If you are new to this blog, you are invited to read first “The Largest Heist in History” which was accepted as evidence and published by the British Parliament, House of Commons, Treasury Committee.

"It is typically characterised by strong, compelling, logic. I loosely use the term 'pyramid selling' to describe the activities of the City but you explain in crystal clear terms why this is so." commented Dr Vincent Cable MP to the author.

This blog demonstrates that:

- the financial system was turned into a pyramid scheme in a technical, legal sense (not just proverbial);

- the current crisis was easily predictable (without any benefit of hindsight) by any competent financier, i.e. with rudimentary knowledge of mathematics, hence avoidable.

It is up to readers to draw their own conclusions. Whether this crisis is a result of a conspiracy to defraud taxpayers, or a massive negligence, or it is just a misfortune, or maybe a Swedish count, Axel Oxenstierna, was right when he said to his son in the 17th century: "Do you not know, my son, with how little wisdom the world is governed?".

Friday, 23 April 2010

Election 2010 - short of ideas or lack of guts

All three major parties, Conservative, (New) Labour and Liberal-Democrats, talk the same about the impact of the financial crisis. "We are all in it together" say their leaders. The discussion is on the issues how we are made to pay for that: a combination of public expenditure cuts and raise in taxes. In the last few days, the media brought a story of Goldman Sachs facing fraud charges in the US and the Financial Services Authority investigating the same in the UK. This accompanies the stories of banks' (again) bumper profits and huge bonuses paid to individual bankers.

In contrast, yesterday during the three parties leaders debate an elderly lady, who worked hard all her life, asked a question whether it was fair for her, at the age of 84 years, to live on £59 a week pension.

"We are all in it together.": retired folk on £59 a week pensions and individuals from financial institutions that, allegedly, committed serious fraud and who are responsible for the current crisis and, thanks to the mechanism that caused the current crisis, collect hundreds of thousands or even millions of pounds in bonuses. And if it were not enough, in her article in yesterday's FT, Gillian Tett clearly suggested that individuals in these institutions, or at least in one of them, operate like mafia under a code of silence.

Thus far the only action that politicians proposed to curb excessive, if not dishonest, bonuses was to tax banks and bankers on their future income, forcing banks to pay more in shares than in cash. Any effective action was frustrated by those who argued, rather irrationally, that such actions would lead to bankers leave the country. Hence not only would very little be collected but the industry would be damaged as it would relocate abroad, away from the City. This is not only nonsensical. This is also looking through the wrong end of the telescope.

In 1997 when New Labour came to power they imposed a retrospective "windfall tax" on "the excess profits of the privatised utilities".

Leaving aside arguments about legality of the bankers profits, there is a uniform agreement amongst three parties, Conservative, (New) Labour and Liberal-Democrats, that bankers pay has been excessive for some years. Therefore all three parties should have proposed a similar windfall, retrospective tax on the individuals working in the City (including any source of future income like pension pots). The tax should go at least as far back as 1997, when the change to financial regulations was introduced and, to avoid any accusation of unfairness, it should tax net income above a reasonable threshold.

For example, as a reasonable guide (i.e. a template for the politicians), for any tax year since 1997/1998, an individual must pay a 90% tax on any net income received above £200,000. Not only would this recoup billions of pounds for the Exchequer, but it would also go some way in resolving such disgraceful cases like Sir Fred Goodwin's pension as his pot would have been reduced accordingly.

No one can question that £200,000 a year net income is generous especially if it comes from the industry that has been proved to be such a financial disaster and massive liability to the taxpayers. If the politicians are really concerned about the bankers leaving the UK as a result of such measure, they can give an incentive for the bankers to stay. For example, they can allow a 1% tax refund for every year that an individual stays in UK and pays taxes up to maximum 10%. I.e. if an individual stayed and paid taxes for the next 10 years he would have paid 80% tax on all his net income above £200,000 for every year between tax year 1997/1998 and 2009/2010.

