it down to the essence, the proposed explanation for the collapse of Bretton Woods seemed to be "USD inflation". Which is sure, plausible enough, I suppose.
Unfortunately they then threw up their hands, ignored everything we know about inflation in general or that inflationary period in specific, and come up with some weird story about how 70s stagflation was actually caused by South American dictators stashing money in Swiss bank accounts and then lending the money to the Italian government to build motorways.
A+ for imagination, but yeah, actually, the US just printed a ton of money. It's not a huge mystery!
> My understanding of the main argument put forth in the article is that capital controls are the answer to global inequality?
And yes, that was the other big weakness. Their argument for capital controls seems to mostly be "inequality was better when we had capital controls, so clearly capital controls caused lower inequality". There's no real attempt to outline a mechanism for this. There's an implication that capital controls allowed higher marginal taxes which in turn financed higher spending, but if you actually look at government spending, this is clearly nonsense. The UK has been spending between 35% and 45% of GDP on government since the 1950s, with no correlation between the start or end of Bretton Woods. Extremely high marginal tax rates may lead to good song lyrics, but they don't necessarily collect a lot of actual money.
Unfortunately they then threw up their hands, ignored everything we know about inflation in general or that inflationary period in specific, and come up with some weird story about how 70s stagflation was actually caused by South American dictators stashing money in Swiss bank accounts and then lending the money to the Italian government to build motorways.
A+ for imagination, but yeah, actually, the US just printed a ton of money. It's not a huge mystery!
> My understanding of the main argument put forth in the article is that capital controls are the answer to global inequality?
And yes, that was the other big weakness. Their argument for capital controls seems to mostly be "inequality was better when we had capital controls, so clearly capital controls caused lower inequality". There's no real attempt to outline a mechanism for this. There's an implication that capital controls allowed higher marginal taxes which in turn financed higher spending, but if you actually look at government spending, this is clearly nonsense. The UK has been spending between 35% and 45% of GDP on government since the 1950s, with no correlation between the start or end of Bretton Woods. Extremely high marginal tax rates may lead to good song lyrics, but they don't necessarily collect a lot of actual money.
Obviously, if there is higher tax rate on higher incomes this will reduce inequality even if the net amount of taxes collected stays the same.
That's a lot less obvious than you'd think, in large part because people have so much scope to react to changes in tax rates by restructuring their income, sheltering it, etc.
The impact of taxation on inequality is empirically much lower than the impact of spending. You can see this, eg, by looking at the Nordic countries, which have relatively flat taxes skewed towards regressive taxes like a VAT, but low inequality, while countries like the US have very progressive income tax structures but high inequality. The difference, at a very high level, is that Denmark spends money on the poor, and the US spends it on the upper middle class. :)
You can see this clearly looking at the first graph here: https://lanekenworthy.net/2008/02/10/taxes-and-inequality-le...
Inequality is reduced via spending, not taxes; taxes are primarily useful as a revenue source.
The impact of taxation on inequality is empirically much lower than the impact of spending. You can see this, eg, by looking at the Nordic countries, which have relatively flat taxes skewed towards regressive taxes like a VAT, but low inequality, while countries like the US have very progressive income tax structures but high inequality. The difference, at a very high level, is that Denmark spends money on the poor, and the US spends it on the upper middle class. :)
You can see this clearly looking at the first graph here: https://lanekenworthy.net/2008/02/10/taxes-and-inequality-le...
Inequality is reduced via spending, not taxes; taxes are primarily useful as a revenue source.
The fun thing is that while I focus mostly on the US debt-based economy, the UK don't seem to be much better today.
You are right that the article did not mention a lot of important factors in bringing down Brenton Woods. The most important being the deficit spending of the US due to the vietnam war and the resulting inflationary pressure on the dollar. The second most important was England's delusional attempts to keep the pound expensive in relation to the other european currencies despite the fact that the french and german economies were clearly outperforming England. So you have a point there.
Regarding your last sentence, I think the point of the article is that capital controls perhaps acted to prevent a lot of the inequality that emerged after they were lifted.
There is no doubt that the years under bretton woods saw the fastest economic growth and improvement in living standards of average people in Western Europe and the US recorded in known history. Perhaps bretton woods was not the only thing to thank for that, but perhaps it had some influence.
