In These New Times

All of this only confirms that it is nonsense to talk of the government nationalising or part-nationalising the banks.

Time for government to insist that loopholes are closed

Ian MacWhirter

Sunday Herald

It has always been a scandal that banks connived with wealthy clients to use offshore tax havens to avoid paying income tax. But the use of offshore vehicles by banks such as Northern Rock and Royal Bank of Scotland has had far more profound consequences than loss of tax revenue.

In the past decade or so, the big banks have all used their offshore tax havens to set up all manner of off-balance sheet vehicles under a plethora of confusing names to avoid regulation and create almost unlimited credit. In a real sense, this use of tax havens is what turned the sub-prime mess into the great banking crash of 2008, Here’s how it works. Take Northern Rock. When the government nationalised the delinquent mortgage bank last year it discovered, to its horror, that the Rock didn’t actually own most of its mortgages – it had sold £50 billion of them to a structured investment vehicle (SIV) called Granite, based in Jersey. Granite was registered as benefiting a charity for children with Down’s Syndrome in the northeast of England. What generosity! Except that the children never saw a penny – it was all an exercise in financial engineering.

The Rock had “sold” its mortgages to itself in the form of this new company-cum-charitable trust. Through legal chicanery it was able to use this SIV to conduct all sorts of financial activities without these appearing on the formal balance sheet of Northern Rock.

Basing these special-purpose vehicles off shore not only means they are able to avoid UK tax, they can also ignore UK banking regulations and capital requirements. This allows them to trade in all manner of derivatives financed by cheap credit on the wholesale money markets – activities which would be illegal under UK jurisdiction.

Only when Northern Rock went bust did any of this emerge, and the government quickly buried the information again for fear of what might happen if voters knew that public money was (and still is) being used to finance systematic tax avoidance and irresponsible lending.

All the big banks have been playing the same game to varying degrees: setting up offshore casinos in which to bet on complex derivatives free of any banking regulations. The $2 trillion hedge fund industry – now collapsing – was built on this offshore strategy, which allowed investors to take staggering risks on derivatives trades working in tandem with banks and pension funds in a world of unregulated finance called the shadow banking system.

The whole apparatus of SIVs, hedge funds and other instruments of speculation permitted the growth of the market in Credit Default Swaps (CDSs) from virtually zero to $62 trillion in seven years. CDSs are like insurance policies on bonds, but they are used by financiers to make various kinds of bets on corporate and government defaults. RBS is one of the big players in these instruments, which are inextricably linked to the mortgage-based Collateralised Debt Obligations which imploded after the sub-prime scandal. The US investor Warren Buffett has called these derivatives “financial weapons of mass destruction”.

In the current international crash, as banks fold, hedge funds collapse and countries go into default, we are now reaping the consequences of allowing this tax haven world of offshore banking. The huge bubble of credit generated by unregulated banking has caused what Charles Bean, the deputy governor of the Bank of England, has described as “possibly the largest financial crisis of its kind in human history”.

British banks which have been leading players in the securitisation “revolution” have had to be part-nationalised as their dodgy lending strategies came home to roost. The country is now heading into a deep recession as normal channels of credit remain frozen. Stock markets around the world have lost trillions as the credit party has ended with a massive hangover of public and private debt.

But incredibly, even as the UK government has taken substantial stakes in the major banks, it has not challenged the use of the offshore tax havens which played such a prominent role in turbocharging the credit bubble. As we reveal today, the network of offshore banking operations which have lost the taxpayer hundreds of millions, if not billions in much-needed tax revenue, are still in existence – now being bankrolled by the British taxpayer. Yes, we are paying banks to avoid paying UK taxes. The government’s blind eye to these offshore scams has made a nonsense of attempts to regulate the banks and control irresponsible lending.

The only politician who seems to understand what has been going on is the Liberal Democrat finance spokesman, Vince Cable, but his has been a lone voice calling for an end to tax haven status. He said: “It seems totally inappropriate for banks funded by the taxpayer to be systematically avoiding British tax and helping customers to do so.”

It’s time to make our banks honest again. As a condition of our continuing to pay public money to save financial institutions, they must agree to pay their taxes like the rest of us.