‘There is no guaranteed income for citizens but the state guarantees corporate profits.’
Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.
Neoliberals never tire of promoting myths of capitalism – it is survival of the fittest, only the efficient and competent survive and the rest are consigned to the dust-bin of capitalism. They preach smaller state and oppose welfare rights for citizens, but actually mobilise the state to erect barriers to entry, secure monopolies, make excessive profits and dump social costs.
Accounting firms are the private police force of capitalism. In their capacity as external auditors they are hired, remunerated and fired by the companies they audit. The audit industry is dominated by a few firms. Due to segmentation of the market, competition is minimal. All tiers have a history of delivering dud audits and advising companies on how to massage financial statements. Between 2010 and 2022, around 250 listed companies went bankrupt. Despite the glaring evidence, auditors raised red flags in only 25% of the cases. KPMG even provided “false and misleading documents and information” to regulators investigation audit failures at Carillion. Due to patronage of the state, the firms remain in business and continue to collect mega fees. The market for external auditing is created by the state and reserved for accountants belonging to a few select trade associations.
The Post Office scandal has once again shown that in pursuit of private gains lawyers lie and cheat to send innocent people to prisons. They thrive from patronage of the state which requires that only barristers or qualified solicitor advocates may represent clients in the higher courts.
Corporations have long mobilised the state to oppose workers’ rights, consumer rights and environmental rights, and demand and abuse tax reliefs. To assuage public anger, government enacted The Criminal Finances Act 2017 and promised to chase corporate tax abusers. To date, no large company has been prosecuted for tax evasion.
The state guarantees corporate profits, no matter how predatory a company is. Privatised water companies routinely dump raw sewage in rivers to endanger human health, biodiversity and marine life, but are guaranteed real returns each year through the pricing formula used by regulators.
Corporate profits are guaranteed through privatisations, outsourcing, private finance initiative and subsidies which Avanti West Coas managers described as “free money”. Train companies have received subsidy of over £75.2bn in the last decade. Between 2015 and 2023 renewable energy sector received £60bn and another £80bn went to fossil fuel companies. Drax burns wood from forests to produce electricity and received £22bn in subsidies. Jaguar and Land Rover received £500m. £500m has been handed to Tata Steel, £500m to Jingye Steel and £5bn to telecom companies to persuade them to provide internet services to rural areas. Patronage of the state is a win-win situation for companies. They keep the resulting assets and income streams whilst government does not take any equity stake, and subsidies are not repayable when companies up sticks for greener pastures.
The scandal-ridden finance industry, the supposed citadel of market efficiency, is the biggest beneficiary from capture of the state. Between 1995 and 2015 it made a negative contribution of £4,500bn to the UK economy. Rather than rooting out corrupt practices, the UK state covers them up. In 2012, HSBC admitted “criminal conduct” and was fined $1.9bn by the US authorities for laundering money. A criminal prosecution was deferred. HSBC is regulated by the UK authorities. It subsequently transpired that the then Chancellor George Osborne and UK financial regulators secretly urged the US authorities to go easy on HSBC as it was too big to fail/jail. No explanation has ever been given to the UK parliament.
The banking industry relies extensively upon the patronage of the state. The state acts as a lender of the last resort. It boosts banking profits through its anti-inflation policies which hike interest rates; effectively forcing people to hand more of their wealth to banks.
In the mid-1970s, due to frauds and reckless risk-taking secondary banks collapsed and the state dutifully rescued them. There has been a banking crisis in every decade since then, culminating in the big crash in 2007-08. The state provided £1,162bn of cash and guarantees (£133bn cash + £1,029bn of guarantees) to bail out banks. Another £895bn of quantitative easing was handed to capital market speculators. The crash was followed by reforms. To curb reckless risk-taking with other people’s money, a cap was imposed on bankers’ bonuses. The regulators duties were strengthened and they no longer had to promote growth of the industry.
The cap has now been abolished and senior bankers stand to get bonuses of ten times their basic salary. The Financial Services and Markets Act 2023 has reintroduced a competitiveness and growth objective for the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). This is effectively a race-to-the-bottom and erodes consumer protection mandate of the regulators. As one regulator put it, “I don’t think that we can achieve long term economic growth if we put the interests of the financial services industry ahead of the interests of other people in our society”.
The state is crafting new mechanisms for rescuing ailing banks. The Bank Resolution (Recapitalisation) Bill is being pushed through parliament. It expands the statutory functions of the Financial Services Compensation Scheme (FSCS), requiring it to provide funds to the Bank of England to meet the costs relating to failure of a bank, its recapitalisation and resolution of uncertainties. The Bill permits the FSCS to recover funds provided to the Bank of England through a levy on the banking sector. Recapitalisation and resolution, which could involve sale or even issuance of new shares, is seen as an alternative to insolvency though that is not ruled out. Thus, well-managed banks will bear the costs arising from badly managed banks.
The government claims that this way public purse won’t bear the cost of rescuing banks. Such claims are highly problematical. Banks will inevitably pass on the cost of additional levies to customers who will ultimately bear the cost of bank failures. The FSCS has a cash balance of £309m and no amount of additional levies will be able to rescue one or more large ailing bank. In such circumstances, the choice would be either insolvency or more likely a rescue financed from public funds.
The Bill introduces new moral hazards. If a bank is going to be bailed out anyway, why should executives constrain their decision-making? They have every economic incentive to be reckless and maximise their salaries and bonuses. The Bill does not clawback salaries and bonuses from executives.
The Bill totally ignores the impact of shadow banks on the regulated banking sector. Hedge funds and private equity are part of a $63 trillion opaque shadow banking system which is financed by banks, insurance companies, corporations, mortgage lenders, high net worth individuals, pension schemes and others. Well known banks such as Barclays, HSBC, Bank of America Merrill Lynch, Credit Suisse, Citibank, Deutsche Bank, Goldman Sachs and Morgan Stanley are key players in the shadow banking system. The system is financed by debt and full entanglement of the regulated banking sector with the shadow banking system is hard to fathom out. The Bank of England official responsible for financial stability strategy and risk said that there were “natural questions about the risks of these financing arrangements, and the growth in kinds and quantity of leverage, or ‘leverage on leverage’, throughout the ecosystem”.
Shadow banks remain unregulated and are not subject to any minimum capital requirements, capital adequacy or stress tests. The collapse of any component can quickly infect the rest of the financial system. For example, Archegos Capital Management, a hedge fund, collapsed in 2021 and literally overnight had negative effects on the capital buffers of Goldman Sachs, Morgan Stanley, UBS and Credit Suisse. The Bill does not propose any regulation of shadow banking. It does not authorise the FSCS to make levies on shadow banks even though their practices may bankrupt regulated banks.
The Bill is part of an impression management exercise encouraging people to believe that they won’t bear the cost of the financial crash. Meanwhile, the state continues to underwrite profits of the banking industry.
Patronage of the state is a key element of contemporary capitalism. The full might of capitalism is unleashed on the local baker, butcher and corner shop, but giant corporations are indulged by the state. There is no guaranteed income for citizens but the state guarantees corporate profits. The public purse is always open for them. The risk of bankruptcy is almost eliminated for banks. Their executives and shareholders are free to play selfish games without bearing any of the social costs. Their privileges are protected by corporate funded think-tanks, the very organisations that advocate cuts in public spending, low wages and erosion of welfare rights for workers. None advocates cuts in capital welfare programmes. No trade union has ever managed to secure a statutory monopoly for its members but accountancy and law trade associations have and their members collect monopoly rents even when they engage in predatory practices. We need to reconstruct the state so that it advances welfare of the people.
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