Occupy London Tours: Canary Wharf

1.Bankers’ plaza: Introduction 2.Lehman Brothers: Derivatives & the Financial Crisis 3.Moody’s: AIG, CDSs & Conflicts of Interest 4.Citigroup: Debt, Money & Inequality 5.Barclays: LIBOR, Blame 6.KPMG: Transfer pricing, Accounting 7.HSBC: ‘Too big to fail’ & regulation 8. FCA: Regulatory failure

Key: • Occupy tours rule = non-speaking guide

While waiting: • Hand out fake money to all. • Hand out ‘IOUs’ to three members of the crowd.

Props: 1.Money 2.Coloured plasticine (green, yellow, red risk); 3x coloured CDO certificates (green, yellow, red); 3x mortgage certificates (green, yellow, red); 3x IOUs (green, yellow, red)

3.6x CDS certificates, Gold star stickers 4.Magic wand; bank balance sheet;UK money supply graph; Where money goes pie chart; bank card

5.Rich Ricci pictures 6.Coffee beans; Starbucks coffee cup; Biro, Loo-roll, tax evasion circles, Barrick Gold subsidiary diagram, DWP vs. HMRC staff graphic

7./8. HSBC & FCA statements

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1. Bankers’ Plaza: introduction B)

• Normally tours show London’s churches and palaces, or dungeons and scenes of crime from previous centuries...

• ...but today we will show you a far murkier side of London’s more recent past...

• ...because as the novelist CS Lewis (of Narnia fame) once wrote: “The greatest evil is not now done in those sordid "dens of crime" that Dickens loved to paint... It is conceived and ordered... in clean, carpeted, warmed and well-lighted offices, by quiet men with white collars and cut fingernails and smooth-shaven cheeks who do not need to raise their voices.”

• So, putting it simply – forget about Jack the Ripper this evening, as we focus on Jack the Rip-Off!

A) • This tour was originally started by a teacher named Liam, who

taught less than a kilometre from here. Both his school, and the Isle of Dogs where we now stand, are in the London borough of Tower Hamlets.

• It is worth bearing in mind throughout the tour this evening that this borough has the second highest rate of severe child poverty in the country and the third highest level of unemployment in London.

• What's more, it is really worth understanding how central this space is to the concentrated wealth created by the UK financial services industry.

• The majority of UK bankers work here – 44,500 – that’s a thousand more than you’ll find in the city

• There are 3200 bankers across the whole of the EU that are paid more than 1 million Euros.

• 3/4 of them are here! So we really are in the belly of the beast... B)

• And, in fact this whole estate – including the streets and pavements – is owned by Canary Wharf Group, which in turn is owned by a consortium including the China Investment Corporation and the Qatar Investment Authority.

• So, in some ways, you're hardly on British soil at all... • During the Occupy London protests in November 2011 Canary

Wharf Group were successfully granted a high court injunction barring “any persons unknown remaining on the Canary Wharf estate in connection to protest action”. That court order lasts indefinitely.

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A) • Still: the last thing we're going to do is take any chances. So for that

reason we've employed our own private bodyguards for this evening's tour. They'll be following us all the way round to make sure we're not disturbed by anyone with any strange ideas...

• Housekeeping: • Fake money • Photo permissions • Live tweeting @occupytours • 'I can't hear!' hand signal – fist of struggle! •If you don't understand something – please say! Either

throw up a hand (not a fist!) or chat to us in-between stops • Likewise, if you're an expert – please help us out and share

your knowledge • The tour will last 2hrs, but if you need (or want!) to leave at

any time, please do. • OK everyone – off we go!

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2. Lehman Brothers: Derivatives & the Financial Crisis

PROPS: A) prepare 3x coloured CDO certificates (green, yellow, red); 3x mortgage certificates (green, yellow, red).

B) • Beware! This building is cursed... • It was originally built for US giant Enron, which collapsed in a

massive corruption scandal before construction was finished. • No problem – Canary Wharf found another buyer – can anyone

guess who? (Clue: the company that surpassed Enron as the most famous corporate bankruptcy of all time).

• Taken over by Lehman Brothers as their European HQ. • It was opened in 2004 by Gordon Brown – and the plaque to

commemorate opening was later sold at auction for £28,000 – that's more than the average salary in the UK: £25,900.

• Who here thinks a Gordon Brown plaque is worth more than a year's work then?

• But, on September 15th 2008 - this building was on the front page of newspapers all over the world – that was the day that Lehman Brothers collapsed and the financial crisis entered its darkest hour.

• What went wrong? To understand that we need to understand the story of derivatives.

• It might sound obscure but this 'financial product' sits at the heart of the crash still shaping our lives today.

• A derivative is basically a bet, whether to speculate on something (to take on risk) or to hedge against something (to protect against risk).

