May 17 2011

How Barclays Capital grew so big

Posted by: Nick Shaxson in: Thoughts

This isn’t a comprehensive analysis of how Barclays Capital grew so big – there are lots and lots of reasons for its growth.  But offshore, as well as tax avoidance, are huge parts of the story. I just came across (again) this 2009 Guardian story which, despite its moderate age, remains well worth revisiting. It contains this quote from a Barclays whistleblower:

The tax avoidance was so big it became the engine of growth for the whole of the investment banking arm.

It is the “casino” investment banking arm Barclays Capital that has substantially driven the growth of the Too-Big-To-Fail bank as a whole. And Too-Big-To-Fail is costly: Andrew Haldane recently estimated that for that year (2009)

The implicit subsidy to UK banks in 2009 was around 100 billion pounds sterling. Which is roughly what we spend on our National Health Service.

(Here is an example of the kind of thing Barclays Capital was up to, from this perspective.) And this kind of thing is or was just part of a much bigger picture. UK Tax chief Dave Hartnett explained in The Telegraph the role that banks played:

The banks have three roles. They provide schemes for tax avoidance for others; they use avoidance themselves and they fund schemes.

The Guardian article, and this story which complements it, are also well, well worth reading (again, even if you have read it already), for some striking and entertaining, if slightly sickening insights into the extraordinary swaggering culture of the place. (Contrast this to Barclays Capital’s own view of its culture.)

Barclays gagged the Guardian on some of its reporting, and although the leaked-but-banned documents aren’t available in the UK, they are available from foreign sites, such as this one.

Next, there is this story, which quotes a whistleblower as saying:

Hand-picked from the major accountancy firms…(they) craft structures spanning the globe of such complexity that one wonders whether they ever have the time or the interest to do anything else in their life other than draw countless boxes on paper.
. . .
It is a commonly held view that no agency in the US or the UK (and least of all the European agencies) has the resources or the commitment to challenge SCM.

I noted in Treasure Islands (p274 of the UK edition) that Barclays had 315 tax haven subsidiaries – that is based on a more full-on 2009 report here and this fact was recently highlighted by Chuka Umunna MP in the UK here.

All this underlines the point made in Treasure Islands that offshore – and remember that this not just about tax, but about financial regulation, and other factors – is absolutely central to the reasons why our banks have grown too big to fail. And of course they are also too offshore to regulate properly.

And it underlines this other general point, which we ought never to forget. If we don’t understand offshore, we’ll never get a proper grasp of where it all went wrong.

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