The Zombie System How Capitalism Has Gone Off the Rails
Part 2: The Blackest of Boxes
But when Mayo, a lending expert, worked for well-known players like UBS and Prudential Securities, he quickly learned that the glittering facades of the American financial industry concealed an abyss of lies and corruption. Mayo met people who recommended buying shares in technology companies in which they themselves held stakes. He saw how top executives diverted funds into their own pockets during mergers. And he met a bank director who only merged his bank with a lender in Florida because he liked boating in the Keys.
What bothered Mayo most of all was that his employers penalized him for doing his job: writing critical analyses of banks. He lost his job at Lehman Brothers because he had downgraded a financial institution with which the Lehman investment department wanted to do business. Credit Suisse fired him because he recommended selling most US bank stocks.
Only when the real estate bubble burst did the industry remember the defiant banking analyst, who already saw the approaching disaster even as then-Deutsche Bank CEO Josef Ackermann issued a yield projection of 25 percent. Fortune called him "one of eight people who saw the crisis coming." The US Congress called on him to testify about the crisis.
Today Mayo writes his analyses for the Asian brokerage group CLSA and they still read like reports from a crisis zone. Central banks have kept lenders alive with low interest rates, and governments have forced them to take up additional capital and comply with thousands of pages of new regulations. Nevertheless, Mayo is convinced that "the incentives that drove the problems are still in place today."
Top bank executives are once again making as much as they did before the crisis, even though the government had to bail out a large share of banks. The biggest major banks did not shrink, as was intended, but instead have become even larger.
New accounting rules were passed, but financial managers can still hide the value of their receivables and collateral behind nebulous terms like "transaction" or "customer order." Bank balance sheets, British central banker Andrew Haldane said caustically, are still "the blackest of boxes."
Before the crash, investment banks gambled with derivatives known by acronyms like CDO and CDS. Today Wall Street institutions try to get the upper hand with high-frequency trading, with their Dark Pools and millisecond algorithms. Regulators fear that high-frequency trading, also known as flash trading, could create incalculable risks for the global financial system.
When analyst Mayo thinks about the modern banking world, he imagines a character in the Roman Polanski film "Chinatown," California detective Jake Gittes. The man solves one corruption case after another, and yet the crime level in Los Angeles doesn't go down. "Why is that?" he finally asks another character, who merely replies: "Forget it, Jake. It's Chinatown."
It's the same with the banking industry, says the analyst. Individual institutions aren't the problem, he explains. The problem is the system. "The banks are Chinatown," says Mayo, "and it is still the situation today."
The little village of Wimmis lies in an area of Switzerland that still looks quintessentially Swiss, the Bernese Oberland, or Highlands, where Swiss flags flutter in front yards. The local tanning salon is called the "Sunne Stübli" (little sun room) and under "item five" of the latest edition of the town's "Placard Ordinance," posted outside the town administration building, organizations must secure their public notices "with thumbtacks" and "not with staples." Everything has its place in Wimmis, as it does in Markus Wenger's window factory. The business owner, with his thinning hair and crafty eyes, is the embodiment of the old saying, "time is money." He walks briskly through his production building, the size of a football field, passing energy-saving transom windows, energy-saving patio doors and energy-saving skylights, which can be installed between solar panels, also to save energy, a system Wenger developed. "We constantly have to think of new things," he says, "otherwise the Czechs will overtake us."
Wenger could pass for a model businessman from the regional chamber of commerce were it not for his support for a political initiative that's about as un-Swiss as banning cheese production in the Emmental region. Wenger advocates raising the inheritance tax.
For decades, Switzerland was based on a unique form of popular capitalism, which promised small craftsmen as many benefits as those who worked in high finance. Switzerland was the discreet tax haven for the world's rich, while simultaneously laying claim to Europe's highest wage levels -- a Rolex model of the social welfare state.
But the country's established class consensus was shattered by the excesses of the financial crisis -- the $60 billion bailout of its biggest bank, UBS, and the millions in golden parachutes paid out to executives so that they wouldn't go to the competition after being jettisoned by their companies.
Since then, a hint of class struggle pervades Swiss Alpine valleys. A series of popular initiatives have been launched, initiatives the financial newspapers have labeled "anti-business." To begin with, the Swiss voted on and approved a cap on so-called "rip-off salaries." Another referendum sought to impose a ceiling on executive compensation, but it failed. A proposal by Social Democrats, Greens and the socially conservative EVP, to support government pensions with a new tax on large inheritances, will be put to a referendum soon.
'The Wealth of Medieval Princes'
Income isn't the problem in Switzerland, where the gap between rich and poor is no wider than in Germany or France. The problem is assets. No other country has as many major shareholders, financiers and investors, and in no country is as much capital concentrated in so few hands. The assets of the 100 wealthiest Swiss citizens have increased almost fivefold in the last 25 years. In the Canton of Zürich, the 10 richest residents own as much as the poorest 500,000. When a Swiss business owner died recently, his two heirs inherited an estate worth as much as all single-family homes and owner-occupied flats in the Canton of Appenzell Innerrhoden. Wealth has become so concentrated in Switzerland, says the former head of the Zürich statistics office, that it "rivals the wealth of medieval princes."
The government benefits hardly at all from this wealth. The Swiss tax authorities recently collected all of 864 million Swiss francs (715 million) in inheritance tax, and this revenue source is unlikely to increase anytime soon. To attract wealthy individuals, the cantons have reduced their tax rates to such low levels that even estates worth billions can be left to the next generation without being subject to any taxation at all.
In the past, the Swiss were fond of their quirky high society, whose lives of luxury in places like Lugano were as spectacular as their bankruptcies. But now, a large share of the super-rich comes from the financial industry, and even an upright window manufacturer like Markus Wenger is often unsure what to make of the demands coming from his high-end customers.
A homeowner recently asked Wenger if he could gold-plate his window fittings. And when he was standing in an older couple's 500-square-meter (5,380-square-foot) apartment not long ago, he found himself wondering: How do they heat this?
A Dangerous Path
Wenger is no revolutionary. He likes the market economy and says: "Performance must be rewarded." His support for a higher inheritance tax is not as much the result of his sense of justice, but rather a cost calculation that he explains as soberly as the installation plan for his windows.
This is how Wenger's calculation works: Today he pays about 8,000 a year in social security contributions for a carpenter who makes 65,000 Swiss francs (54,000). But the Swiss population is aging, so contributions to pension insurance threaten to increase drastically soon. Doesn't it make sense, he asks, to exact an additional, small contribution from those Swiss citizens who hardly pay any taxes at all today on their rapidly growing fortunes?
For Wenger, the answer is obvious. But he also knows that most of his fellow business owners see things differently. They are worried about an "attack by the left" and prefer to support their supposed champion, Christoph Blocher, the billionaire spiritual head of the Swiss People's Party. Only recently, Blocher convinced the Swiss to limit immigration by workers from other European countries. Now Wenger expects Blocher to launch a new campaign under the motto: "Are you trying to drive our business owners out of the country?"
There is more at stake than a few million francs for the national pension fund. The real question is whether wealthy countries like Switzerland should become playthings for their elites. Wenger sees the industrialized countries embarking on a dangerous path, the path of greed and self-indulgence, and he believes Blocher's party is the most visible expression of that. Blocher is pursuing a "policy for high finance," says Wenger. "He is fighting on behalf of money."
The entrepreneur from the Bern Highlands has no illusions over his prospects in the upcoming conflict with the country's great scaremonger. The Swiss are likely to vote on the inheritance tax initiative next year. "In the end," Wenger predicts, "the vote will be 60 to 40 against us."