• Example: Speculation – I place a bet on a cricket match in a fruitless attempt to make it interesting. I'm pretty confident the team I've bet on is going to win, so I put on £100. I take on risk, which may or may not pay off for me, depending on the result of the match.

• Example: Hedging – But obviously I don't want to lose that £100 if things go wrong. So now I also bet, say £20, against the team I've just backed to win. This way if I don't win my bigger bet, I still make back some of my £100 because I'll win my smaller, £20 bet. I have hedged my bets.

• Any derivative will ultimately be one of these two kinds of bets. • Now, the particular type of derivative that lies at the heart of the

financial crisis...is the Collateralised Debt Obligation, or 'CDO'. � of �4 28

[Employ CDO keeper. Explain fines for incorrect answers!] • We thought the best way to explain CDOs wasn't to waffle on about

them. Instead we're going to sell them to you!

A) • Now – all of you were handed free money when you arrived this

evening and I'd like to invite some of you take out a mortgage this evening.

• So I need THREE people who want to buy houses. I also need THREE people to be prepared to invest their money in an exciting financial product that we – the Bank of Occupy – are going to offer you tonight.

• Now, banks sell, amongst other things, mortgages to people. [We provide mortgages to our wannabe home-owners. Hand over lots more cash to them. We show that the bank now owns IOUs from each home-owner]

• Whenever you lend someone money, you take on risk. [We then reveal the colour-coded 'risk' plasticine associated with each mortgage provided]

• The more risk you take on, the more (in theory) 'capital' – i.e., money - you need to reserve in case things go wrong. If you can reduce the risk associated with lending, you can do more of it, and make more money.

• So, a clever method for removing risk created through mortgage lending was invented. Banks pooled mortgages, chopped them up, and squished them back together, and in doing so created our CDOs, which could then be sold to investors, who could choose different risk levels.

[Pull each coloured plasticine ball into three, recombine into three new balls: (green, green, yellow), (yellow, red, green), (red, red, yellow)]

• But what would an investor get when they bought a CDO? • Well: they would be entitled to a number of payments - funded

ultimately from the mortgage repayments - over the lifetime of the CDO. i.e. they would receive a rate of return on their investment.

• If you invested in a lower-risk level, you would receive a lower rate of return. If you invested in a higher risk levels, you would receive a higher rate of return.

[Offer and sell the different risk level CDOs to the three investors] [Run process: money from mortgage holders -> bank -> CDO holders (more to higher risk buyer etc.)]

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• However – the higher-risk investors would be the first not to receive their monthly payment if there wasn't enough cash coming in from mortgage repayments.

[Run process again, showing one mortgage repayment default resulting in higher-risk investor forgoing payment]

• By selling on the debt to investors in this way, the bank has successfully removed the risk associated with it from their books, and shifted it elsewhere within the system.

• Apart from reducing their risk – why else might a bank want to transform debt into CDOs? ◦ To generate cash - which could be reinvested. ◦ This in turn made their balance sheets appear far less risky - cash

looks better than debt! • Questions:

•Who is hedging? (Bank) •Who is speculating? (Investors) •From what do these derivatives (CDOs) derive their value?

(Mortgages)

B) • And therein lay the problem. • As demand continued to rise, there was an incentive to create even

more CDOs – but to do that you needed more of the raw ingredient…which was? (Mortgages!)

• So mortgage lenders started aggressively marketing mortgages to people who simply couldn't afford them – they didn’t need to worry about the risk people defaulting, because they could pass that risk on to the CDO investors.

• The CDOs were attractive to investors because because they were composed of tiny slices of countless mortgage obligations.

• Sure, some individual mortgages within the bundle could default, but it seemed implausible that the whole CDO could go bad.

• Trouble is that by 2007 these derivatives had become too complicated for anyone to assess their risk, and therefore know their value.

• Andrew Haldane, an economist at the Bank of England, estimated that an investor in a complex CDO would need to read in excess of one billion pages to fully understand the ingredients.

• So, if you really wanted to know what you were buying, you'd have had to have started reading the brochure in roughly...110AD – and that's assuming you never slept...and were seriously forward thinking!

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• As more and more people began to fail to repay their unaffordable mortgages trust and belief in the value of CDOs began to crumble – and instead they came to be seen as “toxic debt”.

• Financial institutions holding large numbers of them hit the wall. • Lehman Brothers was one of these, predominantly due to risky

business done right here in London that would have been illegal under US regulations.

• At 1.45am on September 15th 2008 the 4th largest investment bank in the US filed for bankruptcy, after 158 years.

• It remains the biggest bankruptcy in US history, and marked the beginning of a global financial crisis that took us, some say, to within a few hours of the end of western capitalism.

A) • We were so close!

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3. Moody’s: AIG, Credit Default Swaps & Risk

PROPS: B) 6x CDS certificates, Gold star stickers

A) • The architect of 1 Canada Square, until recently London's tallest

building, described it as “a portal to the sky ... a door to the infinite”...

