sabato 31 dicembre 2016
martedì 20 dicembre 2016
Morgan Stanley Fined $7.5 Million... created by Morgan Stanley
Morgan Stanley Fined $7.5 Million For Commingling Customer Cash In "Delta One" Desk Trades
Ok so, Morgan Stanley engaged in some creative "commingling" - what's the big deal, most banks do it. What makes this particular case curious is the basis of the commingling: it involves some of the more interesting, and abstract, concepts of modern finance, including Morgan Stanley's "Delta One" trading desk, as well as the rehypothecation of collateral, all of which participated in a complicated violation of customer protection.
While we present more details below, here is a quick primer on the Customer Protection Rule:
According to the SEC order, Morgan Stanley's transactions violated the Customer Protection Rule, which prohibits broker-dealers from using affiliates to reduce their customer reserve account deposit requirements."it is intended to safeguard customers’ cash and securities so that they can be promptly returned should the broker-dealer fail. The SEC order finds that from March 2013 to May 2015, Morgan Stanley’s U.S. broker-dealer used transactions with an affiliate to reduce the amount it was required to deposit in its customer reserve account."
In the SEC’s order, the regulator says that Morgan Stanley had its affiliate, Morgan Stanley Equity Financing Ltd., serve
as a customer of its U.S. broker-dealer, a relationship that allowed
the affiliate to use margin loans from the U.S. broker-dealer to finance
the costs of hedging swap trades with customers. The margin
loans lowered the borrowing costs incurred to hedge these swap trades
and reduced the U.S. broker-dealer’s customer reserve account deposit
requirements by tens to hundreds of millions of dollars per day.
So how did MS' Delta One desk and rehypothecated customer collateral get involved? Here is the answer, in all its excruciating detail:
* * *The Issue: Financing Firm Hedges of Customer Swaps
Within MS, there are several subsidiary broker-dealers. Among them are MS&Co, which is a U.S. broker-dealer subsidiary of MS, and MSIP, which is a U.K. broker-dealer subsidiary. Across these broker-dealers, MS offers its customers a prime brokerage platform, including access to Delta One Structured Products (“DSP”) desks that offer customers synthetic exposure to specific securities through derivatives. For example, to meet customer demand for synthetic exposure to equity securities—i.e., exposure to price changes in an equity security without owning that equity security itself—a DSP desk will enter into an equity swap with a customer.
A customer entering into an equity swap with a DSP desk can take a long or short position vis-à-vis the underlying equity. If the customer goes long, then it is exposed to the same performance as if it owned the equity. Conversely, if the customer short sells the underlying equity through an equity swap, it obtains short exposure to that equity.
When entering into an equity swap with a customer, the DSP desk seeks to remain as neutral as possible in terms of its own market exposure. To hedge its exposure to the equity swap customer, the DSP desk generally would purchase the underlying equity for an equity swap where the customer had long exposure and would short sell the underlying equity where the customer had short exposure (“DSP Hedge”).
MS imposed a cost on trading desks for using firm capital to purchase their positions, including DSP Hedges. MS makes capital available to its trading desks but charges an interest rate on this capital, known as a proxy rate, that typically is higher than the interest that external third parties charge for collateralized loans. To avoid being assessed this more expensive internal financing rate, MS can finance its positions externally through a securities lending agreement. For example, MS&Co often rehypothecates customer margin securities in order to generate financing for customer margin loans.
In connection with the Prime Broker’s international synthetics business in particular, a portion of the DSP Hedges were less liquid, emerging markets equities (“EM DSP Hedges”), and as a result, they were more difficult to finance externally.
Although a broker-dealer may rehypothecate liquid securities and use the funds obtained to finance less liquid positions, the equity swaps traded in connection with the international synthetics business were largely booked in MSIP which held only a limited amount of liquid securities. Because the EM DSP Hedges exceeded MSIP’s liquid securities available for rehypothecation, the DSP desks were required to pay MS’s proxy rate to finance the EM DSP Hedges.
MS&Co held a substantial amount of liquid customer margin securities that were eligible for rehypothecation under Rule 15c3-3. Recognizing that MS&Co had a surplus of liquid customer margin securities and MSIP had a deficit for rehypothecation purposes, Prime Broker personnel began to explore whether DSP desks could access external financing that MS&Co could generate through rehypothecation in order to more cheaply finance the EM DSP Hedges.
