P Chidambaram
Showing posts with label bank. Show all posts
Showing posts with label bank. Show all posts
Saturday 28 October 2017
Wednesday 25 October 2017
Saturday 21 October 2017
British banks can’t be trusted – let’s nationalise them
Owen Jones in The Guardian
Sometimes the case for a policy is as overwhelming as the level of ridicule it will get from the punditocracy. The nationalisation of Britain’s failed banking industry – the sector responsible for most of our country’s current ills – is one such example. According to a recent poll, half the electorate support nationalising the banks, despite almost no one arguing for such a policy in public life.
It may well be because the banks plunged Britain into one of its worst economic crises in modern history, spawning, according to the Institute for Fiscal Studies, perhaps our worst squeeze in living standards since the 1750s. The fact that they have been bailed out by the taxpayer but allowed to carry on as though little happened – including more top British bankers in 2013 being gifted bonuses worth over €1m than all EU countries combined – while public services are gratuitously slashed, has rightly riled some British voters.
Nationalisation of the banks is not about vengeance, though. Sure, the rip-off inefficiency of rail privatisation, or the failure of the great energy sell-off, or the fact that even the Financial Times has argued that privately run water is an indefensible debacle – all are testament to the intellectual poverty of the “private good, public bad” argument. None quite compete, however, with the matter of the banks leaving the entire western world consumed with the gravest series of crises since the second world war.
Would Brexit, Donald Trump, or the gathering demands for Catalonia to secede from crisis-ridden Spain have happened without the financial collapse? Almost certainly not. It is now somewhat darkly comic to note that most commentators and politicians claimed Labour lost the 2015 election because it was too leftwing. It is notable, then, that over four in 10 voters back then believed Labour was too soft on banks and big business, compared to just over one in five who differed.
Economist Laurie Macfarlane says the banks make a mockery of the nostrums of free-market capitalism. Because the banks were given state bailouts after their catastrophic failures, there is the assumption that, when another crisis hits, the same will happen again.
No other industry enjoys the same protection. They are “too big to fail”, which means they benefit from an implicit subsidy – worth £6bn in 2015. The Bank of England is their lender of last resort. State-backed deposit insurance of up to £85,000 per consumer is another de facto mass public subsidy.
As the New Economics Foundation says, it is commercial banks who are now responsible for creating the vast majority of money in economies like the UK, a source of vast profit. This is called “seigniorage” and – as the foundation puts it – it represents a “hidden annual subsidy” of £23bn a year, or nearly three-quarters of the banks’ after-tax profits. And banks are an essential public utility: it is almost impossible to be a citizen without a bank account, and there is no public option when it comes to making electronic payments.
Even now, as Macfarlane notes, the British state technically owns a fifth of the retail banking industry because of its stake in Royal Bank of Scotland. Repeated RBS scandals, and the aftermath of the EU referendum result, have dented the worth of the company’s shares, meaning that the state selling its stake would result in eye-watering losses. Meanwhile, small businesses have struggled to get the credit they need, and escalating household debt threatens the foundations of the stagnating British economy. But the state’s arms-length approach means RBS has failed both its customers and the broader economy. A profit-driven banking sector closed 1,150 branches in 2014 and 2015; about a third of those were owned by RBS. The bank once promised never to close the last branch in town; the pledge was broken, and 1,500 communities have been left with no bank branch. Vulnerable customers and small businesses inevitably suffer the most.
By contrast, foreign publicly owned banks are self-evident successes. Take Germany: KFW, the government-owned development bank, is crucial in developing national infrastructure as well as the renewable energy revolution. On a regional level, state-owned Landesbanken are responsible for industrial strategy. Then at the most local level, there are Sparkassen: they focus on developing relationships with local businesses and consumers. They’re not beholden to shareholders – instead, they have a stakeholder model, focused on helping local economies – indeed, their capital has to remain in local communities.
It is impossible to understand Britain’s current plight without examining the country’s rapid deindustrialisation in favour of a financial sector concentrated in London and the south-east. And according to New Economics Foundation, while foreign stakeholder banks lend two thirds of their assets to individuals and businesses in the real economy, that’s true with only a tiny proportion of British shareholder banks. Overwhelmingly, it goes to mortgage lending and lending to other financial institutions.
Our current banking system is rigged in favour of a crisis-ridden City. The New Economics Foundation suggests transforming RBS – in which the state still has a three-quarter share – into a network of local banks. Labour’s 2017 manifesto backed a review into these plans. A management board would run the network day to day, but a board of trustees would ensure the bank was accountable to the broader economy and customers, not shareholders.
A third would be elected by workers, a third by local authorities and a third by local stakeholders. The mandate of each local bank would be to promote local economies – not least their small businesses – rather than the City of London. Here is a model of democratic ownership that can, in time, be extended to the rest of the economy.
Can it really be argued that private ownership of the banks is a case study of the glorious success of free market capitalism? The principle architect of Labour’s recent manifesto, Andrew Fisher, called for the nationalisation of Britain’s banking sector in his 2014 book The Failed Experiment: And How to Build an Economy That Works. He was surely right then and he is right now. As Macfarlane notes, there are different possible routes to the banks’ nationalisation: whether it be swapping corporate shares for government bonds, using quantitative easing to buy up shares, or simple nationalisation without compensation. Labour is right to call for a German-style public investment bank, backed up by similar publicly run local banks.
But such proposals are not in themselves sufficient. Britain’s privately run banks have proved a disaster for everyone except their shareholders. The only good alternative is public stakeholder banks, run by workers, consumers and local authorities, with an obligation to defend the best interests of our communities. Privately owned banks have proved a catastrophic failure – for our economy, our social cohesion and our politics. There is surely no alternative to public ownership.
Sometimes the case for a policy is as overwhelming as the level of ridicule it will get from the punditocracy. The nationalisation of Britain’s failed banking industry – the sector responsible for most of our country’s current ills – is one such example. According to a recent poll, half the electorate support nationalising the banks, despite almost no one arguing for such a policy in public life.
It may well be because the banks plunged Britain into one of its worst economic crises in modern history, spawning, according to the Institute for Fiscal Studies, perhaps our worst squeeze in living standards since the 1750s. The fact that they have been bailed out by the taxpayer but allowed to carry on as though little happened – including more top British bankers in 2013 being gifted bonuses worth over €1m than all EU countries combined – while public services are gratuitously slashed, has rightly riled some British voters.
Nationalisation of the banks is not about vengeance, though. Sure, the rip-off inefficiency of rail privatisation, or the failure of the great energy sell-off, or the fact that even the Financial Times has argued that privately run water is an indefensible debacle – all are testament to the intellectual poverty of the “private good, public bad” argument. None quite compete, however, with the matter of the banks leaving the entire western world consumed with the gravest series of crises since the second world war.
Would Brexit, Donald Trump, or the gathering demands for Catalonia to secede from crisis-ridden Spain have happened without the financial collapse? Almost certainly not. It is now somewhat darkly comic to note that most commentators and politicians claimed Labour lost the 2015 election because it was too leftwing. It is notable, then, that over four in 10 voters back then believed Labour was too soft on banks and big business, compared to just over one in five who differed.
Economist Laurie Macfarlane says the banks make a mockery of the nostrums of free-market capitalism. Because the banks were given state bailouts after their catastrophic failures, there is the assumption that, when another crisis hits, the same will happen again.
No other industry enjoys the same protection. They are “too big to fail”, which means they benefit from an implicit subsidy – worth £6bn in 2015. The Bank of England is their lender of last resort. State-backed deposit insurance of up to £85,000 per consumer is another de facto mass public subsidy.
As the New Economics Foundation says, it is commercial banks who are now responsible for creating the vast majority of money in economies like the UK, a source of vast profit. This is called “seigniorage” and – as the foundation puts it – it represents a “hidden annual subsidy” of £23bn a year, or nearly three-quarters of the banks’ after-tax profits. And banks are an essential public utility: it is almost impossible to be a citizen without a bank account, and there is no public option when it comes to making electronic payments.
Even now, as Macfarlane notes, the British state technically owns a fifth of the retail banking industry because of its stake in Royal Bank of Scotland. Repeated RBS scandals, and the aftermath of the EU referendum result, have dented the worth of the company’s shares, meaning that the state selling its stake would result in eye-watering losses. Meanwhile, small businesses have struggled to get the credit they need, and escalating household debt threatens the foundations of the stagnating British economy. But the state’s arms-length approach means RBS has failed both its customers and the broader economy. A profit-driven banking sector closed 1,150 branches in 2014 and 2015; about a third of those were owned by RBS. The bank once promised never to close the last branch in town; the pledge was broken, and 1,500 communities have been left with no bank branch. Vulnerable customers and small businesses inevitably suffer the most.
By contrast, foreign publicly owned banks are self-evident successes. Take Germany: KFW, the government-owned development bank, is crucial in developing national infrastructure as well as the renewable energy revolution. On a regional level, state-owned Landesbanken are responsible for industrial strategy. Then at the most local level, there are Sparkassen: they focus on developing relationships with local businesses and consumers. They’re not beholden to shareholders – instead, they have a stakeholder model, focused on helping local economies – indeed, their capital has to remain in local communities.
It is impossible to understand Britain’s current plight without examining the country’s rapid deindustrialisation in favour of a financial sector concentrated in London and the south-east. And according to New Economics Foundation, while foreign stakeholder banks lend two thirds of their assets to individuals and businesses in the real economy, that’s true with only a tiny proportion of British shareholder banks. Overwhelmingly, it goes to mortgage lending and lending to other financial institutions.
Our current banking system is rigged in favour of a crisis-ridden City. The New Economics Foundation suggests transforming RBS – in which the state still has a three-quarter share – into a network of local banks. Labour’s 2017 manifesto backed a review into these plans. A management board would run the network day to day, but a board of trustees would ensure the bank was accountable to the broader economy and customers, not shareholders.
A third would be elected by workers, a third by local authorities and a third by local stakeholders. The mandate of each local bank would be to promote local economies – not least their small businesses – rather than the City of London. Here is a model of democratic ownership that can, in time, be extended to the rest of the economy.
Can it really be argued that private ownership of the banks is a case study of the glorious success of free market capitalism? The principle architect of Labour’s recent manifesto, Andrew Fisher, called for the nationalisation of Britain’s banking sector in his 2014 book The Failed Experiment: And How to Build an Economy That Works. He was surely right then and he is right now. As Macfarlane notes, there are different possible routes to the banks’ nationalisation: whether it be swapping corporate shares for government bonds, using quantitative easing to buy up shares, or simple nationalisation without compensation. Labour is right to call for a German-style public investment bank, backed up by similar publicly run local banks.
But such proposals are not in themselves sufficient. Britain’s privately run banks have proved a disaster for everyone except their shareholders. The only good alternative is public stakeholder banks, run by workers, consumers and local authorities, with an obligation to defend the best interests of our communities. Privately owned banks have proved a catastrophic failure – for our economy, our social cohesion and our politics. There is surely no alternative to public ownership.
Saturday 18 February 2017
Friday 17 February 2017
Thursday 19 January 2017
Libor scandal: the bankers who fixed the world’s most important number
Liam Vaughan and Gavin Finch in The Guardian
At the Tokyo headquarters of the Swiss bank UBS, in the middle of a deserted trading floor, Tom Hayes sat rapt before a bank of eight computer screens. Collar askew, pale features pinched, blond hair mussed from a habit of pulling at it when he was deep in thought, the British trader was even more dishevelled than usual. It was 15 September 2008, and it looked, in Hayes’s mind, like the end of the world.
Hayes had been woken up at dawn in his apartment by a call from his boss, telling him to get to the office immediately. In New York, Lehman Brothers was hurtling towards bankruptcy. At his desk, Hayes watched the world processing the news and panicking. As each market opened, it became a sea of flashing red as investors frantically dumped their holdings. In moments like this, Hayes entered an almost unconscious state, rapidly processing the tide of information before him and calculating the best escape route.
Hayes was a phenomenon at UBS, one of the best the bank had at trading derivatives. So far, the mounting financial crisis had actually been good for him. The chaos had let him buy cheaply from those desperate to get out, and sell high to the unlucky few who still needed to trade. While most dealers closed up shop in fear, Hayes, with a seemingly limitless appetite for risk, stayed in. He was 28, and he was up more than $70 million for the year.
Now that was under threat. Not only did Hayes have to extract himself from every deal he had done with Lehman, he had also made a series of enormous bets that in the coming days interest rates would remain stable. The collapse of Lehman Brothers, the fourth-largest investment bank in the US, would surely cause those rates, which were really just barometers of risk, to spike. As Hayes examined his trading book, one rate mattered more than any other: the London interbank offered rate, or Libor, a benchmark that influences $350 trillion of securities and loans around the world. For traders such as Hayes, this number was the Holy Grail. And two years earlier, he had discovered a way to rig it.
Libor was set by a self-selected, self-policing committee of the world’s largest banks. The rate measured how much it cost them to borrow from each other. Every morning, each bank submitted an estimate, an average was taken, and a number was published at midday. The process was repeated in different currencies, and for various amounts of time, ranging from overnight to a year. During his time as a junior trader in London, Hayes had got to know several of the 16 individuals responsible for making their bank’s daily submission for the Japanese yen. His flash of insight was realising that these men mostly relied on inter-dealer brokers, the fast-talking middlemen involved in every trade, for guidance on what to submit each day.
Brokers are the middlemen in the world of finance, facilitating deals between traders at different banks in everything from Treasury bonds to over-the-counter derivatives. If a trader wants to buy or sell, he could theoretically ring all the banks to get a price. Or he could go through a broker who is in touch with everyone and can find a counter-party in seconds. Hardly a dollar changes hands in the cash and derivatives markets without a broker matching the deal and taking his cut. In the opaque, over-the-counter derivatives market, where there is no centralised exchange, brokers are at the epicentre of information flow. That puts them in a powerful position. Only they can get a picture of what all the banks are doing. While brokers had no official role in setting Libor, the rate-setters at the banks relied on them for information on where cash was trading.
Most traders looked down on brokers as second-class citizens, too. Hayes recognised their worth. He saw what no one else did because he was different. His intimacy with numbers, his cold embrace of risk and his unusual habits were more than professional tics. Hayes would not be diagnosed with Asperger’s syndrome until 2015, when he was 35, but his co-workers, many of them savvy operators from fancy schools, often reminded Hayes that he wasn’t like them. They called him “Rain Man”.
By the time the market opened in London, Lehman’s demise was official. Hayes instant-messaged one of his trusted brokers in the City to tell him what direction he wanted Libor to move. Typically, he skipped any pleasantries. “Cash mate, really need it lower,” Hayes typed. “What’s the score?” The broker sent his assurances and, over the next few hours, followed a well-worn routine. Whenever one of the Libor-setting banks called and asked his opinion on what the benchmark would do, the broker said – incredibly, given the calamitous news – that the rate was likely to fall. Libor may have featured in hundreds of trillions of dollars of loans and derivatives, but this was how it was set: conversations among men who were, depending on the day, indifferent, optimistic or frightened. When Hayes checked the official figures later that night, he saw to his relief that yen Libor had fallen.
Hayes was not out of danger yet. Over the next three days, he barely left the office, surviving on three hours of sleep a night. As the market convulsed, his profit and loss jumped around from minus $20 million to plus $8 million in just hours, but Hayes had another ace up his sleeve. ICAP, the world’s biggest inter-dealer broker, sent out a “Libor prediction” email each day at around 7am to the individuals at the banks responsible for submitting Libor. Hayes messaged an insider at ICAP and instructed him to skew the predictions lower. Amid the chaos, Libor was the one thing Hayes believed he had some control over. He cranked his network to the max, offering his brokers extra payments for their cooperation and calling in favours at banks around the world.
By Thursday, 18 September, Hayes was exhausted. This was the moment he had been working towards all week. If Libor jumped today, all his puppeteering would have been for nothing. Libor moves in increments called basis points, equal to one one-hundredth of a percentage point, and every tick was worth roughly $750,000 to his bottom line.
For the umpteenth time since Lehman faltered, Hayes reached out to his brokers in London. “I need you to keep it as low as possible, all right?” he told one of them in a message. “I’ll pay you, you know, $50,000, $100,000, whatever. Whatever you want, all right?”
“All right,” the broker repeated.
“I’m a man of my word,” Hayes said.
“I know you are. No, that’s done, right, leave it to me,” the broker said.
Hayes was still in the Tokyo office at 8pm when that day’s Libors were published. The yen rate had fallen 1 basis point, while comparable money market rates in other currencies continued to soar. Hayes’s crisis had been averted. Using his network of brokers, he had personally sought to tilt part of the planet’s financial infrastructure. He pulled off his headset and headed home to bed. He had only recently upgraded from the superhero duvet he’d slept under since he was eight years old.
Hayes’s job was to make his employer as much money as possible by buying and selling derivatives. How exactly he did that – the special concoction of strategies, skills and tricks that make up a trader’s DNA – was largely left up to him. First and foremost he was a market-maker, providing liquidity to his clients, who were mostly traders at other banks. From the minute he logged on to his Bloomberg terminal each morning and the red light next to his name turned green, Hayes was on the phone quoting guaranteed bid and offer prices on the vast inventory of products he traded. Hayes prided himself on always being open for business no matter how choppy the markets. It was his calling card.
Hayes likened this part of his job to owning a fruit and vegetable stall. Buy low, sell high and pocket the difference. But rather than apples and pears, he dealt in complex financial securities worth hundreds of millions of dollars. His profit came from the spread between how much he paid for a security and how much he sold it for. In volatile times, the spread widened, reflecting the increased risk that the market might move against him before he had the chance to trade out of his position.