• ...yet Prince Charles once said: "I personally would go mad if I had to work in a place like that". Just for once I think I might agree with him!

• To pick up where we left the story: the very next day after Lehman Bros collapsed – 16th September 2008 – the giant insurance company AIG had to be rescued by the American taxpayer - and here's why.

• Remember what we said about hedging? Well, think of it as a form of insurance, as a way of managing risk.

• Even though everyone was excitedly buying CDOs left, right and centre, that didn't mean they thought they were completely risk free.

• So, they took out insurance on CDOs they had bought. [Quiz CDO keeper!]

• Now – where are our CDO investors? Would you consider yourselves prudent, sensible people? (Yes!)

• We thought so...which is why we know you'll want to take advantage of our insurance products for your shiny new investments: 'Credit Default Swaps (CDSs)'.

[Employ CDS keeper] • A CDS means that in the event of your investment going bad, I'll

have to pay some or all of the costs you incur. But of course – that'll cost you!

[PROPS: CDS certificates] [CDO investors buy CDSs from A who is acting as AIG – higher risk investor has to pay most etc.]

• Questions: Who is hedging? (CDO investors) Who is speculating? (me - AIG - Insurers) From what do CDSs derive their value? (CDOs)

• Notice how our CDO investors, who were previously speculating (taking on risk), are now hedging (reducing risk), by passing some of it on to the insurance companies.

• Playing a part in the financial system basically comes down to this: taking on and managing risk in a way you think is going to benefit you.

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B) • Now, not only did these insurance policies have a funny name in

the world of finance, they also had a strange feature: you could buy a CDS even if you didn’t own the thing being insured.

• Can anyone suggest why you might want to do this? (To bet – speculate! – that someone else’s CDO will fail).

[Invite others who haven't spent their money yet to insure others' CDOs with AIG’s CDSs – encourage them to think carefully about who’s to insure]

• Who do you think is best placed to judge whether or not a CDO will fail? (Answer: The people making them!). Most famously, Goldman Sachs was simultaneously creating and selling CDOs to clients while buying CDSs to insure them - meaning they were betting against the products they were selling people. This is, basically, fraud.

• Goldman Sachs got away with it because there was no requirement to report CDS deals to a government agency, making them basically impossible to regulate.

• And of course the fact that you could take out this type of insurance on derivatives you didn’t own, and then sell that insurance on again and again, meant that the same product could be insured over and over again, meaning there was virtually no limit to how large the market could get.

• At the time of the 2008 crash, the value of the CDS market was thought to be about the same as global GDP: $68tn - 50x the size of the CDO market.

• So this was why AIG ended up in big trouble: they had insured so many CDOs that they had no way of paying out when the crash arrived – they only survived courtesy of $84bn from the US taxpayer

[AIG empties pockets to demonstrate that he/she has gone bust, then collects bailout money (i.e. taxes) off all citizens….. and then passes a chunk of this straight on to Goldman Sachs (B), explaining that]

• Roughly $8bn of the bailout went straight to Goldman Sachs due to those CDSs they’d been buying!

• And again… it was business done in AIG’s London office that caused the mayhem. Anyone see a pattern emerging here?

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• London operates as a haven for money and business practices that would not be tolerated in other major financial centres. The financial crisis was in some ways a very British crisis.

• Banks argue they’ll just up-and-leave if the rules get tightened; but the kind of banking that is ‘very mobile’ only contributes 0.8% of UK tax revenue according to Oxfam, so why not regulate it out of existence!?

A) • Anyway, why might AIG have thought it was a good idea to insure

so many CDO products? What made them think CDOs were so unlikely to go bad?

• Part of the answer lies with another player we're yet to meet: the credit ratings agencies, of which there are three big players: Moody’s, Standard and Poor’s and Fitch.

• And the reason we're standing here is that Moody’s lives on floors 11-16.

• These businesses would – and still do – assess the risk of any particular financial product, and give them a rating accordingly, with 'AAA' the safest, and 'junk' or 'residual' the riskiest.

• This gives them enormous power. Here's New York Times columnist Thomas Friedman: “There are two superpowers in the world today in my opinion. There's the US and there's Moody's. The US can destroy you by dropping bombs and Moody's can destroy you by downgrading your bonds”.

• Yet, a major factor in the financial crisis was the ratings agencies' willingness to wave through the credit default swaps and assess 90% of CDOs as AAA!

• In the words of the US Financial Crisis Inquiry Commission: ‘This crisis could not have happened without the rating agencies'.

• A big shout out to say thank you to Moody’s! • Why did they get it so wrong? Well, it could have something to do

with the fact that the people who were paying them to rate the derivatives were the same people – the banks – who were making the derivatives – an obvious conflict of interest.