It also cannot be denied that the lack of capital controls allows corrupt leaders to whisk large amounts of money away from countries in distress or in political turmoil.
Regarding your last sentence, I think the point of the article is that capital controls perhaps acted to prevent a lot of the inequality that emerged after they were lifted.
There is no doubt that the years under bretton woods saw the fastest economic growth and improvement in living standards of average people in Western Europe and the US recorded in known history. Perhaps bretton woods was not the only thing to thank for that, but perhaps it had some influence.
It also cannot be denied that the lack of capital controls allows corrupt leaders to whisk large amounts of money away from countries in distress or in political turmoil.
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My theory is that The City was the primary force behind Brexit. They are by far the largest and most influential entity and one of the only few that are going to be better off after Brexit.
Even more, staying in the EU would actually jeopardize their special tax-heaven status as EU was moving toward more banking regulation. Note: EU rules or laws, once accepted by local parliaments, have the status of international law, which is above the local laws. Since The City has special exempt status in British legal system, accepting the EU banking regulation could potentially do away with their special "tax-heaven" status. So leaving the EU was actually a matter of survival for them.
Even more, staying in the EU would actually jeopardize their special tax-heaven status as EU was moving toward more banking regulation. Note: EU rules or laws, once accepted by local parliaments, have the status of international law, which is above the local laws. Since The City has special exempt status in British legal system, accepting the EU banking regulation could potentially do away with their special "tax-heaven" status. So leaving the EU was actually a matter of survival for them.
Do you have anything to substantiate that? All banks were publicly against Brexit and, working myself in the City (and working on dealing with Brexit), I hardly know any banker who was pro Brexit. Banks are large organisations that can deal with the complexity of Brexit by setting up subsidaries and moving people, but this is perceived as a hassle and a distraction, not an opportunity.
As for EU banking regulations, I disagree, it is quite the opposite. The EU has many broken banking systems (like in Italy) which prevents them for going too harsh on banks. The UK regulator has systematically gold pleated every EU regulation, imposed harsher rules and regulatory ratios, and the UK ring-fencing is the only hard ringfencing I am aware of (along with Switzerland). Most other EU countries imposed symbolic ringfencing between retail and wholesale banking activities.
Polish immigration is what caused Brexit really.
As for EU banking regulations, I disagree, it is quite the opposite. The EU has many broken banking systems (like in Italy) which prevents them for going too harsh on banks. The UK regulator has systematically gold pleated every EU regulation, imposed harsher rules and regulatory ratios, and the UK ring-fencing is the only hard ringfencing I am aware of (along with Switzerland). Most other EU countries imposed symbolic ringfencing between retail and wholesale banking activities.
Polish immigration is what caused Brexit really.
Please delete your third paragraph. At best it's a gross oversimplification. At worst, plain old racism.
I found the rest of your comment insightful.
Plain old racism seemed to be a depressingly common reason some voted for Brexit. Made worse by the enthusiasm of the Leave campaign to pander to it with adverts about immigrants and Turkey joining the EU.
Why is it racism?
After Brexit, The City will lose passporting rights and It would lose a large portion of the EU market. Most of City banks are large multinational corporations that care very little about British politics. If anything Brexit was surprising for them as well.
City banks are already moving to EU. JP Morgan is moving to Dublin, Frankfurt, Warsaw, Luxemburg. Goldman is moving to Frankfurt and Paris.
EU will start applying pressure to move City jobs to the continent. Brexit will destroy City and London in long-term.
City banks are already moving to EU. JP Morgan is moving to Dublin, Frankfurt, Warsaw, Luxemburg. Goldman is moving to Frankfurt and Paris.
EU will start applying pressure to move City jobs to the continent. Brexit will destroy City and London in long-term.
>>> EU will start applying pressure to move City jobs to the continent. Brexit will destroy City and London in long-term.
Short term is good so far. Rent did not increase last year and jobs have less candidates applying. People literally stop coming overnight since Brexit, there is less competition for everything.
Long term, we will see. Probably nothing good.
Working at one of these big banks, there are 10 000 employees for each building in canary wharf. It's delusional to think that they can be moved.
Short term is good so far. Rent did not increase last year and jobs have less candidates applying. People literally stop coming overnight since Brexit, there is less competition for everything.
