Hot Money and the Politics of Debt

Hot Money and the Politics of Debt

R.T. Naylor
Copyright Date: 2004
Pages: 480
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  • Book Info
    Hot Money and the Politics of Debt
    Book Description:

    A ball of hot money rolls around the world. It seeks anonymity and political refuge. It dodges taxes and sidesteps currency controls. It rolls through offshore shell companies and secret bank accounts, phoney charities and fraudulent religious foundations. It is kept rolling by white-collar criminals, gun-runners, drug dealers, insurgent groups, scam artists, tax evaders, gold and gem smugglers, and, not least, secret service agents plotting coups and financing revolutions. R.T. Naylor explains the origins of this pool of hot and homeless money, its origins, its uses and abuses, how the world of high finance, corporate and governmental, became hostage to it, and the price the world is paying and will continue to pay until the hostages are released. This book was one of the first, and remains the most comprehensive, to dissect the world of offshore finance, capital flight, money laundering, and tax evasion. Once a subject of concern principally to tax authorities and finance ministries, since the September 11, 2001 hot and homeless money has now become a central preoccupation for police forces and intelligence services around the world.

    eISBN: 978-0-7735-7207-2
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Acknowledgments to the First Edition
    (pp. vii-viii)
  4. Introduction
    (pp. ix-10)
    Michael Hudson

    In this book Tom Naylor exposes the secrets of a financial world that prefers to live and work in the shadows. It is the story of hot money – the flood of anonymous, ostensibly homeless savings – and of the world’s financial havens that help it disappear from the world’s weaker economies as ‘errors and omissions’ (the economic euphemism for capital flight), only to reappear as debts owed by the victimized economies to suitably anonymous ‘foreigners’ operating out of these enclaves.

    This is more than a mere shell game, although shell companies and secret bank accounts are among its most...

  5. Prologue
    (pp. 11-16)

    This is a book about hot and homeless money – where it comes from, how it is used and abused, how the world of high finance, governmental and corporate, became hostage to it, and what price we will pay until the hostages are released.

    This is also a book about international debt loads of crisis proportions – where they came from, how the borrowed money has been used and abused, and how the world economy can shed the crippling burden the debt loads have imposed.

    And this is a book that explores the intimate relationship between the two. For ultimately...

  6. PART ONE/ The World According to Meyer Lansky
    • 1 Capital Flight in the Jet Age
      (pp. 19-30)

      When Bernie Cornfeld, the architect of the world’s largest and most successful offshore mutual fund, bought his first airplane, the joke went around his Investors’ Overseas Services (lOS) that he was about to start ‘Capital Flight Airlines.’¹ It was only partly apocryphal. If Bernie Cornfeld did not invent the modern technology of capital flight, he did far more than most of his contemporaries to put it to work in an imaginative, systematic, and profitable way.

      Providing facilities for money to flee the scrutiny and, consequently, the grasp of any particular political authority may be the world’s second oldest profession. But...

    • 2 Eurodollars and Nonsense
      (pp. 31-46)

      Until the late 1960s, most banks in North America could still pretend to a pattern of behavior consistent with their public image. Bankers, no less than policemen, doctors, and lawyers, need to project a professional mystique to improve their cash-flow position and to cover up colleagues’ periodic gross violations of professional ethics. Long before television created the stereotypes of the tough and incorruptible cop, the twenty-six-hour-a-day MD, and the razor-sharp lawyer brimming over with anger at the plight of the socio-economic underdog, the public was convinced that the banker was a sensible, staid, and conservative custodian of the widow’s mite....

    • 3 Red Ink and Black Gold
      (pp. 47-59)

      The late 1960s and 1970s were happy days for the world’s bankers. Not only was the machinery of peekaboo finance being set firmly in place, but there also seemed to be unlimited eager borrowers and inexhaustible funds to run through that machinery. The pop media had an interesting explanation why that should be so.

      Perhaps drawing inspiration from the fable, common in the 1920s, of an international conspiracy of Jewish financiers, the updated version concerns an international conspiracy of Arab Oil Sheikhs. The story begins in 1973 when the wily Orientals of the oil cartel got together to undermine the...

