Finance: fiddling, fetish and fiction

Nothing changes in the finance sector globally, despite the catastrophic impact of the banks on the world capitalist economy in the global financial crash and the ensuing Great Recession.

In previous posts, I have highlighted the greed, recklessness and instability of the finance sector and its operational leaders. As Marx said, finance is the epitomy of the fetish of money, increasingly based on investing in fictitious capital, that bears no relation to any value created in an economy, let alone overall social need.  As former Bank of England chief economist Andy Haldane put it, finance is socially unproductive.

Haldane posed the question: “In what sense is increased risk-taking by banks a value-added service for the economy at large?”  He answers, “In short, it is not.”  Echoing Marx’s value theory, Haldane concluded: “The act of investing capital in a risky asset is a fundamental feature of capital markets. For example, a retail investor that purchases bonds issued by a company is bearing risk, but not contributing so much as a cent to measured economic activity. Similarly, a household that decides to use all of its liquid deposits to purchase a house, instead of borrowing some money from the bank and keeping some of its deposits with the bank, is bearing liquidity risk. Neither of these acts could be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape. For that reason, statisticians do not count these activities in capital markets as contributing to activity or welfare. Rightly so.” http://www.voxeu.org/article/what-contribution-financial-sector

More evidence of the criminal nature of global banking is to be found in the news that the Malaysian government has filed charges against 17 current and former executives of three Goldman Sachs subsidiaries, over the multi-billion-dollar 1MDB state fund scandal, where former Malaysian prime minister Najib Razak and his family corruptly siphoned off billions – it seems with the connivance of Goldman Sachs, the world’s largest investment bank.  Goldman’s used to be led by Lloyd Blankfein, who claimed he was doing God’s work.

Well, God’s work in this case appears to have Goldmans arranging bond issues worth $6.5 billion for 1MDB, with large amounts of state funds ($2.7bn) were misappropriated in the process.

Over in Switzerland, the former chief executive officer of HSBC’s Swiss private bank pleaded guilty to helping wealthy clients hide assets worth at least 1.6 billion euros ($1.8 billion). Peter Braunwalder was fined 500,000 euros and given a one-year suspended jail sentence, according to a Paris court ruling on the plea. The 68-year-old admitted that he took part in helping clients evade taxes between 2006 and 2007 by opening clandestine Swiss bank accounts and setting up offshore trusts or providing fake loans.  But no jail for him.

The HSBC case follows the conviction of a former minister and Swiss bank UBS which had to pay a record 4.5 billion-euro fine  for criminal wrongdoings of “an exceptionally serious nature.”  And HSBC has only just paid 300 million euros to resolve allegations in the same case.  Again, in the UBS case all the bank executives involved avoided a prison sentence. French bank Societe Generale also agreed last year to pay 250 million euros to end a bribery case and French fund manager Carmignac Gestion said in June it would pay 30 million euros to settle a tax-fraud case.

But in banking, as in capitalism in general, it’s one rule for the elite and another for the rest of us.  On the day Deutsche Bank began making thousands of employees redundant, some managing directors at the company’s office in the City of London were being fitted for suits that cost at least £1,200. Tailors from Fielding & Nicholson, an upmarket tailor, were pictured walking out of the bank’s UK office with suit bags. Ian Fielding-Calcutt, the tailor’s founder, and Alex Riley were there to fit suits for senior managers in spite of plans to cut 18,000 jobs  worldwide. Deutsche’s chief executive, Christian Sewing, has repeatedly said how much he regretted the decision to scrap a fifth of his global workforce. But it did not stop him paying out E50m in golden handshakes to top executives since 2018.

Over at Standard Chartered, American CEO Bill Winters had no compunction about accepting a pension contribution worth 40% of his annual salary and perks worth £6m, 79 times the average employee salary.  When this was questioned, he said that shareholders of the bank were being ‘immature”.  “I think it’s quite appropriate for the board not to ask me to take a pay cut”, he added. “And they didn’t — I don’t think it ever occurred to them to ask.”

And so it goes on.  Ex-UBS Group AG investment banking head Andrea Orcel is suing Banco Santander SA for about 100 million euros ($113 million) after the Spanish bank reneged on an agreement to hire him as chief executive .  In return, Santander has accused Orcel of “dubious ethical and moral behaviour”. The 56-year-old Italian had been offered the top job at Santander last year and had already quit his post as head of UBS’s investment bank when the bank changed its mind in January, saying it could not meet his exorbitant pay demands.

