Ian Fraser

Master Criminals of the Universe

Sabotage: The Business of Finance

By

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Sitting in a white leather armchair at a hustings event in June last year, Boris Johnson bragged that he had, more than any other politician, ‘stuck up for the bankers’ in the wake of the 2008 financial crisis. Earlier, while mayor of London, he described himself as ‘the champion of the City’. Were the prime minister to read Sabotage, one would hope he might reconsider his stance.

Written by two academics at City, University of London, who also happen to be husband and wife – Belarusian-born Anastasia Nesvetailova and Israeli-born Ronen Palan – Sabotage is an astonishing indictment of a global finance industry that’s effectively gone rogue. The authors claim that at least half of what banks and other finance firms do is socially useless, if not actively destructive. They say that the companies Johnson is so determined to stick up for are today dependent for up to half of their profits on four types of sabotage: of clients, of competitors, of governments and of the market itself. Many who work in the world of finance will say they don’t recognise such claims, but Nesvetailova and Palan make a convincing and well-evidenced case that such thinking is baked into the business models of most banks.

The authors begin by outlining the ideas of the largely forgotten Norwegian-American economist Thorstein Veblen (1857–1929). Veblen, who coined the phrase ‘conspicuous consumption’, was among the first academics to expose, and to try to explain, malpractice in the worlds of business and finance. Writing in the run-up to the Wall Street Crash of 1929, he revealed that US businesses were engaged in ‘obstruction, friction, lying, impairing and even the use of force’ in order to maximise profits, with little regard for who got trampled in the process. Superimposing Veblen’s thinking onto today’s more complex financial world, the authors conclude that the primary reason that modern banks are able to consistently churn out huge profits is because they rely on practices that include ‘hindering, obstructing, delaying, misrepresenting, destroying or otherwise taking advantage of the “dumbest person in the room”’.

The authors blame the Austrian economist Friedrich von Hayek (1899–1992) and his disciples for opening the floodgates to such rampant abuse, suggesting that his blind faith in free markets, which caught on during the reigns of Ronald Reagan and Margaret Thatcher, coupled with intense lobbying by the finance industry and the think-tanks it funds, triggered a delusional complacency across the developed world. This in turn created a climate in which it was felt that the US regulatory settlement of 1933–4 was a constraint on growth and should be dismantled.

The settlement, which did so much to rein in the finance industry between the 1930s and the 1980s, was epitomised by the Glass-Steagall Act of 1933, which separated investment or ‘casino’ banking from more socially useful high-street banking, thus eliminating dangerous conflicts of interest. But in thrall to Hayekians and with an administration that had largely been captured by Wall Street bankers, President Bill Clinton repealed it through his Financial Services Modernization Act of 1999. Combined with regulatory loosening and the lionisation of often corrupt bankers – also seen under New Labour in the UK – this let the sabotage genie back out of its bottle.

Even before that, banks and bankers had become emboldened. In Wall Street in the 1980s, wheeler-dealers like Michael Milken and Lewis Ranieri came up with innovations – the junk bond and mortgage-backed securities respectively – that had the potential to transform lending for the benefit of society but ended up sowing the seeds of destruction.

Nesvetailova and Palan describe how bankers believed they had free rein to bolster profits through illicit means, such as the abuse of personal data, signature forgery, the opening of fake accounts, the plunder and asset-stripping of small businesses, money laundering, the rigging of critical benchmarks like LIBOR and the manipulation of foreign exchange markets. The authors invoke Nikolai Gogol’s satirical novel Dead Souls while explaining how RBS staff sought to increase their own bonuses by harvesting the souls of dead people, illicitly signing up deceased customers to so-called ‘premier’ accounts that charge monthly fees. Sabotage became so prevalent that bankers even created their own terms – ‘asymmetric information’, ‘lack of financial literacy’, ‘the principal-agent dilemma’ – to describe how they might turn a dime from customers’ gullibility or ignorance.

From describing how banks rip off their customers, Sabotage moves on to exploring how banks kill each other for profit. The authors call this ‘a game of hosticide and survival, where the victorious feast on the remains of their prey’. Nesvetailova and Palan say that banks’ obsession with taking out rivals and growth by acquisition is often driven by a desire to become ‘too big to fail’ and ‘too big to jail’, a state in which they in effect enjoy massive government subsidies and immunity from prosecution.

The book also covers the fiendishly complex tax avoidance ploys practised by leading banks, a topic on which Palan is an acknowledged expert. The authors remind us that this is another way in which banks sabotage the state, effectively denuding it of tax revenues. Depressingly, the authors do not believe that the rise of financial technology (or fintech) firms or the emergence of cryptocurrencies and such technologies as blockchain will do anything to improve things, suggesting instead that they will turn out to be ‘the holy grail’ of financial sabotage, with cryptocurrencies eclipsing the Cayman Islands as ‘super tax havens’.

The authors deplore the fact that none of the post-crisis reviews of the banking and finance sectors even mention the word ‘sabotage’, saying that this is in marked contrast to the report of the Pecora Commission of 1932–4, which investigated the causes of the Wall Street Crash. This and the subsequent reforms initiated by the American government were designed to tackle ‘the problem of sabotage head on’. They say that the post-2008 banking reforms have been marred by an obsession with ‘stability’ and that common law as practised in the UK creates an unlevel playing field in which banks can ‘shape the rules of the game’, crush victims and obstruct justice. They urge supine financial regulators to get their acts together.

The book has flaws. Sometimes the authors seem overly keen to squeeze a particular financial scandal into the ‘sabotage’ box. A paucity of direct quotes from whistleblowers and ex-industry insiders makes parts of it seem dry, as does the authors’ failure to describe the characters of the often piratical financial innovators whose creations they evaluate. Surprisingly, the role of the ‘enablers’ of sabotage – auditors, accountants and lawyers – doesn’t get a look-in. Nor does the work of some academics at the cutting edge of thinking on financial crime, such as William K Black and George Akerlof. Occasionally, the authors could have leavened their narrative by highlighting some of the positive effects of modern finance.

However, these are niggles. Sabotage is a great book. It lifts the lid on shocking, systematic abuses, of which every user of financial services needs to be aware. It ought to be required reading for every civil servant, regulator and politician in the UK and elsewhere, especially when you consider that, bamboozled by Hayekian thinking and duped by the banks’ lobbying, so many of them see their mission as being to stick up for bankers.

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