Tower of Basel

Adam Lebor, “Tower of Basel: The Shadowy History of the Secret Bank that Runs the World”, Public Affairs (2013) 272 pp.

The Bank for International Settlements (BIS) is host to the world’s most exclusive club.  The members meet every other month in Basel.  When this book was published, its members included Ben Bernanke, the chairman of the US Federal Reserve; Sir Mervyn King, the governor of the Bank of England; Mario Draghi, of the European Central Bank; Zhou Xiaochuan of the Bank of China; and the central bank governors of Germany, France, Italy, Sweden, Canada, India, and Brazil.  [the U.S. did not join until 1994]  BIS provides this meeting away from the demands of politicians and the prying eyes of nosy journalists; hopefully, the bankers bring some much needed order and coordination to the world financial system.

The BIS was set up in 1930 by an international treaty to facilitate WWI reparations from Germany; the BIS and its assets are legally inviolable.  The Swiss authorities have no jurisdiction over the bank or its premises. The BIS has just 140 customers but made tax-free profits of $1.17 billion in 2011-12.

Its history during WWII and its involvement with the Nazis is the stuff of criminal trials.  The BIS accepted looted Nazi gold, conducted foreign exchange deals for the Reichsbank and was used by both the Allies and the Axis powers as a secret contact point to keep the channels of international finance open.  Although the US did not join the BIS until 1994, the bank’s president during its Nazi years was an American, Thomas McKittrick (a buddy of Allen Dulles).

After 1945 the BIS has been heavily involved in the development of the European currency finally launching the Euro in 2002.  The bank is also a leading resource in building new global and regulatory architecture for commercial banks worldwide.  It is amazing that this bank with virtually no accountability to any government is so little known by the general public, yet is so important to world financial health.  The B.I.S. previous to 1945 offers up a lesson in the amorality of finance and the need for greater accountability in international capital flows.

Today the BIS’s Nazi-era history appears forgotten and the organization now presents itself as a repository of financial expertise.  Its economic research staff has often correctly warned about recent debt overleveraging from the late 1990s Asian crisis to the recent subprime crisis.

My Notes:

Pg. xx:  The BIS, located in Basel Switzerland, declares its current mission is threefold: to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in these areas, and to act as a bank for central banks.  The BIS also hosts much of the practical and technical infrastructure that the global network of central banks and their commercial counterparts need to function smoothly.  The BIS buys and sells gold and foreign exchange for its clients.  It provides asset management and arranges short-term credit to central banks when needed.

Pg. 42:  By the end of 1932 only seven of the forty-six countries that had been on the gold standard remained, including France, Italy, and the US, which left the following year.  With no more reparations from the Germans and the collapse of the gold standard, why did the BIS stay in business?  In part, because it was founded under an international treaty, and its statutes were essentially immutable.  It was therefore not possible to close the BIS.  In fact, the end of reparations and the collapse of the gold standard proved a boon for the BIS.  It allowed the bank to focus on its founders’ intentions to build a new transnational financial system of large capital movements, free from political or governmental control.

Pg. 51:  Nazi Germany benefited immeasurably from its relationship with the BIS.  By 1939 the BIS’s investments in Germany totaled 294 million Swiss gold francs ($96 million), a substantial sum.  Additionally, the BIS gave the Third Reich the chance for a more ‘normal’ type of business relations with foreign countries.  It provided the Reichsbank with a ready-made network of contacts and business channels.  It legitimized a national bank engaged in state-sponsored financial chicanery, theft, and appropriations of Jewish businesses through state-organized terror.  The BIS thus endured that the Reichsbank, which should have been a pariah institution, remained a central pillar of the global financial system. 

Pg. 78:  The BIS claim of neutrality during WWII proved worthless.  McKittrick and the rest of the bank’s management turned the BIS into a de facto arm of the Reichsbank.  This was not a result of inertia, passivity, or bureaucratic sloth.  It followed from a series of deliberate policy decisions.  The BIS carried out foreign exchange deals with the Reichsbank.  It accepted looted Nazi gold until the final days of the war, when even neutral countries such as Sweden had begun to refuse it.  It recognized the forcible incorporation of occupied countries, including France, Belgium, Greece, and the Netherlands, into the Third Reich.  By doing so, it also legitimized the role of the Nazi-controlled national banks in the occupied countries in appropriating Jewish-owned assets.  The BIS allowed the Nazi occupation regimes to take ownership of BIS shares, so that the Axis block held 67.4 percent of the bank’s voting stock. 