Meanwhile, in the UK, Britain’s largest mutual society (not even a bank legally) revealed that its former CEO Graham Beale, in addition to his £885,000 salary, got a £292,000 annual pension allowance, a £1 million bonus and £500 a day to cover the cost of travel, security and medical expenses. His benefits from annual expenses alone came to £185,000, covered the cost of travel, security and medical expenses. He was handed almost £400,000 of perks since joining Nationwide. Luke Hildyard, executive director of the High Pay Centre, said: ‘It’s hypocritical for Nationwide to market themselves as a different kind of organisation to the big banks, and then lavish these kinds of sums of money on its executives. It’s hard to believe these payments were critical to the success of the business.’

Then there is reckless drive of profit.  The Bank of England has found widespread weaknesses among the UK’s challenger banks in stress tests that showed new lenders cutting corners in an aggressive pursuit of growth. A senior regulator at the central bank wrote to chief ordering them to tighten standards and correct “overly optimistic” risk modelling. The BoE found that many new lenders displayed an “inability to explain assumptions” in their stress-test models and an “aggressive” focus on growth, even though they tend to make riskier loans. It comes after a scandal at Metro Bank, which had to slash growth plans and turn to investors for a £375m emergency share issue after admitting it had misclassified loans and did not hold sufficient capital.

And as the the world economy slows, for the lower ranks, banking is looking less lucrative. Global investment banks are shedding tens of thousands of jobs as falling interest rates, weak trading volumes and the march of automation create a brutal summer for the sector. Almost 30,000 lay-offs have been announced since April at banks including HSBC, Barclays, Société Générale, Citigroup and Deutsche Bank. Most of the cuts have come in Europe, with Deutsche accounting for more than half the total, while trading desks have been hit hardest.

So nothing has changed at the top of banking globally: big salaries, bonuses, pensions for the top executives, in return for overseeing tax scams, fraud and corruption.  And then there is the real and rising risk of instability and collapse as banks continue to speculate in the ‘fictitious capital’ of ‘exotic’ financial instruments.  More proof that ‘regulation’ will not work and only public ownership of the finance sector under democratic control will deliver a banking service for investment and people’s needs.

6 Responses to “Finance: fiddling, fetish and fiction”

  1. vk Says:

    Yes, this “risk” argument is fundamentally flawed. Most glaring evidence for this is that capitalists act in the direction to eliminate — not to increase — risk (hedge, monopoly, buying politicians, trafficking of privileged information etc. etc.).

    If risk created wealth the movement would be in the opposite direction — capitalists would’ve been acting in the direction of increasing it on purpose.

    –//–

    It makes sense for capitalists and executives to cut jobs and slash salaries at the base of the pyramid while incresing their own pay/dividends.

    In the fiat currency system, having your neighbor receiving less pay is as good as you receiving a raise — the ideal movement being a combination of both (you receive a raise while your proverbial neighbor suffers a pay cut).

    If you receive a raise in a fiat currency system, but, at the same time, the whole world also receives an equal raise, prices will simply go up and nobody gets richer (assuming productivity remains constant and the stage of the development of the productive forces remains the same). This is in opposition to the ancient monetary systems (Late Bronze Age, Ancient Rome), where wealth was directly measured in treasures, land, slaves and other luxuries/delights: you had an aureus, you got an aureus and that would never change (assuming the purity of the coin wasn’t adultered).

  2. Anti-Capital Says:

    How do any of the “sins” committed by financiers, or attributed to finance capital, differ from the everyday activities of “non-finance” capitalists?

    Really, is the argument supposed to be that finance capital and finance capitalists are more craven, venal, vicious than your run of the mill industrial, large, or merchant, petty, capitalist?

    Paid much attention lately to the gap in salaries between industry executives and workers? The non-payment, and cheating on wages by corporate executives? The reduction in health insurance, pensions, etc. that has burned through US industry?

    Do you really think that the greed, recklessness, and/or instability of financial capitalists is greater than the greed, recklessness, and instability of other capitalists?

    And even if you do, so what? What practical, or theoretical difference does that make to a)Marx’s critique b) class struggle?

    You want public ownership under democratic control of the finance sector? Exactly how do you propose to get that? That’s like saying– no wait a minute, not “like saying,” it’s exactly the same as saying you want public ownership under democratic control of industrial capital; as saying you want capital, but without the capitalists. Last time I check that was Proudhon’s solution, not Marx’s.