All of this offered a steady stream of income, but it wasn’t where the big money came from. The thing that really set Hayes apart was his ability to spot price anomalies and exploit them, a technique known as relative value trading. It appealed to his lifelong passion for seeking out patterns. During quiet spells, he spent his time scouring data, hunting for unseen opportunities. If he thought that the price of two similar securities had diverged unduly, he would buy one and short the other, betting that the spread between the two would shrink.
Everywhere he worked, Hayes set up his software to tell him exactly how much he stood to gain or lose from every fraction of a move in Libor in each currency. One of Hayes’s favourite trades involved betting that the gap between Libor in different durations would widen or narrow: what’s known in the industry as a basis trade. Each time Hayes made a trade, he would have to decide whether to lay off some of his risk by hedging his position using, for example, other derivatives.
Hayes’s dealing created a constantly changing trade book stretching years into the future, which was mapped out on a vast Excel spreadsheet. He liked to think of it as a living organism with thousands of interconnected moving parts. In a corner of one of his screens was a number he looked at more than any other: his rolling profit and loss. Ask any decent trader and he will be able to give it to you to the nearest $1,000. It was Hayes’s self-worth boiled down into a single indisputable number.
At the Tokyo headquarters of the Swiss bank UBS, in the middle of a deserted trading floor, Tom Hayes sat rapt before a bank of eight computer screens. Collar askew, pale features pinched, blond hair mussed from a habit of pulling at it when he was deep in thought, the British trader was even more dishevelled than usual. It was 15 September 2008, and it looked, in Hayes’s mind, like the end of the world.
Hayes had been woken up at dawn in his apartment by a call from his boss, telling him to get to the office immediately. In New York, Lehman Brothers was hurtling towards bankruptcy. At his desk, Hayes watched the world processing the news and panicking. As each market opened, it became a sea of flashing red as investors frantically dumped their holdings. In moments like this, Hayes entered an almost unconscious state, rapidly processing the tide of information before him and calculating the best escape route.
Hayes was a phenomenon at UBS, one of the best the bank had at trading derivatives. So far, the mounting financial crisis had actually been good for him. The chaos had let him buy cheaply from those desperate to get out, and sell high to the unlucky few who still needed to trade. While most dealers closed up shop in fear, Hayes, with a seemingly limitless appetite for risk, stayed in. He was 28, and he was up more than $70 million for the year.
Now that was under threat. Not only did Hayes have to extract himself from every deal he had done with Lehman, he had also made a series of enormous bets that in the coming days interest rates would remain stable. The collapse of Lehman Brothers, the fourth-largest investment bank in the US, would surely cause those rates, which were really just barometers of risk, to spike. As Hayes examined his trading book, one rate mattered more than any other: the London interbank offered rate, or Libor, a benchmark that influences $350 trillion of securities and loans around the world. For traders such as Hayes, this number was the Holy Grail. And two years earlier, he had discovered a way to rig it.
Libor was set by a self-selected, self-policing committee of the world’s largest banks. The rate measured how much it cost them to borrow from each other. Every morning, each bank submitted an estimate, an average was taken, and a number was published at midday. The process was repeated in different currencies, and for various amounts of time, ranging from overnight to a year. During his time as a junior trader in London, Hayes had got to know several of the 16 individuals responsible for making their bank’s daily submission for the Japanese yen. His flash of insight was realising that these men mostly relied on inter-dealer brokers, the fast-talking middlemen involved in every trade, for guidance on what to submit each day.
Brokers are the middlemen in the world of finance, facilitating deals between traders at different banks in everything from Treasury bonds to over-the-counter derivatives. If a trader wants to buy or sell, he could theoretically ring all the banks to get a price. Or he could go through a broker who is in touch with everyone and can find a counter-party in seconds. Hardly a dollar changes hands in the cash and derivatives markets without a broker matching the deal and taking his cut. In the opaque, over-the-counter derivatives market, where there is no centralised exchange, brokers are at the epicentre of information flow. That puts them in a powerful position. Only they can get a picture of what all the banks are doing. While brokers had no official role in setting Libor, the rate-setters at the banks relied on them for information on where cash was trading.
Most traders looked down on brokers as second-class citizens, too. Hayes recognised their worth. He saw what no one else did because he was different. His intimacy with numbers, his cold embrace of risk and his unusual habits were more than professional tics. Hayes would not be diagnosed with Asperger’s syndrome until 2015, when he was 35, but his co-workers, many of them savvy operators from fancy schools, often reminded Hayes that he wasn’t like them. They called him “Rain Man”.
By the time the market opened in London, Lehman’s demise was official. Hayes instant-messaged one of his trusted brokers in the City to tell him what direction he wanted Libor to move. Typically, he skipped any pleasantries. “Cash mate, really need it lower,” Hayes typed. “What’s the score?” The broker sent his assurances and, over the next few hours, followed a well-worn routine. Whenever one of the Libor-setting banks called and asked his opinion on what the benchmark would do, the broker said – incredibly, given the calamitous news – that the rate was likely to fall. Libor may have featured in hundreds of trillions of dollars of loans and derivatives, but this was how it was set: conversations among men who were, depending on the day, indifferent, optimistic or frightened. When Hayes checked the official figures later that night, he saw to his relief that yen Libor had fallen.
Hayes was not out of danger yet. Over the next three days, he barely left the office, surviving on three hours of sleep a night. As the market convulsed, his profit and loss jumped around from minus $20 million to plus $8 million in just hours, but Hayes had another ace up his sleeve. ICAP, the world’s biggest inter-dealer broker, sent out a “Libor prediction” email each day at around 7am to the individuals at the banks responsible for submitting Libor. Hayes messaged an insider at ICAP and instructed him to skew the predictions lower. Amid the chaos, Libor was the one thing Hayes believed he had some control over. He cranked his network to the max, offering his brokers extra payments for their cooperation and calling in favours at banks around the world.
By Thursday, 18 September, Hayes was exhausted. This was the moment he had been working towards all week. If Libor jumped today, all his puppeteering would have been for nothing. Libor moves in increments called basis points, equal to one one-hundredth of a percentage point, and every tick was worth roughly $750,000 to his bottom line.
For the umpteenth time since Lehman faltered, Hayes reached out to his brokers in London. “I need you to keep it as low as possible, all right?” he told one of them in a message. “I’ll pay you, you know, $50,000, $100,000, whatever. Whatever you want, all right?”
“All right,” the broker repeated.
“I’m a man of my word,” Hayes said.
“I know you are. No, that’s done, right, leave it to me,” the broker said.
Hayes was still in the Tokyo office at 8pm when that day’s Libors were published. The yen rate had fallen 1 basis point, while comparable money market rates in other currencies continued to soar. Hayes’s crisis had been averted. Using his network of brokers, he had personally sought to tilt part of the planet’s financial infrastructure. He pulled off his headset and headed home to bed. He had only recently upgraded from the superhero duvet he’d slept under since he was eight years old.
Hayes’s job was to make his employer as much money as possible by buying and selling derivatives. How exactly he did that – the special concoction of strategies, skills and tricks that make up a trader’s DNA – was largely left up to him. First and foremost he was a market-maker, providing liquidity to his clients, who were mostly traders at other banks. From the minute he logged on to his Bloomberg terminal each morning and the red light next to his name turned green, Hayes was on the phone quoting guaranteed bid and offer prices on the vast inventory of products he traded. Hayes prided himself on always being open for business no matter how choppy the markets. It was his calling card.
Hayes likened this part of his job to owning a fruit and vegetable stall. Buy low, sell high and pocket the difference. But rather than apples and pears, he dealt in complex financial securities worth hundreds of millions of dollars. His profit came from the spread between how much he paid for a security and how much he sold it for. In volatile times, the spread widened, reflecting the increased risk that the market might move against him before he had the chance to trade out of his position.
All of this offered a steady stream of income, but it wasn’t where the big money came from. The thing that really set Hayes apart was his ability to spot price anomalies and exploit them, a technique known as relative value trading. It appealed to his lifelong passion for seeking out patterns. During quiet spells, he spent his time scouring data, hunting for unseen opportunities. If he thought that the price of two similar securities had diverged unduly, he would buy one and short the other, betting that the spread between the two would shrink.
Everywhere he worked, Hayes set up his software to tell him exactly how much he stood to gain or lose from every fraction of a move in Libor in each currency. One of Hayes’s favourite trades involved betting that the gap between Libor in different durations would widen or narrow: what’s known in the industry as a basis trade. Each time Hayes made a trade, he would have to decide whether to lay off some of his risk by hedging his position using, for example, other derivatives.
Hayes’s dealing created a constantly changing trade book stretching years into the future, which was mapped out on a vast Excel spreadsheet. He liked to think of it as a living organism with thousands of interconnected moving parts. In a corner of one of his screens was a number he looked at more than any other: his rolling profit and loss. Ask any decent trader and he will be able to give it to you to the nearest $1,000. It was Hayes’s self-worth boiled down into a single indisputable number.
Tom Hayes was a phenomenon at UBS, one of the best the bank had at trading derivatives. Photograph: Bloomberg via Getty Images
By the summer of 2007, the mortgage crisis in the US caused banks and investment funds around the world to become skittish about lending to each other without collateral. Firms that relied on the so-called money markets to fund their businesses were paralysed by the ballooning cost of short-term credit. On 14 September, customers of Northern Rock queued for hours to withdraw their savings after the bank announced it was relying on loans from the Bank of England to stay afloat.
After that, banks were only prepared to make unsecured loans to each other for a few days at a time, and interest rates on longer-term loans rocketed. Libor, as a barometer of stress in the system, reacted accordingly. In August 2007, the spread between three-month dollar Libor and the overnight indexed swap – a measure of banks’ overnight borrowing costs – jumped from 12 basis points to 73 basis points. By December it had soared to 106 basis points. A similar pattern could be seen in sterling, euros and most of the 12 other currencies published on the website of the British Bankers’ Association each day at noon.
Everyone could see that Libor rates had shot up, but questions began to be asked about whether they had climbed enough to reflect the severity of the credit squeeze. By August 2007, there was almost no trading in cash for durations of longer than a month. In some of the smaller currencies there were no lenders for any time frame. Yet, with trillions of dollars tied to Libor, the banks had to keep the trains running. The individuals responsible for submitting Libor rates each day had no choice but to put their thumb and forefinger in the air and pluck out numbers. It was clear that their “best guesses” were unrealistically optimistic.
A game of brinkmanship had developed in which rate-setters tried to predict what their rivals would submit, and then come in slightly lower. If they guessed wrong and input rates higher than their peers, they would receive angry phone calls from their managers telling them to get back into the pack. On trading floors around the world, frantic conversations took place between traders and their brokers about expectations for Libor.
Nobody knew where Libor should be, and nobody wanted to be an outlier. Even where bankers tried to be honest, there was no way of knowing if their estimates were accurate because there was no underlying interbank borrowing on which to compare them. The machine had broken down.
Vince McGonagle, a small and wiry man with a hangdog expression, had been at the enforcement division of the Commodity Futures Trading Commission (CFTC) in Washington for 11 years, during which time his red hair had turned grey around the edges. A practising Catholic, McGonagle got his law degree from Pepperdine University, a Christian school in Malibu, California, where students are prepared for “lives of purpose, service and leadership”.
While his classmates took highly paid positions defending companies and individuals accused of corporate corruption, McGonagle opted to build a career bringing cases against them. He joined the agency as a trial attorney and was now, at 44, a manager overseeing teams of lawyers and investigators.
McGonagle closed the door to his office and settled down to read the daily news. It was 16 April, 2008, and the headline on page one of the Wall Street Journal read: “Bankers Cast Doubt on Key Rate Amid Crisis”. It began: “One of the most important barometers of the world’s financial health could be sending false signals. In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London interbank offered rate, known as Libor, is becoming unreliable.”
The story, written at the Journal’s London office near Fleet Street, went on to suggest that some of the world’s largest banks might have been providing deliberately low estimates of their borrowing costs to avoid tipping off the market “that they’re desperate for cash”. That was having the effect of distorting Libor, and therefore trillions of dollars of securities around the world.
The journalist’s sources told him that banks were paying much more for cash than they were letting on. They feared if they were honest they could go the same way as Bear Stearns, the 85-year-old New York securities firm that had collapsed the previous month.
The big flaw in Libor was that it relied on banks to tell the truth but encouraged them to lie. When the 150 variants of the benchmark were released each day, the banks’ individual submissions were also published, giving the world a snapshot of their relative creditworthiness. Historically, the individuals responsible for making their firm’s Libor submissions were able to base their estimates on a vibrant interbank money market, in which banks borrowed cash from each other to fund their day-to-day operations. They were prevented from deviating too far from the truth because their fellow market participants knew what rates they were really being charged. Over the previous few months, that had changed. Banks had stopped lending to each other for periods of longer than a few days, preferring to stockpile their cash. After Bear Stearns there was no guarantee they would get it back.
With so much at stake, lenders had become fixated on what their rivals were inputting. Any outlier at the higher – that is, riskier – end was in danger of becoming a pariah, unable to access the liquidity it needed to fund its balance sheet. Soon banks began to submit rates they thought would place them in the middle of the pack rather than what they truly believed they could borrow unsecured cash for. The motivation for low-balling was not tied to profit – many banks actually stood to lose out from lower Libors. This was about survival.
Ironically, just as Libor’s accuracy faltered, its importance rocketed. As the financial crisis deepened, central bankers monitored Libor in different currencies to see how successful their latest policy announcements were in calming markets. Governments looked at individual firms’ submissions for clues as to who they might be forced to bail out next. If banks were lying about Libor, it was not just affecting interest rates and derivatives payments. It was skewing reality.
There was no inkling at this stage that traders such as Hayes were pushing Libor around to boost their profits, but here was a benchmark that relied on the honesty of traders who had a direct interest in where it was set. Libor was overseen by the British Bankers Association (BBA). In both cases, the body responsible for overseeing the rate had no punitive powers, so there was little to discourage firms from cheating.
When McGonagle finished reading the Wall Street Journal article, he emailed colleagues and asked them what they knew about Libor. His team put together a dossier, including some preliminary reports from within the financial community. In March, economists at the Bank for International Settlements, an umbrella group for central banks around the world, had published a paper that identified unusual patterns in Libor during the crisis, although it concluded these were “not caused by shortcomings in the design of the fixing mechanism”.
A month later, Scott Peng, an analyst at Citigroup in New York, sent his customers a research note that estimated the dollar Libor submissions of the 18 firms that set the rate were 20 to 30 basis points lower than they should have been because of a “prevailing fear” among the banks of “being perceived as a weak hand in this fragile market environment”.
While there was no evidence of manipulation by specific firms, McGonagle was coming around to the idea of launching an investigation.
In 2009, Hayes was lured away from UBS to join Citigroup. The head of Citigroup’s team in Asia, the former Lehman banker Chris Cecere, a small, goateed American with a big reputation for finding new ways to make money, had been given millions of dollars to attract the best talent – and Hayes was his round-one pick.
It wasn’t just the $3m signing bonus that had won Hayes over. The promise of a fresh start at one of the world’s biggest banks, with him at centre stage in its aggressive expansion into the Asian interest-rate derivatives market, had proved too tempting to resist. After persuading him to join, Cecere boasted to colleagues that he’d found “a real fucking animal”, who “knows everybody on the street”.
By the summer of 2007, the mortgage crisis in the US caused banks and investment funds around the world to become skittish about lending to each other without collateral. Firms that relied on the so-called money markets to fund their businesses were paralysed by the ballooning cost of short-term credit. On 14 September, customers of Northern Rock queued for hours to withdraw their savings after the bank announced it was relying on loans from the Bank of England to stay afloat.
After that, banks were only prepared to make unsecured loans to each other for a few days at a time, and interest rates on longer-term loans rocketed. Libor, as a barometer of stress in the system, reacted accordingly. In August 2007, the spread between three-month dollar Libor and the overnight indexed swap – a measure of banks’ overnight borrowing costs – jumped from 12 basis points to 73 basis points. By December it had soared to 106 basis points. A similar pattern could be seen in sterling, euros and most of the 12 other currencies published on the website of the British Bankers’ Association each day at noon.
Everyone could see that Libor rates had shot up, but questions began to be asked about whether they had climbed enough to reflect the severity of the credit squeeze. By August 2007, there was almost no trading in cash for durations of longer than a month. In some of the smaller currencies there were no lenders for any time frame. Yet, with trillions of dollars tied to Libor, the banks had to keep the trains running. The individuals responsible for submitting Libor rates each day had no choice but to put their thumb and forefinger in the air and pluck out numbers. It was clear that their “best guesses” were unrealistically optimistic.
A game of brinkmanship had developed in which rate-setters tried to predict what their rivals would submit, and then come in slightly lower. If they guessed wrong and input rates higher than their peers, they would receive angry phone calls from their managers telling them to get back into the pack. On trading floors around the world, frantic conversations took place between traders and their brokers about expectations for Libor.
Nobody knew where Libor should be, and nobody wanted to be an outlier. Even where bankers tried to be honest, there was no way of knowing if their estimates were accurate because there was no underlying interbank borrowing on which to compare them. The machine had broken down.