Within certain limits, the Customer Protection Rule allows a broker-dealer to finance one customer’s margin activity with another customer’s assets, but does not allow one broker-dealer’s customer activity to finance another broker-dealer’s activities. As described below, the Prime Broker conceived of an affiliate that would transact with MS&Co, on one hand, and the DSP desks, on the other hand, for the purpose of providing financing for the EM DSP Hedges that was below the proxy rate.
The Proposed Solution: Affiliated Entity MSEFL
In early 2012, senior personnel from the Prime Broker developed a transaction structure centered on the use of an affiliate of MS&Co to hold the EM DSP Hedges, which it would purchase with funds obtained from margin loans extended by MS&Co. Following some initial meetings with relevant stakeholders regarding the broad contours of this idea, a New Product Approval (“NPA”) process was initiated in April 2012.
The affiliate—which eventually became MSEFL—would be a prime brokerage customer of MS&Co. Through this relationship, MSEFL would receive margin loans from MS&Co. MS&Co would fund these margin loans through the rehypothecation of its other customers’ liquid margin securities.
The EM DSP Hedges would trade in an MS account for global DSP desks, but would settle in MSEFL’s prime brokerage account. Therefore, the funds from the margin loans from MS&Co would be used to purchase or to borrow the EM DSP Hedges. In addition, the DSP desks would transfer the economics of the relevant, underlying equity swaps to MSEFL via a total return swap. The mechanics of the proposed transaction structure were as follows.
The Prime Broker estimated that, by avoiding MS’s proxy rate, MSEFL could achieve cost savings of up to $34 million per year. The Prime Broker’s use of MSEFL was ultimately more limited, and the Prime Broker thus did not realize this amount of savings.
From April to August 2012, the NPA was reviewed by stakeholders, including the Legal and Compliance Division and the Financial Control Group, which is responsible for ensuring MS&Co maintains sufficient funds to safeguard customer cash under Rule 15c3-3.
The Problem with the Proposed Solution: The Customer Protection Rule
Rule 15c3-3 imposes restrictions and responsibilities on a broker-dealer that are designed to safeguard its customers’ cash and securities so that these assets can be promptly returned if the broker-dealer fails. As to customer cash, Rule 15c3-3 requires a broker-dealer to maintain a reserve of funds and/or certain qualified securities in its Reserve Account that is at least equal in value to the net cash owed to customers. 17 CFR 240.15c3-3(e). The amount required to be maintained in the Reserve Account is based upon a computation typically performed on a weekly basis, which is calculated pursuant to a formula contained in Exhibit A to Rule 15c3-3 (“Reserve Formula”).6 See id. 240.15c3-3a. Subject to some adjustments, Rule 15c3-3 requires that a broker-dealer hold an amount equal to at least the excess of “credits” over “debits” in its Reserve Account. Id. 240.15c3-3(e). The term “credits” refers to the amount of cash the broker-dealer owes its customers or cash derived from the use of customer securities, while “debits” refers to amounts the customers owe the broker-dealer, for example due to margin loans extended to customers. See id. 240.15c3-3a.
The proposed transaction structure involving MSEFL was problematic for two reasons. First, the stated intent and objective of Rule 15c3-3 is to “eliminat[e] . . . the use by broker-dealers of customer funds and securities to finance firm overhead and such firm activities as trading and underwriting through the separation of customer related activities from other broker-dealer operations.” Exch. Act Rel. No. 9775, 1972 WL 125434, at *1 (Sept. 14, 1972).7 The EM DSP Hedges were used to hedge the Prime Broker’s risk arising out of equity swaps with the Prime Broker’s customers, which was transferred to MSEFL, an affiliate of MS&Co. As a result, the financing of the EM DSP Hedges was inconsistent with Rule 15c3-3.
Second, as described below, the transaction structure allowed for the impermissible reduction of the Reserve Account through the debits of an affiliate.
The margin loans from MS&Co to MSEFL established a potential debit that MS&Co intended to use to reduce its Reserve Account by the same amount as the margin loans. In mid-August 2012, however, Prime Broker personnel identified a problem with the inclusion of this debit in the Reserve Formula.
Because broker-dealers could potentially seek to reduce their Reserve Account requirement through affiliates, Rule 15c3-3 also limits a broker-dealer’s ability to include debits generated by the activity of affiliates. Note E(4) of the Reserve Formula (“Note E(4)”) provides that the debits of affiliates should be excluded “unless the broker or dealer can demonstrate that such debit balances are directly related to credit items in the formula.” In other words, debits attributable to an affiliate’s positions can be included in a broker-dealer’s Reserve Formula only to the extent that there are directly related credits attributable to those positions. This limitation imposed by Note E(4) is designed to ensure that debits related to affiliate activity, on a net basis, will not reduce a broker-dealer’s Reserve Account requirement.
