Oh goody world government then you`ll be happy . But why are tax havens such an issue here; obvious ‘innit’ , too much tax. According to the OECD in 2006 Britain ranked ninth in the industrial world in terms of the size of overall tax burden, taking 37.4% of GDP in tax. Germany, Canada, Switzerland and the USA all take substantially less. Only the very high tax economies mainly of Scandinavia together with France and Italy take more.( Factor in house prices and we are virtually state slaves by international standards ). In terms of complexity we are world beaters further encourages sophisticated tax avoidance
Tax avoidance is the Guardian public Sector parasites version of “Scab” but while officially HMRC condemns tax avoidance, it deals …… As a result there is hardly a single corporation of any size, including state corporations, which does not employ tax avoidance methods . In addition to creating tax havens the sheer cost of this self defeating endevour is eye watering
Administering personal tax credits costs at least 20% of the funds involved- The global cost of tax collection including indirectly from the employment of accountants and tax advisers/avoiders could be as much as 30% of the tax take – about £100 billion
You will never stop tax avoidance when it is such a richly tempting activity. Lower and simpler taxes would solve a great deal and staunch the bleed of waste .

Of course then would not help the stealthy advamce of global socialism that with the increasingly demgogic Obama trashing the US has become a mouth watering propect for the loons of the left. As ever it proceeds without any consent .

“99.9% ”

Is this one of the 76.378% of statistics that is made up on the spur of the moment?

What’s with the “avoiding/evading”?

If they were acting illegally – prosecute.

If not then change the rules.

And who made the rules?
Why, genius Brown of course.

And WTF is an “anti-avoidance” provision, and how would it work exactly?

More generally, when will you get it through your skull that companies do not bear the costs of tax.

Only people can in the end pay tax: owners (through lower dividends), customers (higher prices) and employees (fewer jobs and/or lower wages).

And what happens to these avoided corporate taxes?
Higher dividends – which are taxed.
And lower prices and/or more jobs – how dreadful is that!

“More generally, when will you get it through your skull that companies do not bear the costs of tax.

Only people can in the end pay tax: owners (through lower dividends), customers (higher prices) and employees (fewer jobs and/or lower wages).”

Fine ,so we should stop giving rights to companies too then. Biggest mistake the USA Supreme court made about 100 years ago when it allowed companies to have the same rights as individuals.

Sally – although you normally come across as a foul-mouthed imbecile – I kind of agree with you on that point.

And what happens to these avoided corporate taxes?
Higher dividends – which are taxed.

But if you could put together a team to avoid taxes on dividends – because you want to minimise paying any tax at all – what happens then?

http://devilskitchen.me.uk/2009/03/barclays-tax-avoidance.html

Do the fucking LPUK say that on the doorstep? I’d love to see them come to my house and tell me paying taxes is just something oiks like me do, whereas it should be optional for banker scum and the rest of their boss class pals.

If libertarianism is that fucking good, why don’t you stand a candidate in this seat at the next election and save your deposits?

If you want a good example of the contempt bankers and wall street have for the people and govts try this……

Asked about Geithner’s comments and his decision regarding opening the discount window to Wall Street after Bear had been sold for $2 a share and not earlier, [Bear CEO]Jimmy Cayne became spitting angry.

“The audacity of that p—k in front of the American people announcing he was deciding whether or not a firm of this stature and this whatever was good enough to get a loan,” he said. “Like he was the determining factor, and it’s like a flea on his back, floating down underneath the Golden Gate Bridge, getting a h–d-on, saying, ‘Raise the bridge.’ This guy thinks he’s got a big d–k. He’s got nothing, except maybe a boyfriend. I’m not a good enemy. I’m a very bad enemy. But certain things really—that bothered me plenty. It’s just that for some clerk to make a decision based on what, your own personal feeling about whether or not they’re a good credit? Who the f–k asked you? You’re not an elected officer. You’re a clerk. Believe me, you’re a clerk. I want to open up on this f—-r, that’s all I can tell you.”

This is how these Wall Street sees the government, all govts. Clerks.

David Brough

That’s not a very accurate paraphrasing is it? In fact it’s a work of fiction.

Great quote.

And you are right.

Unfortunately Obama/Geithner are now more compliant clerks and are hosing Wall Street firms with money.

http://www.clusterstock.com is a good site for coverage

“Sally – although you normally come across as a foul-mouthed imbecile”

As far as my language is concerned it is all English words, part of our heritage. I would have thought a little Englander Tory like you would be proud of our heritage, but I guess not.

As for imbecile, I will leave that to you seeing as you are an expert in that area. .

Sally – excellent – please never, ever change…

Sally is rather sweet actually . In my imagination we are like two Dinosaurs honking our plangent ululations across an apocalyptic fissure opening between us …but I digress

And what happens to these avoided corporate taxes?
Higher dividends – which are taxed

I think that is a rather optimistic view of the way money works in an organisation , it certainly bears no relation to any I `ve worked in. Generally though the point is a good one . Similarly whenever osts are added by way of regulation thoe costs are born by customers ( See Chamber of Commerce to day on the £70 billion stopping recovery) . Additionally when the legal frame work tightens the cost of that is born by customers via the additional costs of purchasing Liability Insurance etc. etc.

