by Adam LeBor
The Financial Stability Board, hosted at the BIS, is likely to become the fourth pillar of the global financial system, after the BIS itself, the IMF, and the World Bank. The FSB coordinates national financial authorities and regulators. Its members include the Federal Reserve, the ECB, the Bank of England, and the national banks of China, Saudi Arabia, Switzerland, Russia, Japan, and Korea. The IMF, the World Bank, the European Commission, and the BIS itself are also members of the FSB, as are three of the most powerful committees hosted at the BIS: the Basel Committee on Banking Supervision, the Committee on the Global Financial System, and the committee dealing with payment and settlement systems. The writer Matt Taibbi once memorably described Goldman Sachs, the giant investment bank, as a “vampire squid.”8 The BIS is now the vampire squid of the regulatory world, hosting a myriad of committees that in turn spawn a raft of subcommittees, many of which are composed of the same central bankers and officials, each producing reams of reports that are passed back and forth from Basel to national central banks and governments in an endless merry-go-round of resolutions and recommendations.
Others argue that the answer to the banking crisis is not more insider committees and regulatory bodies hosted at the BIS, or anywhere else, but much less, or none at all. “Banking should become a normal industry, like manufacturing bicycles,” said Andrew Hilton, of the Centre for the Study of Financial Innovation. “Banking should be regulated to protect against fraud, to protect consumers, and to protect the banks’ integrity, but nothing else. That sounds crazy because everyone says that banking is special. Banking is only special because the sums of money flowing through these institutions are so large they can bring society down. If the banks were smaller, if they did simpler things and they were not a systemic threat, either individually or within a cluster, you would not have to regulate them. The banks would take out insurance and the system would be protected.”9
Such views are regarded with horror in Basel. Yet, the heart of the matter is that BIS is an opaque, elitist, and anti-democratic institution, out of step with the twenty-first century. The BIS should have been closed down in the early 1930s, after the collapse of the German reparations program. Instead it funded the Holocaust and the Nazi war machine. Its staff members, such as Thomas McKittrick and Per Jacobssen, passed vital economic intelligence to the Nazis—often with the knowledge of the Allied authorities. The bank embodied the most cynical kind of capitalism. While millions died, it kept financial channels open across the frontlines.
After 1945 the BIS and its allied committees shaped much of the postwar financial world. Behind the scenes the BIS provided the necessary financial mechanisms, support, and technical expertise for the financial aspects of the Euro-integrationist project. Without the BIS the euro would not exist. The BIS gave birth to the European Central Bank, a bank that is accountable neither to the European Parliament nor to any government, even though it controls the monetary policy of seventeen countries. The BIS has survived through the decades just as it was born—by opacity, secrecy, and by hiding behind a carapace of legal immunities. These protections perpetuate the technocrats’ belief that a tiny, self-selecting elite, unaccountable to everyday citizens, should manage global finance. The BIS’s privileges are a hangover from a thankfully vanished age of deference to authority, at least in the developed world.
Andrew Crockett, the bank’s general manager from 1994 to 2003, did peel back some of the bank’s obsessive secrecy. When the BIS was drawn into the torrent of revelations about Swiss banks, looted gold, and collaboration with the Nazis that erupted in 1996–1997, Crockett opened up the bank’s wartime archives. It was a sensible decision and a boon for historians and investigators. “Our view was that if anyone had done anything bad it was a long time ago, so there was nothing in it for us to hide it. We decided that the only answer was complete transparency,” recalled William White.10 The bank spent two hundred thousand Swiss francs on specialized computers to digitize and microfilm the records, which had been neglected for decades, and hired a specialist historian, Piet Clement. (Crockett also made himself available for interview on the BIS’s wartime record and spoke at length to the author, which is included in the author’s 1998 work Hitler’s Secret Bankers: The Myth of Swiss Neutrality During the Holocaust.) The bank’s archives, which are open under the thirty-year rule, are a valuable resource for historians.
But the BIS is far less forthcoming about its present-day governance. The bank’s annual reports and other documents are available on its website, and it has a Twitter feed: @bis_org. In February 2013, it had more than thirteen thousand followers. The bank often tweets several times a day, with links to speeches by central bankers as well as studies and working papers published by the bank, thus providing a continuous update to the documents available on the bank’s website. But this information is already in the public domain. Information about the bank’s internal operations, such as the agenda and themes of the governors’ meetings, the elite Economic Consultative Committee, or the attendance list, and the transactions the BIS carries out with the public funds held by central banks whose reserves it manages are not tweeted and nor, at least for the foreseeable future, are they ever likely to be. Rather, the emphasis remains firmly on confidentiality. When the author asked Stephen Cecchetti, the bank’s economic adviser, about the high level of secrecy around the governors’ meetings and the BIS’s activities, he replied, “Banks have confidentiality agreements that bind them not to disclose information about their customers. In the conduct of its banking business, the BIS strives to exceed best practice in its customer relationships.”11
There is usually no press conference or press statement after the governors’ meetings, but the BIS has for years held a press conference after the Annual General Meeting and the release of the annual report. The 2011 gathering, which can be viewed online, was a low-key, even desultory affair.12 Jaime Caruana, the general manager, read a prepared statement. He and Cecchetti then invited questions from the handful of journalists present. There were four questions: three about the work of the Basel Committee and one about monetary policy. Cecchetti did not speak. The press conference lasted seventeen minutes. The journalists were specialist correspondents. There was no press conference in 2012. The journalists covering the BIS told the bank it was not necessary as the bank releases the annual report with a long embargo and also organizes a teleconference. Had there been a press conference in 2012, a general reporter would have honed in on a much stronger story—one which raises profound questions about the bank’s tradition of secrecy, its legal immunities and their implications for the bank’s future.