• Credit ratings agencies were supposed to be impartial, but they weren't: banks could go elsewhere if their products didn't get a desirable rating.

• So it made business sense for the ratings agencies to hand out AAAs.

• And it worked! Between 2002 and 2006, Moody’s share price doubled, and its revenue tripled.

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B) • Now, as a company, getting a good credit rating means cheaper

borrowing. • One way to boost your credit rating is by becoming Too Big To Fail -

i.e. by making yourself so huge that if you went bust the entire economy would plunge into crisis.

• Once you are that important, ratings agencies like Moody’s add a few extra notches to your credit rating.

[Add some gold stars to AIG’s forehead. Ask audience] • Why should being so huge get you get a better credit rating?

(Answer: because it means that even if you make some very reckless decisions, and everything goes tits up for you, it’s very likely that the government will step in to bail you out.)

• So there is a massive benefit in play here, which we call the Too Big To Fail subsidy - and it’s worth 1/3-1/2 of the profits of the largest EU banks, according to the European Commission.

• And this subsidy is one reason that risky derivative trading is so large - if banks weren’t too big to fail borrowing for such risky business as derivatives trading would be much, much more expensive.

A) • At our next stop we'll finish our story of the financial crisis, by

adding the final piece to the jigsaw: just how did there come to be so much debt?

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4. Citigroup – Inequality, Debt & Money Creation

PROPS: B) Magic wand; bank balance sheet;UK money supply graph; Where money goes pie chart; bank card

B) • You'll have all heard a lot about the high levels of private debt in our

economy. • You might have wondered to yourself where the money came from

for all that extra borrowing? • Put your hand up if you've ever wondered that? Well, you'd be

right to find this a bit peculiar. • Not by coincidence, the growth of debt in our economy is closely

linked with the growth of our money supply since the 1970s. • As you can see from this graph, in just eight years leading up to the

financial crisis, the amount of money in the UK economy doubled! • Fingers on buzzers ladies and gentleman! Where do you think that

money came from? • Is the answer:

a) the Royal Mint b) the Bank of England, or c) private banks?

• Drum roll…the answer is c)! • Turns out 97% of the money supply created in the UK today is not

created by the Bank of England, but by private banks. • You might be wondering how this is possible. Well, Ladies and Gen-

tlemen, today, before your very eyes, we are going to do a live demonstration of money creation!

• With the help of this debit card, and this magic wand, and the coop-eration of X bank [whichever bank is shown on our debit card] we are going to expand the nation's money supply by £10 Sterling!

A) • Now, there is nothing special about this bank card [Ask a member of the audience to verify this.] • And furthermore, I can verify that this account is empty, in fact, it

is overdrawn. I am going to put this card into my otherwise empty hat.

[Verify with a member of the audience that there is nothing else in top hat except for bank card. Go behind red flag held up by glam-orous assistant, mutter "abracadabra 2863" as you type in pin code…

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turn around again, and produce hat with bank card, £10 and ideally a receipt - and pass around hat for inspection!]

• Now, Ladies and Gentlemen, my bank account used to be over-drawn by £x amount - it is now overdrawn by £x amount. In other words, my bank has lent me an additional £10, which you see here.

• You might assume that in order to lend me this £10 my bank took some money that already existed within the system - from somebody else's' savings - and transferred it to me.

• We have to break it to you today: that's not how money works in our modern world.

• When a bank makes a loan - whether an overdraft, or a business loan, or a mortgage - they are in fact creating brand new money.

• Now unfortunately we can't tell you how this happens because a good magician never tells!

• … unless of course anybody wants to make us an offer we can't refuse?

[Wait until somebody coughs up some cash]

B) [PROPS Magic wand, Bank balance sheet, IOU from first stop to lie on top of balance sheet ]

• Ok, turns out we are not such good magicians after all. • To explain how banks create money, we first need to show you what

a bank balance sheet looks like. Here is the balance sheet of the Bank of Occupy.

• On the asset side you have everything the bank actually owns – all the bank branches, all the cash in the tills, all the reserves they own, bonds and gilts, other financial assets – as well as IOUs of various types from other banks and institutions and people.

• So these IOUs from our first stop – remember these? These sit on the asset side.

• On the liabilities side you have all the things that the Bank of Occupy owes to other banks and institutions and people, including their shareholders.

• So for example, if someone has some savings, that would show up on the liabilities side for me, because if they want to withdraw that money, I have to cough up.

• This bit here is in a different colour because it’s special - it’s a measure of what would be left over if the bank sold all it’s assets,

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and paid off all its liabilities –– also known as equity. This is owed to shareholders.

• Now, it’s a balance sheet which means it has to…balance! Assets always equal liabilities plus equity.

• So if something is added to the asset side, then the equivalent amount must always be added to the liability side.

• If something disappears from the asset side – say the value of an asset crumbles - then the equivalent amount disappears from the liability side – and that comes out of equity.