Long term, we will see. Probably nothing good.
Working at one of these big banks, there are 10 000 employees for each building in canary wharf. It's delusional to think that they can be moved.
> Working at one of these big banks, there are 10 000 employees for each building in canary wharf. It's delusional to think that they can be moved.
They're already being moved. The question is how many and how fast, not whether it can happen at all.
They're already being moved. The question is how many and how fast, not whether it can happen at all.
It's strange because I've worked at one of the bank's mentioned for the last year and haven't heard of a single relocation.
I think that it might be overblown or not affecting technology departments.
I would have also thought that if 20% of the workforce were relocated it would be visible in the canteen, etc.
Not saying that a relocation isn't happening at all, just saying that it's not visible within a bank.
I think that it might be overblown or not affecting technology departments.
I would have also thought that if 20% of the workforce were relocated it would be visible in the canteen, etc.
Not saying that a relocation isn't happening at all, just saying that it's not visible within a bank.
It's completely overblown. Don't believe a thing you read in the news.
My last company opened a new office in non major US cities last year. The next day the newpapers published the article <Corp is moving to new town after Brexit>. There is no relation, we had to get back to them to redo the announcement.
About my current bank, there is a published article from a major media outlet specifically saying that my department stopped hiring and is being moved overseas because of Brexit. It couldn't be further from the truth, we've been hiring dozens of people over the last years. I don't know who to complain to to have this removed.
My last company opened a new office in non major US cities last year. The next day the newpapers published the article <Corp is moving to new town after Brexit>. There is no relation, we had to get back to them to redo the announcement.
About my current bank, there is a published article from a major media outlet specifically saying that my department stopped hiring and is being moved overseas because of Brexit. It couldn't be further from the truth, we've been hiring dozens of people over the last years. I don't know who to complain to to have this removed.
It’s both. I know banking and insurance companies that offered relocations last year, but IMO that’s to save effort hiring for the EU offices rather than moving existing jobs. Moving an entire department isn’t practical.
> It's delusional to think that they can be moved.
no. it's delusional to think otherwise, unless you're naive enough to think anyone actually means an office is moved overnight.
no. it's delusional to think otherwise, unless you're naive enough to think anyone actually means an office is moved overnight.
You're naive to think that thousands of people can't be relocated overnight. Historically, that came along war and starvation.
Hopefully, politicians are just messing around and not trying to go down that road.
Hopefully, politicians are just messing around and not trying to go down that road.
I agree, these large multinational banks, just like any other large multinational company, can do things very quickly if needed.
Dump local staff, re-hire in the other country. Dump local back office staff, re-hire in the other country, or, they already have it outsourced.
If its on some executive's KPI or has their yearly bonus at risk... mountains can be moved in a blink of an eye.
Dump local staff, re-hire in the other country. Dump local back office staff, re-hire in the other country, or, they already have it outsourced.
If its on some executive's KPI or has their yearly bonus at risk... mountains can be moved in a blink of an eye.
I am not aware that anyone is moving large amount of staff there. Most banks are moving as little staff as they can get away with.
Quite the contrary. They lose passaporting rights with Brexit
Not to mention all the EU nationals they employ
> special tax-heaven status as EU was moving toward more banking regulation.
"Tax haven" status has "nothing" to do with banks, it has to do with taxation rules and agreements. (Some banking rules could have an effect, but in general they don't. Bank secrecy is something that has gone out the window a couple of years now, so it's indifferent)
Not to mention all the EU nationals they employ
> special tax-heaven status as EU was moving toward more banking regulation.
"Tax haven" status has "nothing" to do with banks, it has to do with taxation rules and agreements. (Some banking rules could have an effect, but in general they don't. Bank secrecy is something that has gone out the window a couple of years now, so it's indifferent)
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The City was mostly for Remain. However, paradoxically, it is one of the sectors of the UK economy that will be least affected by it, as single market regulations don't cover services very broadly.
Note that UK financial regulations are usually more strict than EU ones (excepting some tax treatments).
Note that UK financial regulations are usually more strict than EU ones (excepting some tax treatments).
What mechanism do you think the banks used to persuade voters in the north and regions to vot leave, while themselves overwhelmingly voting remain, while also keeping this mechanism secret?
There was no secret conspiracy. It was a free vote.