Chomsky often used General Motors as an example and I have always thought that there was a lot of truth to the basic premises that giving General Motors the same rights as Mrs Smith was not the intention of the founding fathers .
He said ….”If I point out that General Motors tries to maximise profits and market share, that’s not a conspiracy theory, it’s an institutional analysis … .
Also true, nonetheless I tend to the view that “Corridors of power “ stuff the Murdoch Press et al, falls down when there is some access to the market . If there is, whatever malign intentions the fat cats have will be stumped by everyone voting with their feet. The banking system, had huge hurdles to new entrants. Otherwise the colossal rewards handed to mediocre people would not have been maintained . It is my suspicion that it is the introduction of the market not its expulsion that will be a our saviour …but first we will have to try it the “World Government “ way,… I just hope it fails quickly , I can`t stand the waiting

Newmania – though Sally (unlike your good self) has the virtue of brevity!

I offer a generous feast of opinion cjcj , whereas you are a blog standard self satisfied little tit . Must we discuss it ?

“a generous feast” – er, for a dung beetle perhaps!

Did you get out the wrong side of the bed this morning.
It was just a light-hearted remark.
Blimey.

“It’s wrong. Can you not see that?”

The bankers stared back, confused. No, they just couldn’t see it.”

I have to admit that I don’t get it either.

It’s wrong to obey the law of the land is it?

Remember, all of this is about tax avoidance. That is, using the law as written by the politicians to minimise the amount of tax legally and lawfully owed.

So what is being complained about is that these companies are using the very laws that the politicians wrote.

They might not be using them as the politicians intended but then that’s the stupidity of the politicians, nothing else.

Let me know when you’re going to start shouting at the politicians themselves for writing crap laws.

Oh right cjcj , soz .

Group hug !

OK, got to this a little late and nice to see the comments thread has already descended into personal abuse.

Tim Worstall,

If the law said you could rape children, would it be OK to rape children?

There is a disjunct between a) what the law says and b) what is right. We like to assume that a) and b) often match up. My article is trying to show that with regards to tax havens, they do not. And that needs to be changed.

Yes, a lot of banks and corporations find elaborate ways of staying within the letter of the law (though via secrecy jurisdictions a great many of them find ways of stepping outside of the law too).

The point is, the letter of the law is it stands is not good enough. Half of my article is trying to make that precise point.

When am I going to shout at the politicians?

I have to ask, did you read my article? I repeatedly make the point that Brown is up to his neck in responsibility for this….

Unsurprisingly, the only people who defend the bankers are newmania, our resident idiot/troll, and Tim Worstall – who rails about everything else that is wrong with govt laws but would like to maintain the letter of the law specifically on tax avoidance.

Newmania @1:

But why are tax havens such an issue here; obvious ‘innit’ , too much tax.

Er, only by a definition which says ‘any’ is ‘too much’. Capital interests (companies, banks) capable of doing so will avoid all the tax they can. If it becomes possible for one to avoid all tax, they will. In fact, didn’t the Grauniad manage to make the government pay them 800k last year? That’s really, really, not how it’s supposed to work.

cjcjc @3:

What’s with the “avoiding/evading”?

Tax evasion is class of crime in which someone is liable for tax and doesn’t pay it.
Tax avoidance is a class of “crime” in which someone exploits insufficiently rigorous law or international differences in law to make it possible to claim they didn’t owe the tax in the first place.
One involves breaking the current rules, which will occasionally get you punished (but only if you’re low enough down the ladder); the other involves achieving the exact same result as far as the citizens’ interests are concerned, but costs the criminal slightly more in lawyers and means you end up sitting in the Bahamas on a pile of cash higher than your head.

And what happens to these avoided corporate taxes?
Higher dividends – which are taxed.
And lower prices and/or more jobs – how dreadful is that!

Sort of. For every hundred million of tax avoided in the UK, there will be more jobs and lower prices in America. Or China, or Russia. Or, more accurately, there will be more football clubs that can be bought by foreign personal interests, and more holidays and more private jets. The idea is that the tax revenues on business done here should go to the government here, and in practice those revenues lurk in the private pocket-books of conglomerate owners.

It’s worth pointing out that Warren Buffet agrees with me; I have the quote on paper rather than online so I’m going to cite once I’ve gone home, as I’m at the pub.

TimW @19:

So what is being complained about is that these companies are using the very laws that the politicians wrote.

It seems to me as though the article poster is arguing that not only is moving lots of money out of the country rather than putting it into a state infrastructure which could really use it ‘wrong’, the thing they’re mostly arguing is wrong is that the bankers are even trying to do it at all. There does seem to be a general idea that bankers shouldn’t try to keep money; which I don’t agree with. I wish they wouldn’t choose to try and defraud the government to achieve the goal, but the goal is reasonable.

Therefore, we need to try and close the system. The only way that seems plausible to me is to make the places in which they hide stop accepting them.

I’ve no problem with you trying to change the law. I might disagree about the specific change that you want to make but that’s another matter.