Vince McGonagle, a small and wiry man with a hangdog expression, had been at the enforcement division of the Commodity Futures Trading Commission (CFTC) in Washington for 11 years, during which time his red hair had turned grey around the edges. A practising Catholic, McGonagle got his law degree from Pepperdine University, a Christian school in Malibu, California, where students are prepared for “lives of purpose, service and leadership”.
While his classmates took highly paid positions defending companies and individuals accused of corporate corruption, McGonagle opted to build a career bringing cases against them. He joined the agency as a trial attorney and was now, at 44, a manager overseeing teams of lawyers and investigators.
McGonagle closed the door to his office and settled down to read the daily news. It was 16 April, 2008, and the headline on page one of the Wall Street Journal read: “Bankers Cast Doubt on Key Rate Amid Crisis”. It began: “One of the most important barometers of the world’s financial health could be sending false signals. In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London interbank offered rate, known as Libor, is becoming unreliable.”
The story, written at the Journal’s London office near Fleet Street, went on to suggest that some of the world’s largest banks might have been providing deliberately low estimates of their borrowing costs to avoid tipping off the market “that they’re desperate for cash”. That was having the effect of distorting Libor, and therefore trillions of dollars of securities around the world.
The journalist’s sources told him that banks were paying much more for cash than they were letting on. They feared if they were honest they could go the same way as Bear Stearns, the 85-year-old New York securities firm that had collapsed the previous month.
The big flaw in Libor was that it relied on banks to tell the truth but encouraged them to lie. When the 150 variants of the benchmark were released each day, the banks’ individual submissions were also published, giving the world a snapshot of their relative creditworthiness. Historically, the individuals responsible for making their firm’s Libor submissions were able to base their estimates on a vibrant interbank money market, in which banks borrowed cash from each other to fund their day-to-day operations. They were prevented from deviating too far from the truth because their fellow market participants knew what rates they were really being charged. Over the previous few months, that had changed. Banks had stopped lending to each other for periods of longer than a few days, preferring to stockpile their cash. After Bear Stearns there was no guarantee they would get it back.
With so much at stake, lenders had become fixated on what their rivals were inputting. Any outlier at the higher – that is, riskier – end was in danger of becoming a pariah, unable to access the liquidity it needed to fund its balance sheet. Soon banks began to submit rates they thought would place them in the middle of the pack rather than what they truly believed they could borrow unsecured cash for. The motivation for low-balling was not tied to profit – many banks actually stood to lose out from lower Libors. This was about survival.
Ironically, just as Libor’s accuracy faltered, its importance rocketed. As the financial crisis deepened, central bankers monitored Libor in different currencies to see how successful their latest policy announcements were in calming markets. Governments looked at individual firms’ submissions for clues as to who they might be forced to bail out next. If banks were lying about Libor, it was not just affecting interest rates and derivatives payments. It was skewing reality.
There was no inkling at this stage that traders such as Hayes were pushing Libor around to boost their profits, but here was a benchmark that relied on the honesty of traders who had a direct interest in where it was set. Libor was overseen by the British Bankers Association (BBA). In both cases, the body responsible for overseeing the rate had no punitive powers, so there was little to discourage firms from cheating.
When McGonagle finished reading the Wall Street Journal article, he emailed colleagues and asked them what they knew about Libor. His team put together a dossier, including some preliminary reports from within the financial community. In March, economists at the Bank for International Settlements, an umbrella group for central banks around the world, had published a paper that identified unusual patterns in Libor during the crisis, although it concluded these were “not caused by shortcomings in the design of the fixing mechanism”.
A month later, Scott Peng, an analyst at Citigroup in New York, sent his customers a research note that estimated the dollar Libor submissions of the 18 firms that set the rate were 20 to 30 basis points lower than they should have been because of a “prevailing fear” among the banks of “being perceived as a weak hand in this fragile market environment”.
While there was no evidence of manipulation by specific firms, McGonagle was coming around to the idea of launching an investigation.
In 2009, Hayes was lured away from UBS to join Citigroup. The head of Citigroup’s team in Asia, the former Lehman banker Chris Cecere, a small, goateed American with a big reputation for finding new ways to make money, had been given millions of dollars to attract the best talent – and Hayes was his round-one pick.
It wasn’t just the $3m signing bonus that had won Hayes over. The promise of a fresh start at one of the world’s biggest banks, with him at centre stage in its aggressive expansion into the Asian interest-rate derivatives market, had proved too tempting to resist. After persuading him to join, Cecere boasted to colleagues that he’d found “a real fucking animal”, who “knows everybody on the street”.
Citigroup in Canary Wharf, London Photograph: DBURKE / Alamy/Alamy
Cecere set in motion plans for Citigroup to join the Tibor (Tokyo interbank offered rate) panel which, Hayes would crow, was even easier to influence than Libor because fewer banks contributed to it. Hayes wanted to hit the ground running when he started trading, and being able to influence the two benchmarks that helped determine the profitability of the bulk of his positions was an important step. Another was bringing Citigroup’s own London-based Libor-setters on board.
On the afternoon of 8 December, Cecere was at his desk on the Tokyo trading floor. He had an office but seldom used it, preferring to be amid the action. He believed that six-month yen Libor was too high. After checking the submissions from the previous day, he was surprised to see that Citigroup had input one of the highest figures.
Cecere contacted the head of the risk treasury team in Tokyo, Stantley Tan, and asked him to find out who the yen-setter was and request that he lower his input by several basis points. It turned out the risk treasury desk in Canary Wharf was responsible for the bank’s Libor submissions.
“I spoke to our point man in London,” Tan wrote back to Cecere that afternoon. “I have asked him to consider moving quotes [lower]”.
Cecere checked the Libors again later that night and was annoyed to see that Citigroup had only reduced its six-month rate by a quarter of a basis point.
He wrote to Tan, “Can you speak with him again?”
The following day, Tan went back to the treasury desk in London as requested. He also forwarded the message chain to Andrew Thursfield, Citigroup’s head of risk treasury in London. The response he got back from his UK counterpart left little room for misinterpretation: it was a thinly veiled warning to back off.
Hayes, who sat just behind his boss, was not on the email chain, but Cecere sent it to him.
Thursfield was a straitlaced man in his forties who had spent more than 20 years in risk management at Citigroup after joining as a graduate trainee. He saw himself as the guardian of the firm’s balance sheet and didn’t take kindly to being told how to do his job by a pushy trader who knew nothing of the intricacies of bank funding.
Rather than lowering the inputs, Thursfield’s team increased its submission days later, pushing the published Libor rates higher. Hayes would have to try a different tack. On 14 December he sent an email to his London counterpart, asking him to approach the rate-setters directly.
“Do you talk to the cash desk and did we know in advance?” Hayes asked, referring to the bank’s decision to bump up its Libor submissions. “We need good dialogue with the cash desk. They can be invaluable to us. If we know ahead of time we can position and scalp the market.”
What Hayes didn’t realise was that no amount of schmoozing was going to get the rate-setters onside. Unlike some banks, Citigroup was taking the CFTC’s investigation into Libor seriously. In March 2009, Thursfield had personally delivered an 18-page presentation via video link to investigators on the rate-setting process. The cash traders weren’t about to risk their necks for someone they didn’t know who worked on the other side of the world.
It wasn’t just that they knew they were being watched. Thursfield was not only a stickler for the rules but had taken a personal dislike to Hayes when the pair had met three months earlier. It was October 2009, shortly after Hayes had accepted the job at Citigroup, and his boss had sent him to London to meet the bank’s key players.
“Good to meet you. You can help us out with Libors. I will let you know my axes,” Hayes said by way of an opening gambit when he was introduced to Thursfield.
Unshaven and dishevelled, Hayes told the Citigroup manager how the cash desk at UBS frequently skewed its submissions to suit his book. He boasted of his close relationships with rate-setters at other banks and how they would do favours for each other. Hayes was trying to charm Thursfield, but he had badly misjudged the man and the situation. The following day Thursfield called his manager, Steve Compton, and relayed his concerns.
“Once you stray on to talking about Libor fixings, I mean we just paid another $75,000 bill to the lawyer this week for the work they’re doing on the CFTC investigation,” Thursfield said. “Whoever is the desk head, or whatever, [should] have a close watch on just what he’s actually doing and how publicly. It’s all, you know, very much barrow-boy-type [behaviour].”
The knock on Hayes’s door came at 7am on a Tuesday, two weeks before Christmas 2012. Hayes padded down the bespoke pine staircase of his newly renovated home in Woldingham, Surrey, to let in more than a dozen police officers and Serious Fraud Office investigators. A year before, he had been fired from Citigroup, and shortly afterwards returned to the UK, where he married his girlfriend Sarah Tighe.
Hayes stood at his wife’s side as the officers swept through the property, gathering computers and documents into boxes and loading them into vehicles parked at the end of the gravel driveway. The couple had only moved in a fortnight before. Their infant son was upstairs in bed. Traffic was heavy by the time the former trader was led to the back of a waiting car. The 20-mile crawl from Surrey to the City of London passed in silence.
Bishopsgate police station is a grey, concrete building on one of the financial district’s busiest thoroughfares. In a formal interview, Hayes was told he had been brought in to answer questions relating to allegations that between 2006 and 2009 he had conspired to manipulate yen Libor with two of his colleagues. Hayes responded that he planned to help but would need time to consider the 112 pages of evidence so would not be answering any questions that day. It was late when he arrived back in Surrey.
In June, Barclays had become the first bank to reach a settlement with authorities, admitting to rigging the rate and agreeing to pay a then-record £290 million in fines. From the moment Barclays had settled, sparking a political firestorm that burned for weeks, Hayes’s destiny had been leading to this point. The Serious Fraud Office (SFO), which had previously resisted launching a probe into Libor rigging, was forced to reverse its position and on 6 July issued a statement announcing it would be undertaking a criminal investigation. That week the government launched its own review into the scandal. The British public and its politicians were out for scalps.
On 19 December, eight days after his arrest, Hayes was at home on his computer when a news bulletin popped up with a link to a press conference in Washington. As cameras flashed, Attorney General Eric Holder and Lanny Breuer, head of the Justice Department’s criminal division, took turns outlining the $1.5bn settlement the authorities had reached with UBS over Libor. The Swiss bank, they explained, had pleaded guilty to wire fraud at its Japanese arm. Then came the sucker punch.
“In addition to UBS Japan’s agreement to plead guilty, two former UBS traders have been charged, in a criminal complaint unsealed today, with conspiracy to manipulate Libor,” said Breuer. “Tom Hayes has also been charged with wire fraud and an antitrust violation.” Neither Tan nor Cecere has ever been charged with wrongdoing.
At that moment the full horror of the situation hit Hayes for the first time. The two most powerful lawyers in the US planned to extradite him on three separate criminal charges, each carrying a 20–30 year sentence. Less than 24 hours later, a member of Hayes’s legal team was on the phone to the SFO to discuss cutting a deal.
Fighting the charges seemed futile: the UBS settlement made reference to more than 2,000 attempts by Hayes and his colleagues to influence the rate over a four-year period. He was the star attraction, the “Jesse James of Libor”, as he would later tell it. The US authorities had yet to issue extradition papers, but it was only a matter of time.
RBS, Barclays and other banks fined in Swiss franc Libor case
So began a race to convince the SFO to take on Hayes as a sort of chief informant, who in return would receive leniency and, more importantly, an agreement that he would be dealt with in the UK.
To secure this arrangement Hayes had to agree to tell the SFO everything he knew and promise to testify against everybody involved. Crucially, he also had to plead guilty to dishonestly rigging Libor. It was not enough to admit trying to influence the rate. He had to confess that he knew it was wrong.
During two days of so-called scoping interviews to test his knowledge of the case, Hayes talked openly about his campaign to rig Libor, for the first time in his life. At the SFO’s offices near Trafalgar Square he admitted he had acted dishonestly and brought the investigators’ attention to aspects of the case they knew nothing about. The interviews covered everything from his entry into the industry and his trading strategies to how the Libor scheme began and the various individuals who helped him rig the rate. They barely had to prod to get him to talk. Hayes seemed to relish reliving moments from his past. His voice sped up when he talked about heady days piling into positions, squeezing the best prices from brokers and playing traders off against each other.
“The first thing you think is where’s the edge, where can I make a bit more money, how can I push, push the boundaries, maybe you know a bit of a grey area, push the edge of the envelope,” he said in one early interview. “But the point is, you are greedy, you want every little bit of money that you can possibly get because, like I say, that is how you are judged, that is your performance metric.”
Paper coffee cups piled up as Hayes went over the minutiae of the case. At one stage, Hayes was asked about how he viewed his attempts to move Libor around. The exchange would prove crucial.
“Well look, I mean, it’s a dishonest scheme, isn’t it?” Hayes said. “And I was part of the dishonest scheme, so obviously I was being dishonest.”
This article is adapted from The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important Number by Liam Vaughan and Gavin Finch
Cecere set in motion plans for Citigroup to join the Tibor (Tokyo interbank offered rate) panel which, Hayes would crow, was even easier to influence than Libor because fewer banks contributed to it. Hayes wanted to hit the ground running when he started trading, and being able to influence the two benchmarks that helped determine the profitability of the bulk of his positions was an important step. Another was bringing Citigroup’s own London-based Libor-setters on board.
On the afternoon of 8 December, Cecere was at his desk on the Tokyo trading floor. He had an office but seldom used it, preferring to be amid the action. He believed that six-month yen Libor was too high. After checking the submissions from the previous day, he was surprised to see that Citigroup had input one of the highest figures.
Cecere contacted the head of the risk treasury team in Tokyo, Stantley Tan, and asked him to find out who the yen-setter was and request that he lower his input by several basis points. It turned out the risk treasury desk in Canary Wharf was responsible for the bank’s Libor submissions.
“I spoke to our point man in London,” Tan wrote back to Cecere that afternoon. “I have asked him to consider moving quotes [lower]”.
Cecere checked the Libors again later that night and was annoyed to see that Citigroup had only reduced its six-month rate by a quarter of a basis point.
He wrote to Tan, “Can you speak with him again?”
The following day, Tan went back to the treasury desk in London as requested. He also forwarded the message chain to Andrew Thursfield, Citigroup’s head of risk treasury in London. The response he got back from his UK counterpart left little room for misinterpretation: it was a thinly veiled warning to back off.
Hayes, who sat just behind his boss, was not on the email chain, but Cecere sent it to him.
Thursfield was a straitlaced man in his forties who had spent more than 20 years in risk management at Citigroup after joining as a graduate trainee. He saw himself as the guardian of the firm’s balance sheet and didn’t take kindly to being told how to do his job by a pushy trader who knew nothing of the intricacies of bank funding.
Rather than lowering the inputs, Thursfield’s team increased its submission days later, pushing the published Libor rates higher. Hayes would have to try a different tack. On 14 December he sent an email to his London counterpart, asking him to approach the rate-setters directly.
“Do you talk to the cash desk and did we know in advance?” Hayes asked, referring to the bank’s decision to bump up its Libor submissions. “We need good dialogue with the cash desk. They can be invaluable to us. If we know ahead of time we can position and scalp the market.”
What Hayes didn’t realise was that no amount of schmoozing was going to get the rate-setters onside. Unlike some banks, Citigroup was taking the CFTC’s investigation into Libor seriously. In March 2009, Thursfield had personally delivered an 18-page presentation via video link to investigators on the rate-setting process. The cash traders weren’t about to risk their necks for someone they didn’t know who worked on the other side of the world.
It wasn’t just that they knew they were being watched. Thursfield was not only a stickler for the rules but had taken a personal dislike to Hayes when the pair had met three months earlier. It was October 2009, shortly after Hayes had accepted the job at Citigroup, and his boss had sent him to London to meet the bank’s key players.
“Good to meet you. You can help us out with Libors. I will let you know my axes,” Hayes said by way of an opening gambit when he was introduced to Thursfield.
Unshaven and dishevelled, Hayes told the Citigroup manager how the cash desk at UBS frequently skewed its submissions to suit his book. He boasted of his close relationships with rate-setters at other banks and how they would do favours for each other. Hayes was trying to charm Thursfield, but he had badly misjudged the man and the situation. The following day Thursfield called his manager, Steve Compton, and relayed his concerns.
“Once you stray on to talking about Libor fixings, I mean we just paid another $75,000 bill to the lawyer this week for the work they’re doing on the CFTC investigation,” Thursfield said. “Whoever is the desk head, or whatever, [should] have a close watch on just what he’s actually doing and how publicly. It’s all, you know, very much barrow-boy-type [behaviour].”
The knock on Hayes’s door came at 7am on a Tuesday, two weeks before Christmas 2012. Hayes padded down the bespoke pine staircase of his newly renovated home in Woldingham, Surrey, to let in more than a dozen police officers and Serious Fraud Office investigators. A year before, he had been fired from Citigroup, and shortly afterwards returned to the UK, where he married his girlfriend Sarah Tighe.
Hayes stood at his wife’s side as the officers swept through the property, gathering computers and documents into boxes and loading them into vehicles parked at the end of the gravel driveway. The couple had only moved in a fortnight before. Their infant son was upstairs in bed. Traffic was heavy by the time the former trader was led to the back of a waiting car. The 20-mile crawl from Surrey to the City of London passed in silence.
Bishopsgate police station is a grey, concrete building on one of the financial district’s busiest thoroughfares. In a formal interview, Hayes was told he had been brought in to answer questions relating to allegations that between 2006 and 2009 he had conspired to manipulate yen Libor with two of his colleagues. Hayes responded that he planned to help but would need time to consider the 112 pages of evidence so would not be answering any questions that day. It was late when he arrived back in Surrey.
