Thursday, 12 March 2009

The International and Banking and investing Swindles in billions

Today, Thursday March 12th it is banking reality day in the aftermath of the great swindle in the all time when have learnt during the past two years of the infamy of bankers and speculators on a scale never before experienced in the history of capitalism.

Bernard L Madoff pleaded guilty to 11 charges swindling four thousand eight hundred major investors out of some $65 million in what is known as a Ponzi or pyramid scandal in which rather than invest in proportion to holdings and pay interest at a level based on actual returns, he used capital of subsequent investors to pay the higher interest, cover loses and repay early investors seeking all or part of their funds. Whatever plea bargaining was involved he was sent to prison prior to sentencing and as the 70 year faces 150 years jail from the charges it could be that he fancies his chances of staying alive in jail than out unless the $170 billion law suit against him is able to tract down where the money went and recover a substantial amount. So far only $1 billion has been recovered.

Of course large frauds is nothing new and in 1919 Charles Ponzi began to advertise that by investing in foreign postage coupons. He could increase any investment amount by 50% in 45 days. He aimed his publicity at the $10 investor and as the paper gains were published with $10 becoming $1000 dollars in a year millions became involved including it is said three quarters of the Boston Police department. The problem was there was no profit and he used the new investments to pay out those who wanted to cash in, which surprising few did given the way their small investment was expanding. 100 new investors were required to pay out any one keeping their holdings for a a year and this this rose expontentially every 45 days.

Later I report on the film the International and the real life story of the BCCI on which the film is said to have been inspired.

Tuesday 10th March was close to a back to normal day although at one level of experience I try not to do normal. I use the term as the approximation of the approach taken by the majority of the other citizens. Even though I had prepared for the weekend away over one day, and been away for only part of three days, I anticipated it would take a week for proper catch because of having to double on the writing in addition to other priorities, interests and plans, and digesting the experience of being 70. For all those who say it is just number, I have to say it is not and even if it is a self created state of mind which others may not experience, being 70 feels very different from being sixty and the wish to find out what being 80 feels like takes hold.

To achieve such a feeling I will have to say no to myself more often when it comes to food and force myself to go walkies when it is the last thing I feel like doing. The main test is to come in April with the opportunity to go swimming for free between 7.30 and 9 am in the morning. For Tuesday the celebratory mood continued and I decided to arrange to experience two of Sunderland’s fight for survival in the Premiership games over the next month. The first is on Saturday against an improve Wigan Athletic and is something of a make or break match. I decided to arrange over the internet. Previously it was only possible to indicate an area and a seat would be notified according to its numerical and alphabetical location and to accepted or rejected, but since the last occasion of buying a ticket this way, all available seats are indicated in the selected location and I selected one about four on five rows below the concourse and a few seats in from the gangway. However when I reached the point of confirmation I lost the page and appeared to have returned to start again. This I did and found the selected seat no longer available and selected another which went through as far as receiving a confirmation notice with the promise of an email. When the email did not arrive I began to wonder if I had achieved two purchases or none and this appeared to be the situation when turning to the purchase history, which I ought to have done as my first reaction, there was a notice of two seats pending and this continued for the rest of the morning.

I was interested in going to see Clive Owen in the International, a film about the contemporary international banking, and where all adult seats are available throughout the day at the Sunderland Empire on Tuesdays for under £4 with free parking in the adjacent multi level car park. There was a first showing of the film on the day at 4.40 so I planned the rest of the day to leave at least an hour before this and visit the Stadium of Light to sort out my ticket for Saturday. I had also tried without success to book a ticket for one fo the start home games of the year, against Manchester United, the team of the season which is in danger of winning every competition that is available. They have won he League Cup, are in the semi finals of of the FA Cup and on Wednesday have the opportunity to progress to the last eight of the European Champion’s League along with all three other British Clubs in the competition, and while having a healthy lead in the Premiership. They have become the best club team in Europe, possibly the world and while the hope will be that Sunderland will play well enough for a draw, the opportunity to see such a team play live is too good to miss.

There was a free assistant on arrival and I purchased a seat close to where I sat with my former season ticket for the game against united in mid April. I explained what had happened regarding the seat for the match against Wigan and the assistant departed to the separate system in another part of the building and was away for a good ten minutes returning to advise that in fact I had purchased two seats under the system, both would be printed with one cancelled and the posted, and I selected the best in this respect. The ticket arrived on Thursday morning and as a bonus the internet service charge of £1.25 have been waived. Well done Sunderland, the club, once again.
I arrived at the car park and in a seat in the theatre just as the programme commenced. The day was going well. The car park is approached from side street and although the new building to the left of the car park has been completed. This is a colourful ten to twelve story building mainly of apartments, with a Bowling Alley forming the base of the building. Looking up I noted that there was a pedestrian entrance bridge between the upper floors of the car park and the apartment block. This floor was empty when I had once gone for a look and that below is usually only a quarter used if that.