As this would be basic tax legislation, like windfall tax in 1997 on "the excess profits of the privatised utilities", all other options against the financial institutions and individuals working for them would still remain open. In 1997 some opponents of the windfall tax argued then that it would damage utilities industry. It did not. By the same token, such tax will not damage banking. This would not be a tax on banks, that might be struggling now as institutions. This would be a tax on individual bankers who collected massive payments whilst they were driving the industry into a disaster. This measure would not be about justice but recouping billions of pounds that the Exchequer needs so badly.

So are our leaders short of ideas or they do not have guts?

Thursday, 22 April 2010

Communism (for the rich) is alive (and well)

In yesterday's Financial Times Martin Wolf published an article "The challenge of halting the financial doomsday machine". It appears that the mainstream analysts are slowly reaching the correct diagnosis albeit in a descriptive manner and in a roundabout way.

What Martin Wolf describes as the financial system has all classic hallmarks of a pyramid scheme (for example, of an Albanian type). However, being clearly out of his depth, he simply still does not realise that banks continue to lend with loan to deposit ratio (LTD) greater than 100% which perpetuates this doomsday machine. (Whilst writing about "leverage" could be interpreted in that way, it is far too imprecise as lending with LTD less than 100% is also leveraging).

Surprisingly (or maybe not) Martin Wolf appears to be an adversary of a free market competitive economy. He clearly does not like an idea of not bailing out failing banks. Alongside a pyramid scheme operated by the banks, they are classic anti-competitive oligopolies. For centuries, until the current crisis, banks had been allowed to fail and indeed sometimes they had. In that respect there is no reason to consider banks any different than other companies (like oil and gas). Indeed the chief issue is that "banks are too big to fail". If the banks are broken up into much smaller businesses (in a similar way as Standard Oil was broken up nearly 100 years ago) with a clear and transparent ownership (that provides reserve capital, in cash of course) and accountability, then banks can be let go bust. And if this happens individual owners will lose their investment, so they will ensure the safety ofthe system. And even if they fail, as the number of the banks will be very large, a collapse of one or two (or three) banks will be easily absorbed by the system. The kind of communist thinking ("communism for the rich") that Martin Wolf presents will ensure that the problems will not go away any time soon. Lenin is dead, long live... Martin Wolf.

Saturday, 17 April 2010

Just a start?...

Surely the recent news that US' Securities and Exchange Commission accused Goldman Sachs of fraud did not come to this blog readers as a surprise. The author of this blog argued for a long time that the financial industry is the hotbed of pathological behaviour: both in professional substance and in style.

At a time when the western world has been in deep in recession, banks were making "profits". Where could this "profit" come possibly from? Banks themselves are not creating directly any economic wealth. They are a service industry: if their clients, businesses and individuals, are not making money, how possibly banking industry keeps on making money. The only rational answer is that the financial system is in a pathological state: it is designed and set up to fleece the mainstream economy. The actual service provided is nothing more than a cover-up of thieving practices.

There still exists a myth of intellectual sophistication and professional complexity in finance. But, in fact, the industry strategies that amount to, by example, insuring a house before deliberately burning it down are not particularly sophisticated or complex. Rather primitive, dishonest and criminal. Incidentally whilst such strategies in the world of insurance are almost impossible (a role of insurance excess is to prevent that, i.e. that an insurance owner does not have a commercial interest in causing a damage), in the world of financial engineering it is possible to insure a prospective "loss" many times over (i.e. a perverse arrangement whereby a policy holder may have an interest in causing a damage in order to claim insurance exceeding the actual loss).

The SEC's move is good news and hopefully the start of the process of holding financial industry to account. There is no doubt that Goldman Sachs case is not even a tiny bit of the tip of the iceberg, measured in quadrillions of dollars, of what is happening in the world of high finance. It is promising that historically the US' authorities have a pretty good record on trying to root out the pathology from the economic free market. Hopefully Goldman Sachs case is just a good start that will lead to unravelling real causes and mechanics of the current financial crisis, the largest heist in history. As Brad Hintz of the US brokerage Bernstein said: "There is rising public appetite for punishment of the guilty parties that caused the credit crisis."