In June, Barclays had become the first bank to reach a settlement with authorities, admitting to rigging the rate and agreeing to pay a then-record £290 million in fines. From the moment Barclays had settled, sparking a political firestorm that burned for weeks, Hayes’s destiny had been leading to this point. The Serious Fraud Office (SFO), which had previously resisted launching a probe into Libor rigging, was forced to reverse its position and on 6 July issued a statement announcing it would be undertaking a criminal investigation. That week the government launched its own review into the scandal. The British public and its politicians were out for scalps.
On 19 December, eight days after his arrest, Hayes was at home on his computer when a news bulletin popped up with a link to a press conference in Washington. As cameras flashed, Attorney General Eric Holder and Lanny Breuer, head of the Justice Department’s criminal division, took turns outlining the $1.5bn settlement the authorities had reached with UBS over Libor. The Swiss bank, they explained, had pleaded guilty to wire fraud at its Japanese arm. Then came the sucker punch.
“In addition to UBS Japan’s agreement to plead guilty, two former UBS traders have been charged, in a criminal complaint unsealed today, with conspiracy to manipulate Libor,” said Breuer. “Tom Hayes has also been charged with wire fraud and an antitrust violation.” Neither Tan nor Cecere has ever been charged with wrongdoing.
At that moment the full horror of the situation hit Hayes for the first time. The two most powerful lawyers in the US planned to extradite him on three separate criminal charges, each carrying a 20–30 year sentence. Less than 24 hours later, a member of Hayes’s legal team was on the phone to the SFO to discuss cutting a deal.
Fighting the charges seemed futile: the UBS settlement made reference to more than 2,000 attempts by Hayes and his colleagues to influence the rate over a four-year period. He was the star attraction, the “Jesse James of Libor”, as he would later tell it. The US authorities had yet to issue extradition papers, but it was only a matter of time.
RBS, Barclays and other banks fined in Swiss franc Libor case
So began a race to convince the SFO to take on Hayes as a sort of chief informant, who in return would receive leniency and, more importantly, an agreement that he would be dealt with in the UK.
To secure this arrangement Hayes had to agree to tell the SFO everything he knew and promise to testify against everybody involved. Crucially, he also had to plead guilty to dishonestly rigging Libor. It was not enough to admit trying to influence the rate. He had to confess that he knew it was wrong.
During two days of so-called scoping interviews to test his knowledge of the case, Hayes talked openly about his campaign to rig Libor, for the first time in his life. At the SFO’s offices near Trafalgar Square he admitted he had acted dishonestly and brought the investigators’ attention to aspects of the case they knew nothing about. The interviews covered everything from his entry into the industry and his trading strategies to how the Libor scheme began and the various individuals who helped him rig the rate. They barely had to prod to get him to talk. Hayes seemed to relish reliving moments from his past. His voice sped up when he talked about heady days piling into positions, squeezing the best prices from brokers and playing traders off against each other.
“The first thing you think is where’s the edge, where can I make a bit more money, how can I push, push the boundaries, maybe you know a bit of a grey area, push the edge of the envelope,” he said in one early interview. “But the point is, you are greedy, you want every little bit of money that you can possibly get because, like I say, that is how you are judged, that is your performance metric.”
Paper coffee cups piled up as Hayes went over the minutiae of the case. At one stage, Hayes was asked about how he viewed his attempts to move Libor around. The exchange would prove crucial.
“Well look, I mean, it’s a dishonest scheme, isn’t it?” Hayes said. “And I was part of the dishonest scheme, so obviously I was being dishonest.”
This article is adapted from The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important Number by Liam Vaughan and Gavin Finch
Saturday 14 January 2017
All those in developing countries please look away now - Aid in reverse: how poor countries develop rich countries
Jason Hickel In The Guardian
We have long been told a compelling story about the relationship between rich countries and poor countries. The story holds that the rich nations of the OECD give generously of their wealth to the poorer nation cheats of the global south, to help them eradicate poverty and push them up the development ladder. Yes, during colonialism western powers may have enriched themselves by extracting resources and slave labour from their colonies – but that’s all in the past. These days, they give more than $125bn (£102bn) in aid each year – solid evidence of their benevolent goodwill.
This story is so widely propagated by the aid industry and the governments of the rich world that we have come to take it for granted. But it may not be as simple as it appears.
The US-based Global Financial Integrity (GFI) and the Centre for Applied Research at the Norwegian School of Economics recently published some fascinating data. They tallied up all of the financial resources that get transferred between rich countries and poor countries each year: not just aid, foreign investment and trade flows (as previous studies have done) but also non-financial transfers such as debt cancellation, unrequited transfers like workers’ remittances, and unrecorded capital flight (more of this later). As far as I am aware, it is the most comprehensive assessment of resource transfers ever undertaken.
The flow of money from rich countries to poor countries pales in comparison to the flow that runs in the other direction
What they discovered is that the flow of money from rich countries to poor countries pales in comparison to the flow that runs in the other direction.
In 2012, the last year of recorded data, developing countries received a total of $1.3tn, including all aid, investment, and income from abroad. But that same year some $3.3tn flowed out of them. In other words, developing countries sent $2tn more to the rest of the world than they received. If we look at all years since 1980, these net outflows add up to an eye-popping total of $16.3tn – that’s how much money has been drained out of the global south over the past few decades. To get a sense for the scale of this, $16.3tn is roughly the GDP of the United States
What this means is that the usual development narrative has it backwards. Aid is effectively flowing in reverse. Rich countries aren’t developing poor countries; poor countries are developing rich ones.
What do these large outflows consist of? Well, some of it is payments on debt. Developing countries have forked out over $4.2tn in interest payments alone since 1980 – a direct cash transfer to big banks in New York and London, on a scale that dwarfs the aid that they received during the same period. Another big contributor is the income that foreigners make on their investments in developing countries and then repatriate back home. Think of all the profits that BP extracts from Nigeria’s oil reserves, for example, or that Anglo-American pulls out of South Africa’s gold mines.
But by far the biggest chunk of outflows has to do with unrecorded – and usually illicit – capital flight. GFI calculates that developing countries have lost a total of $13.4tn through unrecorded capital flight since 1980.
Most of these unrecorded outflows take place through the international trade system. Basically, corporations – foreign and domestic alike – report false prices on their trade invoices in order to spirit money out of developing countries directly into tax havens and secrecy jurisdictions, a practice known as “trade misinvoicing”. Usually the goal is to evade taxes, but sometimes this practice is used to launder money or circumvent capital controls. In 2012, developing countries lost $700bn through trade misinvoicing, which outstripped aid receipts that year by a factor of five.
Multinational companies also steal money from developing countries through “same-invoice faking”, shifting profits illegally between their own subsidiaries by mutually faking trade invoice prices on both sides. For example, a subsidiary in Nigeria might dodge local taxes by shifting money to a related subsidiary in the British Virgin Islands, where the tax rate is effectively zero and where stolen funds can’t be traced.
GFI doesn’t include same-invoice faking in its headline figures because it is very difficult to detect, but they estimate that it amounts to another $700bn per year. And these figures only cover theft through trade in goods. If we add theft through trade in services to the mix, it brings total net resource outflows to about $3tn per year.
That’s 24 times more than the aid budget. In other words, for every $1 of aid that developing countries receive, they lose $24 in net outflows. These outflows strip developing countries of an important source of revenue and finance for development. The GFI report finds that increasingly large net outflows have caused economic growth rates in developing countries to decline, and are directly responsible for falling living standards.
Who is to blame for this disaster? Since illegal capital flight is such a big chunk of the problem, that’s a good place to start. Companies that lie on their trade invoices are clearly at fault; but why is it so easy for them to get away with it? In the past, customs officials could hold up transactions that looked dodgy, making it nearly impossible for anyone to cheat. But the World Trade Organisation claimed that this made trade inefficient, and since 1994 customs officials have been required to accept invoiced prices at face value except in very suspicious circumstances, making it difficult for them to seize illicit outflows.
FacebookTwitterPinterest Protest about tax havens in London in 2016, organised by charities Oxfam, ActionAid and Christian Aid. Photograph: Carl Court/Getty Images
Still, illegal capital flight wouldn’t be possible without the tax havens. And when it comes to tax havens, the culprits are not hard to identify: there are more than 60 in the world, and the vast majority of them are controlled by a handful of western countries. There are European tax havens such as Luxembourg and Belgium, and US tax havens like Delaware and Manhattan. But by far the biggest network of tax havens is centered around the City of London, which controls secrecy jurisdictions throughout the British Crown Dependencies and Overseas Territories.
In other words, some of the very countries that so love to tout their foreign aid contributions are the ones enabling mass theft from developing countries.
The aid narrative begins to seem a bit naïve when we take these reverse flows into account. It becomes clear that aid does little but mask the maldistribution of resources around the world. It makes the takers seem like givers, granting them a kind of moral high ground while preventing those of us who care about global poverty from understanding how the system really works.
Poor countries don’t need charity. They need justice. And justice is not difficult to deliver. We could write off the excess debts of poor countries, freeing them up to spend their money on development instead of interest payments on old loans; we could close down the secrecy jurisdictions, and slap penalties on bankers and accountants who facilitate illicit outflows; and we could impose a global minimum tax on corporate income to eliminate the incentive for corporations to secretly shift their money around the world.
We know how to fix the problem. But doing so would run up against the interests of powerful banks and corporations that extract significant material benefit from the existing system. The question is, do we have the courage?
We have long been told a compelling story about the relationship between rich countries and poor countries. The story holds that the rich nations of the OECD give generously of their wealth to the poorer nation cheats of the global south, to help them eradicate poverty and push them up the development ladder. Yes, during colonialism western powers may have enriched themselves by extracting resources and slave labour from their colonies – but that’s all in the past. These days, they give more than $125bn (£102bn) in aid each year – solid evidence of their benevolent goodwill.
This story is so widely propagated by the aid industry and the governments of the rich world that we have come to take it for granted. But it may not be as simple as it appears.
The US-based Global Financial Integrity (GFI) and the Centre for Applied Research at the Norwegian School of Economics recently published some fascinating data. They tallied up all of the financial resources that get transferred between rich countries and poor countries each year: not just aid, foreign investment and trade flows (as previous studies have done) but also non-financial transfers such as debt cancellation, unrequited transfers like workers’ remittances, and unrecorded capital flight (more of this later). As far as I am aware, it is the most comprehensive assessment of resource transfers ever undertaken.
The flow of money from rich countries to poor countries pales in comparison to the flow that runs in the other direction
What they discovered is that the flow of money from rich countries to poor countries pales in comparison to the flow that runs in the other direction.
In 2012, the last year of recorded data, developing countries received a total of $1.3tn, including all aid, investment, and income from abroad. But that same year some $3.3tn flowed out of them. In other words, developing countries sent $2tn more to the rest of the world than they received. If we look at all years since 1980, these net outflows add up to an eye-popping total of $16.3tn – that’s how much money has been drained out of the global south over the past few decades. To get a sense for the scale of this, $16.3tn is roughly the GDP of the United States
What this means is that the usual development narrative has it backwards. Aid is effectively flowing in reverse. Rich countries aren’t developing poor countries; poor countries are developing rich ones.
What do these large outflows consist of? Well, some of it is payments on debt. Developing countries have forked out over $4.2tn in interest payments alone since 1980 – a direct cash transfer to big banks in New York and London, on a scale that dwarfs the aid that they received during the same period. Another big contributor is the income that foreigners make on their investments in developing countries and then repatriate back home. Think of all the profits that BP extracts from Nigeria’s oil reserves, for example, or that Anglo-American pulls out of South Africa’s gold mines.
But by far the biggest chunk of outflows has to do with unrecorded – and usually illicit – capital flight. GFI calculates that developing countries have lost a total of $13.4tn through unrecorded capital flight since 1980.
Most of these unrecorded outflows take place through the international trade system. Basically, corporations – foreign and domestic alike – report false prices on their trade invoices in order to spirit money out of developing countries directly into tax havens and secrecy jurisdictions, a practice known as “trade misinvoicing”. Usually the goal is to evade taxes, but sometimes this practice is used to launder money or circumvent capital controls. In 2012, developing countries lost $700bn through trade misinvoicing, which outstripped aid receipts that year by a factor of five.
Multinational companies also steal money from developing countries through “same-invoice faking”, shifting profits illegally between their own subsidiaries by mutually faking trade invoice prices on both sides. For example, a subsidiary in Nigeria might dodge local taxes by shifting money to a related subsidiary in the British Virgin Islands, where the tax rate is effectively zero and where stolen funds can’t be traced.
GFI doesn’t include same-invoice faking in its headline figures because it is very difficult to detect, but they estimate that it amounts to another $700bn per year. And these figures only cover theft through trade in goods. If we add theft through trade in services to the mix, it brings total net resource outflows to about $3tn per year.
That’s 24 times more than the aid budget. In other words, for every $1 of aid that developing countries receive, they lose $24 in net outflows. These outflows strip developing countries of an important source of revenue and finance for development. The GFI report finds that increasingly large net outflows have caused economic growth rates in developing countries to decline, and are directly responsible for falling living standards.
Who is to blame for this disaster? Since illegal capital flight is such a big chunk of the problem, that’s a good place to start. Companies that lie on their trade invoices are clearly at fault; but why is it so easy for them to get away with it? In the past, customs officials could hold up transactions that looked dodgy, making it nearly impossible for anyone to cheat. But the World Trade Organisation claimed that this made trade inefficient, and since 1994 customs officials have been required to accept invoiced prices at face value except in very suspicious circumstances, making it difficult for them to seize illicit outflows.
FacebookTwitterPinterest Protest about tax havens in London in 2016, organised by charities Oxfam, ActionAid and Christian Aid. Photograph: Carl Court/Getty Images
Still, illegal capital flight wouldn’t be possible without the tax havens. And when it comes to tax havens, the culprits are not hard to identify: there are more than 60 in the world, and the vast majority of them are controlled by a handful of western countries. There are European tax havens such as Luxembourg and Belgium, and US tax havens like Delaware and Manhattan. But by far the biggest network of tax havens is centered around the City of London, which controls secrecy jurisdictions throughout the British Crown Dependencies and Overseas Territories.
In other words, some of the very countries that so love to tout their foreign aid contributions are the ones enabling mass theft from developing countries.
The aid narrative begins to seem a bit naïve when we take these reverse flows into account. It becomes clear that aid does little but mask the maldistribution of resources around the world. It makes the takers seem like givers, granting them a kind of moral high ground while preventing those of us who care about global poverty from understanding how the system really works.
Poor countries don’t need charity. They need justice. And justice is not difficult to deliver. We could write off the excess debts of poor countries, freeing them up to spend their money on development instead of interest payments on old loans; we could close down the secrecy jurisdictions, and slap penalties on bankers and accountants who facilitate illicit outflows; and we could impose a global minimum tax on corporate income to eliminate the incentive for corporations to secretly shift their money around the world.
We know how to fix the problem. But doing so would run up against the interests of powerful banks and corporations that extract significant material benefit from the existing system. The question is, do we have the courage?
Saturday 19 November 2016
The Big Short: is the next financial crisis on its way?
Patrick Collinson in The Guardian
In the Oscar-winning The Big Short, Steve Carell plays the angry Wall Street outsider who predicts (and hugely profits from) the great financial crash of 2007-08. He sees sub-prime mortgages rated triple-A but which, in reality, are junk – and bets billions against the banks holding them. In real life he is Steve Eisman, he is still on Wall Street, and he is still shorting stocks he thinks are going to plummet. And while he’s tight-lipped about which ones (unless you have $1m to spare for him to manage) it is evident he has one major target in mind: continental Europe’s banks – and Italy’s are probably the worst.
Why Italy? Because, he says, the banks there are stuffed with “non-performing loans” (NPLs). That’s jargon for loans handed out to companies and households where the borrower has fallen behind with repayments, or is barely paying at all. But the Italian banks have not written off these loans as duds, he says. Instead, billions upon billions are still on the books, written down as worth about 45% to 50% of their original value.
The big problem, says Eisman, is that they are not worth anywhere near that much. In The Big Short, Eisman’s staff head to Florida to speak to the owners of newly built homes bundled up in “mortgage-backed securities” rated as AAA by the investment banks. What they find are strippers with loans against multiple homes but almost no income, the mortgages arranged by sharp-suited brokers who know they won’t be repaid, and don’t care. Visiting the housing estates that these triple-A mortgages are secured against, they find foreclosures and dereliction.
What is very negative is that in every country in Europe, the largest owner of sovereign bonds are that country’s banks
In a mix of moral outrage at the banks – and investing acumen – Eisman and his colleagues bought as many “swaps” as possible to profit from the inevitable collapse of the mortgage-backed securities, making a $1bn profit along the way.
This time around, Eisman is not padding around the plains of Lombardy because he says the evidence is in plain sight. When financiers look to buy the NPLs off the Italian banks, they value the loans at what they are really worth – in other words, how many of the holders are really able to repay, and how much money will be recovered. What they find is that the NPLs should be valued at just 20% of their original price. Trouble is, if the Italian banks recognise their loans at their true value, it wipes out their capital, and they go bust overnight.
“Europe is screwed. You guys are still screwed,” says Eisman. “In the Italian system, the banks say they are worth 45-50 cents in the dollar. But the bid price is 20 cents. If they were to mark them down, they would be insolvent.”