IN 1991 ARGENTINA went bust and defaulted on almost $81 billion worth of debts. The Argentine government eventually offered creditors thirty-five cents on the dollar—previously bankrupt countries had offered fifty to sixty cents. Nonetheless, by 2010 93 percent of creditors had accepted the offer. The remainder, however, were still holding out, demanding a higher payout for their $6 billion worth of debt, including accrued interest. The two main groups are around sixty thousand people in Italy, some of whom bought Argentine bonds to fund their retirement, and a pair of investment funds—Elliott Management and an affiliate, NML Capital—known as “vulture funds,” which chase countries in default and which bought many of the bonds in secondary markets. Elliott has chased the Argentine central bank through the American courts. The Italian bondholders are fighting their case at the International Centre for Investment Disputes, which is part of the World Bank group. Both the funds and the Italian investors have won several legal victories.13
However, the Argentine central bank has shipped a substantial part of its reserves to the BIS, where the monies are out of the creditors’ reach. The funds are now suing the BIS and drawing unwelcome attention to the bank’s hyper-privileged legal immunities. The funds allege that the BIS has allowed the Argentine central bank to store between 80 and 90 percent of its $48 billion in foreign reserves in Basel (most central banks keep a small pro
portion of their reserves there). Lisa Weekes, the bank’s head of press, declined to answer detailed questions from the author in December 2012 about the Argentine reserves but pointed to a letter she had published in the Wall Street Journal in July 2011.14
Weekes confirmed in that letter that the Argentine central bank holds an account at the BIS. The BIS will not disclose the actual sum deposited by the Argentine central bank, citing client confidentiality, but said that the figure of around $40 billion is “grossly overstated.” The letter noted that the Swiss Federal Tribunal, Switzerland’s highest court, rejected the funds’ action and upheld the BIS’s immunities, noting that “accepting central banks’ deposits is part of the BIS’s mission, enabling it to fulfill its statutory function as an international settlement hub for central banks.” The BIS, wrote Weekes, like other international organizations, is “protected by immunities that that allow it to carry out its functions in the public interest.”
The definition of “public interest,” however, looks rather different to the holders of Argentine bonds. The Argentine BIS deposits are a “clear deviation of the bank’s standards,” wrote Claudio Loser, a former director of the Western Hemisphere Department of the IMF. “The BIS has a serious conflict of interest: it is playing the interests of one national depositor against the interests of many others.”15 In December 2012 the Swiss Federal Council (the Swiss federal government) confirmed that the funds cannot sequester any of the Argentine deposits held at the BIS. The council ruled that there had been no abuse of immunity of the 1987 headquarters agreement between the BIS and the Swiss Federal Council, which governs the bank’s legal statues and immunities.
So for now, at least, the BIS seems to have won the battle over the Argentine reserves. But the wider questions remain. What if other countries seek to use the bank as a refuge from their creditors? “Argentina is a big question for the bank,” says one former BIS official. “Is the government depositing with the BIS because it is a good place to put its money, or because its deposits are immune and the BIS cannot be sued and forced to surrender them?”16 The BIS has also helped to repatriate looted money. After the death of the Nigerian dictator Sani Abacha in 1998, the Nigerian authorities pursued hundreds of millions of dollars that had been looted and deposited in Swiss banks. In 2004 the Swiss authorities ordered that almost $500 million be transferred from Swiss banks to a holding account at the BIS for Nigeria, before being transferred to the country’s central bank.
The Argentine reserves and the Nigerian looted assets highlight how the BIS’s immunities are a double-edged sword: they arguably provide safe haven for a country fleeing its creditors but also ensure that the BIS is the bank of choice for diplomatically sensitive transactions such as the return of looted assets. “It’s very important that an institution that is mainly dealing with the central banks of sovereign countries should have full immunity in its financial transactions from the jurisdiction of national legal systems, as do the IMF and World Bank,” said Malcolm Knight.17 Every country dealing with the BIS should be required to sign a single, consistent agreement similar to that required by the IMF, that would provide immunities for all the financial transactions of the BIS with residents of that country, as well as other immunities necessary for the operation of an official international institution, such as immunities for its staff while traveling, said the former BIS general manager.
The BIS “has not become a refuge in any sense at all,” said King.