There was no secret conspiracy. It was a free vote.
huh? London voted purely in favour of remain. And due to loss of financial passporting etc will have the largest negative fall-out.
London did not vote "purely" in favour of remain. In fact, 40% of voters in London voted for Brexit. A lot of people have been romanticizing London as being liberal, multicultural, too worldly and dynamic to fall for Brexit. But 40% is, in fact, a lot, especially for something this dumb.
Interestingly, Bloomberg recently had a video segment on brexit and which financial institutions would win or lose. Unfortunately, since it was video I now cannot find the darned thing.
Anyways, it had several parts and in each part there was a representative of a group of institutions that talked about his/her opinion. The groups, as well as i can remember them, were "the city elders", the fintech startups, the money managers, the large international banks, and the insurance companies.
Pretty much all of them were strongly against brexit, except for the "city elders." The city elders were represented by an old man that was very pro brexit, explaining that he would welcome lighter regulation in order to offer more services.
So apparently there are people within the city that yearn for brexit because they want to break free of EU regulations and handle hot money like in the old days. I am not sure exactly who "the city elders" are, but apparently they exist and wish for brexit.
So it seems like there are different forces with different priorities within the city. And while most institutions that actually perform most of the economic activity from small startups to giant banks and insurance companies are against brexit, there lurk a bunch of scheming old men in a dark smoke filled room sipping port and licking their chops in happy anticipation of brexit (at least that is how i imagine them ).
But as to the question whether these "city elders" caused brexit itself, I am not sure. It seems that brexit was caused merely by a bunch of opportunist politicians trying to take advantage of the anti-immigrant backlash, and that they were searching for influence and votes rather than success at brexit.
Anyways, it had several parts and in each part there was a representative of a group of institutions that talked about his/her opinion. The groups, as well as i can remember them, were "the city elders", the fintech startups, the money managers, the large international banks, and the insurance companies.
Pretty much all of them were strongly against brexit, except for the "city elders." The city elders were represented by an old man that was very pro brexit, explaining that he would welcome lighter regulation in order to offer more services.
So apparently there are people within the city that yearn for brexit because they want to break free of EU regulations and handle hot money like in the old days. I am not sure exactly who "the city elders" are, but apparently they exist and wish for brexit.
So it seems like there are different forces with different priorities within the city. And while most institutions that actually perform most of the economic activity from small startups to giant banks and insurance companies are against brexit, there lurk a bunch of scheming old men in a dark smoke filled room sipping port and licking their chops in happy anticipation of brexit (at least that is how i imagine them ).
But as to the question whether these "city elders" caused brexit itself, I am not sure. It seems that brexit was caused merely by a bunch of opportunist politicians trying to take advantage of the anti-immigrant backlash, and that they were searching for influence and votes rather than success at brexit.
Look at the distribution of votes. Unless the City managed to influence outlying areas while having no effect on its own neighbouring areas, I'd say it's more likely that it was for remain. Banks can be blamed for a lot, but not Brexit.
http://www.ox.ac.uk/news-and-events/oxford-and-brexit/brexit...
http://www.ox.ac.uk/news-and-events/oxford-and-brexit/brexit...
Brexit has already been disastrous for The City, and it looks to become more so. It's practically the only thing that could unseat London as the premiere european finacial hub. Brexit is everything The City dreaded.
> They are by far the largest and most influential entity and one of the only few that are going to be better off after Brexit.
That is now what outside experts predict, nor is what the banks themselves are predicting, nor is it in line with how they are acting, nor is it matched by what has already taken place.
> staying in the EU would actually jeopardize their special tax-heaven status as EU was moving toward more banking regulation
First, I don't think you 100% understand what regulations are at issue here; there is no "special tax-heaven[sic] status".
But yes, there are rules changes coming that are designed to hamper The City and (not at all coincidentalyl) to push banks from London to Frankfurt. And inside the EU, the UK had some ability to lobby for tweaks to weaken or avoid these regulations. Outside they do not. This isn't a way for them to avoid this issue, this is a way to ensure that can't. For the bankers, Brexit is seen as an existential threat. Just look through the Brexit related headlines on, eg, Bloomberg. It's unmitigated doom, gloom, and panic.
