You are probably familiar with Trainline, the app that makes it easy to buy train tickets. You are probably less familiar with the corporate structure behind it, or the long journey that your 75p-or-so booking fee takes from your phone to the company’s owners. First it flows through five UK-based companies, then into one in Jersey, then to Luxembourg, then to the Cayman Islands, and then “having already passed through twenty or so companies after leaving your bank account, it joins a multitude of other financial streams and rivers from around the world, which come together and flow into the United States and into the maw of KKR, a giant US investment firm”.
The infinite complexity of the financial networks that lie behind everyday transactions is part of what Nicholas Shaxson, a journalist best known for Treasure Islands, an exposé of tax havens, calls “the finance curse”. His argument is that “once a financial sector grows above an optimal size and beyond its useful roles, it begins to harm the country that hosts it”.
The complex financial engineering behind companies such as Trainline, thus, enables them to avoid tax by stashing revenues in tax shelters, while drawing away talent, energy and resources that would be better used on more productive enterprises. The bigger the financial sector grows, the better it gets at shaping laws to its advantage, so the more money it makes and the bigger it gets.
The book’s principal virtue springs from Shaxson’s skill in unpicking the complexity of the system and explaining it in layman’s terms. He takes the reader by the hand and leads them through bank capital requirements, special purpose vehicles, credit-default swaps and the other derivatives that were one of the main causes of the great crash — in more detail, although with fewer bubbles, than Margot Robbie did in her bathtub in The Big Short.
A particularly enlightening aspect of the tour is that through private equity. Shaxson starts with Careline Homecare, a company that provides local authorities with carers who visit elderly people in their homes, and after travelling through eight layers of companies called things such as Midco, Topco and Bidco, he arrives at the swanky Mayfair office of a private equity company. The point of the infinite complexity of ownership, he explains, is twofold. First, it is rather like dividing a pizza: you slice the company, its cashflow and debt into different niches to attract different sorts of lenders, enabling you to pile the thing as high as possible with debt.
Second, the complexity of the structure and the variety of jurisdictions helps you to avoid tax. Private equity, he concedes, is not in itself rotten, for it can be used to make inefficient companies work better. He takes the view of one of his sources in the business, who compares it to cancer: “A good idea gone bad, like a normal healthy process that has grown wildly in ways that were never envisaged.”
Shaxson also does an excellent job of fingering the regulatory laxity of the City of London. Britain owes its pre-eminence as a financial centre to the combination of a strong legal system — which stops people stealing your money — with a weak regulatory one, which allows you to steal other people’s. The combination of tax havens such as the Cayman Islands, a British overseas territory, with the powerful judicial system available in London, is irresistible to those who wish to keep their cash from thieves and also from their governments’ prying eyes.
Financial crime is barely punished in Britain. While American regulators imposed $150 billion of fines for activities related to the financial crisis, British regulators imposed none. Any fines on British banks were imposed by American regulators. Indeed, Shaxson could have gone further in his attack on the City by underlining its role in ruining other countries; if kleptocrats did not find it so easy to stash their money in London, they would have less incentive to steal it.
While many of Shaxson’s charges are well-aimed and hit their target, as the book gathers pace it widens its angle of attack to spray bullets at pretty much all the usual Spartist targets — accountants, consultants, lawyers, hedge funds, private prisons, the railways, plus a few less expected ones such as the University of Oxford, London and Jean-Claude Juncker, the president of the European Commission. Juncker’s presence as a hate figure suggests Shaxson probably shares the view of the Corbynist wing of the Labour Party that the EU is a capitalist puppet.
Anything that might be seen as aiding and abetting “financialisation” comes under attack. The tone switches from one of journalistic probing to that of a conspiracy theorist whose fingers are typing too fast for his brain. “The billionaire classes need to distract us away from focusing on how they got rich. So, using their influence or control over the media, they revert to the old political formula: using their control over the media to deflect popular fury in other directions, towards people with the wrong skin colour or the wrong sexual orientation, or from the wrong religious groups. The world has seen this hate-filled formula before.” Hold on: who, what and where is the evidence? None is offered.
Some readers, no doubt, will regard the invective as a strength rather than a weakness. Polemics suit a populist era. Shaxson’s book will no doubt sell very well as a bible for Corbynistas, but it risks putting off those who are looking for enlightenment, rather than to have their prejudices confirmed. Which is a shame, because there is a great deal of well reported, well argued stuff in it.