    • 4 Sheikhs in Sombreros?
      (pp. 60-74)

      Standing before the United Nations General Assembly on October 1, 1982, President José Lopez Portillo described Mexico as ‘a living example of what occurs when that enormous, volatile, and speculative mass of capital goes all over the world in search of high interest rates, tax havens, and supposed political and exchange stability. It decapitalizes entire countries and leaves havoc in its wake.’¹

      President Portillo’s lament came only some two months before his term of office expired. One might draw an obvious analogy to former US President Dwight Eisenhower’s famous warning, during the last days of his administration, about the dangers...

  7. PART TWO/ Parables of Peculiar Talents
    • 5 Putting the Money Changers Back in the Temple
      (pp. 77-91)

      The world’s most sanctimonious offshore banking center and tax haven sat, not on some idyllic Caribbean or South Pacific island, but in the heart of Rome. Nor did it originate in the plots and plans of American ‘libertarians,’ or in the schemes of Mitch WerBell’s gunslingers. Rather it emerged from a fateful meeting in 1929 between Italian dictator Benito Mussolini and Pope Pius XI. That meeting laid the foundations for the creation of an institution through which Italian state finances could be subverted, capital flight encouraged, and Mafia money washed.¹

      Mussolini badly needed the support of the Vatican for a...

    • 6 Of Dope, Debt, and Dictatorship
      (pp. 92-105)

      In October 1980, one month after a NATO-sponsored coup brutally ended several years of political turmoil in Turkey, the southern cornerstone of the NATO alliance,¹ London’s prestigiousInternational Banking Reportmade a cheerful announcement: ‘A feeling of hope is evident among international bankers that Turkey’s military coup may have opened the way to greater stability as an essential prerequisite for the revitalization of the Turkish economy.’² Those same international bankers were soon fondly contemplating the prospect of a Soviet invasion of Poland, the northern bulwark of the Warsaw Pact, with the same objective in mind – ‘revitalization’ of an economy...

    • 7 Playing Russian Roulette with the Polish Debt
      (pp. 106-117)

      Good behavior among debtors was in short supply as the 1980s unfolded. Nor was the deportment of some creditors much better. After Ali Agça pulled the trigger in St. Peter’s Square on May 13, 1981, he neglected to put forward the one explanation that might have won him absolution, namely that he was defending the stability of the international monetary system against attempts by John Paul II and his bankers, Calvi and Marcinkus, to undermine it (Nor did Ali then advance his subsequent claim to be Jesus Christ reincarnate, a claim that, if validated, might have given him the spiritual...

    • 8 Paradise Lost?
      (pp. 118-133)

      Solidarity may have been an unwitting victim of the Ambrosiano debacle. If so, it had plenty of company, including some two hundred creditor banks with loans totalling $450 million due from Banco Ambrosiano Holdings of Luxembourg. Someone had to pay. That called into question the future of one, indeed two, of the world’s offshore centers, and highlighted the shaky financial position of some of the Vatican’s principal allies at home and abroad.

      At the time of the Italian government’s refusal to honor the debts incurred by BAH Luxembourg, complex negotiations with the Vatican were in progress. At issue was a...

    • 9 What Went Down with the Belgrano?
      (pp. 134-149)

      In the spring of 1982, a British war fleet set sail for the Malvinas Islands in the south Atlantic. In the diplomatic scramble that followed, negotiations intermediated by President Fernando Belaunde Terry of Peru seemed to be successful. The Argentine military forces, which had occupied the islands, were to be withdrawn in exchange for a commitment by Britain to continue the process by which sovereignty over the Malvinas was being gradually ceded to Argentina.

      However, for reasons to do with the need to bolster her government’s then-sagging electoral fortunes, with lingering British imperial xenophobia, and with the desire to ‘demonstrate’...

    • 10 Born-Again Banking
      (pp. 150-162)

      Both the upheavals in Catholic finance in Italy and Spain and the defeat of Argentina in its twin wars–for the Malvinas and for a rational resolution of its debt problem – provided an opportunity for another group of practitioners of the arts and sciences of peekaboo finance. And they brought into the limelight yet another flourishing hot-money mill.

      These participants viewed Central America through red-tinted glasses. The Argentine military, protesting American support for Britain, had ceased to aid the antigovernment guerrillas in Nicaragua and to bolster the juntas in the surrounding states. Argentine ‘advisers’ and arms were soon replaced...