From https://www.bloomberg.com/graphics/2017-brexit-bankers/:
> Frankfurt has emerged as the biggest winner in the fight for thousands of London-based jobs that will have to be relocated to new hubs inside the European Union after Brexit.
> Morgan Stanley, Citigroup Inc., Standard Chartered Plc and Nomura Holdings Inc have picked the German city for their EU headquarters to ensure continued access to the single market. Goldman Sachs Group Inc. and UBS Group AG are weighing a similar decision, said people familiar with the matter, asking not to be named because the plans aren’t public. HSBC Holdings Plc is the biggest non-French bank so far to opt for Paris, while Barclays Bank Plc has plumped for Dublin.
> London could lose 10,000 banking jobs and 20,000 roles in financial services as clients move 1.8 trillion euros ($2.1 trillion) of assets out of the U.K. on Brexit, according to think-tank Bruegel. The implications for the U.K. are substantial: finance and related professional services bring in some £190 billion ($248 billion) a year, representing 12 percent of the British economy.
Brexit is already gutting the UK financial sector, full stop.
> They are by far the largest and most influential entity and one of the only few that are going to be better off after Brexit.
That is now what outside experts predict, nor is what the banks themselves are predicting, nor is it in line with how they are acting, nor is it matched by what has already taken place.
> staying in the EU would actually jeopardize their special tax-heaven status as EU was moving toward more banking regulation
First, I don't think you 100% understand what regulations are at issue here; there is no "special tax-heaven[sic] status".
But yes, there are rules changes coming that are designed to hamper The City and (not at all coincidentalyl) to push banks from London to Frankfurt. And inside the EU, the UK had some ability to lobby for tweaks to weaken or avoid these regulations. Outside they do not. This isn't a way for them to avoid this issue, this is a way to ensure that can't. For the bankers, Brexit is seen as an existential threat. Just look through the Brexit related headlines on, eg, Bloomberg. It's unmitigated doom, gloom, and panic.
From https://www.bloomberg.com/graphics/2017-brexit-bankers/:
> Frankfurt has emerged as the biggest winner in the fight for thousands of London-based jobs that will have to be relocated to new hubs inside the European Union after Brexit.
> Morgan Stanley, Citigroup Inc., Standard Chartered Plc and Nomura Holdings Inc have picked the German city for their EU headquarters to ensure continued access to the single market. Goldman Sachs Group Inc. and UBS Group AG are weighing a similar decision, said people familiar with the matter, asking not to be named because the plans aren’t public. HSBC Holdings Plc is the biggest non-French bank so far to opt for Paris, while Barclays Bank Plc has plumped for Dublin.
> London could lose 10,000 banking jobs and 20,000 roles in financial services as clients move 1.8 trillion euros ($2.1 trillion) of assets out of the U.K. on Brexit, according to think-tank Bruegel. The implications for the U.K. are substantial: finance and related professional services bring in some £190 billion ($248 billion) a year, representing 12 percent of the British economy.
Brexit is already gutting the UK financial sector, full stop.
What you say makes rational sense, and yet when I walk down Bishopsgate or come out of the Canary Wharf station this is not the perception that I have. What I see is an explosion of activity and districts that are coming apart at the seems.
For me the big disaster for the City this year was the announcement that Crossrail 1 won't open for a year and the delays around Crossrail 2 and HS2 (although I think that HS2 is not the best way of spending the bag full of billions that it will cost).
For me the big disaster for the City this year was the announcement that Crossrail 1 won't open for a year and the delays around Crossrail 2 and HS2 (although I think that HS2 is not the best way of spending the bag full of billions that it will cost).
who/what is the "The City"?
"The City" is to London as "Wall Street" is to New York. It's a term for one specific geographical part of the city which historically was a centre of the financial industry, and is now used to refer to the financial industry in general.
It variously means London, The City of London (which is a district inside London with an unusual political status), or the host of financial and trading services industries which in the UK are largely based in the City of London.
It doesn't mean greater London. It means the second and third things on your list.
Welcome to capitalism & competitive forces 101.
Of course the hot money moves to the place offering optimal conditions. Just like if you have a very portable app you'll host it on whatever cloud provider is cheapest & best.
Of course the hot money moves to the place offering optimal conditions. Just like if you have a very portable app you'll host it on whatever cloud provider is cheapest & best.