The debit resulting from the margin loans to MSEFL had no directly related credit and thus would have improperly reduced MS&Co’s Reserve Account. Initially, MS&Co believed that the credits resulting from the rehypothecation of MS&Co’s other customers’ liquid margin securities could be considered directly related. But, as the Financial Control Group advised, “the credit must arise from the rehypothecating of the affiliates [sic] own collateral to be deemed directly related.” As such, the Prime Broker concluded that it could not achieve the desired cost savings because of the absence of a directly related credit and considered further options to determine whether it could operationalize MSEFL.
The Proposed Fix: Transferring Short Sale Proceeds to MSEFL
In an effort to keep the debit that would be generated by MS&Co’s margin loan to MSEFL in the Reserve Formula, the Prime Broker explored whether they could identify directly related credits to add to the transaction structure. In or about early September 2012, the Prime Broker considered whether the problem might be resolved by having the DSP desk transfer separate short sale positions—the proceeds of which are credits in the Reserve Formula—to MSEFL.
As mentioned above, the DSP desks could trade equity swaps that offered customers either long or short synthetic exposure to underlying equities. When a DSP desk offered short exposure
through an equity swap, the DSP desk would establish the DSP Hedge by shorting the underlying equity and, in doing so, receive short sale proceeds.
To implement this updated transaction structure, MSEFL would sell short to the DSP desk the underlying equities that the DSP desk had shorted to establish the DSP Hedge. The DSP desk would use the proceeds from its own short sales to pay MSEFL for these equities. MS&Co would then borrow the underlying equities and deliver them to the DSP desk to cover MSEFL’s short sales, and MS&Co would credit MSEFL with short sale proceeds. The DSP desk, in turn, could then close out its short sales. The revised transaction structure included the following additional elements:
The Problem with the Proposed Fix: The Customer Protection Rule
Prior to its approval and implementation, MS&Co did not realize that this updated transaction structure achieved a result contrary to Rule 15c3-3 generally and the purpose of Note E(4).
MS&Co intended for MSEFL’s short sale proceeds to serve as the directly related credit for purposes of the debit resulting from the margin loans to MSEFL. Therefore, MS&Co believed that it could now offset that debit in its Reserve Formula.
When MS&Co borrowed the underlying equities to execute the short sale, however, that borrow was included as a debit in its Reserve Formula. Therefore, MS&Co was claiming that a credit (the short sale proceeds) was directly related to MSEFL’s debit (the margin loan from MS&Co) even though that same credit already generated a separate, offsetting debit (the stock borrow).
MS&Co was improperly using the same credit to offset two different debits— specifically, relying on a credit that already offset another debit in order to serve as the directly related credit for purposes of the separate affiliate debit. Further, MS&Co did not comply with Note E(4), which is designed to ensure that net affiliate activity does not decrease a broker-dealer’s Reserve Account requirement.
FINRA’s Interpretations of Financial and Operational Rules includes guidance reflecting advice from Commission staff that specifically speaks to this point: “A short sale credit balance . . . may not be used for netting purposes with a debit balance with the same customer in arriving at the excludable debit balance portion from the reserve formula pursuant to Note[] E(4) . . . .” FINRA Interpretations of Financial and Operational Rules, Rule 15c3-3(Exhibit A – Note E(6))/011 (NYSE Interpretation Memo No. 04-3 (June 2004)) (describing advice from SEC Staff).
Although they consulted with an external subject matter expert, MS&Co personnel did not appreciate that the updated transaction structure ran contrary to Note E(4). The Financial Control Group ultimately concluded during the NPA process that “including shorts was ‘benign’ and wouldn’t require additional explanation or ‘proving.’” Consequently, on September 17, 2012, the Prime Broker “mov[ed] forward with expanding the structure to include shorts equal to the debit.”
MS&Co Used MSEFL to Finance Firm Hedges for Over Two Years
The NPA received final approval on March 6, 2013, and MSEFL financed EM DSP Hedges until May 2015, when Commission staff contacted MS&Co regarding its use of MSEFL. MS&Co had controls in place intended to ensure that affiliate debits would be excluded from the Reserve Formula. Because MS&Co’s practice was first to net all account debits against credits and then to exclude any affiliate net debit balance, however, MS&Co’s controls did not exclude the affiliate debits offset by credits arising from short sale proceeds in MSEFL’s account.