But I am always insistent that everyone has to obey the letter of the law. I insist that prosecutors, the police, the courts, obey the letter of the law when they try to bang people up for example. I defended Abu Hookhand and his right to a fair trial for example. Indeed, I insisted that as a British citizen he has, deserves and should get, exactly the same treatment and rights as I would get. For the simple reason that we are both British citizens and that’s what that means, that we are equal before the law.

Or do you think this is an area where we should abandon the letter of the law and simply declare things to be “wrong”. You know, bang people up just because we think they’re “bad ‘uns”?

I think there’s a great deal wrong with all sorts of laws in the UK. I even think that there’s a great deal wrong with tax law. But I’m absolutely adamant that while we attempt to change those laws we still hold everyone, most especially the State, to the letters of those laws.

I’ve lived and worked in a country for a number of years where they did not have the rule of law and I’ll guarantee you that living in a place without the law is worse than doing so in a place with bad law. Most especially if it’s the rulers, those with the power over life and liberty, who get to decide which laws are to be obeyed to the letter and which to be brushed aside upon whim.

That position I’ve outlined above is of course the liberal attitude towards the law, at least as historically understood. How strange that I seem to be the only one on a site called “Liberal Conspiracy” to even articulate it, let alone suggest that it might be a useful view to adhere to in a liberal society.

Tim – you’re arguing against yourself. No one has said the law should be ignored. The point is that the law, as it stands on tax avoidance, is shit, and needs to be changed.

Lets open up the tax havens. Let’s get rid of the tax loopholes.

“No one has said the law should be ignored.”

Yes they are:

“Announce that this ban will be extended to all UK companies through a general anti-avoidance provision being enacted in the UK;”

That’s exactly what that is. It’s a “yes, we know, you’ve crossed the ts, dotted the is, you’ve obeyed the letter of the law exactly. However we still don’t like it so hand over the money you bastard.”

Yes, thanks Sunny.

And Tim, do you really think what Barclays or Tesco have been doing is obeying the letter of the law? I guess, technically, they have. But then there’s the *spirit* of the law…and it’s hard to say they’ve kept to that.

But then, if you ask any lawyer or magistrate, they will admit that the distinction between letter and spirit of the law is not as hard and fast as is tpyically assumed…

…meaning that if the will to get rid of secrecy jurisdictions was there, it could happen.

Tim said:

”
“No one has said the law should be ignored.”

Yes they are:

“Announce that this ban will be extended to all UK companies through a general anti-avoidance provision being enacted in the UK;”

That’s exactly what that is. It’s a “yes, we know, you’ve crossed the ts, dotted the is, you’ve obeyed the letter of the law exactly. However we still don’t like it so hand over the money you bastard.”

”

Your conclusion doesn’t follow. The correct conclusion is: “we’ve decided the laws weren’t right, so we’re changing them, you bastards.”

That’s quite different from what you said. And quite consistent with what Sunny and myself have said.

“Your conclusion doesn’t follow.”

Actually it does.

If you want to change the law so that various stunts are not tried, go right ahead and argue your case.

But if you’re going to bring in a general anti-avoidance provision you are expressly saying that you expect people to do things legal under your new laws but which you still don’t like. Thus the provision, so you can get them anyway.

If your new laws didn’t leave any room for people to do what you don’t want them to do while their actions were still legal, then you wouldn’t need the general provision would you?

The very existence of the provision means that you want to over ride the letter of the law.

If you are brought up to believe, as most on the Right are , that tax is evil it is no surprise to find that they think it is morally correct to avoid paying it.

As for the idea that is always put forward by the Right that reducing tax stops people from avoiding it, nonsense. Over the last 30 years the tax rates have been brought down considerably for the top 40%. Income tax, Property tax (removing the rates and replacing it with a poll tax was a massive reduction in tax for the rich) Corporation tax , capital gains tax, The huge tax free savings given away in pensions and Peps and Isas. And now the Tories plan more tax give aways in inheritance tax, and yet the urge to avoid paying tax is just as strong.

You can not satisfy these people, they will always want more tax reductions. And in my experience they are the first in the queue to demand hand outs from the state. Farmers being the worst offenders. state

Tim Worstall,

Actually it does.

If you want to change the law so that various stunts are not tried, go right ahead and argue your case.

But if you’re going to bring in a general anti-avoidance provision you are expressly saying that you expect people to do things legal under your new laws but which you still don’t like. Thus the provision, so you can get them anyway.

If your new laws didn’t leave any room for people to do what you don’t want them to do while their actions were still legal, then you wouldn’t need the general provision would you?

The very existence of the provision means that you want to over ride the letter of the law.

I think I see the source of this confusion. As I read him, Paul wants the law changed such that some current instances of tax avoidance become tax evasion (ie. no longer legal). That’s changing the letter of the law. You read him as saying that the letter of the law won’t be changed, but that there should be an anti-avoidance provision such that people are punished for tax avoidance (ie. punished for something that is not illegal).

I don’t think Paul’s argument loses any force if we interpret it the way I have done (which I think is what Paul means), and it gets round your worry.