• This is what happened - in catastrophic style - to Lehman Bros: so many of their so-called ‘assets’ turned out to be worthless that they completely wiped out their equity - they went ‘insolvent’.

A) • When a bank makes a loan of – say - £10 what happens is that a lia-

bility is added here. This is brand new digital money! An elec-tronic deposit of £10 - appears in your account ready for you to withdraw.

• At the same time an asset is created. This is an IOU. This is your promise to repay the bank.

• And that’s why it’s listed as an asset – because it is a source of income for me, the bank.

• In fact, it’s a pretty huge source of income. Because 97% of money is created in this way, through debt creation, we are effectively, paying interest on our entire money supply - £192m’s worth each and every day, according to Positive Money, a monetary reform campaign group.

B) • But loans are only a source of income if the borrowers pay up! • Remember: balance sheets have to balance. If the loan goes bad,

and has to be written off from the asset side of the balance sheet, the equivalent amount has to disappear from the value of the bank’s equity.

• So, how does a bank protect itself from this risk associated with lending?

• Derivatives! We learned earlier how they enabled banks to transform dodgy loans into investors’ cash, and so remove (they thought) the risk associated with un-repaid loans.

[Replace an IOU from the asset side of the balance sheet with a central bank reserve] • In fact - and this is crucial to understand - the fees for derivatives,

not the interest paid on the loans - became the banks’ driving motivation to lend.

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• They no longer cared about the long term health of the mortgages they were creating - just as long as someone was willing to buy their derivatives!

A) • And there you have it, ladies and gentlemen - that’s what is really

going on behind the scenes… • As Martin Wolf, the chief financial commentator for the Financial

Times puts it: THE ESSENCE OF THE CONTEMPORARY MONETARY SYSTEM IS THE CREATION OF MONEY, OUT OF NOTHING, BY PRIVATE BANKS’ OFTEN FOOLISH LENDING.” (FINANCIAL TIMES, 9TH NOVEMBER 2010)

• What was so foolish about banks lending? • Time for our second quiz ladies and gentlemen! What kind of thing

do you think banks created most of this money for? Was it .. a) mortgage lending b) lending to households for consumption (credit cards and personal loans) c) lending to ordinary businesses for investment d) lending to financial institutions?

The answer is a), mortgages, often ‘subprime’, followed closely by d) lending to financial institutions - often to buy derivatives whose value was derived from those sub prime mortgages!

[PROP:: PIE CHART SHOWING WHERE NEW MONEY CREATED IN DECADE LEADING UP TO CRISIS WENT]

• Remember that we said in eight years leading up to the crisis banks doubled the money supply? To put another way: it took 300 years to create the 1st trillion pounds - but just 8 years to create the 2nd!

• That is a lot of lending.

B) • What happens when you have lots more money chasing a roughly

fixed number of goods – such as houses? Answer: House price inflation!

• Once house prices started rising, this triggers a positive feedback loop: people became more willing to borrow, so banks create more money for the housing market, so then prices rise further,

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so then people became even more willing to borrow, and round we go….

• There were once better constraints on bank money creation, but these were dismantled during the deregulation of the 1980s.

• Some argue that they were lifted deliberately to maintain growth in the face of rising inequality.

• Funnily enough, the rich aren’t actually very good at spending money: they have way too much of the stuff!

• So as society becomes more unequal, more and more money goes to a rich minority, and ends up sitting idly in bank accounts, which means demand for stuff on sale drops.

• In an economy like the UK’s, where 50% of spending is by consumers, this is a problem.

• To keep the economy ticking over, to keep ordinary businesses in business, ordinary people need to have money, because ordinary people do spend.

• Thing is - if wages aren’t rising fast enough to feed the economy, debt is the only way to enable this.

• So, you can argue that inequality is both a cause and effect of the crisis of ’08.

A) • Problem is, more household debt doesn’t solve the problem - it just

delays the next crisis! • Inequality is still worsening, the economy is still dependent on

debt-fuelled consumption, and banks still create the majority of their loans for mortgages and financial speculation.

• Globally, debt as a share of GDP has risen from 246% in 2000 to 286% in 2014.

• We’re very likely to see another crash if that something doesn’t change.

B)

• That ends our story of the financial crisis. From here on in it’s all scandal, fraud, tax evasion..and suspect regulation.

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5. Barclays: Financial crimes

PROPS: Prepare Rich Ricci pictures

A) • Welcome to the global HQ of Barclays Bank. • Please everyone, keep a close eye on your personal belongings at

this stop, as our bodyguards have warned us that thieves are known to operate in the area.

• When we started doing these tours, we described this place as being the financial equivalent of a Bond villain’s hideout. In retrospect, we were probably guilty of understatement.

• Barclay’s isn’t all bad though. In the interests of balance, we’re going to tell you some good things about one of the UK’s most famous banks.