  8. PART THREE/ High Finance in Cocaine Country
    • 11 On Coca-collateral and the Andean Debt
      (pp. 165-185)

      At the 1981 Academy Awards ceremony, Johnny Carson quipped, ‘The biggest moneymaker in Hollywood last year was Colombia. Not the studio –the country.’¹ His comment was only partially flippant. From the trendsetting denizens of Hollywood and other high-income, high-profile social groups,² cocaine use spread through American society.³ By 1984 the US was guesstimated to be importing about sixty-five tons per annum, worth between $30 and $65 billion on the street, a sum sufficient to provoke an American administration cadmpaign insisting that the spread of drug use was a communist plot.⁴

      It is a long way from the Beverly Hills mansions...

    • 12 Country of Convenience
      (pp. 186-196)

      While Costa Rica and Uruguay competed for the title of ‘Switzerland of the Americas,’ Panama bore a closer resemblance to Hong Kong.¹ There has been a long spiritual and political relationship between the two areas. Both Panama and Hong Kong were created, by the US and Britain respectively, as commercial and financial centers to serve their broader ambitions. While Britain and the other major powers of the late nineteenth century carved up China, the US fostered the emergence of Panama as an ‘independent’ country.

      In 1898 the US launched the Spanish-American War, acquiring from a decadent Spanish empire the Philippines...

  9. PART FOUR/ What Gets Washed in the Pacific Basin?
    • 13 Some Like It Hot
      (pp. 199-215)

      In 1839 William Jardine, a Canton-based drug trafficker, seized on the Chinese government’s confiscation of illegal opium stocks to steer the British government into the first Opium War. At the end of that conflict, the Chinese empire was forced to pay a cash indemnity covering the costs of the war and the confiscated opium; and it was forced to cede Hong Kong to Britain as a permanent trading and smuggling base. William Jardine moved his business to Hong Kong, becoming the new colony’s first landlord.¹ From such roots grew Jardine-Matheson, the major multinational conglomerate engaged in commerce, real estate, and...

    • 14 Birds of a Feather…
      (pp. 216-228)

      Just as Margaret Thatcher’s post-Malvinas bellicosity in the summer of 1982 helped precipitate a property-market collapse that autumn, so her insistence in the summer of 1983 on a continued British presence in Hong Kong after the treaties expired helped bring on a financial crisis the next autumn.

      As the banks reeled from the property-market collapse, China fed the panic to demonstrate that if its two objectives, recovery of Hong Kong and preserving the colony’s prosperity, were unobtainable on its terms, it was prepared to sacrifice the second for the first. In so doing, China turned a 1982 squeeze on the...

  10. PART FIVE/ What Flies into the Cuckoo’s Nest?
    • 15 Swiss Contributions to Economic Development
      (pp. 231-249)

      There is an old proverb that the best defense is a good offense. And who could be expected to be more conversant with old proverbs than a pope? With one financial scandal after another spinning around his head, Pope John Paul II had a ready reply. On a 1984 state visit to a place where popes, if not angels, had formerly feared to tread, he boldly declared:

      Tiny Switzerland has today become a world power in business and finance. As a democratically constituted society you must watch vigilantly over all that goes on in this powerful world of money. The...

    • 16 Good Neighbor Switzerland
      (pp. 250-270)

      By the time of the Marc Rich affair, many sets of inquiring eyes were focused on Switzerland, for its role as a refuge for fugitive American financiers, or at least for their money, was based on long experience with its European neighbors, particularly those that could least afford it.

      Italian money began moving to Switzerland well before the First World War. In the 1920s Swiss banks established branches in the south of Switzerland specifically to service Italian flight capital. During and after the Second World War the Swiss business in Italian flight capital was aided by a special partner. That...

  11. PART SIX/ The Grim Reaper
    • 17 Economics for the Moral Majority
      (pp. 273-284)

      When a recently elected Ronald Reagan was photographed holding a copy ofNews World, there were two possible interpretations. One was that the Moonie publication had replacedReader’s Digestas the president’s main source of hard information on the state of the world. The second was that Reagan was engaging in a gesture of solidarity toward fellow believers – not in the divinity of the Reverend Moon, but in the legitimacy of the worship of the golden calf.

      To the advocates of ‘supply-side’ economics, that old-time economic religion preached by the Reaganites, government meddling with the distribution of income undermines...

    • 18 Buddy, Can You Spare a Billion?
      (pp. 285-297)

      During the 1970s many American banks had grown by leaps and bounds. But as the 1980s unfolded, the US banking system¹ found itself in a precarious position. Major banks with double or treble their equity tied up in loans to delinquent debtor countries became household gossip. Moreover, world energy and agricultural prices were soft, and, until late 1985, the high dollar was pricing American manufactured goods out of world markets. As a result, equal or worse was the threat to banks that had lent to the domestic farm, energy, and manufacturing sectors. Banks were forced into a scramble for deposits...