Eisman is careful not to name any specific Italian bank. But fears about the solvency of the system – weighed down by an estimated €360bn in bad debts – are not new. In official “stress tests” of 51 major European banks in July by the European Banking Authority, Italy’s third largest bank, Banca Monte dei Paschi di Siena, emerged as the weakest. It triggered a rescue package – and soothing words from Italy’s finance minister, who said there was no generalised crisis in the banking system. But MPPS’s share price remains at just 25 cents, down more than 90% from two years ago.
How worried should British bank account (and shareholders) be? “I’m not really worried about England’s banks,” says Eisman. “They are in better shape than most in Europe.” When it comes to the US, Eisman’s outrage, so central to the plot of The Big Short, has melted away (just don’t start him on Household Finance Corporation, the HSBC-owned lender at the heart of sub-prime crisis). “I think the regulators did a horrendous, just horrendous job pre-crisis. But under the Fed, the banks have been enormously deleveraged and de-risked. There are no sub-prime mortgages any more... the European regulators have been much more lenient than the US regulators.”
Eisman was of the view that US banks were rather boring as an investment – although Donald Trump’s victory has changed that. “I have a feeling there could be a softening in the Department of Labor rules (an Obama-led crackdown on how banks sell financial products) and the regulatory environment has now changed in favour of the banks.”
Steve Eisman: ‘I’m not really worried about England’s banks. They are in better shape than most in Europe.’ Photograph: Bloomberg via Getty Images
Trump’s victory has sent the bond markets into disarray, with the yield on government bonds rising steeply. While this sounds good for savers – interest rates could rise – it is bad news for the holders of government bonds, which fall in value when the yield rises. Eisman sees that as another woe for Europe’s banks, who hold vast amounts of “sovereign bonds”.
“What is very negative is that in every country in Europe, the largest owner of that country’s sovereign bonds are that country’s banks,” he says. As the bonds decline in value, then the capital base of the banks deteriorates.
He doesn’t share the optimism around Deutsche Bank since Trump’s victory. The troubled German bank, facing a $14bn fine in the US for mortgage bond mis-selling, was for a long time one of the biggest lenders to the Trump business empire. In the three days after Trump’s victory, shares in Deutsche Bank, regarded as Europe’s most systemically important bank, jumped by a fifth from €12.90 to €15.30 as traders bet on Trump-inspired leniency over the fine.
But Eisman doesn’t buy it. By his reckoning, Deutsche Bank was less fundamentally profitable than its rivals, and relied more on leverage to boost earnings. His analysis suggests it will struggle to return to its former profitability.
Critics will point out that shorting the likes of Banca Monte dei Paschi di Siena or Deutsche Bank sounds fine – except that the share price of both have already fallen so dramatically the bad news is already in the price. But we don’t know for sure if they are Eisman’s precise targets – because he’s not willing to say unless you give him at least $1m to manage in one of his “personal accounts”.
Eisman now effectively runs his own “boutique” operation within a bigger Wall Street firm, Neuberger Berman. His “Eisman Long/Short SMA” account has opened to wealthy investors, and in January he will be in London drumming up interest among investors.
But not everything Eisman touches turns to gold. He declines to say how much he made during the financial crash, when he was manager of funds at FrontPoint Financial Services, though it was reportedly as much as $1bn. But in 2010 FrontPoint ran into trouble after one of its manager pleaded guilty to insider trading and was given a five-year prison sentence.
Eisman later set up a hedge fund, Emrys Partners, gathering nearly $200m from investors, but its returns were relatively humdrum compared to the drama of the great crash, making 3.6% in 2012 and 10.8% in 2013, according to the Wall Street Journal.
Did he think the film accurately portrayed what went on? He visited the set, and gave Carell and the other actors (Brad Pitt and Christian Bale also starred) advice and notes.
“When I saw the film, I thought it was great and that Steve Carell was wonderful. But I thought, hey, I wasn’t that angry. After the crash I was interviewed by the Federal Crisis Inquiry Commission, and I saw a transcription later on. After reading it, I realised that ‘yes’, I really was that angry... but the Fed has done a very good job since.”
In the Oscar-winning The Big Short, Steve Carell plays the angry Wall Street outsider who predicts (and hugely profits from) the great financial crash of 2007-08. He sees sub-prime mortgages rated triple-A but which, in reality, are junk – and bets billions against the banks holding them. In real life he is Steve Eisman, he is still on Wall Street, and he is still shorting stocks he thinks are going to plummet. And while he’s tight-lipped about which ones (unless you have $1m to spare for him to manage) it is evident he has one major target in mind: continental Europe’s banks – and Italy’s are probably the worst.
Why Italy? Because, he says, the banks there are stuffed with “non-performing loans” (NPLs). That’s jargon for loans handed out to companies and households where the borrower has fallen behind with repayments, or is barely paying at all. But the Italian banks have not written off these loans as duds, he says. Instead, billions upon billions are still on the books, written down as worth about 45% to 50% of their original value.
The big problem, says Eisman, is that they are not worth anywhere near that much. In The Big Short, Eisman’s staff head to Florida to speak to the owners of newly built homes bundled up in “mortgage-backed securities” rated as AAA by the investment banks. What they find are strippers with loans against multiple homes but almost no income, the mortgages arranged by sharp-suited brokers who know they won’t be repaid, and don’t care. Visiting the housing estates that these triple-A mortgages are secured against, they find foreclosures and dereliction.
What is very negative is that in every country in Europe, the largest owner of sovereign bonds are that country’s banks
In a mix of moral outrage at the banks – and investing acumen – Eisman and his colleagues bought as many “swaps” as possible to profit from the inevitable collapse of the mortgage-backed securities, making a $1bn profit along the way.
This time around, Eisman is not padding around the plains of Lombardy because he says the evidence is in plain sight. When financiers look to buy the NPLs off the Italian banks, they value the loans at what they are really worth – in other words, how many of the holders are really able to repay, and how much money will be recovered. What they find is that the NPLs should be valued at just 20% of their original price. Trouble is, if the Italian banks recognise their loans at their true value, it wipes out their capital, and they go bust overnight.
“Europe is screwed. You guys are still screwed,” says Eisman. “In the Italian system, the banks say they are worth 45-50 cents in the dollar. But the bid price is 20 cents. If they were to mark them down, they would be insolvent.”
Eisman is careful not to name any specific Italian bank. But fears about the solvency of the system – weighed down by an estimated €360bn in bad debts – are not new. In official “stress tests” of 51 major European banks in July by the European Banking Authority, Italy’s third largest bank, Banca Monte dei Paschi di Siena, emerged as the weakest. It triggered a rescue package – and soothing words from Italy’s finance minister, who said there was no generalised crisis in the banking system. But MPPS’s share price remains at just 25 cents, down more than 90% from two years ago.
How worried should British bank account (and shareholders) be? “I’m not really worried about England’s banks,” says Eisman. “They are in better shape than most in Europe.” When it comes to the US, Eisman’s outrage, so central to the plot of The Big Short, has melted away (just don’t start him on Household Finance Corporation, the HSBC-owned lender at the heart of sub-prime crisis). “I think the regulators did a horrendous, just horrendous job pre-crisis. But under the Fed, the banks have been enormously deleveraged and de-risked. There are no sub-prime mortgages any more... the European regulators have been much more lenient than the US regulators.”
Eisman was of the view that US banks were rather boring as an investment – although Donald Trump’s victory has changed that. “I have a feeling there could be a softening in the Department of Labor rules (an Obama-led crackdown on how banks sell financial products) and the regulatory environment has now changed in favour of the banks.”
Steve Eisman: ‘I’m not really worried about England’s banks. They are in better shape than most in Europe.’ Photograph: Bloomberg via Getty Images
Trump’s victory has sent the bond markets into disarray, with the yield on government bonds rising steeply. While this sounds good for savers – interest rates could rise – it is bad news for the holders of government bonds, which fall in value when the yield rises. Eisman sees that as another woe for Europe’s banks, who hold vast amounts of “sovereign bonds”.
“What is very negative is that in every country in Europe, the largest owner of that country’s sovereign bonds are that country’s banks,” he says. As the bonds decline in value, then the capital base of the banks deteriorates.
He doesn’t share the optimism around Deutsche Bank since Trump’s victory. The troubled German bank, facing a $14bn fine in the US for mortgage bond mis-selling, was for a long time one of the biggest lenders to the Trump business empire. In the three days after Trump’s victory, shares in Deutsche Bank, regarded as Europe’s most systemically important bank, jumped by a fifth from €12.90 to €15.30 as traders bet on Trump-inspired leniency over the fine.
But Eisman doesn’t buy it. By his reckoning, Deutsche Bank was less fundamentally profitable than its rivals, and relied more on leverage to boost earnings. His analysis suggests it will struggle to return to its former profitability.
Critics will point out that shorting the likes of Banca Monte dei Paschi di Siena or Deutsche Bank sounds fine – except that the share price of both have already fallen so dramatically the bad news is already in the price. But we don’t know for sure if they are Eisman’s precise targets – because he’s not willing to say unless you give him at least $1m to manage in one of his “personal accounts”.
Eisman now effectively runs his own “boutique” operation within a bigger Wall Street firm, Neuberger Berman. His “Eisman Long/Short SMA” account has opened to wealthy investors, and in January he will be in London drumming up interest among investors.
But not everything Eisman touches turns to gold. He declines to say how much he made during the financial crash, when he was manager of funds at FrontPoint Financial Services, though it was reportedly as much as $1bn. But in 2010 FrontPoint ran into trouble after one of its manager pleaded guilty to insider trading and was given a five-year prison sentence.
Eisman later set up a hedge fund, Emrys Partners, gathering nearly $200m from investors, but its returns were relatively humdrum compared to the drama of the great crash, making 3.6% in 2012 and 10.8% in 2013, according to the Wall Street Journal.
Did he think the film accurately portrayed what went on? He visited the set, and gave Carell and the other actors (Brad Pitt and Christian Bale also starred) advice and notes.
“When I saw the film, I thought it was great and that Steve Carell was wonderful. But I thought, hey, I wasn’t that angry. After the crash I was interviewed by the Federal Crisis Inquiry Commission, and I saw a transcription later on. After reading it, I realised that ‘yes’, I really was that angry... but the Fed has done a very good job since.”
Thursday 11 August 2016
How the World Bank’s biggest critic became its president
Andrew Rice in The Guardian
In a shanty town perched in the hilly outskirts of Lima, Peru, people were dying. It was 1994, and thousands of squatters – many of them rural migrants who had fled their country’s Maoist guerrilla insurgency – were crammed into unventilated hovels, living without basic sanitation. They faced outbreaks of cholera and other infectious diseases, but a government austerity program, which had slashed subsidised health care, forced many to forgo medical treatment they couldn’t afford. When food ran short, they formed ad hoc collectives to stave off starvation. A Catholic priest ministering to a parish in the slum went looking for help, and he found it in Jim Yong Kim, an idealistic Korean-American physician and anthropologist.
In his mid-30s and a recent graduate of Harvard Medical School, Kim had helped found Partners in Health, a non-profit organisation whose mission was to bring modern medicine to the world’s poor. The priest had been involved with the group in Boston, its home base, before serving in Peru, and he asked Kim to help him set up a clinic to aid his flock. No sooner had Kim arrived in Lima, however, than the priest contracted a drug-resistant form of tuberculosis and died.
Kim was devastated, and he thought he knew what to blame: the World Bank. Like many debt-ridden nations, Peru was going through “structural adjustment”, a period of lender-mandated inflation controls, privatisations and government cutbacks. President Alberto Fujimori had enacted strict policies, known collectively as “Fujishock”, that made him a darling of neoliberal economists. But Kim saw calamitous trickledown effects, including the tuberculosis epidemic that had claimed his friend and threatened to spread through the parish.
So Kim helped organise a conference in Lima that was staged like a teach-in. Hundreds of shanty town residents met development experts and vented their anger with the World Bank. “We talked about the privatisation of everything: profits and also suffering,” Kim recalls. “The argument we were trying to make is that investment in human beings should not be cast aside in the name of GDP growth.” Over the next half-decade, he would become a vociferous critic of the World Bank, even calling for its abolition. In a 2000 book, Dying for Growth, he was lead author of an essay attacking the “capriciousness” of international development policies. “The penalties for failure,” he concluded, “have been borne by the poor, the infirm and the vulnerable in poor countries that accepted the experts’ designs.”
Kim often tells this story today, with an air of playful irony, when he introduces himself – as the president of the World Bank. “I was actually out protesting and trying to shut down the World Bank,” Kim said one March afternoon, addressing a conference in Maryland’s National Harbor complex. “I’m very glad we lost that argument.”
In a shanty town perched in the hilly outskirts of Lima, Peru, people were dying. It was 1994, and thousands of squatters – many of them rural migrants who had fled their country’s Maoist guerrilla insurgency – were crammed into unventilated hovels, living without basic sanitation. They faced outbreaks of cholera and other infectious diseases, but a government austerity program, which had slashed subsidised health care, forced many to forgo medical treatment they couldn’t afford. When food ran short, they formed ad hoc collectives to stave off starvation. A Catholic priest ministering to a parish in the slum went looking for help, and he found it in Jim Yong Kim, an idealistic Korean-American physician and anthropologist.
In his mid-30s and a recent graduate of Harvard Medical School, Kim had helped found Partners in Health, a non-profit organisation whose mission was to bring modern medicine to the world’s poor. The priest had been involved with the group in Boston, its home base, before serving in Peru, and he asked Kim to help him set up a clinic to aid his flock. No sooner had Kim arrived in Lima, however, than the priest contracted a drug-resistant form of tuberculosis and died.
Kim was devastated, and he thought he knew what to blame: the World Bank. Like many debt-ridden nations, Peru was going through “structural adjustment”, a period of lender-mandated inflation controls, privatisations and government cutbacks. President Alberto Fujimori had enacted strict policies, known collectively as “Fujishock”, that made him a darling of neoliberal economists. But Kim saw calamitous trickledown effects, including the tuberculosis epidemic that had claimed his friend and threatened to spread through the parish.
So Kim helped organise a conference in Lima that was staged like a teach-in. Hundreds of shanty town residents met development experts and vented their anger with the World Bank. “We talked about the privatisation of everything: profits and also suffering,” Kim recalls. “The argument we were trying to make is that investment in human beings should not be cast aside in the name of GDP growth.” Over the next half-decade, he would become a vociferous critic of the World Bank, even calling for its abolition. In a 2000 book, Dying for Growth, he was lead author of an essay attacking the “capriciousness” of international development policies. “The penalties for failure,” he concluded, “have been borne by the poor, the infirm and the vulnerable in poor countries that accepted the experts’ designs.”
Kim often tells this story today, with an air of playful irony, when he introduces himself – as the president of the World Bank. “I was actually out protesting and trying to shut down the World Bank,” Kim said one March afternoon, addressing a conference in Maryland’s National Harbor complex. “I’m very glad we lost that argument.”
Medical staff treat people with Ebola in Kailahun, Sierra Leone, 2014. Photograph: Carl de Souza/AFP/Getty Images
The line always gets a laugh, but Kim uses it to illustrate a broader story of evolution. As he dispenses billions of development dollars and tees off at golf outings with Barack Obama – the US president has confessed jealousy of his impressive five handicap – Kim is a long way from Peru. The institution he leads has changed too. Structural adjustment, for one, has been phased out, and Kim says the bank can be a force for good. Yet he believes it is only just awakening to its potential – and at a precarious moment.
Last year, the percentage of people living in extreme poverty dropped below 10% for the first time. That’s great news for the world, but it leaves the World Bank somewhat adrift. Many former dependents, such as India, have outgrown their reliance on financing. Others, namely China, have become lenders in their own right. “What is the relevance of the World Bank?” Kim asked me in a recent interview. “I think that is an entirely legitimate question.”
Kim believes he has the existential answers. During his four years at the bank’s monumental headquarters on H Street in Washington, he has reorganised the 15,000-strong workforce to reflect a shift from managing country portfolios to tackling regional and global crises. He has redirected large portions of the bank’s resources (it issued more than $61bn in loans and other forms of funding last year) toward goals that fall outside its traditional mandate of encouraging growth by financing infrastructure projects – stemming climate change, stopping Ebola, addressing the conditions driving the Syrian exodus.
Yet many bank employees see Kim’s ambitions as presumptuous, even reckless, and changes undertaken to revitalise a sluggish bureaucracy have shaken it. There have been protests and purges, and critics say Kim’s habit of enunciating grandiose aspirations comes with a tendency toward autocracy. The former bank foe now stands accused of being an invasive agent, inflicting his own form of shock therapy on his staff. “The wrong changes have been done badly,” says Lant Pritchett, a former World Bank economist.
Pritchett argues that, beyond issues of personality and style, Kim’s presidency has exposed a deep ideological rift between national development, which emphasises institution-building and growth, and what Pritchett terms “humane” development, or alleviating immediate suffering. Kim, however, sees no sharp distinction: he contends that humane development is national development – and if the bank persists in believing otherwise, it could be doomed to obsolescence.
Kim likes to say that as a doctor with experience of treating the poor, his humanitarian outlook is his strongest qualification for his job – an opinion that probably vexes critics who point out that he knew little about lending before arriving at the bank. “Finance and macroeconomics are complicated, but you can actually learn them,” he says. “The hardest thing to learn is mud-between-your-toes, on-the-ground development work. You can’t learn that quickly. You can’t learn that through trips where you’re treated like a head of state. You have to have kind of done that before.”