• First, they have roof friendly to wildlife with grass and plants to attract birds. It's a long way up – but then Barclays has always been careful to look after its high-fliers!

• Second, in 2010, Barclay’s chairman Marcus Agius wrote a letter to the Financial Times, co-signed by the bosses of many other global financial firms

• He argued that banks should not only be guided by the maxim of ‘is it legal and profitable?’ but also by a ‘larger social and moral purpose’.

• Maximising profit above all else, he argued, would undermine the very trust markets rely on.

• Way to go Marcus, we think you’re on to something!

B) • So, you might think that it was Marcus who had these enormous

word-statues installed in the lobby, in recognition of the bank’s commitment to its ‘larger social and moral purpose’.

• In fact, they arrived only after Marcus was forced to resign in July 2012 in the wake of a UK record fine of £290m for manipulating LIBOR – which some say is the biggest financial corruption case in history. Convenient, eh?

• It led the bank’s CEO Bob Diamond to resign too. • If you think 'Bob Diamond' is a good name for a banker – try this

one: when Diamond was originally promoted to CEO, his replacement as head of investment banking was a man named....Rich Ricci!

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B) • Anyway, we digress! • Can anyone tell us what LIBOR stands for? (London Interbank

Offered Rate). [Employ LIBOR keeper]

• LIBOR is an interest rate which is very widely used to set the cost of borrowing on mortgages and loans and to regulate the returns on many kinds of investments, including those owned by public institutions, as well as individuals.

• So, for example, you might have an adjustable mortgage interest rate of LIBOR+5%, or your pension fund might have bonds with a return of LIBOR plus 4%.

A) • This is how it was worked out: every morning the British Bankers

Association – chaired by our friend Marcus Agius until the scandal broke - would ring 16 major banks and ask them what they thought they would have to pay other banks, in interest, in order to borrow money.

• Using the answers given, a small team at Thomson Reuters would discard the highest and lowest estimates as outliers and then derive an average rate, the LIBOR rate, which they would then report at 11:30am every day.

• If LIBOR is low, this suggests banks have confidence – i.e. are willing to lend to one another.

• If LIBOR is high, they lack confidence, and there is probably instability in the market.

[Test LIBOR keeper]

B) • So why rig it? There are two main reasons:

•First, during the crisis certain banks lied about what they expected to be charged to borrow from other banks in order to make it appear that they were not at risk of defaulting, and therefore maintain confidence.

•Second, and far more sinister, was this: if you are trading derivatives which are indexed to LIBOR then you can make a lot of money if you can also manipulate LIBOR rate down and up, on particular days..

• It is almost impossible to express the scale of this fraud. • The total value of assets and products affected by LIBOR is

estimated to be $450tn – over 300x the size of the CDO market in 2008.

[Test CDO keeper]

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• It is effectively the largest price-rigging feat imaginable. • • It’s clear that Marcus was right about one thing in his letter to

the FT • Barclays is not guided by the philosophy of ‘is it legal and

profitable?’. • It seems the bank only cares about what is profitable - and will

break the law as long as the benefits of doing so exceed the costs. A)

• Media coverage of such financial crimes tends to reinforce the idea that the perpetrators are isolated individuals, ‘bad apples’.

• Tom Hayes, was one of them - a former derivatives trader at UBS and Citigroup. He was the first to face a jury trial on LIBOR-related charges.

• But knowledge that this entire market was rigged was widespread, including among managers.

• When Citigroup sought to lure Tom Hayes away from UBS with a $5 million job offer in 2009, some at UBS fought to keep him.

• Hayes’ boss wrote in an email to executives “his strong connections with Libor setters in London [are] invaluable”. This wasn’t something that was going on under the radar.

• [Quiz LIBOR keeper!] • What’s more: Iin order to rig LIBOR multiple banks, including

Barclay’s, UBS, the Royal Bank of Scotland had to coordinate a simultaneous lie in order to effectively move the rate in any particular direction.

B)

• This coordination was betrayed in emails revealed by regulators between Barclays employees.

• Here’s a Barclays trader requesting a rate fix from another bank: “duuuude … whats up with ur guys 34.5 3m fix … tell him to get it up!!”

• This time an email from a former Barclays trader, then at a different bank, giving thanks for the cooperation of LIBOR riggers at Barclays:

“Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”

• Similar collusion has emerged recently in the FOREX scandal in which traders were manipulating foreign exchange markets in or-der to make profit.

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• There’s a term for all of this behaviour: financial crime. But as of yet, no executives have even been charged with any wrong-doing.

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6. KPMG: Tax Evasion, Accounting

PROPS: A) Coffee beans; Starbucks coffee cup; Biro, Loo-roll, tax evasion circles, Barrick Gold subsidiary diagram, DWP vs. HMRC staff graphic

A) • Welcome to KPMG - one of the ‘Big Four’ auditors, the others

being Deloitte, Price Waterhouse Coopers and Ernst & Young -they audit 99 of the FTSE 100 companies

• Their job is to audit company accounts. • This means they're responsible for making sure company

accounts are in order, and pointing out any irregularities, risks or holes they find.

