City boys: episode 2

Some people tell us that the financial and legal services industry (FLSI or Flossy for short) centred in the City of London creates wealth for the rest of the country. Other people tell us that Flossy extracts wealth from anyone in range – including all the people in the rest of the country. The two lots probably agree that there are financial and legal services which we do need, which any modern economy needs in order to function: the difficulty arises over what they do with the rest of their time.

A journalist by the name of Nicholas Shaxson has written the book at reference 1 all about it, previously noticed by me at references 2, 3 and 4. A proponent of the wealth extraction rather than the wealth creation version of the story. This post is the result of my having, after some time, gotten around to finishing the book.

An easy enough read, with introduction, eleven short chapters and a conclusion, although the tone is irritating at times and it starts to feel a bit stodgy, shrill and repetitive by the end – at getting on for 300 pages of journalism. For those wanting an even easier read, there is the introductory reference 5.

I offer a few snippets, in no particular order.

Many large companies operate with a stack of holding companies arranged on top of them, a stack which might have as many as ten layers. Curiously, many of these companies will have the same address, while at least some of them will be registered in some haven or other – some haven which is light on regulation and taxation and heavy on secrecy. And with the mere existence of these stacks providing an impressive amount of confusion and secrecy. With the only purpose of these complicated arrangements, apart from earning fat fees for the people who set them up and run them – being the evasion of both tax and regulation by the principals.

In which connection I learn about the theft of Panama from Columbia and the invention of the shipping haven (aka flags of convenience), which eventually mutated into the tax haven. A country which I had thought to be a small place, but which actually has a third the area of the UK, just about the size of Ireland. A substantial, if rather hot and hilly place.

Limited companies are useful in this context. Private equity companies, themselves exempt from the regulations and reporting that go with being listed (private means private), so organise things that they can strip all the loose money out of the limited companies that they have invested in, that they own, while making sure that all the debts stay inside. Sometimes even going so far as to get the limited company to borrow the money to pass upstairs, under some cover or other. With the magic words ‘limited liability’ meaning that if these debts go bad, they do not greatly disturb the private equity boys (limited liability means their liability is limited). All of which sounds to me very like the asset stripping which was all the thing in the days of Slater Walker, in the late 1960’s of my lefty youth. With the Walker in this particular duet going on to become a Conservative Cabinet Minister. While the firm went bust, so not such a great proposition.

Another much abused dodge is the trust, which provides much secrecy, confuses ownership and generally defeats both taxman and regulator. Abuses which resulted in much anti-trust legislation in the US after the great Wall Street Crash, legislation which has been steadily unwound in the present century. With Shaxson reminding us of the use by Northern Rock of a small, north of England charity (charities being a specialised, public interest form of trust) to do with the Down’s Syndrome as a fig-leaf to cover up some of its more unusual goings-on.

Flossy is very keen on fee generating mergers and acquisitions (aka consolidations), with the result that monopolies are doing well. One only has to look at Microsoft, Google and Facebook, all of which have effectively monopolistic grips on very big markets, to see that monopolies are a good thing. And the Sage of Omaha (aka Warren Buffett) is very keen on them, seeing them as reliable generators of shareholder value.

We are reminded that Jean-Claude Juncker got to where is today by building Luxembourg into a world class tax haven. But diehard Brexiteers should remember that this trick works much better in a very small country than in a middle sized one. While, in the meantime, London does its bit with its lawyers and accountants putting their imprimatur onto all kinds of shady goings-on which they should not be mixed up with. According to Shaxson, US regulators, at least before the arrival of Trump, used to get quite angry about the lax standards on this side of the pond.

We are reminded that Flossy sucks in far too many of out brightest and best. The brightest and best who would, in the olden days, being doing more useful things like brewing better beer or building better bridges. Or governing some remote part of India from a donkey.

And just to show that I am not obsessed with Flossy, I note that she has a little sister called the management consulting industry, another parasite sucking wealth out of the rest of the world, in particular out of the once proud public services of the United Kingdom. With the big four accountancy firms being both very big in this world and very bad at spotting big, bad apples – which one might have thought was their proper business.

Both the Conservative and the Labour parties got very excited about the private finance initiative, one of the dirtier deeds of these management consultants, dressed up as a wheeze to bring private sector flair into dossy old public sector services, but really a wheeze to get government spending off balance sheet – and with payback deferred mañana. The catch for rest of us being that this eventual payback is huge, with the result that the services in question cost perhaps three times as much as they would have, had they been financed in the usual way, by long term, low interest government bonds.

Shaxson makes an entertaining parallel between the attempts of civil servants to manage PFI contracts and those of Soviet central planners to manage the Soviet Union.

He airs arguments for and against corporation tax, coming down on the side of the fors. Which is where I am: abolishing corporation tax in favour of more income tax might, in a perfect world, be morally neutral, but in a world where many people work hard to avoid paying income tax, corporation tax is a useful backstop.

Last but not least, he reminds us of the large amounts of big money going in to respectable sounding institutions like the Oxford University Centre for Business Taxation, the very people to which hollowed out government departments have to turn to for advice. I associate to the large amount of money poured into lobbying (in various guises) by the tobacco industry in an effort to stop government meddling with that market.

Conclusions

The book is not very attractively produced and has plenty of faults, but it does confirm my prior belief that this country would do a lot better if Flossy were to be significantly cut back. And Bing turns up plenty more of the same on the search term ‘financial services crash parasite’ – this being the source for reference 5.

More positively, an interesting, if sometimes tiresome read. Will many of the city boys be moved to read it, to learn the error of their ways?

I am also prompted to wonder, not for the first time, whether this whole edifice is not a cunningly disguised way for Flossy to charge exorbitant commission on the flow of money, some decent, some dirty, into the UK. The flow of money which provides the fuel for the whole business, the flow which keeps the standard of living of all the mugs just about high enough that they don’t complain about the rather higher standard of living of the very important Flossites. But it is not sustainable: eventually we will have sold everything that can be sold and the inflow will turn into an outflow. But Flossy will be OK because she will be able to charge commission on that too.

References

Reference 1: The Finance Curse: How global finance is making us all poorer – Nicholas Shaxson - 2018.

Reference 2: https://psmv4.blogspot.com/2018/11/juncker.html.

Reference 3: https://psmv3.blogspot.com/2018/11/city-boys.html.

Reference 4: https://psmv4.blogspot.com/2019/01/distribution-of-good-things-of-life.html.

Reference 5: https://www.independent.co.uk/. A decade on from the financial crash, we are still suffering its long burn - Ben Chu – 2018. Available by search on the ‘Independent’ website.

Reference 6: https://psmv3.blogspot.com/2018/11/city-boys-episode-1.html. Just to round things out. Naming conventions not quite all they might be.