Over the last 30 years the tax rates have been brought down considerably for the top 40%.

Complete and utter twaddle in fact the top tax rate hovers at the level which the IFS tells us is the maximum amount of additional revenue that can be extracted . ‘Inheritance’ is money that has already been taxed once (at least ) and the whole thing only blew up because New Labour used of an extreme fiscal lag to place yet more stealth taxes on ordinary aspiring people to hand to their layabout chums. Its hardly an issue now.

Unsurprisingly, the only people who defend the bankers are newmania, our resident idiot/troll, and Tim Worstall – who rails about everything else that is wrong with govt laws but would like to maintain the letter of the law specifically on tax avoidance.

Sunny if you would like the benefit of my wisdom which is to yours as a Mighty Oak is to a little weed, you only have to ask nicely .

“Over the last 30 years the tax rates have been brought down considerably for the top 40%.

Complete and utter twaddle ”

No it is you that talks twaddle.

As you righties never tire of telling us in 1979 the top rate of tax was 80% it is now 40% Even someone of your limited ability can do the basic maths on that one.

There was a rateable system of tax on property which was much higher on expensive properties which is why Thatcher was so keen to get rid of it. There was not peps or ISA’s, capital gains tax was higher.

Thanks Peter, I think that clears it up nicely.

Is that Peter Hawkins, by any chance?

Yes dear but no-one pays it , no-one will pay this one as the IFS have concluded and as previously discussed on this very blog. That is why such top rates are a gesture only . In any case I had not realised you meant back into the 70s ….. which was the previous occasion the Labour Party bankrupted the country turned the lights off left the dead unburied and tried to blame it on the toffs, .The time before that it was Wilson …

I think you might have appoint if you were to say that the ordinary employed person has seen his tax bill go up what appears an unfair amount compared to the untouchable rich . That has certainly been true otherwise you are as charmingly deluded as ever

Paul,

Aye, it is.

Let me know when you’re going to start shouting at the politicians themselves for writing crap laws.

That’s an interesting argument, Tim.

The notion that laws are there to be circumvented – almost always by society’s elite, remember, since those expensive lawyers won’t work for peanuts – to better help individuals enrich themselves by fucking their fellow man…

Well, it may be within the letter of the law, but it’s not going to be a vote winner, is it?

I mean, we’ve just witnessed an epic financial krakatoa that has screwed millions of ordinary people, and much of it was brought on by the likes of AIG using their massive financial and political clout to make politicians alter the law in their favour… Strenuously lobbying for naked CDOs to be exempted from gaming laws springs to mind, an astonishing wheeze which had the entirely predictable result of suicide bombing the company, its shareholders, most of the firms it did business with and most of all the man in the street.

Sure, blame the politicians for being bought off, but the obvious lesson is this – unregulated business will fuck you, your mother and your dog if there’s a penny in it, and those advocating such things better be prepared to explain that to the electorate.

My point is, most people recognise that there’s more to civilisation than simply not breaking the law. Yer average person recognises that, for the whole shebang to function well, individuals have to refrain from actively seeking to fuck everyone else at every possible opportunity. That’s kind of what’s being argued here.

You may disagree – you might think that’s irrational and anti-competitive. I’d suggest that this is why the likes of the Labour Party and the Tories have traded power for a century, while the Libertarians can’t even get a candidate elected to the PTA.

“and much of it was brought on by the likes of AIG using their massive financial and political clout to make politicians alter the law in their favour… Strenuously lobbying for naked CDOs to be exempted from gaming laws springs to mind,”

It would be useful if you knew what you were talking about. AIG wasn’t in the CDO market. They were in the CDS one.

Come back when you’ve brushed up on your financial market knowledge.

It would be useful if you knew what you were talking about. AIG wasn’t in the CDO market. They were in the CDS one.

That doesn’t invalidate the broader point, which is:
As I read him, Paul wants the law changed such that some current instances of tax avoidance become tax evasion (ie. no longer legal). That’s changing the letter of the law.

.. as Peter says above. But then who’s surprised you’re making excuses for tax avoiders? You and the TPA lot have little regard for the poor taxpayers, who end up paying more because rich companies avoid paying their share.

Come back when you’ve brushed up on your financial market knowledge.

Oh, I know what I’m talking about Timbo, it’s kind of big news at the moment.

Do you think “pedantry and airy dismissal” are going to come across well for the Libertarian Party candidate on Question Time when he tries to explain to the Littlebrains why the bankers and the major businesses shouldn’t have to put up with the same laws they do?

To be clear, I can see where you’re coming from ideologically – it’s just going to be a hard, hard sell is what I’m saying, and frankly I don’t think Eau De Condescension is the right aftershave to be wearing while you’re explaining unpalatable policies.

“Libertarian Party candidate”

Eh? What are you talking about? i’m not in the LP and most unlikely ever to be so.

I’m actually a candidate for UKIP in London.

“Oh, I know what I’m talking about Timbo, it’s kind of big news at the moment.”

Apparently not if you think that AIG was in the CDO market.

What are you talking about? …I’m actually a candidate for UKIP in London.