• You’d have thought that when looking through these accounts they would have noticed some problems in the run up to the financial crisis?

• But no! The Big Four auditors saw nothing. • Subsequently, they have come under scrutiny from a far left

pressure group – otherwise known as the House of Lords Economic Affairs Committee – which accused the Big Four auditors of “a dereliction of duty” in the run-up to the crisis:

• "Either they were culpably unaware of the mounting dangers, or ... they equally culpably failed to alert the supervisory authority of their concerns"

• But significant chunks of KPMG's business suggest it doesn’t feel a sense of public duty at all…

B) • To demonstrate why, I’d like to offer you a very special deal – who’d

like to buy this toilet roll for a thousand dollars? • No? Well, what about this Biro then, for a mere $8.5k? • Thought not…but we haven’t just made these prices up. In fact,

someone else did. And quite likely it was with KPMG’s help! • These numbers are, in reality, the results of ‘global transfer

pricing’ - a common practice of multinational firms that operate in several countries.

• Remember the big story about Starbucks not paying any corporation tax in the UK between 2009-2012, and only £8.6m since 1997, despite sales of £3bn? That was transfer pricing. And this is how it might have worked…

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[Recruit Ethiopian farmer, Starbucks Switzerland, Starbucks UK, coffee lover - run supply chain example] [PROPS: Coffee beans, Starbucks coffee cup] [Run transfer pricing example]

• Questions: ◦ Did Starbucks UK make a a profit or a loss? ◦ Did Starbucks Switzerland make a a profit or a loss? ◦ What do businesses pay corporation tax on? ◦ Which of the UK or Switzerland has lower corporation tax,

do you think?

A) • So that is how they do it! • They fiddle prices for trade between their own subsidiaries to

make it appear that all their profits are made in places where they pay low – or no – corporation tax, even if, like Boots in 2008, that involves moving your registered global HQ to a post box in Switzerland.

• And it’s all completely legal, thanks to what is known as the ‘Arms Length Principle’, which treats transactions between subsidiaries as if they were between unconnected parties.

• In front of the Parliamentary Public Accounts Committee, Starbucks had the audacity use the fact that they were making a loss in the UK to justify not paying corporation tax.

• So, they were effectively claiming that they’d remained in the UK for 15 years as a charity, handing out subsidised coffee to the Great British public – which means they thought you lot were charity cases...

• KPMG's website boasts that “we help multinationals develop and implement commercially sensible, fiscally efficient transfer pricing policies... and assess the impact... on their overall tax position”

• And all of this costs us very dear indeed. Here’s the government’s own estimate of how much money they lose by failing to clamp down on tax evasion and avoidance.

• Now compare that to their estimate of how much money they lose through benefit fraud!

[PROPS: Tax evasion/avoidance circle to compare with benefit fraud & Show numbers of civil servants devoted to investigating fraud]

• Perhaps all that rhetoric of a crisis of public spending, should actually be one of a crisis of public revenue?

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• And we know there’s at least one good solution to this crisis. And that is to get rid of the Arm’s Length principle.

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7. HSBC: Remuneration, Empire, Neo-Empire

B) • Welcome to HSBC, the world’s second largest bank (and it’s most

local of course!) • The lions are called ‘Stephen’ (roaring one) and ‘Stitt’ (quiet one) –

after two HSBC managers in Shanghai in the 1920s... • ...and inside the building you can see a ‘history wall’. • Now, we've taken a look, and realised there were a few bits missing

from the story. So we thought we'd fill you in. • In fact, HSBC was created in the aftermath of the mid-19th century

‘Opium Wars’ to finance the opium trade that the British, and allies, had declared war on China in order to maintain.

• HSBC actually stands for ‘Hong Kong and Shanghai Banking Corporation’ - reminding us of its birth from the rubble of an imperial drug war.

• But, if you thought HSBC's drug-money days were over – think again.

A) • In July 2012 a US Senate investigation uncovered “astounding

complacency” in HSBC’s US bank, which was found to have been facilitating the extraction of drug money.

• It even helped move 7bn in physical dollars out of the US and into Mexico.

• HSBC agreed to a fine of just under $2bn in December 2012 for this and other offences.

• But US authorities decided not to criminally prosecute the bank, and risk it losing its banking license. Eric Holder – US Attorney General said in June 2013 in front of the Senate Judiciary Committee:

"I am concerned that the size of …these institutions becomes so large that it does become difficult for us to prosecute them, when we are hit with indications that...it will have a negative impact on the national economy, perhaps even the world economy”

• Translation? Banks are still not only too big to fail – but too big to jail.