I purchased my seat ticket at the food and drinks counter as the main box office has been closed during the day for this and the previous visit, thus appearing to reflect that this 14 screen enterprise, the only cinema complex in the city, is not getting the custom necessary to justify and assistant at both counters. I believe the reason is different and this is the second chain making this change with one having abolished the separate box office all together. It is a selling device encourage people to buy food and drink and have packets fo sweets weight and purchased as well as the seat tickets. I had to return to the counter soon after selecting my seat in the theatre having forgotten to get the car park ticket machine endorsed so that there was nothing to pay when seeking further endorsement to depart the car park.

I thought the International is a brilliant contemporary thriller action film with a subject of high topicality. Clive Owen plays a former Scotland Yard officer who previously investigated the involvement of an international bank with a headquarters in Germany in a contract killing murder and where the only clue to the assassin was a foot print which suggested the individual had an artificially supported leg. We learn during the film of two versions of what happened when Clive believed he had the evidence to proceed enquiries against the bank. His and that on his file.

Clive is now attached to Interpol based in Lyon France and is working closely with a colleague based in the USA and where a colleague of Clive has been approached by someone from within the bank with information vital to their enquiries. Clive is across the roadway close to the airport when his colleague appears to have a fatal heart attack, but on investigation this is not the position and he has been cleverly murdered. The contact, a high level executive within the bank is also found to have died in a car accident a few hours later.

The film, which is a USA German collaboration and opened at the Berlin Film festival, is loosely based on the collapse of Bank of Credit and Commerce International in the later 1980’s and was the 7th largest private bank in the world handling $20 billion and with 30000 employees and 400 branches in 78 countries. In this real instance the bank’s crime involved fraud rather than murder, the arms trade and corruption, although the Bank of Credit and Commerce International was Incorporated in London and therefore came under the Bank of England regulatory system and had a HQ in Luxembourg.

The bank was founded in Pakistan in 1972 by Agha Hasan Abedi who had previously set up the United Bank of Pakistan in 1959, and after the bank was nationalised in 1971 he established the international bank with help from the ruler of Abu Dhabi and a 25% holding by the Bank of America. Back in the mid 1980’s the message which I received during a four week residential management course for senior and international executives of commercial firms was the vulnerability when based exclusively within one political system and country and the importance of establishing a network of holdings across nations and with local alliances and joint enterprises, and with the ability to transfer interests from country to country if trading circumstances changed.

Both in the real case of BCCI and the film this approach has been closely followed together with the importance of hiring creatives and having the machinery to get rid of them without trace if they stuffed up.

The approach advocated on the course was designed to evade the uncertainty of government behaviour especially in a democracy or unstable leadership, to avoid controls and monitoring and defeating the potential damaging action of employees through their trade unions. However it was also a framework for responsible corporations whose directors had a duty to protect the interests of their shareholders,

The approach of the new BBCI bank in 1972 was to place an emphasis on capital growth rather than share holder profits and attracting investments of a substantial and regular nature. It joined up with parallel enterprises based in other countries notably Geneva and Kuwait and split its holdings between Luxembourg and the Cayman islands through a series of companies there. The bank grew quickly form having a value of $200 million to $1.6 billion and this led to questions, notably in the Guardian Newspaper, about the how this progress was being achieved. The paper suggested that the money of depositors was being used to finance growth rather than being invested. However there is now evidence that in fact pressure was being put on the bank by rivals because of its success as it moved into Third World Markets in Asia, Africa, the Middle East and South America, and then a foothold in China, one of the first banks to do so. This was achieved through the skill and personality of the owner.

He also established a structure which placed him and the CEO at the head of a network of 248 managers and general manager each with considerable authority and answerable directly to the head and CEO. He also ensured that the regulatory system of any individual country did not have supervision over the whole and where the monitoring in Luxembourg and the Cayman was notoriously weak. Fortunately for investors in the USA there was such concern that an instruction was issued not to allow the bank to buy into the USA through acquiring a bank there. However it had already become involved through the Bank of America and appeared to overtaking its partner. It also had an auditing arrangement with several major players and others but under pressure Price Waterhouse become the sole accountants in 1987 and they became concerned at the scale of losses, much of which was unaccountable but understood to have been the result of speculation losses in the commodities and financial markets.