Good God, and I thought you were just another internet ranter like the rest of us – best of luck to you, then, although of course, not that much luck.

I mean “Catch all nomenclature for very strident right wing pro-business types who harbour intense dislike for government”. It’s close enough for me.

Apparently not if you think that AIG was in the CDO market.

Again, I’m sure you know very well what I meant, and I’d like to think you could just assume that I’m aware of the difference – are you really going to use that as an excuse to ignore what I’m saying about business, society and democracy?

Like I say, I’m not picking nits in your ideology – do away, it’s your electoral funeral. All I’m saying is that what you’re arguing here is going to come across like the Divine Right of Kings, and it’s going to hit the public ear like the fat end of a baseball bat.

That’s because I’d bet folding paper that a vast majority of the British public are going to be closer to my Don’t deliberately fuck thy neighbour theory than your position, however legally sound it might be. Do you see what I mean?

May I start by confessing to be a tax avoider.

The focus on tax havens is often misplaced. They are rarely the very top of an ownership chain. The underlying investor,whether corporate or individual is usually located somewhere more sensible. If someone really lives in the Cayman Islands then well and good. But reality is that he makes money by living in the UK or by a business being in the UK. So if he moves his money to the Cayman Islands and tells the tax authorities he will be taxed on the income as the rules catch that. if he moves the income and doesn’t tell the tax authorities that is fraud. So it is fraud pure and simple that information sharing stops. No problems there. Activate clunking fist.

There are a lot of companies in Cayman etc that are merely vehicles to allow investors to make investments without incurring additional tax over that of their home countries. That is often legitimate.

The “structured finance” transactions the bankers do are very hard to justify. On the one hand they are easy to attack because there is a weak commercial motive other than tax. However, the loopholes are endless and there does come a time for a General Anti Avoidance Rule. We may be getting a bit closer in the next budget. The problem is ensuring you do not have a rule whose extent of application is so uncertain it strangles legitimate businesses.

To me the problem area is transaction driven tax avoidance. Suppose I need to reorganise a business and raise funds by selling a division. Why is a company allowed to sell shares tax free but is crucified if it has to sell buildings & goodwill? So you do a bit of planning, its not really avoidance is it? well just a bit? What it idefinitely is is one law for the big boys with good advisers (me!) and another for the struggling smaller companies. That is not good.

If I borrow to buy a worldwide business and then want to get tax relief for the interest costs in each of the countries I have to do planning. Each country looks at that in isolation and cries “avoidance”. Its not, well not really.mmmm.

And yes we do need an international approach. The tax whores that are Luxembourg, the Netherlands, Ireland and Switzerland are a bigger threat than the sandy shores of the carribean.

That does mean convergence of tax approaches. So called “tax competition” is just ripping off your neighbours or subsidy competition for your industries. Tax convergence will lead to substantially common tax rules across Europe. Say 20 years?

Hello? Is this thing on?

“Like I say, I’m not picking nits in your ideology – do away, it’s your electoral funeral. All I’m saying is that what you’re arguing here is going to come across like the Divine Right of Kings, and it’s going to hit the public ear like the fat end of a baseball bat.”

Forgive me if I point out what I think is an obvious point about politics. I wouldn’t use quite the same words on a hustings as I would here in this rather more rarified intellectual atmosphere.

In the detailed sort of discussion here the difference between CDOs and CDSs is important and someone who is going to mix and match them isn’t quite up to speed on said details. Their analyses of what to do next are going to be a little poor in detail if they’ve not analysed what happened correctly.

For example, while AIG was indeed brought down by their activities in hte CDS market that market as a whole worked just fine. The only credit market that has stayed open and liquid throughout. What screwed AIG was a combination of their own stupidity (or rather, of those few in AIG Financial Products) and the technical points about their AAA credit rating and non posting of collateral…and then losing it and having tp post said collateral.

The CDO market on hte other hand might have been a bad idea to begin with. Designed to spread risk it did that all to well, making what could have been a local problem (US sub prime) into something systematically threatening.

If we are, again in this intellectual discussion, to work out how to build again or build differently, the financial system then we need to analyse those bits that worked and still work and are worth keeping and those that we might want to either regulate more heavily or regulate out of business.

On the hustings I wouldn’t of course make such fine distinctions.I’d run much more with “Some parts of the system worked, some didn’t. What we need to do is work out which so that we don’t throw the baby out with hte bathwater. We want and need a well functioning banking system….the trick is to figure out what that actually is”.

Same point, perhaps, made in a different manner.

It’s the appropriate language for the people one is discussing things with, no?

A word on this letter of law/spirit of law thing. Tax avoidance is allowed by the letter of the law, and it is also allowed by the spirit of the law (if there is such a thing). There is a blanket provision somewhere, which I will now toddle off and try to find, which states that individuals and companies may arrange their tax affairs in an advantageous a way to themselves as possible.

Surely what you guys (and the Lib Dem on the committee) are saying is that tax avoidance is morally wrong. Its wrongness has nothing to do with law.

