Treasure Islands - Nicholas Shaxson [131]
The accounts of Bear Stearns Ireland Ltd. state that it was regulated by the Irish Financial Services Regulatory Authority, and EU directives state that the host country—Ireland, in this case—is responsible for regulation. Yet in an interview, the Irish regulator said he considered his remit to extend to “Irish banks”: It was effectively regulated nowhere. The Irish regulator did not feature in any media analysis of Bear Stearns’s insolvency; Stewart cited nineteen funds in difficulties in the crisis and added that “almost always, the IFSC link is not discussed.”
Several German banks that got into trouble also had funds quoted in Dublin. These included IKB, which got €7.8 billion in German state aid; and Sachsen, which got €17.8 billion of emergency funding and €2.8 billion in state aid. “And yet none of the accounts or prospectus for any of the years examined mentioned regulation or the Irish regulator,” Stewart reported. “Within Ireland the Financial Regulator has been quoted as saying that they have no responsibility for entities whose main business is raising and investing in funds based on subprime lending.” The Financial Times analysis of the episode laid the blame almost entirely on the structure of the German banking system.
In Ireland, Stewart noted, if the relevant documents are provided to the regulator by 3 P.M., the fund will be authorized the next day. Yet a prospectus for a quoted instrument is a complex legal and financial document; a debt instrument issued by Sachsen Bank ran to 245 pages. The regulator could not have assessed it in the two hours between 3 P.M. and the normal close of business. In Luxembourg, Stewart noted, a new law stated that a fund can enjoy preauthorization approval if the fund manager “notifies” the regulator within a month of launch. It is the captured state, over again.
In April 2010 the U.S. Securities and Exchange Commission (SEC) opened a fraud probe into Goldman Sachs, alleging that it misled investors by misrepresenting the role of a CDO in a deal known as Abacus 2007-AC1. In July 2010 Goldman agreed to pay $550 million to settle the charge without admitting or denying the SEC’s allegation. The deal’s structure is notable43:
Issuer: ABACUS 2007-AC1, Ltd., Incorporated with limited liability in the Cayman Islands.
Co-Issuer: ABACUS 2007-AC1, Inc., a corporation organized under the laws of the state of Delaware.
McClatchy’s, the only mainstream media organization to investigate the deal’s offshore nature, found 148 such deals by Goldman Sachs in the Cayman Islands over a seven-year period.44 In fact, every big Wall Street player used the Caymans for this business. These deals “became key links in a chain of exotic insurance-like bets called credit-default swaps that worsened the global economic collapse by enabling major financial institutions to take bigger and bigger risks without counting them on their balance sheets . . . sheltered by the Caymans’ opaque regulatory apparatus.”
It was not so much the Caymans’ opacity that attracted these large players—though that helped—as its “flexibility.” When tax haven supporters say they promote “efficiency” in global markets, this is the kind of thing they are talking about. At the heart of this efficiency is these jurisdictions’ flexibility, which, as we have seen, is really about their political capture by financial capital. Whatever the banks want, they get. And from this flows power.
Rudolf Elmer, a senior accountant in a Swiss bank’s Caymans office until 2003, takes the story further.45
Supervision in the Caymans was especially lax, he said. “Even if you have the right regulatory framework,” he said, “you need the brainpower to audit the banks and companies. There is a general lack of this in the offshore world. You get a lot of high-risk