Kim talks fast and he walks fast. Following him – a lithe, balding 56-year-old surrounded by a deferential, suited entourage – you can easily imagine him in a white coat as a physician making his rounds. He has a doctor’s diagnostic mindset too; he talks about ascertaining “the problem”, or what public-health experts call the “cause of the causes”. He thinks of poverty as an ailment and is trying to devise a “science of delivery”. It’s a philosophy built on a life-long interest in the intersection of science and humanities. Born in Seoul in 1959 to parents displaced by the Korean war, Kim emigrated to the US with his family when he was a child, eventually ending up in Muscatine, Iowa. His was one of two Asian families in the small town. His mother was an expert in Confucian philosophy, his father a dentist. Kim excelled at his studies while playing quarterback in high school. He attended Brown University in Providence, Rhode Island, where he studied human biology. His father wanted him to be a doctor, but he gravitated toward anthropology. Because Harvard let him pursue a medical degree and a PhD simultaneously, he landed there. Kim struck up a friendship with Paul Farmer, a fellow student, over shared interests in health and justice. In 1987, they formed Partners in Health.
The two came of age when the World Bank’s influence was arguably at its most powerful and controversial. Conceived along with the International Monetary Fund at the 1944 Bretton Woods conference, the bank was meant to rebuild Europe. However, it found its central mission as a source of startup capital for states emerging from the demise of colonial empires. The bank could borrow money cheaply in the global markets, thanks to the creditworthiness of its shareholders (the largest being the US government), then use that money to finance the prerequisites for economic growth – things such as roads, schools, hospitals and power plants. Structural adjustment came about in response to a series of debt crises that culminated in the 1980s. The Bretton Woods institutions agreed to bail out indebted developing states if they tightened their belts and submitted to painful fiscal reforms.
The line always gets a laugh, but Kim uses it to illustrate a broader story of evolution. As he dispenses billions of development dollars and tees off at golf outings with Barack Obama – the US president has confessed jealousy of his impressive five handicap – Kim is a long way from Peru. The institution he leads has changed too. Structural adjustment, for one, has been phased out, and Kim says the bank can be a force for good. Yet he believes it is only just awakening to its potential – and at a precarious moment.
Last year, the percentage of people living in extreme poverty dropped below 10% for the first time. That’s great news for the world, but it leaves the World Bank somewhat adrift. Many former dependents, such as India, have outgrown their reliance on financing. Others, namely China, have become lenders in their own right. “What is the relevance of the World Bank?” Kim asked me in a recent interview. “I think that is an entirely legitimate question.”
Kim believes he has the existential answers. During his four years at the bank’s monumental headquarters on H Street in Washington, he has reorganised the 15,000-strong workforce to reflect a shift from managing country portfolios to tackling regional and global crises. He has redirected large portions of the bank’s resources (it issued more than $61bn in loans and other forms of funding last year) toward goals that fall outside its traditional mandate of encouraging growth by financing infrastructure projects – stemming climate change, stopping Ebola, addressing the conditions driving the Syrian exodus.
Yet many bank employees see Kim’s ambitions as presumptuous, even reckless, and changes undertaken to revitalise a sluggish bureaucracy have shaken it. There have been protests and purges, and critics say Kim’s habit of enunciating grandiose aspirations comes with a tendency toward autocracy. The former bank foe now stands accused of being an invasive agent, inflicting his own form of shock therapy on his staff. “The wrong changes have been done badly,” says Lant Pritchett, a former World Bank economist.
Pritchett argues that, beyond issues of personality and style, Kim’s presidency has exposed a deep ideological rift between national development, which emphasises institution-building and growth, and what Pritchett terms “humane” development, or alleviating immediate suffering. Kim, however, sees no sharp distinction: he contends that humane development is national development – and if the bank persists in believing otherwise, it could be doomed to obsolescence.
Kim likes to say that as a doctor with experience of treating the poor, his humanitarian outlook is his strongest qualification for his job – an opinion that probably vexes critics who point out that he knew little about lending before arriving at the bank. “Finance and macroeconomics are complicated, but you can actually learn them,” he says. “The hardest thing to learn is mud-between-your-toes, on-the-ground development work. You can’t learn that quickly. You can’t learn that through trips where you’re treated like a head of state. You have to have kind of done that before.”
Kim talks fast and he walks fast. Following him – a lithe, balding 56-year-old surrounded by a deferential, suited entourage – you can easily imagine him in a white coat as a physician making his rounds. He has a doctor’s diagnostic mindset too; he talks about ascertaining “the problem”, or what public-health experts call the “cause of the causes”. He thinks of poverty as an ailment and is trying to devise a “science of delivery”. It’s a philosophy built on a life-long interest in the intersection of science and humanities. Born in Seoul in 1959 to parents displaced by the Korean war, Kim emigrated to the US with his family when he was a child, eventually ending up in Muscatine, Iowa. His was one of two Asian families in the small town. His mother was an expert in Confucian philosophy, his father a dentist. Kim excelled at his studies while playing quarterback in high school. He attended Brown University in Providence, Rhode Island, where he studied human biology. His father wanted him to be a doctor, but he gravitated toward anthropology. Because Harvard let him pursue a medical degree and a PhD simultaneously, he landed there. Kim struck up a friendship with Paul Farmer, a fellow student, over shared interests in health and justice. In 1987, they formed Partners in Health.
The two came of age when the World Bank’s influence was arguably at its most powerful and controversial. Conceived along with the International Monetary Fund at the 1944 Bretton Woods conference, the bank was meant to rebuild Europe. However, it found its central mission as a source of startup capital for states emerging from the demise of colonial empires. The bank could borrow money cheaply in the global markets, thanks to the creditworthiness of its shareholders (the largest being the US government), then use that money to finance the prerequisites for economic growth – things such as roads, schools, hospitals and power plants. Structural adjustment came about in response to a series of debt crises that culminated in the 1980s. The Bretton Woods institutions agreed to bail out indebted developing states if they tightened their belts and submitted to painful fiscal reforms.
A wall dividing shanty towns and rich neighbourhoods in Lima, Peru, where Kim’s journey to the World Bank began. Photograph: Oxfam/EPA
To Kim and Farmer, the moral flaw in the bank’s approach was that it imposed mandates with little concern for how cutting budgets might affect people’s health. They thought that “the problem” in global health was economic inequality, and in Haiti Partners in Health pioneered a grassroots methodology to tackle it: improve the lives of communities by training locals to provide medical care (thus creating jobs) and by expanding access to food, sanitation and other basic necessities. Though hardly insurgents – they were based at Harvard, after all – the friends passionately argued that policy discussions in Geneva and Washington needed to be informed by ground truths, delivered by the people living them.
Farmer’s impressive work ethic and pious demeanour made him famous – and the subject of Tracy Kidder’s acclaimed book Mountains Beyond Mountains – but Kim was the partner with systemic ambitions. “For Paul, the question is, ‘What does it take to solve the problem of giving the best care in the world to my patients?’” Kim says. “But he doesn’t spend all his time thinking about, ‘So how do you take that to scale in 188 countries?’” (Both men, who remain close friends, have wonMacArthur Foundation “genius grants” for their work.)
Kim’s desire to shape policy landed him at the World Health Organisation (WHO) in 2003, overseeing its HIV/Aids work. The job required him to relocate to Geneva with his wife – a paediatrician he had met at Harvard – and a son who was just a toddler. (They now have two children, aged 16 and seven.) In the vigorously assertive style that would become his hallmark – going where he wants to go even if he’s not sure how to get there – Kim pledged to meet an audacious goal: treating three million people in the developing world with antiretroviral drugs by 2005, a more than sixfold increase over just two years. The strategy, in Kim’s own words, was, “Push, push, push.” The “three-by-five pledge,” as it was known, ended up being impossible to reach, and Kim publicly apologised for the failure on the BBC. But the world got there in 2007 – a direct result, Kim says, of the pledge’s impact on global-health policymaking: “You have to set a really difficult target and then have that really difficult target change the way you do your work.”
Kim left the WHO in 2006. After a stopover at Harvard, where he headed a centre for health and human rights, he was hired to be president of Dartmouth College in New Hampshire. He arrived in 2009, with little university management experience but characteristically high hopes. With the global recession at its zenith, however, Kim was forced to spend much of his time focused on saving Dartmouth’s endowment.
He hardly knew the difference between hedge funds and private equity, so a venture capitalist on the college’s board would drive up from Boston periodically to give him lessons, scribbling out basic financial concepts on a whiteboard or scratch paper. His tenure soon turned stormy as he proposed slashing $100m from the school’s budget and clashed with faculty members who complained about a lack of transparency. Joe Asch, a Dartmouth alumnus who writes for a widely read blog about the university, was highly critical of Kim. “He is a man who is very concerned about optics and not so concerned about follow-through,” Asch says now. “Everyone’s sense was that he was just there to punch his ticket.” Soon enough, a surprising opportunity arose.
The way Kim tells it, the call came out of the blue one Monday in March 2012. Timothy Geithner, another Dartmouth alumnus who was then the US treasury secretary, was on the line asking about Kim’s old nemesis. “Jim,” Geithner asked, “would you consider being president of the World Bank?”
When the government contacted him, Kim confesses, he had only the foggiest notion of how development finance worked. He had seen enough in his career, however, to know that running the bank would give him resources he scarcely could have imagined during his years of aid work. Instead of agonising over every drop of water in the budgetary bathtub, he could operate a global tap. “When I really saw what it meant to be a bank with a balance sheet, with a mission to end extreme poverty,” Kim says, “it’s like, wow.” His interest was bolstered by the bank’s adoption, partly in response to 1990s-era activists, ofstringent “safeguards”, or lending rules intended to protect human rights and the environment in client states.
To Kim and Farmer, the moral flaw in the bank’s approach was that it imposed mandates with little concern for how cutting budgets might affect people’s health. They thought that “the problem” in global health was economic inequality, and in Haiti Partners in Health pioneered a grassroots methodology to tackle it: improve the lives of communities by training locals to provide medical care (thus creating jobs) and by expanding access to food, sanitation and other basic necessities. Though hardly insurgents – they were based at Harvard, after all – the friends passionately argued that policy discussions in Geneva and Washington needed to be informed by ground truths, delivered by the people living them.
Farmer’s impressive work ethic and pious demeanour made him famous – and the subject of Tracy Kidder’s acclaimed book Mountains Beyond Mountains – but Kim was the partner with systemic ambitions. “For Paul, the question is, ‘What does it take to solve the problem of giving the best care in the world to my patients?’” Kim says. “But he doesn’t spend all his time thinking about, ‘So how do you take that to scale in 188 countries?’” (Both men, who remain close friends, have wonMacArthur Foundation “genius grants” for their work.)
Kim’s desire to shape policy landed him at the World Health Organisation (WHO) in 2003, overseeing its HIV/Aids work. The job required him to relocate to Geneva with his wife – a paediatrician he had met at Harvard – and a son who was just a toddler. (They now have two children, aged 16 and seven.) In the vigorously assertive style that would become his hallmark – going where he wants to go even if he’s not sure how to get there – Kim pledged to meet an audacious goal: treating three million people in the developing world with antiretroviral drugs by 2005, a more than sixfold increase over just two years. The strategy, in Kim’s own words, was, “Push, push, push.” The “three-by-five pledge,” as it was known, ended up being impossible to reach, and Kim publicly apologised for the failure on the BBC. But the world got there in 2007 – a direct result, Kim says, of the pledge’s impact on global-health policymaking: “You have to set a really difficult target and then have that really difficult target change the way you do your work.”
Kim left the WHO in 2006. After a stopover at Harvard, where he headed a centre for health and human rights, he was hired to be president of Dartmouth College in New Hampshire. He arrived in 2009, with little university management experience but characteristically high hopes. With the global recession at its zenith, however, Kim was forced to spend much of his time focused on saving Dartmouth’s endowment.
He hardly knew the difference between hedge funds and private equity, so a venture capitalist on the college’s board would drive up from Boston periodically to give him lessons, scribbling out basic financial concepts on a whiteboard or scratch paper. His tenure soon turned stormy as he proposed slashing $100m from the school’s budget and clashed with faculty members who complained about a lack of transparency. Joe Asch, a Dartmouth alumnus who writes for a widely read blog about the university, was highly critical of Kim. “He is a man who is very concerned about optics and not so concerned about follow-through,” Asch says now. “Everyone’s sense was that he was just there to punch his ticket.” Soon enough, a surprising opportunity arose.
The way Kim tells it, the call came out of the blue one Monday in March 2012. Timothy Geithner, another Dartmouth alumnus who was then the US treasury secretary, was on the line asking about Kim’s old nemesis. “Jim,” Geithner asked, “would you consider being president of the World Bank?”
When the government contacted him, Kim confesses, he had only the foggiest notion of how development finance worked. He had seen enough in his career, however, to know that running the bank would give him resources he scarcely could have imagined during his years of aid work. Instead of agonising over every drop of water in the budgetary bathtub, he could operate a global tap. “When I really saw what it meant to be a bank with a balance sheet, with a mission to end extreme poverty,” Kim says, “it’s like, wow.” His interest was bolstered by the bank’s adoption, partly in response to 1990s-era activists, ofstringent “safeguards”, or lending rules intended to protect human rights and the environment in client states.
Barack Obama nominates Kim for the presidency of the World Bank, Washington DC, 2012. Photograph: Charles Dharapak/AP
By custom, the World Bank had always been run by an American, nominated by the US president for a five-year term. But in 2012 there was a real international race for the post. Some emerging-market nations questioned deference to the United States, and finance experts from Nigeria and Colombia announced their candidacies. After considering political heavyweights such as Susan Rice, John Kerry and Hillary Clinton – who were all more interested in other jobs – Obama decided he needed an American he could present as an outsider to replace the outgoing president, Robert Zoellick, a colourless former Goldman Sachs banker and Republican trade negotiator. Clinton suggested Kim and “championed Jim as a candidate”, says Farmer. (Partners in Health works with the Clinton Foundation.)
Embedded within the dispute over superpower prerogatives was a larger anxiety about what role the World Bank should play in the 21st century. Extreme poverty had dropped from 37% in 1990 to just under 13% in 2012, so fewer countries needed the bank’s help. With interest rates at record lows, the states that needed aid had more options for borrowing cheap capital, often without paternalistic ethical dictates. New competitors, such as investment banks, were concerned mainly with profits, not safeguards. As a result, whereas the World Bank had once enjoyed a virtual monopoly on the development-finance market, by 2012 its lending represented only about 5% of aggregate private-capital flows to the developing world, according to Martin Ravallion, a Georgetown University economist. And while the bank possessed a wealth of data, technical expertise and analytical capabilities, it was hampered by red tape. One top executive kept a chart in her office illustrating the loan process, which looked like a tangle of spaghetti.
At Kim’s White House interview, Obama still needed some convincing that the global-health expert could take on the task of reinvigorating the bank. When asked what qualified him over candidates with backgrounds in finance, Kim cited Obama’s mother’s anthropology dissertation, about Indonesian artisans threatened by globalisation, to argue that there was no substitute for on-the-ground knowledge of economic policies’ impact. Two days later, Obama unveiled his pick, declaring that it was “time for a development professional to lead the world’s largest development agency”.
Kim campaigned for the job with the zeal of a convert. In an interview with the New York Times, he praised the fact that, unlike in the 1990s, “now the notion of pro-poor development is at the core of the World Bank”. He also embarked on an international “listening tour” to meet heads of state and finance ministers, gathering ideas to shape his priorities in office. Because votes on the bank’s board are apportioned according to shareholding, the US holds the greatest sway, and Obama’s candidate was easily elected. Kim took office in July 2012, with plans to eradicate extreme poverty. Farmer cites a motto carved at the entry to the World Bank headquarters – “Our dream is a world free of poverty” – that activists such as Kim once sniggered at. “Jim said, ‘Let’s change it from a dream to a plan, and then we don’t have to mock it.’”
Kim still had to win over another powerful constituency: his staff. Bank experts consider themselves an elite fraternity. Presidents and their mission statements may come and go, but the institutional culture remains largely impervious. “The bank staff,” says Jim Adams, a former senior manager, “has never fully accepted the governance.” When Robert McNamara expanded the bank’s mission in the late 1960s, doing things such as sending helicopters to spray the African black fly larvae that spread river blindness, many staffers were “deeply distressed to see the institution ‘running off in all directions’”, according to a history published in 1973. When James Wolfensohn arrived in the mid-1990s with plans to move away from structural adjustment and remake the bank like a consulting firm, employees aired their gripes in the press. “Shake-up or cock-up?” asked an Economist headline. Paul Wolfowitz, whose presidency was marred by leaks, was pushed out in 2007 after accusations of cronyism resulted in a damning internal investigation.
Recognising this fraught history, Kim went on a second listening tour: he met representatives of every bank department and obtained what he describes, in anthropologist-speak, as “almost a formal ethnography” of the place. What he lacked in economic knowledge, he made up for in charm. “Dr Kim is personable, Dr Kim is articulate, Dr Kim looks very moved by what he has to say,” says Paul Cadario, a former bank executive who is now a professor at the University of Toronto.
By custom, the World Bank had always been run by an American, nominated by the US president for a five-year term. But in 2012 there was a real international race for the post. Some emerging-market nations questioned deference to the United States, and finance experts from Nigeria and Colombia announced their candidacies. After considering political heavyweights such as Susan Rice, John Kerry and Hillary Clinton – who were all more interested in other jobs – Obama decided he needed an American he could present as an outsider to replace the outgoing president, Robert Zoellick, a colourless former Goldman Sachs banker and Republican trade negotiator. Clinton suggested Kim and “championed Jim as a candidate”, says Farmer. (Partners in Health works with the Clinton Foundation.)