Newmania “In my imagination we [Newmania and Sally] are like two Dinosaurs honking our plangent ululations across an apocalyptic fissure opening between us …but I digress”

Huge big LOL.

Apologies for the delay – I was detained by a family do and a terrible Scotland game.

In the detailed sort of discussion here the difference between CDOs and CDSs is important and someone who is going to mix and match them isn’t quite up to speed on said details. Their analyses of what to do next are going to be a little poor in detail if they’ve not analysed what happened correctly.

Well, indeed. No doubt my economic knowledge is riddled with elementary errors, many of them not caused by failing to proof-read before clicking “Submit Commit”.

What screwed AIG was a combination of their own stupidity (or rather, of those few in AIG Financial Products) and the technical points about their AAA credit rating and non posting of collateral…and then losing it and having tp post said collateral.

This is kind of central to the point I’m getting at – AIG wasn’t just a random, unlucky victim of rash betting. It didn’t just make stupid errors, it had to actively lobby the government and the regulatory bodies for deregulation to allow them to screw the pooch that badly.

AIG’s implosion wasn’t accidental, it was the result of years of deliberate scheming. They successfully lobbied Congress to exempt CDSs from gaming laws. They paid financial whizzkids millions to come up with sound theories for why the pigs in their pokes – those AAA rated CDOs – were rock solid investments. They had to push and push so that they would be regulated by the Office of Thrift Supervision, specifically because they knew OTS wouldn’t make any significant effort to regulate them. They deliberately lent to people who they knew couldn’t afford to pay off their debts, in pursuit of a marginally bigger stack of chips for the poker table.

To be blunt, they wagered many times the value of their company on a bet that it won’t rain next week. They knew they were pushing crap, but as long as the money was coming in nobody cared. They rigged the system in their favour then embarked on an epic voyage of fiscal fuckery that’s turned American democracy into a contest to see which party can make the bankers the happiest.

They did all this deliberately, using all their resources to the fullest extent to push the boundaries with Congress, with oversight bodies and ratings agencies. They stretched every sinew to be allowed to tank themselves, their neighbours and their friends.

This might seem tangential to this discussion, but it’s actually critical. Here’s what you said earlier –

“Some parts of the system worked, some didn’t. What we need to do is work out which so that we don’t throw the baby out with hte bathwater. We want and need a well functioning banking system….the trick is to figure out what that actually is”.

How about, we crack down on the part whereby bankers are rewarded for deliberately rigging the game in their favour? The part where massive rewards flow to those who deliberately construct a system for selling a turd as a tiara? THAT might restore a bit more confidence than, say, rigging taxation laws so they give glittering prizes to the most devious.

This is why I’m talking about business in the context of society and democracy – our civilisation relies on more than the willingness of our neighbours to simply obey the law. Alix is correct that this is a moral issue, but I’d say it’s a moral imperative. In order for society to function, we need to be confident that our neighbours aren’t scheming on ways to circumvent the law and legally rob us of everything we own.

I imagine just about everyone would agree with that sentiment. It’s the assumption of big business that they’re exempt from that basic requirement that always, always leads to these collossal financial Krakatoas. That’s why business should be heavily regulated – they, like everyone else, have a social responsibility not to invent new and ingenious methods of fucking us all to death for pennies.

I know this isn’t nice politically correct language, but I feel it has the additional force of being accurate.

…many of them not caused by failing to proof-read before clicking “Submit Commit”.

Damn it, that’s ironic stupidity on several levels.

You’re rather making my point for me.

“They successfully lobbied Congress to exempt CDSs from gaming laws.”

A CDS would never be covered by gaming laws. They’re an insurance product, insurance against the risk of default. Which is why an insurance company, AIG, was offering them.

As I’ve said, if you really do not understand the system you purport to be analysing you’re not going to get far in your analysis.

“They paid financial whizzkids millions to come up with sound theories for why the pigs in their pokes – those AAA rated CDOs – were rock solid investments. They had to push and push so that they would be regulated by the Office of Thrift Supervision, specifically because they knew OTS wouldn’t make any significant effort to regulate them.”

As before, AIG wasn’t in the CDO business. It simply wasn’t bundling up mortgages, wasn’t creating tranches or AAA securities. It just wasn’t in that business at all. It was, again, in the CDS business, not the CDO. They really are very different things.

“They deliberately lent to people who they knew couldn’t afford to pay off their debts, in pursuit of a marginally bigger stack of chips for the poker table.”

AIG didn’t lend money to anyone.

Here’s a handy little hint. As I say, some parts of the financial system turned out to be not all that great. Some turned out to be just fine. What we want to work out is which is which? Which parts do we want to keep and which parts don’t we?

A CDO. Parcel up a load of loans (auto, mortgages, credit cards, student loans, anything) and then slice that pool into tranches. Sell the different tranches to different investors with different appetites for risk and or income. Bottom tranche takes the first risks, that say 10% of the underlying loans will default. Higher interest rate obviously. Next tranche, next 20% of defaults. Higher rating, lower interest rate. Etc until you’ve parcelled out 100% of the pool of loans.

