Ewald Engelen & Rodrigo Fernandez University of Amsterdam & Leuven University
HOW A FISCAL ARBITRAGE MACHINE BECAME A SOURCE OF LEVERAGE FOR THE BANKING CABAL – THE CASE OF LEHMAN BROTHERS TREASURY BV
INTRODUCTION • Shadow banking debated by the policy community in terms of its systemic risks (Fed, FSB, BIS, EC, G-‐20) • Missing is the central role of offshore financial centers (OFCs) in facilitaOng the flow of capital between shadow banking enOOes (including SPEs) • If we focus on the geography of shadow banking we clearly see concentraOons of stocks, flows and transacOons in a small number of financial centers, many of them OFCs.
A STORY OF ‘INSTITUTIONAL CONVERSION’ IN TWO PARTS • Part 1: shadow banking in the Netherlands: size, scale, scope & risks • Part 2: The case of Lehman Brothers Treasury BV • Conclusion: insOtuOonal conversion & elite responses
PART 1: SHADOW BANKING IN THE NETHERLANDS: SIZE, SCALE, SCOPE & RISKS
Number of hits for "shadow banking" on R.com 180 160 140 120 100 80 60 40 20 0 2007
2008
2009
2010
2011
2012
Total assets of financial intermediaries 20 jurisdictions and euro area
Exhibit 2-1 USD trillion
Source: National flow of funds data.
The shadow banking system’s share of total financial intermediation has decreased since the onset of the crisis and has been recently stable at a level around 25% of the
Grafiek 2.4 Nederland relatief grote OFI-sector Procenten balanstotaal, 2011.
VS 35,4%
Overige 27,4%
Hongkong 2,0% Zwitserland 2,0% Duitsland 3,5% Frankrijk 4,0% Japan 5,9%
Bron: FSB.
VK 13,6% Nederland 6,2%
SHADOW BANKING IN THE EU-‐27
7% 4% 4% 29% 7%
7%
8% 19% 15%
UK Luxembourg Netherlands Ireland Germany France Spain Italy other
Grafiek A1.1 Ontwikkeling Nederlandse financiële sector EUR miljard.
3.500
3.000
2.500
2.000
1.500
1.000
500
0 1999
2001
BBP Banken Bron: CBS.
2003
2005
2007
Verzekeraars en pensioenfondsen Overige financiële instellingen
2009
2011
As a percentage of banks’ total assets N etherlands
Source: National Flow of Funds data.
Un
gering.
17
Eigenlijk zijn vanuit schaduwbankperspectief vooral hedgefondsen
Grafiek 3.1 Uitsplitsing Overige financiële instellingen Balanstotalen in EUR miljard, ultimo 2011. Roodgekleurde onderdelen hebben een relatief hoog schaduwbankgehalte. Financiële BFI’s 500 Securitisatievehikels 330 Financiële maatschappijen 128 Hedgefondsen 18 Geldmarktfondsen 2 Beleggingsinstellingen* 340 Holdings financiële instellingen 184 Beleggingsondernemingen 91 * Exclusief hedgefondsen
Niet-financiële BFI’s 1500 Overig 14 Participatiemaatschappijen 25
Bron: DNB, CBS. 14 Securitisatievehikels worden in de verschillende statistieken op uiteenlopende manieren
Het schaduwbankwezen: een verkenning voor Nederland
Grafiek 3.5 Samenstelling BFI securitisatievehikels EUR miljard, 2011.
RMBS 3
CMBS 1
Overig 3
Auto ABS 3
Multiissuance 24
Synthetische CDO 4
Bron: DNB.
Cash CDO 59
aan strikte voorwaarden voldoen. Een concernfinancieringsmaatschappij dient de Grafiek 3.3 Ontwikkeling BFI-sector EUR miljard.
3.000
30%
2.000
25%
1.000
20%
0
15% 2003
2004
2005
2006
2007
Bancair
Overige financieel
Securitisatievehikels
Niet-financieel
Bron: DNB.
2008
2009
2010
Percentage financiële BFI’s
PART 2: THE CASE OF LEHMAN BROTHERS TREASURY BV
THE ‘HOLLAND ROUTE’ • The London branch of the globally acOve bank acts as lead manager and arranger; • The Dutch enOty (SPE) is a shell company and formally acts as issuer of the notes; • A large Dutch trust firm is responsible for all local administraOve tasks and responsibiliOes that are related to a Dutch domicile and tax ruling; • AdministraOve funcOons related to the note program, are conducted by one or more banks located in the UK; • The notes are listed on the exchanges of Ireland, Luxembourg, or both, but are also sold OTC; • The notes are not offered to US buyers that are not ‘qualified insOtuOonal investors’, in accordance with regulaOon S.
SITUATING LEHMAN BROTHERS TREASURY BV IN THE LEHMAN BROTHERS HOLDING STRUCTURE
UNLIMITED FUNDING FOR LEHMAN BROTHERS THROUGH A BRASS PLATE COMPANY Maximimum debt isuance of EMTN 120
Billion of Dollar
100
80
60
40
20
0 1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
LESSONS FROM THE DUTCH CASE • OFCs offer a safe haven for financial insOtuOons that aim to circumvent regulaOon and taxes resulOng in a dual market environment: a convenOonal, regulated market AND an offshore market without regulaOon which before the crisis served as funding channel, blowing up banks balance sheets • This dual market structure could lead to the increased importance of shadow banking as a means to extend and intermediate credit as the convenOonal market becomes more regulated • Tackling OFCs is not only important for pushing back tax avoidance but also to properly regulate and supervise global, deleveraged finance in the post-‐crisis world.
CONCLUSIONS 1 • InsOtuOonal conversion (Thelen 2002; 2004; Streeck & Thelen 2005: 26ff): ‘insOtuOons redirected to new goals, funcOons or purposes… to fit the interests of new actors’
• From avoiding double taxaOon to double non-‐taxaOon-‐ 1890s to 1980s • From fiscal arbitrage to shadow banking-‐2000s • Trust companies: – from small administraOve back office for the members of the stock exchange originaOng in the 19th century issuance of railway stocks – To mulOnaOonals providing a broad range of services for fiscal and regulatory arbitrage
CONCLUSIONS 2 • New actors (or old actors with new narraOves): banks, law firms, trust corporaOons, fiscal specialists – parafinance: part and parcel of financializaOon (€ 3 bn industry) • Elite responses: obfuscaOon, issue (de)linkages (interbank market, OFCs, shadow banking), story telling, abusing absence of internaOonal reregulatory consensus to control damage, relying on public/media lack of interest (‘social silence’: Tel)