    Makes me think, more and more, the entire distinction between “productive” and “non-productive” capital is specious from the getgo; it’s a moral argument– productive=good; finance=bad, as if with capitalism, it’s even or ever possible to distinguish, separate the two. Pretty sure that’s why Marx advocates the overthrow of capitalism as capitalism, as a mode of production, not simply a network of credit.

    • mandm Says:

      I agree with most of your and VK’s critique, except for the point about about “unproductive” capital. There is a distinction (not recognized by capitalists as such): unproductive capital does not produce surplus value, but is parasitic upon it.

      I agree that I am twisting certain key marxian categories out of shape, but I would include war production as unproductive production (I even like the concept of it being viewed systemically and metaphorically as embodying dead labor, constant capital).

      What makes neoliberal (destructive production) capitalism so blatantly “corrupt” is that financial capitalism, in its dialectical identification with productive capitalism, has become (at least since ww2) the stronger “aspect” of contradictory unity of the two, driving late capitalism’s war on humanity and nature.

  3. Boffy Says:

    I agree with pretty much all of this post. Its necessary to distinguish between the role of banks as providers of credit, and loanable money-capital, and the role of investment banks and finance houses in purely speculative activities, in search of capital gains.

    In considering “financial capital” as distinguished from “industrial capital” its also necessary to not fall into the trap of thinking that banks and finance houses are “financial capital” rather than “industrial capital”.

    In Capital II, Marx defines industrial capital as the totality of the circuits of the three type of capital – productive-capital, commodity-capital and money-capital. He then goes on to show how, the part of this circuit of industrial capital that involves circulation rather than production, i.e. the metamorphosis of the commodity-capital into money-capital, and of this money-capital back into productive-capital, simply becomes the function of specialist, independent forms of capital, i.e. merchant capital, and money-dealing capital, which is merely a specific form of commercial capital. This money-dealing capital, like other merchant capital continues to exist within the circuit of industrial capital, and thereby as a form of industrial capital.

    That distinguishes it from interest-bearing capital, which exists completely outside the circuit of industrial capital. Marx, in Capital III, in extensive analysis of the operation of the banking system, demonstrates the way capital becomes identified exclusively with interest-bearing capital. He cites Bank of England governor Lord Overstone, for whom capital is only this money-capital, and capitalists are, thereby only the owners of this loanable money-capital, with the actual industrial capitalists, especially after that task falls to professional managers, being seen as merely a form of skilled worker, and profits thereby being reduced to nothing more than a form of wages for such entrepreneurial labour. Hence the return to capital comes to be seen as interest, not profit, whilst themselves essentially disappear from view.

    Marx points out that one consequence is the idea purveyed by the banks that all of the advances they make are an advance of capital, whereas, in the main, what the bank advances is only the result of previous deposits of realised profits from companies themselves. A main function of the bank remains simply as money-dealing capital, taking in receipts on the one hand, and making payments on the other. In so far as as the banks and finance houses perform this role, they are an integral part of the circuit of industrial capital, and are “industrial capitals” themselves, just as much as a large wholesaler or retailer is an industrial capital, because its operations are an integral aspect of the circuit of industrial capital, simply acting as a specialist in the role of metamorphosing commodity-capital into money-capital, on behalf of industrial capital a a whole.

    Interest-bearing capital refers to those that monopolise the ownership of loanable money-capital, which essentially refers to the top 0.01% whose wealth is held in that form of fictititious capital, of shares, bonds, and other such assets. The banks, financial houses, stock exchange only symbolise and concentrate this financial capital in so far as they act to centralise this loanable money-capital in one place, and to utilise it accordingly to extract the maximum amounts of interest, or to otherwise maximise the interests of the owners of this fictitious capital, e.g. by inflating asset prices.

    As Marx puts it, in Capital III, Chapter 33,

    “Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.”

    When capital arrives at this stage, which it essentially had done by the end of the 19th century, following the introduction of the 1855 Limited Liability Act, and consequent explosion of public companies, which creates the dominance of socialised capital over private capital, the social function of the owner of capital comes to an end, as had happened with the landlords, as soon as their function in agricultural production had been superseded by the role of the capitalist farmer.

    So, long as capitalism and capital exists, then interest-bearing capital exists, because it is always possible to sell capital itself, i.e. the use value of capital to produce the average profit, as a commodity. But, just as private capital was replaced by socialised capital at the end of the 19th century, in the form of the cooperative and corporation, which form the transitional form of property between capitalism and socialism, so too the provision of credit, and loanable money-capital becomes socialised too.