There’s nothing intrinsically wrong or awful about this process of securitisation. Just an extention of what we already do with equity, secured debt, unsecured, senior, junior debt etc.

Where the CDO process did go wrong is that bank *were not* selling all of these bonds. They hung on to the top tranche those AAA rated ones. Rather than dispersing that risk they were concentrating that part of it. Thus when there was a general fall in house prices the banks started to fall over. Exacerbated by having to mark to market etc.

A CDS is something very different. I’ve got $1 million in bonds (ah, I wish!) and I want to insure against the possibility that the company that owes me that money will go bust. Default on the bonds that is. So I go to an insurance company (AIG Financial Products perhaps but there are many others) and offer to pay a premium. I pay say 50 basis points (about right for top notch bonds back awhile). Thus I am going to pay $5,000 every 6 months to the insurer for the next 5 years. In return if that bond defaults the insurer gives me my $1 million back.

Again, there’s nothing intrinsically wrong, awful or immoral about this procedure. It’s an insurance contract, insuring someone’s credit. You can achieve much the same by buying a put contract on the same bond. It’s just that the CDS market is a great deal more liquid than the market for options on bonds (and worth noting that the CDS market is still extremely liquid,).

Where it went wrong for AIG was that 1) They screwed up. Yes, clearly and obviously. Horriblymispriced their risks.But 2) they had an AAA credit rating themselves.

Everyone posts collateral on a CDS each and every day. A bond falls in value and you’ve written a CDS? You hand over that money to the person who bought it from you. If the bond then rises in value again, he gives that money back to you. Everyone does this every day.

But, but, not if you’ve got an AAA credit rating. Then you don’t have to post collateral. Which AIG did and they didn’t have to, until the day that they lost their AAA credit rating and they had to post a hundred billion or two of collateral on CDS contracts that were losing money.

That’s where all that US money has gone. To post collateral. (OK. well, now they’re closing out the contracts as well but initially at least, it all went on collateral).

Now you can see that a CDO and a CDS are different things, yes? And that there’s no essential reason why either of them should be banned? There’s nothing immoral or illegal about either of them?

Now, two things that really were stupid. The banks holding on to those top tranches of the CDOs. And AAA companies not having to post collateral.

Neither of those two are going to reappear in our lifetimes. Even bankers aren’t stupid enough to do that again.

OK, now that we actually know what is going on and that we know that the real stupidities are already ruled out because, yes, even bankers aren’t that stupid, so, what do we want to change? Are there any other parts of this CDO or CDS system that we want to change? Make illegal? Regulate against?

Rants about how all bankers are evil, rigging the market, screwing us, they’re terribly cathartic I know. But they’re not actually all that useful when the ranter doesn’t know what’s been going on and thus has little idea of what might need to be changed.

“Damn it, that’s ironic stupidity on several levels.”

Muphry’s Law as it is known

“I’m actually a candidate for UKIP in London”

Faro South?

Very good indeed.

No, I’ve been working in London since the autumn.

And is that a permanent move?

Not if I get elected, no. I’ll have to go and work in Brussels, won’t I?

Oh yes, I forgot there’s no easy way to get from London to Brussels…

A CDS would never be covered by gaming laws. They’re an insurance product, insurance against the risk of default. Which is why an insurance company, AIG, was offering them.

My information is that CDSs were specifically exempted from regulation as either gaming or securities by the Commodity Futures Modernisation Act in 1999 or so, which implies to me that they may could have been covered by gaming laws.

You’re giving half the story here, surely – the CDSs weren’t just insurance for companies lending, they were sold to anyone who wanted to buy. I may not know much, but I know the difference between “gambling” and “insurance”, and offering anyone willing to stake the chance to bet on business X defaulting looks a hell of a lot like gambling to me.

AIG didn’t lend money to anyone.

Yes, I’m rather stupidly eliding “AIG” and “the banks”, which shows you how good I am at argumentation. I’m not holding up AIG as a universal symbol for evil, I’m using them as an example of what happens when a small group gains disproportionate, unregulated power… I think Enron or even the East India Company would serve equally well.

Long story short – the bankers didn’t recklessly frag the world’s financial markets because they’re evil, they did it because they are human beings, and humans have an unfortunate habit of presuming that they’re unassailable geniuses. The appropriate response is to recognise this and plan against it.

I’m not saying that any financial wheeze should be banned, I’m saying that they should be regulated far more closely. Further, I’m saying that big business needs to realise that the law isn’t a code of annoying, pedantic rules to be bent or broken when it gets in the way. When I said that the bankers were rigging the system, I mean they – like every other interest group – use the full extent of their political and financial clout to have laws written the way they like it. You can see the results on your high street.

That’s going to have to change, because we’ve seen time and time again that big business is prone to bouts of astonishing hubris and misjudgement, and I believe that culture that says the law is for the little people is right at the root of it.

This attitude that business is perfectly entitled to pull every trick and con it can to avoid the same rules the rest of us live by, and that any attempt to make them play nice is some lefty foolishness, is at the heart of the problem. It’s anti-democratic, elitist and it encourages twerpy book-keepers to believe that they’re action heroes, with predictable results.