B) • Which brings us to our final theme for this tour: regulation.  And

our final story of this evening starts right here, at HSBC.

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• In 2003 HSBC bought a US bank, the ‘Home Finance Company’ -more commonly referred to as HFC bank.

• They specialised in sub-prime mortgage lending. Anyone remem-ber that?

• They also managed third party store branded credit cards for com-panies such as Dixons, B&Q and John Lewis.

• A lawyer named Nicholas Wilson, who worked at the time on behalf HFC, noticed that illegal fees were being added to accounts that were in arrears, up to £5000 in some cases, purportedly to cover the cost of recovering the debt.

• Outraged, Wilson informed his law firm bosses that the charges were illegal, and was ignored.

• He reported them to theLaw Society in 2006 and was immediately sacked.

• After several years of inaction, Wilson took his case to the regulator in 2012, expecting action.

• Let’s find out what happened at our final stop: the Financial Conduct Authority.

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9. Financial Conduct Authority

Props: HSBC & FCA statements A)

• Welcome to the Financial Conduct Authority (FCA): sounds pretty impressive eh? It forms one half of what was previously the ‘Financial Services Authority’ (FSA) - split in two by George Osborne in 2013.

• In it’s own words, its objectives are to: ◦ Protect consumers ◦ Protect financial markets ◦ Promote competition

• No doubt it was the ‘protect consumers’ bit that Nicholas Wilson had in mind when he contacted them to tell of the £1bn fraud he had uncovered at HFC.

• But the FSA wasn’t interested: so in 2014 Wilson lodged a Freedom of Information request demanding to know why. In response the FCA sent Wilson an email explaining its inaction.

• Separately, Joel Benjamin (a financial journalist & founder of the Move Your Money campaign) received a letter directly from HSBC in response to his question about the same case at the company’s 2014 AGM.

[GET TWO PEOPLE TO SIMULTANEOUSLY READ OUT THE TEXTS]

B)

• OK, OK…anyone notice anything funny here? Turns out the FCA literally just copied and pasted HSBC’s own (incorrect) explanation for their response to Wilson’s Freedom of Information request.

• They admitted this explicitly in a statement in December 2014. • Journalist Ian Fraser had this to say about it:

• “The case suggests the FCA is no less of a captured regulator, willing to side with big banks (and take at face value their own guileful responses), than its disastrous predecessor, the FSA.”

• Ouch! • No doubt regulating the feral banking system is no easy task, but

surely it can’t help that the FCA, an independent body, doesn’t receive…wait for it…any government funding to do its job.

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• Who funds it? The very banks it regulates. There are arguments for and against this, but the potential conflicts of interest should be clear.

• What’s more: if the FCA tries to levy fines that are too large against banks, its sister-regulator - the Prudential Regulation Authority (PRA) whose job is to stop banks, and thus the banking system, going broke - is likely to kick up a fuss given the potential for damage to bank balance sheets.

• So here we are again at the crux of the issue: Too. Big. To. Fail. Even if one regulator does try to punish banks for wrong doing, the other may block the action to protect the wider banking system.

• This is what we call a serious systemic problem. • And what of Lord Stephen Green, Chairman of HSBC at the time of

the HFC fraud and responsible for HSBC’s south american business at the time of the Mexican drug-money scandal? He didn’t get off lightly!: promotion to UK Trade Minister in 2010!

• We need a properly resourced regulator with teeth, the willpower to protect whistleblowers like Wilson - and staff who can write their own emails.

• But most of all we need banks that are small enough to fail - or regulation will remain a sideshow in a grand financial farce.

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8. Conclusion

B) • So here we are, at the end of our tour for this evening. • We've just got one last thing to do: there's some people here today

without whom we simply wouldn't have been able to make the tour happen.

• And so it's with enormous gratitude that we say a huge thanks to our private bodyguards!

• For the last one and a half hours they've kept ruffians, thieves, ragamuffins and – worst of all – protesters at bay – let's hear it for them!

A) • More seriously, as well as enjoying the tour today, we hope you've

learned a thing or two – and above all been inspired to learn more and take action.

• We didn't come here just to look at the scenery, but to change it. None of this has to be – and while these towers look solid and imposing, we've learned today just how close they came to tumbling a few years ago.

• The more we refuse to be mystified by what goes on in them, and the wider we can share our knowledge, the more successful we'll be in building an alternative.

B) • Finally, you might have noticed how everything on the tour has

been bought and sold – how it has been monetised. It's possible to turn all human interactions into monetary exchanges, if you want, but we'd rather not.

• So the one thing that's truly free today is the tour itself – so no donations please! All we need is our fake money back!

End checklist: • Flyers & things to do • Please give us your feedback by reviewing us online, or filling

in the Survey Monkey, or emailing • We will be heading to the pub for a quick drink - please do

join us • Book yourself onto another of our tours

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