Embedded within the dispute over superpower prerogatives was a larger anxiety about what role the World Bank should play in the 21st century. Extreme poverty had dropped from 37% in 1990 to just under 13% in 2012, so fewer countries needed the bank’s help. With interest rates at record lows, the states that needed aid had more options for borrowing cheap capital, often without paternalistic ethical dictates. New competitors, such as investment banks, were concerned mainly with profits, not safeguards. As a result, whereas the World Bank had once enjoyed a virtual monopoly on the development-finance market, by 2012 its lending represented only about 5% of aggregate private-capital flows to the developing world, according to Martin Ravallion, a Georgetown University economist. And while the bank possessed a wealth of data, technical expertise and analytical capabilities, it was hampered by red tape. One top executive kept a chart in her office illustrating the loan process, which looked like a tangle of spaghetti.
At Kim’s White House interview, Obama still needed some convincing that the global-health expert could take on the task of reinvigorating the bank. When asked what qualified him over candidates with backgrounds in finance, Kim cited Obama’s mother’s anthropology dissertation, about Indonesian artisans threatened by globalisation, to argue that there was no substitute for on-the-ground knowledge of economic policies’ impact. Two days later, Obama unveiled his pick, declaring that it was “time for a development professional to lead the world’s largest development agency”.
Kim campaigned for the job with the zeal of a convert. In an interview with the New York Times, he praised the fact that, unlike in the 1990s, “now the notion of pro-poor development is at the core of the World Bank”. He also embarked on an international “listening tour” to meet heads of state and finance ministers, gathering ideas to shape his priorities in office. Because votes on the bank’s board are apportioned according to shareholding, the US holds the greatest sway, and Obama’s candidate was easily elected. Kim took office in July 2012, with plans to eradicate extreme poverty. Farmer cites a motto carved at the entry to the World Bank headquarters – “Our dream is a world free of poverty” – that activists such as Kim once sniggered at. “Jim said, ‘Let’s change it from a dream to a plan, and then we don’t have to mock it.’”
Kim still had to win over another powerful constituency: his staff. Bank experts consider themselves an elite fraternity. Presidents and their mission statements may come and go, but the institutional culture remains largely impervious. “The bank staff,” says Jim Adams, a former senior manager, “has never fully accepted the governance.” When Robert McNamara expanded the bank’s mission in the late 1960s, doing things such as sending helicopters to spray the African black fly larvae that spread river blindness, many staffers were “deeply distressed to see the institution ‘running off in all directions’”, according to a history published in 1973. When James Wolfensohn arrived in the mid-1990s with plans to move away from structural adjustment and remake the bank like a consulting firm, employees aired their gripes in the press. “Shake-up or cock-up?” asked an Economist headline. Paul Wolfowitz, whose presidency was marred by leaks, was pushed out in 2007 after accusations of cronyism resulted in a damning internal investigation.
Recognising this fraught history, Kim went on a second listening tour: he met representatives of every bank department and obtained what he describes, in anthropologist-speak, as “almost a formal ethnography” of the place. What he lacked in economic knowledge, he made up for in charm. “Dr Kim is personable, Dr Kim is articulate, Dr Kim looks very moved by what he has to say,” says Paul Cadario, a former bank executive who is now a professor at the University of Toronto.
The funeral of a woman who died of Aids on the outskirts of Kigali, Rwanda. Photograph: Sean Smith for the Guardian
The initial goodwill, however, vanished when Kim announced his own structural adjustment: a top-to-bottom reorganisation of the bank. It wasn’t so much the idea of change that riled up the staff. Even before Kim took office, respected voices were calling for a shakeup. In 2012, a group of bank alumni published a report criticising an “archaic management structure”; low morale was causing staff turnover, and there was an overreliance on consultants, promotion on the basis of nationality, and a “Balkanisation of expertise”. Where Kim went awry, opponents say, was in imposing his will without first garnering political support. “One famous statement is that the World Bank is a big village,” says Cadario, now a Kim critic. “And if you live in a village, it is a really bad idea to have enemies.”
The bank had been designed around the idea that local needs, assessed by staff assigned to particular countries and regions, should dictate funding; cooperation across geographical lines required internal wrangling over resources. So Kim decided to dismantle existing networks. He brought in the management consulting firm McKinsey & Co, which recommended regrouping the staff into 14 “global practices”, each of which would focus on a policy area, such as trade, agriculture or water. Kim hired outsiders to lead some departments and pushed out several formerly powerful officials with little explanation. To symbolise that he was knocking down old walls, he had a palatial, wood-panelled space on the World Bank’s executive floor retrofitted as a Silicon Valley-style open-plan office, where he could work alongside his top staff.
Kim also announced that he would cut $400m in administrative expenses, and eliminate about 500 jobs – a necessary measure, he said, because low interest rates were cutting into the bank’s profits. Kim says he “made a very conscious decision to let anyone who wanted… air their grievances.” His opponents detected no such tolerance, however, and their criticisms turned ad hominem. Around Halloween in 2014, a satirical newsletter circulated among the staff, depicting Kim as Dr Frankenstein: “Taking random pieces from dead change management theories,” it read, “he and his band of external consultants cobble together an unholy creature resembling no development bank ever seen before.” Anonymous fliers attacking Kim also began to appear around bank headquarters.
Kim portrayed internal dissent as a petty reaction to perks such as travel per diems being cut. “There’s grumbling about parking and there’s grumbling about breakfast,” he told the Economist. Meanwhile, bank staffers whispered about imperial indulgences on Kim’s part, such as chartering a private jet. (Kim claims this is a longstanding practice among bank presidents, which he only uses when there are no other options.)
A French country officer named Fabrice Houdart emerged as a lead dissenter, broadcasting his frustrations with Kim in a blog on the World Bank’s intranet. In one post, he questioned whether “a frantic race to show savings… might lead to irreversible long-term damages to the institution.” (This being the World Bank, his sedition was often illustrated with charts and statistics.) The staff went into open rebellion after Houdart revealed that Bertrand Badré, the chief financial officer, whom Kim had hired and who was in charge of cutting budgets, had received a nearly $100,000 bonus on top of his $379,000 salary. Kim addressed a raucous town hall meeting in October 2014, where he told furious staffers, “I am just as tired of the change process as all of you are.”
A few months later, Houdart was demoted after being investigated for leaking a privileged document. The alleged disclosure was unrelated to Kim’s reorganisation – it had to do with Houdart’s human rights advocacy, for which he was well known at the bank – and Kim says the investigation began before Houdart’s denunciations of his presidency. Critics, however, portray it as retaliatory. “Fabrice has become a folk hero,” Cadario says, “because he was brave enough to say what many of the people within the bank are thinking.” (Houdart is currently disputing his demotion before an internal administrative tribunal.)
“It’s never fun when large parts of the organisation are criticising you personally,” Kim admits. Yet he maintains that his tough decisions were necessary. “In order to do a real change, you have to put jobs at risk,” he says. “And completely understandably, people hate that.”
In the heat of the staff revolt, Kim was devoting attention to a very different crisis: Ebola. In contrast with the bank’s historically cautious, analytical approach, Kim was pushing it to become more involved in emergency response. He committed $400m to confront the epidemic immediately, a quarter of which he pushed out in just nine days. He dispatched bank employees to afflicted west African countries and reproached the head of the WHO for the organisation’s lack of urgency. “Rather than being tied up in bureaucracy, or saying, ‘We don’t do those things,’ Jim is saying that if poor people’s lives are at risk… then it is our business,” says Tim Evans, whom Kim hired to run the bank’s new global practice for health.
Some bank veterans disagreed, vehemently. Nearly two years on, they still worry that in trying to save the day, Kim runs the risk of diverting the bank from its distinct mission. “Pandemic response is important – but it’s not the WHO, it’s the World Bank,” says Jean-Louis Sarbib, a former senior vice-president who now runs a nonprofit development consultancy. “I don’t think he understands the World Bank is not a very large NGO.” Referencing Kim’s work with Partners in Health, Sarbib adds, “The work of the World Bank is to create a system so that he doesn’t need to come and create a clinic in Haiti.”
In reply to this critique, Kim likes to cite a study co-written by a former World Bank economist, Larry Summers, that found that 24% of full-income growth in developing countries between 2000 and 2011 was attributable to improved public health. Put simply, Kim says, pandemics and other health deficits represent enormous threats to economic development, so they should be the World Bank’s business. The same goes for climate change, which the bank is fighting by funding a UN initiative to expand sustainable energy. As for violent conflicts, rather than waiting until the shooting has stopped and painstakingly preparing a post-conflict assessment – as the bank has done in the past – Kim wants to risk more capital in insecure zones.
“We… bought into this notion that development is something that happens after the humanitarian crisis is over,” Kim said at a recent event called the Fragility Forum, where he sat next to representatives of various aid groups and the president of the Central African Republic in the World Bank’s sun-soaked atrium. “We are no longer thinking that way.”
After the forum, amid a whirlwind day of meetings and speeches, Kim stopped at a hotel cafe with me to unwind for a few minutes. As a counterweight to his life’s demands, he practices Korean Zen-style meditation, but he also seems to blow off steam by brainstorming aloud. Goals and promises came pouring out of him like a gusher. Besides eliminating extreme poverty, which he has now promised will be done by 2030, Kim wants to raise incomes among the bottom 40% of the population in every country. He also wants to achieve universal access to banking services by 2020.
Long past our allotted interview time, Kim told me he had just one more idea: “Another huge issue that I want to bring to the table is childhood stunting.” At the Davos World Economic Forum this year, he explained, everyone was chattering about a “fourth industrial revolution”, which will centre on artificial intelligence, robotics and other technological leaps. But Kim thinks whole countries are starting out with a brainpower deficit because of childhood malnutrition. “These kids have fewer – literally fewer – neuronal connections than their non-stunted classmates,” he said. “For every inch that you’re below the average height, you lose 2% of your income.”
“This is fundamentally an economic issue,” he continued. “We need to invest in grey-matter infrastructure. Neuronal infrastructure is quite possibly going to be the most important infrastructure.”
To World Bank traditionalists, addressing nutrition is an example of the sort of mission creep that makes Kim so maddening. Despite its name and capital, the bank can’t be expected to solve all the world’s humanitarian problems. (“We are not the UN,” is an informal mantra among some staffers.) Poor countries may well prefer the bank to stick to gritty infrastructural necessities, even if Kim and his supporters have splashier goals. “The interests of its rich-country constituencies and its poor-country borrowers are diverging,” Pritchett says. “It’s like the bank has a foot on two boats. Sooner or later, it’s going to have to jump on one boat or the other, or fall in the water. So far, Jim Kim is just doing the splits.”
The initial goodwill, however, vanished when Kim announced his own structural adjustment: a top-to-bottom reorganisation of the bank. It wasn’t so much the idea of change that riled up the staff. Even before Kim took office, respected voices were calling for a shakeup. In 2012, a group of bank alumni published a report criticising an “archaic management structure”; low morale was causing staff turnover, and there was an overreliance on consultants, promotion on the basis of nationality, and a “Balkanisation of expertise”. Where Kim went awry, opponents say, was in imposing his will without first garnering political support. “One famous statement is that the World Bank is a big village,” says Cadario, now a Kim critic. “And if you live in a village, it is a really bad idea to have enemies.”
The bank had been designed around the idea that local needs, assessed by staff assigned to particular countries and regions, should dictate funding; cooperation across geographical lines required internal wrangling over resources. So Kim decided to dismantle existing networks. He brought in the management consulting firm McKinsey & Co, which recommended regrouping the staff into 14 “global practices”, each of which would focus on a policy area, such as trade, agriculture or water. Kim hired outsiders to lead some departments and pushed out several formerly powerful officials with little explanation. To symbolise that he was knocking down old walls, he had a palatial, wood-panelled space on the World Bank’s executive floor retrofitted as a Silicon Valley-style open-plan office, where he could work alongside his top staff.
Kim also announced that he would cut $400m in administrative expenses, and eliminate about 500 jobs – a necessary measure, he said, because low interest rates were cutting into the bank’s profits. Kim says he “made a very conscious decision to let anyone who wanted… air their grievances.” His opponents detected no such tolerance, however, and their criticisms turned ad hominem. Around Halloween in 2014, a satirical newsletter circulated among the staff, depicting Kim as Dr Frankenstein: “Taking random pieces from dead change management theories,” it read, “he and his band of external consultants cobble together an unholy creature resembling no development bank ever seen before.” Anonymous fliers attacking Kim also began to appear around bank headquarters.
Kim portrayed internal dissent as a petty reaction to perks such as travel per diems being cut. “There’s grumbling about parking and there’s grumbling about breakfast,” he told the Economist. Meanwhile, bank staffers whispered about imperial indulgences on Kim’s part, such as chartering a private jet. (Kim claims this is a longstanding practice among bank presidents, which he only uses when there are no other options.)
A French country officer named Fabrice Houdart emerged as a lead dissenter, broadcasting his frustrations with Kim in a blog on the World Bank’s intranet. In one post, he questioned whether “a frantic race to show savings… might lead to irreversible long-term damages to the institution.” (This being the World Bank, his sedition was often illustrated with charts and statistics.) The staff went into open rebellion after Houdart revealed that Bertrand Badré, the chief financial officer, whom Kim had hired and who was in charge of cutting budgets, had received a nearly $100,000 bonus on top of his $379,000 salary. Kim addressed a raucous town hall meeting in October 2014, where he told furious staffers, “I am just as tired of the change process as all of you are.”
A few months later, Houdart was demoted after being investigated for leaking a privileged document. The alleged disclosure was unrelated to Kim’s reorganisation – it had to do with Houdart’s human rights advocacy, for which he was well known at the bank – and Kim says the investigation began before Houdart’s denunciations of his presidency. Critics, however, portray it as retaliatory. “Fabrice has become a folk hero,” Cadario says, “because he was brave enough to say what many of the people within the bank are thinking.” (Houdart is currently disputing his demotion before an internal administrative tribunal.)
“It’s never fun when large parts of the organisation are criticising you personally,” Kim admits. Yet he maintains that his tough decisions were necessary. “In order to do a real change, you have to put jobs at risk,” he says. “And completely understandably, people hate that.”
In the heat of the staff revolt, Kim was devoting attention to a very different crisis: Ebola. In contrast with the bank’s historically cautious, analytical approach, Kim was pushing it to become more involved in emergency response. He committed $400m to confront the epidemic immediately, a quarter of which he pushed out in just nine days. He dispatched bank employees to afflicted west African countries and reproached the head of the WHO for the organisation’s lack of urgency. “Rather than being tied up in bureaucracy, or saying, ‘We don’t do those things,’ Jim is saying that if poor people’s lives are at risk… then it is our business,” says Tim Evans, whom Kim hired to run the bank’s new global practice for health.
Some bank veterans disagreed, vehemently. Nearly two years on, they still worry that in trying to save the day, Kim runs the risk of diverting the bank from its distinct mission. “Pandemic response is important – but it’s not the WHO, it’s the World Bank,” says Jean-Louis Sarbib, a former senior vice-president who now runs a nonprofit development consultancy. “I don’t think he understands the World Bank is not a very large NGO.” Referencing Kim’s work with Partners in Health, Sarbib adds, “The work of the World Bank is to create a system so that he doesn’t need to come and create a clinic in Haiti.”
In reply to this critique, Kim likes to cite a study co-written by a former World Bank economist, Larry Summers, that found that 24% of full-income growth in developing countries between 2000 and 2011 was attributable to improved public health. Put simply, Kim says, pandemics and other health deficits represent enormous threats to economic development, so they should be the World Bank’s business. The same goes for climate change, which the bank is fighting by funding a UN initiative to expand sustainable energy. As for violent conflicts, rather than waiting until the shooting has stopped and painstakingly preparing a post-conflict assessment – as the bank has done in the past – Kim wants to risk more capital in insecure zones.
“We… bought into this notion that development is something that happens after the humanitarian crisis is over,” Kim said at a recent event called the Fragility Forum, where he sat next to representatives of various aid groups and the president of the Central African Republic in the World Bank’s sun-soaked atrium. “We are no longer thinking that way.”
After the forum, amid a whirlwind day of meetings and speeches, Kim stopped at a hotel cafe with me to unwind for a few minutes. As a counterweight to his life’s demands, he practices Korean Zen-style meditation, but he also seems to blow off steam by brainstorming aloud. Goals and promises came pouring out of him like a gusher. Besides eliminating extreme poverty, which he has now promised will be done by 2030, Kim wants to raise incomes among the bottom 40% of the population in every country. He also wants to achieve universal access to banking services by 2020.
Long past our allotted interview time, Kim told me he had just one more idea: “Another huge issue that I want to bring to the table is childhood stunting.” At the Davos World Economic Forum this year, he explained, everyone was chattering about a “fourth industrial revolution”, which will centre on artificial intelligence, robotics and other technological leaps. But Kim thinks whole countries are starting out with a brainpower deficit because of childhood malnutrition. “These kids have fewer – literally fewer – neuronal connections than their non-stunted classmates,” he said. “For every inch that you’re below the average height, you lose 2% of your income.”
“This is fundamentally an economic issue,” he continued. “We need to invest in grey-matter infrastructure. Neuronal infrastructure is quite possibly going to be the most important infrastructure.”