Now, no doubt you think I’m still not getting it. As I said upthread, it doesn’t really matter – ask ten strangers, and at least nine of them are going to tell you the banks and Tesco should have to obey the same laws as us, and not bust a gut trying to find scams to wriggle out of their obligations. You can sugarcoat proposals to help them do so all you like, but there’s no getting away from that.

“Long story short – the bankers didn’t recklessly frag the world’s financial markets because they’re evil, they did it because they are human beings, and humans have an unfortunate habit of presuming that they’re unassailable geniuses. The appropriate response is to recognise this and plan against it.”

Fine, which still means that we’ve got to do two things. Which parts of the financial system, which products, which practices, do we want to keep and which don’t we? That’s something which, I submit, requires detailed knowledge of what was actually happening. In rather more detail than would be provided by 9 out of 10 on the streets.

Secondly we’ve got to find the regulators, the law makers, who know more than the market participants and then make sure that they face the correct incentives. With, of course, the problem that if all human beings make mistakes then so will the regulators.

And perhaps our biggest problem about regulation is how to stop them from stamping on all and any form of innovation. For it’s always easier to say no than it is to allow something potentially useful to be approved.

Securitisation, for example, is an excellent idea in itself. Would our mooted new system of regulation allow or not allow that to develop?

Hello,

this is a great article written by a former IMF chief economist about the capture of the US political economy by financiers. I think people on both sides of the debate in this comments thread should find it rewarding.

No reasonable excuse for the delay there, just laziness.

Cheers Luis, that’s a really interesting article and it makes many of the points I’ve been trying to make without being quite as dumbassed about it.

That’s something which, I submit, requires detailed knowledge of what was actually happening. In rather more detail than would be provided by 9 out of 10 on the streets.

Well, indeed. Is securitisation a good idea? How do we encourage both responsibility and innovation? I haven’t got a clue. I’ll leave the getting-financial-markets-back-up-and-running to people with expertise in that department. My guess is, the solution will look lots like the measures already taken, i.e. throwing free money at the banks, letting too-big-to-fail institutions be bought up by others that are too-big-to-fail etc. Basically, governments are going to have to fellate the lot of them until they’re happy again, so that in five years time they’ll be ready to hit us with another accidental asteroid strike – by then, there’ll be a whole raft of new reasons why nobody could possibly have predicted such an unimaginable economic earthquake.

I accept that getting the banks lending is for financial whizzkids to work out – what I’m interested in is accountability, which is why I mention 9 out of 10 punters in the street. We’re not China here, so any business that operates in our territory should abide by the rules set by the population, rather than bending them to suit or stuffing the bodies that police their behaviour with inside men.

I’m talking about the balance of power here, and I think it’s clear that big financial institutions have far too much power relative to other institutions. The judiciary screws up when government exerts too much direct control over its operations, with cases collapsing left, right and centre – so it seems to be with these financial behemoths, who just can’t resist rejigging the system until they explode their own companies and the world’s economy. It’s not like this is the first time we’ve seen this happen.

What might help encourage a sense of responsibility? Well, stemming the continual cross-pollenation between government and finance might be an idea. It’s difficult to separate their powers when the two are run by and for the same people – that goes qunituple for the Americans… And never mind finding regulators who are more talented than the bankers, we could try finding regulators who are actually interested in regulating. It seems to me that, whatever it was the bankers were drinking before this shitstorm blew up, a lot of the regulatory bodies had sampled a sniff themselves.

Maybe companies and business schools could spend more time on ethics and responsibility to clients and less time on coaching their students in tax avoidance. Perhaps we as a people could try to make corporate malfeasance a central issue in elections, which would certainly provide the parties with an incentive to regulate. Maybe we could make a concerted effort to look out for tomorrow’s Bernie Madoffs, and make it clear that anyone we catch isn’t going to an open prison – they’ll be doing hard time in Shiv-Em-In-The-Lung then Pound-Em-In-The-Ass prisons.

Because the alternative is to accept that a tiny, super-wealthy elite in our society is above the law, and above the opinions of the electorate. That’s the problem that has to be addressed, because people who think they can do anything frequently try to, and you don’t have to open a newspaper to see what happens when some of them do.

“Which parts of the financial system, which products, which practices, do we want to keep and which don’t we? That’s something which, I submit, requires detailed knowledge of what was actually happening. In rather more detail than would be provided by 9 out of 10 on the streets.”

Replace the word “financial system” with “European Union” and that approach looks a tad different to the one taken by UKIP.

@60 – but that’s Tim in ‘Thoughtful blogger’ mode see, as opposed to Tim in ‘UKIP press officer’ mode or Tim in ‘Spam blogger, erm Polly, yes quite’ mode.

Perhaps he should add a .sig to his posts so we know which capacity he’s posting in at the time.

“Replace the word “financial system” with “European Union” and that approach looks a tad different to the one taken by UKIP.”

Don´t see it myself. UKIP rejects the political union part. Entirely happy to cooperate on things like trade etc without that part of it.

(This is in UKIP press officer mode)

> (This is in UKIP press officer mode)

Heh. Yes, quite.