Pg. 79:  While Nazi territorial annexations were accepted, Soviet ones were not.  In June 1940 the Red Army invaded Latvia, Lithuania, and Estonia.  The Soviets ordered the three central bank governors to instruct the BIS to transfer their gold reserves to the Soviet Union’s state bank.  The parallel with the Czechoslovak gold confiscation by the Germans was clear—but the outcome was very different.  The BIS this time refused because McKittrick refused (the rest of the bank, as legalistic as ever, would have acquiesced).

Pg. 84:  Nazi Germany needed to buy vast amounts of raw materials to manufacture armaments and to feed, head, and clothe its population.  Swedish steel, Romanian oil, Portuguese tungsten, even South American beef, all had to be purchased and paid for in hard currency.  Nazi Germany needed a financial channel to neutral countries it ran through the BIS.  This is the main reason Nazi Germany did not invade Switzerland or Sweden.  These neutral countries were far more use to the Third Reich as monetary hubs than as extra territory.

Pg. 87:  The cozy relations between the BIS, the SNB (Switzerland National Bank) and the Third Reich stayed buried until the late 1990s, when the scandal broke that Swiss commercial banks were still holding the assets of Holocaust victims.  During the war the SNB bought $280 million of gold from the Nazis.  By 1943 the SNB knew about the extermination of European Jewry, but bank officials did not take measures to distinguish looted gold from other Reichsbank holdings.

Pg. 171:  The ECSC (The European Coal and Steel Community) plans were originally drawn up by John Foster Dulles and Jean Monnet after the end of WWII.  The ECSC was the first step on the road to today’s European Union.  The loans for this organization which began operation in 1951 were handled by the BIS.   In 1957 six core countries—Germany, France, Italy, Belgium, Luxembourg, and the Netherlands—signed the Treaty of Rome establishing the European Economic Community.  A European customs union came into existence in 1960; in 1979 Europeans voted in the first elections for the European Parliament; in 1992 twelve European countries signed the Maastricht Treaty bringing the European Union into existence. 

[The European Coal and Steel Community (ECSC) was an international organization serving to unify European countries after the Second World War. It was formally established by the Treaty of Paris (1951), which was signed by Belgium, France, West Germany, Italy, the Netherlands and Luxembourg. The ECSC was the first international organization to be based on the principles of supranationalism, and would ultimately lead the way to the founding of the European Union.]  Taken from Wikipedia.

Pg. 206:  The Iron Curtain was first opened in Hungary, three months before the Berlin Wall was breached. 

Pg. 234:  The Eurozone has two inherent flaws.  First, it is not a homogeneous currency area.  Uniting countries as diverse as Germany and Greece—each with different cultures, histories, economic and fiscal policies, and attitudes toward the role of the state and rights to raise taxes, is a hazardous endeavor.  Second, the Eurozone needs a credible transnational fiscal system, with rules and enforcement mechanisms.  National governments in the Eurozone retained the rights to raise taxes and control their public spending, even though those decisions impacted on the other members.  The warnings about the single currency’s contradictions went unheeded and Europe is now paying the price. 

fiscal policies: taxes and public spending

monetary policy: interest rates and control of inflation

Pg. 238:  The BIS has an excellent record of forecasting bad things that will happen from excessive lending.

*The bank had warned about the excessively easy credit that was fueling the Asian economic boom during the 1990s—in 1997 the debt crisis exploded.

*The bank warned that the US repeal of the Glass-Steagall Act in 1999 would trigger another cycle of boom, bust, and depression.  The BIS was especially concerned about Fannie Mae and Freddie Mac.  The two institutions were government enterprises that provided liquidity to the mortgage system.  They purchased home loans and turned them into mortgage-backed securities.  Then Wall Street worked out how to purchase and securitize mortgages without going through Freddie or Fannie. 

*Despite its legions of experts, the BIS was unable to predict or prevent the Libor scandal, when commercial banks made vast profits by manipulating interbank lending rates for their own advantage.

Pg. 241:  Some banks counted long-term debts and off-balance sheet items as assets, while others did not.  In 1988 the Basel Committee drew new rules, which said, in essence, that bank capital must equal at least 8 percent of its assets, including its loans and liabilities.  If a bank did not have sufficient capital, it must reduce its liabilities and risk exposure.  The committee has no powers of enforcement, but it does have enormous moral authority.  Any bank wishing to operate in international markets must adhere to the 8 percent rule.   With hindsight, looking back at 2007 it is clear that the capital requirements of Basel II were insufficient; Basel III accords, which have not yet been implemented, aim to further hone the regulations governing banks’ capital requirements.

Pg. 257:  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. 

Others argue that the answer to the banking crisis is not more insider committee and regulatory bodies.  ‘Banking should become a normal industry, like manufacturing bicycles.  It should be regulated to protect against fraud, to protect consumers, and to protect the banks integrity, but nothing else.  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 smaller 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.