To World Bank traditionalists, addressing nutrition is an example of the sort of mission creep that makes Kim so maddening. Despite its name and capital, the bank can’t be expected to solve all the world’s humanitarian problems. (“We are not the UN,” is an informal mantra among some staffers.) Poor countries may well prefer the bank to stick to gritty infrastructural necessities, even if Kim and his supporters have splashier goals. “The interests of its rich-country constituencies and its poor-country borrowers are diverging,” Pritchett says. “It’s like the bank has a foot on two boats. Sooner or later, it’s going to have to jump on one boat or the other, or fall in the water. So far, Jim Kim is just doing the splits.”
The World Bank headquarters in Washington. Photograph: Lauren Burke/AP
Kim’s defenders insist the bank hasn’t abandoned its core business. In fact, as private investment in emerging markets has contracted recently, due to instability in once-booming economies such as Brazil, countries have found more reasons to turn to the World Bank. Its primary lending unit committed $29.7bn in loans this fiscal year, nearly doubling the amount from four years earlier. “There is so much need in the world that I’m not worried we’re going to run out of projects to finance,” Kim says. He also hopes the worst of the tumult within the bank is over. A few elements of his reorganisation have been scaled back; after the new administrative structure proved unwieldy, the 14 global practices were regrouped into three divisions. Some of his more polarising hires have also left.
A five-year term, Kim says, is hardly sufficient to implement his entire agenda, and he has conveyed his desire to be reappointed in 2017. Though internal controversies have been damaging, and America’s domination of the bank remains a source of tension, the next US president (quite possibly Kim’s friend Hillary Clinton) will have a strong say in the matter. If he keeps his job, Kim wants to show that the World Bank can serve as a link between great powers and small ones, between economics and aid work – retaining its influence as old rules and boundaries are erased and new ones are scribbled into place.
Kim thinks he can succeed, so long as he keeps one foot rooted in his experiences as a doctor with mud between his toes. But he also wants to share his revelations about capital with his old comrades. “I really feel a responsibility to have this conversation with development actors who, like me 10 years ago, didn’t really understand the power of leverage,” Kim says with a guileless air.
“God,” he adds, “it is just such a powerful tool.”
Kim’s defenders insist the bank hasn’t abandoned its core business. In fact, as private investment in emerging markets has contracted recently, due to instability in once-booming economies such as Brazil, countries have found more reasons to turn to the World Bank. Its primary lending unit committed $29.7bn in loans this fiscal year, nearly doubling the amount from four years earlier. “There is so much need in the world that I’m not worried we’re going to run out of projects to finance,” Kim says. He also hopes the worst of the tumult within the bank is over. A few elements of his reorganisation have been scaled back; after the new administrative structure proved unwieldy, the 14 global practices were regrouped into three divisions. Some of his more polarising hires have also left.
A five-year term, Kim says, is hardly sufficient to implement his entire agenda, and he has conveyed his desire to be reappointed in 2017. Though internal controversies have been damaging, and America’s domination of the bank remains a source of tension, the next US president (quite possibly Kim’s friend Hillary Clinton) will have a strong say in the matter. If he keeps his job, Kim wants to show that the World Bank can serve as a link between great powers and small ones, between economics and aid work – retaining its influence as old rules and boundaries are erased and new ones are scribbled into place.
Kim thinks he can succeed, so long as he keeps one foot rooted in his experiences as a doctor with mud between his toes. But he also wants to share his revelations about capital with his old comrades. “I really feel a responsibility to have this conversation with development actors who, like me 10 years ago, didn’t really understand the power of leverage,” Kim says with a guileless air.
“God,” he adds, “it is just such a powerful tool.”
Jeremy Corbyn’s Labour opponents should accept that their failures created him
Owen Jones in The Guardian
Unless there is a dramatic and unlikely political upset, Jeremy Corbyn will again win the Labour leadership contest. It will be a victory gifted by his opponents. Last year, his triumph was dismissed as a combination of madness, petulance and zealotry. But many commentators lack any understanding or curiosity about political movements outside their comfort zone. Political analysts who scramble over one another to understand, say, the rise of Ukip have precious little interest in a similar treatment of Corbynism, abandoning scholarship for sneers. The likes of Ukip or Donald Trump or the French Front National are understood as manifestations, however unfortunate, of genuine grievances: the movements behind Bernie Sanders, Podemos and Jeremy Corbyn are dismissed as armies of the self-indulgent and the deluded.
A few days ago, I wrote a piece about the Labour leadership’s desperate need to get a handle on strategy, vision and competence, and reach beyond its comfort zone. A failure to do so could mean not just its own eventual demise, but that of Labour and the left for a generation or more. Among some, this piece provoked dismay and even fury. Yet Corbyn’s victory is all but assured, and if the left wishes to govern and transform the country as well as a political party, these are questions that have to be addressed – and a leadership contest that may be swiftly followed by a potentially disastrous snap election is exactly the right time. But that is of limited comfort to Corbyn’s opponents – some of whom are now dragging their own party’s membership through the courts. They often seem incapable of soul-searching or reflection.
Corbyn originally stood not to become leader, but to shift the terms of debate. His leadership campaign believed it was charging at a door made of reinforced steel. It turned out to be made of paper. Corbyn’s rise was facilitated by the abolition of Labour’s electoral college and the introduction of a registered supporters scheme. The biggest cheerleaders included Blairites; much of the left was opposed, regarding it – quite legitimately – as an attempt to dilute Labour’s trade union link. When the reform package was introduced, Tony Blair called it “bold and strong”, adding that he probably “should have done it when I was leader”. Two years ago, arch-Blairite columnist John Rentoul applauded the reforms, believing they helped guarantee Ed Miliband would be succeeded by a Blairite. Whoops.
Here was a semi-open primary in which candidates had an opportunity to enthuse the wider public: Corbyn’s opponents failed to do so. The French Socialists managed to attract 2.5 million people to select their presidential candidate in 2011; a similar number voted in the Italian Democratic party’s primary in 2013. In the early stages of last year’s leadership contest, members of Liz Kendall’s team were briefing that she could end up with a million votes. The hubris. The candidates preaching electability had the least traction with a wider electorate. There are many decent Labour MPs, but it is difficult to think of any with the stature of the party’s past giants: Barbara Castle, Nye Bevan, Ernie Bevin, Herbert Morrison, Margaret Bondfield, Harold Wilson, Stafford Cripps, Ellen Wilkinson. Machine politics hollowed out the party, and at great long-term cost. If, last year, there had been a Labour leadership candidate with a clear shot at winning a general election, Labour members might have compromised on their beliefs: there wasn’t, and so they didn’t.
When a political party faces a catastrophic election defeat, a protracted period of reflection and self-criticism is normally expected. Why were we rejected, and how do we win people back? But in Labour’s internal battle, there has been precious little soul-searching by the defeated. Mirroring those on the left who blame media brainwashing for the Tories’ electoral victories, they simply believe they have been invaded by hordes of far-left zombies assembled by Momentum. The membership are reduced to, at best, petulant children; at worst, sinister hate-filled mobs. Some of those now mustering outrage at Corbynistas for smearing Labour critics as Tories were the same people who applied “Trot” as a blanket term for leftwingers in the Blair era. Although Tom Watson (no Blairite) accepts there are Momentum members “deeply interested in political change”, he has raised the spectre of the shrivelled remnants of British Trotskyism manipulating younger members; but surely he accepts they have agency and are capable of thinking for themselves? Arch critics reduce Corbynism to a personality cult, which is wrong. In any case, when Blair was leader, I recall his staunchest devotees behaving like boy-band groupies. I remember Blair’s final speech to party conference – delegates produced supposedly homemade placards declaring“TB 4 eva” and “We love you Tony”.
Corbynism is assailed for having an authoritarian grip on the party, mostly because it wins victories through internal elections and court judgments: ironic, given that Blairism used to be a byword for “control freakery”. Corbyn’s harshest critics claimed superior political nous, judgment and strategy, then launched a disastrously incompetent coup in the midst of a post-Brexit national crisis, deflecting attention from the Tories, sending Labour’s polling position hurtling from poor to calamitous, and provoking almost all-out war between Labour’s membership and the parliamentary party: all for the sake of possibly gifting their enemy an even greater personal mandate. They denounce Corbyn’s foreign associations, but have little to say about former leader Blair literally having been in the pay of Kazakhstan’s dictator Nursultan Nazarbayev, whose regime stands accused of torture and the killing of opponents. Corbyn’s bitterest enemies preach the need to win over middle-class voters, then sneer at Corbynistas for being too middle class (even though, as a point of fact, polling last year found that Corbyn’s voters were the least middle class). They dismiss Corbynistas as entryists lacking loyalty to the Labour party, then leak plans to the Telegraph – the Tories’ in-house paper – to split the party.
It is the absence of any compelling vision that, above all else, created the vacuum Corbyn filled. Despite New Labour’s many limitations and failings, in its heyday it offered something: a minimum wage, a windfall tax on privatised utilities, LGBT rights, tax credits, devolution, public investment. What do Corbyn’s staunchest opponents within Labour actually stand for? Vision was abandoned in favour of finger-wagging about electability with no evidence to back it up. Owen Smith offers no shortage of policies: but it is last summer’s political insurgency within Labour’s ranks one must thank for putting them on the agenda. Some MPs now back him not because they believe in these policies – they certainly do not, and follow Blair’s line that he would prefer a party on a clearly leftwing programme to lose – but because they believe he is a stop-gap.
Anything other than gratitude for New Labour’s record is regarded as unforgivable self-indulgence. The Iraq war – which took the lives of countless civilians and soldiers, plunged the region into chaos and helped spawn Islamic State – is regarded as a freakish, irrational, leftwing obsession. The left defended New Labour against the monstrously untruthful charge that overspending caused the crash, but the failure to properly regulate the banks (yes, the Tories wanted even less regulation) certainly made it far worse, with dire consequences. On these, two of the biggest judgment calls of our time, the left was right and still seethes with resentment that it wasn’t listened to.
The problems go much deeper, of course. Social democracy is in crisis across Europe: there are many factors responsible, from the changing nature of the modern workforce to the current model of globalisation, to the financial crash, to its support for cuts and privatisation. Still, that is no excuse for a failure to reflect. Corbyn’s opponents have long lacked a compelling vision, a significant support base and a strategy to win. When Labour fails at the ballot box, its cheerleaders are often accused of blaming their opponents rather than examining their own failures.
The same accusation can be levelled now at Corbyn’s opponents. They are, by turns, bewildered, infuriated, aghast, miserable about the rise of Corbynism. But they should take ownership of it, because it is their creation. Unless they reflect on their own failures – rather than spit fury at the success of others – they have no future. Deep down, they know it themselves.
Unless there is a dramatic and unlikely political upset, Jeremy Corbyn will again win the Labour leadership contest. It will be a victory gifted by his opponents. Last year, his triumph was dismissed as a combination of madness, petulance and zealotry. But many commentators lack any understanding or curiosity about political movements outside their comfort zone. Political analysts who scramble over one another to understand, say, the rise of Ukip have precious little interest in a similar treatment of Corbynism, abandoning scholarship for sneers. The likes of Ukip or Donald Trump or the French Front National are understood as manifestations, however unfortunate, of genuine grievances: the movements behind Bernie Sanders, Podemos and Jeremy Corbyn are dismissed as armies of the self-indulgent and the deluded.
A few days ago, I wrote a piece about the Labour leadership’s desperate need to get a handle on strategy, vision and competence, and reach beyond its comfort zone. A failure to do so could mean not just its own eventual demise, but that of Labour and the left for a generation or more. Among some, this piece provoked dismay and even fury. Yet Corbyn’s victory is all but assured, and if the left wishes to govern and transform the country as well as a political party, these are questions that have to be addressed – and a leadership contest that may be swiftly followed by a potentially disastrous snap election is exactly the right time. But that is of limited comfort to Corbyn’s opponents – some of whom are now dragging their own party’s membership through the courts. They often seem incapable of soul-searching or reflection.
Corbyn originally stood not to become leader, but to shift the terms of debate. His leadership campaign believed it was charging at a door made of reinforced steel. It turned out to be made of paper. Corbyn’s rise was facilitated by the abolition of Labour’s electoral college and the introduction of a registered supporters scheme. The biggest cheerleaders included Blairites; much of the left was opposed, regarding it – quite legitimately – as an attempt to dilute Labour’s trade union link. When the reform package was introduced, Tony Blair called it “bold and strong”, adding that he probably “should have done it when I was leader”. Two years ago, arch-Blairite columnist John Rentoul applauded the reforms, believing they helped guarantee Ed Miliband would be succeeded by a Blairite. Whoops.
Here was a semi-open primary in which candidates had an opportunity to enthuse the wider public: Corbyn’s opponents failed to do so. The French Socialists managed to attract 2.5 million people to select their presidential candidate in 2011; a similar number voted in the Italian Democratic party’s primary in 2013. In the early stages of last year’s leadership contest, members of Liz Kendall’s team were briefing that she could end up with a million votes. The hubris. The candidates preaching electability had the least traction with a wider electorate. There are many decent Labour MPs, but it is difficult to think of any with the stature of the party’s past giants: Barbara Castle, Nye Bevan, Ernie Bevin, Herbert Morrison, Margaret Bondfield, Harold Wilson, Stafford Cripps, Ellen Wilkinson. Machine politics hollowed out the party, and at great long-term cost. If, last year, there had been a Labour leadership candidate with a clear shot at winning a general election, Labour members might have compromised on their beliefs: there wasn’t, and so they didn’t.
When a political party faces a catastrophic election defeat, a protracted period of reflection and self-criticism is normally expected. Why were we rejected, and how do we win people back? But in Labour’s internal battle, there has been precious little soul-searching by the defeated. Mirroring those on the left who blame media brainwashing for the Tories’ electoral victories, they simply believe they have been invaded by hordes of far-left zombies assembled by Momentum. The membership are reduced to, at best, petulant children; at worst, sinister hate-filled mobs. Some of those now mustering outrage at Corbynistas for smearing Labour critics as Tories were the same people who applied “Trot” as a blanket term for leftwingers in the Blair era. Although Tom Watson (no Blairite) accepts there are Momentum members “deeply interested in political change”, he has raised the spectre of the shrivelled remnants of British Trotskyism manipulating younger members; but surely he accepts they have agency and are capable of thinking for themselves? Arch critics reduce Corbynism to a personality cult, which is wrong. In any case, when Blair was leader, I recall his staunchest devotees behaving like boy-band groupies. I remember Blair’s final speech to party conference – delegates produced supposedly homemade placards declaring“TB 4 eva” and “We love you Tony”.
Corbynism is assailed for having an authoritarian grip on the party, mostly because it wins victories through internal elections and court judgments: ironic, given that Blairism used to be a byword for “control freakery”. Corbyn’s harshest critics claimed superior political nous, judgment and strategy, then launched a disastrously incompetent coup in the midst of a post-Brexit national crisis, deflecting attention from the Tories, sending Labour’s polling position hurtling from poor to calamitous, and provoking almost all-out war between Labour’s membership and the parliamentary party: all for the sake of possibly gifting their enemy an even greater personal mandate. They denounce Corbyn’s foreign associations, but have little to say about former leader Blair literally having been in the pay of Kazakhstan’s dictator Nursultan Nazarbayev, whose regime stands accused of torture and the killing of opponents. Corbyn’s bitterest enemies preach the need to win over middle-class voters, then sneer at Corbynistas for being too middle class (even though, as a point of fact, polling last year found that Corbyn’s voters were the least middle class). They dismiss Corbynistas as entryists lacking loyalty to the Labour party, then leak plans to the Telegraph – the Tories’ in-house paper – to split the party.
It is the absence of any compelling vision that, above all else, created the vacuum Corbyn filled. Despite New Labour’s many limitations and failings, in its heyday it offered something: a minimum wage, a windfall tax on privatised utilities, LGBT rights, tax credits, devolution, public investment. What do Corbyn’s staunchest opponents within Labour actually stand for? Vision was abandoned in favour of finger-wagging about electability with no evidence to back it up. Owen Smith offers no shortage of policies: but it is last summer’s political insurgency within Labour’s ranks one must thank for putting them on the agenda. Some MPs now back him not because they believe in these policies – they certainly do not, and follow Blair’s line that he would prefer a party on a clearly leftwing programme to lose – but because they believe he is a stop-gap.
Anything other than gratitude for New Labour’s record is regarded as unforgivable self-indulgence. The Iraq war – which took the lives of countless civilians and soldiers, plunged the region into chaos and helped spawn Islamic State – is regarded as a freakish, irrational, leftwing obsession. The left defended New Labour against the monstrously untruthful charge that overspending caused the crash, but the failure to properly regulate the banks (yes, the Tories wanted even less regulation) certainly made it far worse, with dire consequences. On these, two of the biggest judgment calls of our time, the left was right and still seethes with resentment that it wasn’t listened to.
The problems go much deeper, of course. Social democracy is in crisis across Europe: there are many factors responsible, from the changing nature of the modern workforce to the current model of globalisation, to the financial crash, to its support for cuts and privatisation. Still, that is no excuse for a failure to reflect. Corbyn’s opponents have long lacked a compelling vision, a significant support base and a strategy to win. When Labour fails at the ballot box, its cheerleaders are often accused of blaming their opponents rather than examining their own failures.
The same accusation can be levelled now at Corbyn’s opponents. They are, by turns, bewildered, infuriated, aghast, miserable about the rise of Corbynism. But they should take ownership of it, because it is their creation. Unless they reflect on their own failures – rather than spit fury at the success of others – they have no future. Deep down, they know it themselves.
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