It’s very important that in the future sovereign debt issues will not lead a sovereign debtor into a position where it can be exploited by a small minority of creditors who will not go along with the restructuring. The BIS is not special in this debate. This is a much broader debate about how we deal with sovereign debt restructuring. Should creditors such as vulture funds be able to buy their way into sovereign debt and then try and extract a position that is much more favorable to themselves than any other creditor? In the future, sovereign debt should be issued with “collective action clauses” to prevent such holding out behavior, but in a way that is part of the legal rules of the game. The BIS is no different to the IMF or any other international body that has a degree of legal exemption.18
The bank’s belief that it should be so rigorously protected embodies its central contradiction: that it is shaping the regulatory future of global finance and calls for good governance, yet its own affairs are kept firmly hidden behind a thicket of legal immunities and protections.
THE BIS PROGRESSES through the twentieth-first century with ever more confidence, even though there is no need for it to exist. Its banking services could be carried out by commercial banks, which would be legally bound to observe the necessary confidentiality to prevent market speculation on the central banks’ interventions. Its research department and its databases could be relocated to any decent university. Its famed hospitality could be easily replicated in any number of luxury hotels or conference centers. The committees hosted by the BIS that regulate banking and the international financial system could be relocated to the IMF or housed in a new think tank, with open and transparent governance. Breaking down the bank into its constituent parts would help democratize global finance.
Yet the bank is not worried. It has powerful friends, who, it believes, will ensure its inviolability and survival. The Swiss Federal Council, the governing body of the country where the bank is based, has strongly re-affirmed its commitments to the BIS’s legal inviolability. The board of directors, which manages the bank’s affairs, reads like a who’s who of the world’s most powerful central bankers. It includes Ben Bernanke, Sir Mervyn King, Mark Carney, Mario Draghi, Jens Weidemann of the Bundesbank, and Zhou Xiaochuan of the Bank of China. The bank’s management can reach any one of these with a telephone call, knowing that the governors will make time for them.
The bank’s collective memory is reassuring too: in 1945, the BIS outmaneuvered powerful enemies, such as Henry Morgenthau, the US Treasury secretary who wanted the bank to be closed down for collaborating with the Nazis. Whatever legal or political travails may lie ahead, such as the breakup of the Eurozone, a deepening of the financial crisis, or even a new war, banking insiders say there will always be a need for a financial intermediary operating across the lines and behind the scenes.
The BIS helped give birth to the euro and will also be ready to step in should it fail. If the euro crisis worsens and the single currency breaks up, the BIS’s expertise will be deemed essential to ensure that the fallout is contained. In early 2013, as this book went to press, there were signs that the Bundesbank, which had been forced against its will to adopt the single currency, was now placing its faith in the oldest store of value of all: gold. The Bundesbank announced that it plans to repatriate 300 tons of the gold it holds in the vaults of the New York Federal Reserve. Germany stores more than two-thirds of its gold reserves, which are worth $183 billion, in New York, Paris, and London. All 374 tons will be removed from Paris, although the German holdings will stay in at the Bank of England.
The decision to move the gold out of Paris but leave it in London was immediately interpreted as a loss of faith in the euro and the supranational project. As the Eurozone and European superstate project totters, gold mania is sweeping through Germany. Humanity’s favorite store of value is seen as a safer bet than a currency barely a decade old. In 2012 the German state auditing agency demanded that the Bundesbank carry out an inventory of all German gold stored abroad. Bundesbank officials said that they personally checked all the holdings, which were accounted for. The gold mania would seem very familiar to Hjalmar Schacht and Montagu Norman. Folk memories run deep, especially in Germany, which has twice faced economic meltdown in the last century—in 1918 and 1945. The much-vaunted German economic miracle was always rooted in massive injections of foreign capital, by Wall Street in the 1920s and by the United States government after 1945. Such largesse is unlikely to be repeated nowadays. If the euro collapses, gold is a safer bet than hoping for another tran
satlantic bailout.
The new emphasis on gold can only be good news for the BIS, and is a return to the bank’s roots. As Gianni Toniolo, the author of the BIS official history, notes, the gold standard—fixing the value of a currency to a weight of gold—was “embedded in the very DNA” of the BIS.19 The gold standard is long gone, but gold prices continue to rise, and gold still has a powerful hold over investors’ psyches. It is certainly ever more central to the BIS’s banking operations, so much so that the Financial Times has described the bank as “the ultimate bullion pawnbroker.”20 The BIS 2012 annual report revealed that the bank holds 355 metric tons of gold (worth almost $19 billion) in connection with its gold swap contracts, meaning that the bank exchanges currencies for gold, which it returns at the end of the contract.21
The BIS would be an essential part of any rescue operation if the euro fell apart, said Rudi Bogni, a veteran international banker. “The BIS could certainly help technically; it has the skills required for any intervention in the markets, should it be required.” The BIS could also prove useful in darker scenarios, such a major new war. And it certainly has extensive experience of keeping financial channels open between warring parties. In the modern, globalized economy, preserving those links would be judged even more important than in the Second World War. “When people start shooting at each rather than talking to each other, the economies and trade still continue. There is always an interest that is bigger than war,” said Bogni. “Even in death you have financial interests that continue after the death of the individual. So in a war where the parties are not dead, they will want to continue those interests after the war.”22 Basel would doubtless, once more, be the place of choice to keep those channels open.