By 1990 the situation had escalated to the extent that the bank was lending to its own shareholders $1.4 billion and had secretly taken over control of the First Bank of America. This had been achieved through the take over by a group of Arab investors on the understanding that they had no connection or involvement with the BCCI, when in fact they were heavily committed thus giving the BCCI a 60 percent holding. Price Waterhouse signed a audit report despite the problems and issues.

The bank developed some interesting friends and became involved with USA back dictators such as Sadam Hussein and Manuel Noreiga with the consequence that some rivals labelled it the Bank of Crooks and Criminals International although in fact it provided better terms to governments of developing countries than British, French, American and Swiss banks. It was found to have been involved in a drugs money launderings scheme based in Florida but it also laundered money for the CIA.

It also established various Philanthropic foundations which were instrumental in funding universities in the Pakistan, established the Cromwell Hospital in London and assisted in the protection of historical buildings and monuments throughout the developing world and contributed to the arts, culture, sports, health and education in many poor countries and all employees were asked to voluntarily contribute to these good works and which were said to have been at the heart of the interests of the bank’s founder.

In March 1991 the Bank of England requested Price Waterhouse to conduct an enquiry into the workings of the bank and they concluded that ti was impossible to reconstruct its financial history but concluded there was widespread fraud and manipulation. Parts of this report was then leaked the Sunday Times including the information that the Abu Nidal Terrorist group had used fake identities to open an account at a branch near Harrods in London.

There was also an involvement with arms deals for Iraq in which an American Financer was said to have been a principal and he was subsequently indicted for tax evasion and racketeering, but was subsequently pardoned by Bill Clinton on the last day of his administration despite the individual having fled the USA into exile.

Although the Bank attempted to reconstruct itself it was ordered to be shut down and this was achieved at a court in Luxembourg at the request of Regulators and Security services. A million depositors were affected by the decision although very different from the bank situations today about 75% was recovered. There were various enquiries in the USA and the UK. The liquidators Deloitte and Touche sued Price Waterhouse and Ernest and Young the Bank‘s auditors and this case was settled for $175 million in 1998. A law suit was initiated for $400 million in 1999 against Abu Dharbi, the result of which is unknown and a $1 billion suit was initiated against the Bank of England which took nine years to come to court because of the bank’s statutory immunity, and which said to have cost £100m dollars but was then dropped within two years because continuation was contrary to creditors interests.
Now here’s as thought. OK so the owner and his managers broke the rules but 75% of debt was recovered and this could have been significantly higher given the costs to lawyers involved in law suits and enquiries of various kinds. There has never been any suggestion that the motivation behind the bank was not to help the poor and developing nations and major and to make significant and worthwhile philanthropic contributions to a wide range of good causes.

It is also a well established fact that all major governments will use private banks and similar enterprises for their shady and off the record activities whether supplying arms, changing regimes, or breaking sanctions. The major criminal enterprises of the world will place their money with banks as will the corrupt dictators and their leading supporters.

We now know that the dividing line between what is legal and acceptable and what is not in the world of banking, financial institutions, investing and speculations is an ugly shade of grey in which government collude and the rest of us suffer to varying degrees. I do not know enough to make any kind of judgement about the BCCI but to suggest that what happened has to viewed within the context of events over the past two years.

The theme of the 2009 released film the International is of a very different order although it covers aspects of the BCCI event. A small group of chief executives had complete control over what the bank did, especially its secret intelligence and security system and was able to command the intervention and support of governments, security services and senior police officers to avoid enquiries and bad publicity and in aiding and covering up murder. In the film the main plot is about the bank doing a deal with an arms contractor to supply an African rebel forces with arms manufactured in China. The bank gained in two ways. It established a channel to gain arms via China in the future and it gained as a result of participating in the promotion of conflict because who ever won there would be significant debts and as we all have realised recently banks make part of their money, and executives their fantastical bonuses by the creation and manipulation of debt.

In the film the head of the arms contractor is a leading Italian politician seeking election to become Prime Minister. When he decides to pull out of the deal and it is known that his two sons are willing to negotiate, they arrange for his assassination. However a similar foot print is discovered and the Clive and his USA colleague work out that the wearer of the artificial leg would have been required to reveal at the airport security and this in turn leads to CCTV identification, and a trace to New York and eventually to the individual assassin, just before the bank has arranged his elimination realising that the investigators are on the trail. There is a splendid series of finales. There is most prolonged and dramatic of gun fights ever screened. There is the comeuppance of the leading members of the bank. And there is the reality at the end when the key statement that whatever you do, we are part of the real world banking system and we will be allowed by the powers that be to continued, is shown to be true. Real life is always worse than fiction because happy endings and true justice rarely if ever happens

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