    • 19 What’s Better in the Bahamas?
      (pp. 298-309)

      Florida was not the only target of the big American money-center banks. They also cast a critical eye at the offshore booking centers of the euromarket. After ten years of lobbying by the banks, in 1981 the Fed had given first to New York and subsequently to other major centers permission to open International Banking Facilities (IBFS). These permitted the big banks to operate in the offshore sector, unencumbered by domestic regulations, without leaving home. The money-center banks of New York hoped to lure back much of the hundreds of billions of dollars’ worth of loan business thats US banks...

    • 20 Ghost Companies and Haunted Banks
      (pp. 310-324)

      In the spring of 1982 the CIA issued an unprecedented public denial: ‘The CIA has not engaged in operations against the Australian government, has no ties with Nugan-Hand, and does not involve itself in drug trafficking.’¹ At the time ‘the Company’ was being haunted by the specter of a bizarre scandal surfacing from the underworld of international banking –the collapse of the Nugan-Hand merchant bank of Sydney. This institution, which passed its time laundering drug money, trafficking in arms, and funding CIA covert operations, was described as having enough former top-level military personnel on its staff to be able to...

  12. PART SEVEN/ Strange Harvest
    • 21 Capital Punishment
      (pp. 327-346)

      The 1970s were, to some degree, a decade of development. Aided by foreign loans and strong commodity markets, many developing countries made impressive gains. While ‘waste,’ ‘corruption,’ and diversion of money to the military were amply evident, public works and industry did take shape.

      The 1980s have been, to a considerable extent, a decade of undevelopment. Past income gains have often been erased, economic diversification regressed, and capital cannibalized,¹ as the IMF and other creditor interests decided that the developing countries should learn to live below their means.²

      In 1982 GDP in Latin America fell 1.2%, the first absolute drop...

    • 22 Taking Stock
      (pp. 347-367)

      The legitimization of the debt, its conversion into a recognized publicsector obligation, was only the first step. Next came the task of finding a means by which the debtors could actually pay.

      The creditors faced a grim dilemma. They could maintain their façade of liquidity, by forcing developing countries to slash imports and investment yet further to divert foreign exchange into debt-service payments.¹ But this would endanger their own solvency by undermining the long-term capacity of the debtors to service their debts.

      Furthermore, the substitution of interest payments for import purchases cost the industrialized countries and the creditor banks’ domestic...

    • 23 Flight of Fancy
      (pp. 368-380)

      By 1987 developing-country debts to the West were getting perilously close to a trillion-dollar question, of which the commercial-bank portion was perhaps $400 billion and growing. How that debt emerged and came to bear its current interest load is a question evaded in refinancing negotiations. In fact, a major objective of those negotiations is still to whitewash the debt. First they aim to assure that the governments of the debtor countries assume obligations incurred by private companies and citizens, or by officials who used their public power to accumulate private wealth. Then the negotiations ensure, through long-term rescheduling, retroactive public...

  13. Postscript: The Permanent Bull Economy
    (pp. 381-401)

    When Ronald Reagan proclaimed the existence of a ‘permanent bull market’, it was not intended as a sardonic description of a meeting of his closest advisers. Rather it was a salute to a stock market boom that in five years pushed average American share prices up 300% while real national output in the US rose 20%.¹ It was a hymn of praise to a speculative frenzy atop an economy in which real industrial investment had virtually stopped, in which the farm sector was mired in a replay of the Great Depression, and in which the public infrastructure had deteriorated to...

  14. Afterword: On Whom the Toll Tells
    (pp. 402-443)

    Nearly two decades have passed sinceHot Moneyfirst appeared in print. Since then much has happened, yet little has changed, except perhaps for the worse. To do even partial justice to the panorama of sleaze that has formed the core of recent world financial history would require a small encyclopedia – maybe not so small. However, most of that history consists of variations, grand and petty, on a few larcenous themes already developed in the original text. Those themes were fourfold.

    First, the world was awash in hot and homeless money. Although most was of (more or less) legitimate...

  15. Final Acknowledgments
    (pp. 444-445)
  16. Notes
    (pp. 446-515)
  17. Bibliography and Sources
    (pp. 516-520)
  18. Index
    (pp. 521-536)