Consequently, MS&Co reduced the amount that it calculated it was required to deposit in its Reserve Account through its use of MSEFL by over $305 million on average and as much as approximately $752 million on a single day. Because MS&Co’s improper use of credits to offset affiliate debits was not limited to MSEFL, MS&Co further reduced the amount it calculated it was required to deposit in the Reserve Account by nearly $78 million on average and as much as about $417 million on a single day.
MS&Co Incorrectly Calculated and Reported Reserve Formula
MS&Co is required to submit monthly reports, known as Financial and Operational Combined Uniform Single (“FOCUS”) Reports, and annual audited financial statements. These FOCUS Reports and annual audited financial statements include, among other things, a broker-dealer’s Reserve Formula calculation. By improperly including debits from affiliates, MS&Co’s Reserve Formula calculations were inaccurate until it corrected this error in May 2015. Consequently, information in MS&Co’s FOCUS Reports and annual audited financial statements on its Reserve Formula calculations was inaccurate.
What makes this particular instance of commingling especially notable, aside from the in depth look from a regulatory standpoint inside the real "plumbing" of Delta One desks, is that virtually every other broker dealer has engaged in a similar if not identical operation, hoping that under the guise of extensively rehypothecated collateral, both clients and regulators would be oblivious to what is happening. Surprisingly, on this one occasions the SEC wised up. We wonder if it will follow suit with other similar transgressions, which however are far less troubling than the fundamental concept of using and resuing collateral with virtually no supervision, something a very critical Jeff Snider touched upon last night.
For those interest, the full SEC order and explanation is below.
MS Delta One by zerohedge on Scribd
sabato 17 dicembre 2016
Calhoun : Speech on public deposits, May 28, 1836
Speeches of John C. Calhoun : delivered in the Congress of the United States from 1811 to the present time
Published 1843
- page 226
SPEECH ON THE PUBLIC DEPOSITES, MAY 28, 1836.
The Senate then proceeded to the consideration of the bill to regulate the
deposites of the public money.
After some words from Mr. Wright in explanation, Mr. Calhoun said : This
bill, which the senator from New-York proposes to strike out in order to substitute his amendment, is no stranger to this body. It was reported at the last session by the Select Committee on Executive Patronage, and passed the Senate after a full and deliberate investigation, by a mixed vote of all parties, of twenty to twelve. As strong as is this presumptive evidence in its favour, I would, notwithstanding, readily surrender the bill and adopt the amendment of the senator from New-York, if I did not sincerely believe that it is liable to strong and decisive objections. I seek no lead on this important subject ; my sole aim is to aid in applying a remedy to what I honestly believe to be a deep and dangerous disease of the body politic : and I stand prepared to co-operate with any one, be he of what party he may, who may propose a remedy, provided it shall promise to be safe and efficient. I, in particular, am desirous of co-operating with the senator from New-York, not only because I desire the aid of his distinguished talents, but, still more, of his decisive influence with the powerful party of which he is so distinguished a member, and which now, for good or evil, holds the destiny of the country in its hands. It was in this spirit that I examined the amendment proposed by the senator ; and I regret to say, after a full investigation, I cannot acquiesce in it, as I feel a deep conviction that it will be neither safe nor efficient. So far from being substantially the same as the bill, as stated by the senator, I cannot but regard it as essentially different, both as to objects and means. The objects of the bill are, first, to secure the public interest as far as it is connected with the deposites ; and, next, to protect the banks in which they are made against the influence and control of the executive branch of this government, with the view both to their and the public interest. Compared with the bill, in respect to both, the proposed amendment will be found to favour the banks against the people, and the executive against the banks. I do not desire the Senate to form their opinion on my authority. I wish them to examine for themselves ; and, in order to aid them in the examination, I shall now proceed to state, and briefly illustrate, the several points of difference between the bill and the proposed amendment, taking them in the order in which they stand in the bill.