    The majority of new loanable money-capital comes from the profits of the socialised capital, not from individual money-lending capitalists, who themselves only continue to increase their personal wealth, because they exert unjustifiable control over the socialised capital. via their representatives appointed to company Boards. Today, large amounts of loanable money-capital comes from workers themselves. In Britain, around £1 trillion exists in workers pension funds, but the workers are allowed no control over those funds. The funds are controlled by the banks, which are themselves controlled by the representatives of the shareholders.

    The actual personification of the socialised capital, be it in the cooperative or the corporation is the army of professional day to day managers, technicians, administrators and so on, today drawn from the working-class itself, and often organised into trades unions alongside he other workers. That fact, and the need for the shareholders to pursue their own interests as against the company interest, is what causes them to appoint their own executives above these “functioning capitalists”. Their grossly inflated remuneration, unlike that of the actual professional manages, is usually in inverse proportion to the value they contribute. In the worker owned cooperatives these executives are usually irrelevant to production, except where it is a very large operation that requires a higher level of coordination.

    As Marx puts it,

    “On the basis of capitalist production a new swindle develops in stock enterprises with respect to wages of management, in that boards of numerous managers or directors are placed above the actual director, for whom supervision and management serve only as a pretext to plunder the stockholders and amass wealth. Very curious details concerning this are to be found in The City or the Physiology of London Business; with Sketches on Change, and the Coffee Houses, London, 1845.

    “What bankers and merchants gain by the direction of eight or nine different companies, may be seen from the following illustration: The private balance sheet of Mr. Timothy Abraham Curtis, presented to the Court of Bankruptcy when that gentleman failed, exhibited a sample of the income netted from directorship … between £800 and £900 a year. Mr. Curtis having been associated with the Courts of the Bank of England, and the East India House, it was considered quite a plum for a public company to acquire his services in the boardroom” (pp. 81, 82).

    The remuneration of the directors of such companies for each weekly meeting is at least one guinea. The proceedings of the Court of Bankruptcy show that these wages of supervision were, as a rule, inversely proportional to the actual supervision performed by these nominal directors.”

    (Capital III, Chapter 23)

    So long as capital exists, interest-bearing capital will exist, but its clear that Marx made a distinction between this interest-bearing capital, and its parasitic nature compared to real capital. Even commercial capital, which produces no surplus value, at least increases the amount of realised profits, by reducing circulation costs. Interest is simply a drain on profits in the same way that rent is a drain on profits.

    Interest-bearing capital will remain as long as capital remains, because it is necessary to move money-capital from where it is not required to where it is required, and under capitalism that implies the payment of interest. And, as Marx says, in Capital III, Chapter 27, capitalism will not disappear over night. It will take the form of the extension of the socialised capital, which in part will be effected by means of the use of credit.

    “The co-operative factories of the labourers themselves represent within the old form the first sprouts of the new, although they naturally reproduce, and must reproduce, everywhere in their actual organisation all the shortcomings of the prevailing system. But the antithesis between capital and labour is overcome within them, if at first only by way of making the associated labourers into their own capitalist, i.e., by enabling them to use the means of production for the employment of their own labour. They show how a new mode of production naturally grows out of an old one, when the development of the material forces of production and of the corresponding forms of social production have reached a particular stage. Without the factory system arising out of the capitalist mode of production there could have been no co-operative factories. Nor could these have developed without the credit system arising out of the same mode of production. The credit system is not only the principal basis for the gradual transformation of capitalist private enterprises into capitalist stock companies, but equally offers the means for the gradual extension of co-operative enterprises on a more or less national scale. The capitalist stock companies, as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to the associated one, with the only distinction that the antagonism is resolved negatively in the one and positively in the other.”

    As Marx says, this transitional stage between capitalism and socialism, during which these transitional forms of property exist and expand, and during which, the workers must engage in a political struggle for control over that socialised capital extends over a protracted period.

    “As the system of bourgeois economy has developed for us only by degrees so too its negation, which is its ultimate result.”Grundrisse, p 712.)

    When the bourgeoisie fought against the landlord class, a starting point was to demonstrate that the latter now had no useful social role to perform. The same is true today in relation to the owners of interest-bearing capital. The political struggle involves highlighting that fact, and highlighting the fact that there is no reason that shareholders, any more than bondholders or other creditors should have a vote on company policies, or be able to appoint boars of directors, as in fact Jon Kay and Aubrey Silberston discussed 30 years ago.

  4. Boffy Says:

    Michael,

    I don’t know if you’ve read this article in Moneyweek, or the piece by Merdith referred to, but I found it interesting in terms of cycle theory, and wonder what your thoughts might be?

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