The first section of the bill provides that the banks shall pay at the rate of
two per cent, per annum on the deposites for the use of the public money. This
provision is entirely omitted in the amendment, which proposes to give to the
banks the use of the money without interest. That the banks ought to pay
something for the use of the public money, all must agree, whatever diversity of opinion there may be as to the amount. According to the last return of
the treasury department, there was, on the first of this month, $45,000,000 of
public money in the thirty-six depository Banks, which they are at liberty to
use as their own for discount or business, till drawn out for disbursements, an
event that may not happen for years. In a word, this vast amount is so much
additional banking capital, giving the same, or nearly the same, profit to those
institutions as their permanent chartered capital, without rendering any other
service to the public than paying away, from time to time, the portion that might be required for the service of the government. Assuming that the banks realize a profit of six per cent, on these deposites (it cannot be estimated at less), it would five, on the present amount, nearly three millions of dollars per annum, and on the probable average public deposites of the year, upward of two millions of dollars ; which enormous profit is derived from the public by comparatively few individuals, without any return or charge, except the inconsiderable service of paying out the draughts of the treasury when presented. But it is due to the senator to acknowledge that his amendment is predicated on the supposition that some disposition must be made of the surplus revenue, which would leave in the banks a sum not greater than would be requisite to meet the current expenditure : a supposition which necessarily must affect, very materially affect, the decision of the question of the amount of compensation the banks ought to make to the public for the use of its funds ; but, let the disposition be what it may, the omission in the amendment of any compensation whatever is, in my opinion, wholly indefensible.
The next point of difference relates to transfer warrants. The bill prohibits
the use of transfer warrants, except with a view to disbursement, while the
amendment leaves them, without regulation, under the sole control of the treasury department. To understand the importance of this difference, it must be
borne in mind that the transfer warrants are the lever by which the whole banking operations of the country may be controlled through the deposites. By them the public money may be transferred from one bank to another, or from one state or section of the country to another state or section ; and thus one bank may be elevated and another depressed, and a redundant currency created in one state or section, and a deficient in another ; and, through such redundancy or deficiency, all the moneyed engagements and business transactions of the whole
community may be made dependant on the will of one man. With the present
enormous surplus, it is difficult to assign limits to the extent of this power. The secretary, or the irresponsible agent unknown to the laws, who, rumour says,
has the direction of this immense power (we are permitted to have no certain
information), may raise and depress stocks and property of all descriptions at
his pleasure, by withdrawing from one place and transferring to another, to the
unlimited gain of those who are in the secret, and certain ruin of those who are
not. Such a field of speculation has never before been opened in any country ;
a field so great, that the Rothschilds themselves might be tempted to enter it
with their immense funds. Nor is the control which it would give over the politics of the country much less unlimited. To the same extent that it may be
used to affect the interests and the fortunes of individuals, to the like extent it may be employed as an instrument of political influence and control. I do not
intend to assert that it has or will be so employed ; it is not essential at present to inquire how it has or will be used. It is sufficient for my purpose to show, as I trust I have satisfactorily, that it may be so employed. To guard
against the abuse of so dangerous a power, the provision was inserted in the
bill to prohibit the use of transfer warrants, except, as stated, for the purpose of disbursement ; the omission of which provision in the amendment is a fatal objection to it of itself, were there no other. But it is far from standing alone : the next point of difference will be found to be not less striking and fatal.
The professed object of both the bill and the amendment is to place the safekeeping of the public moneys under the regulation and control of law, instead of being left, as it now is, at the discretion of the executive. However strange It may seem, the fact is, nevertheless, so, that the amendment entirely fails to effect the object which it is its professed object to accomplish. In order that It may be distinctly seen that what I state is the case, it will be necessary to view the provisions of the bill and the amendment in reference to the deposite separately, as they relate to the banks in which the public funds are now deposited, and those which may hereafter be selected to receive them.
The bill commences with the former, which it adopts as banks of deposite,
and prescribes the regulations and conditions on the observance of which they
shall continue such ; while, at the same time, it places them beyond the control and influence of the executive department, by placing them under the protection of law so long as they continue faithfully to perform their duty as fiscal
agents of the government. It next authorizes the Secretary of the Treasury to
select, under certain circumstances, additional banks of deposite, as the exigency of the public service may require, on which it imposes like regulations and conditions, and places, in like manner, under the protection of law. In all this the amendment pursues a very different course. It begins with authorizing the secretary to select the banks of deposite, and limits the regulations and conditions it imposes on such banks ; leaving, by an express provision, the present banks wholly under the control of the treasury or the executive department, as they now are, without prescribing any time for the selection of other banks of deposite, or making it the duty of the secretary so to do. The consequence is obvious. The secretary may continue the present banks as long as he pleases ; and so long as he may choose to continue them, the provisions of the amendment, so far as relates to the deposites, will be a dead letter ; and the banks, of course, instead of being under the control of the law, will be contrary, as I have said, to the professed object both of the bill and amendment— subiect exclusively to his will. -
The senator has attempted to explain this difference, but, I must say, very unsatisfactorily. He said that the bill prohibited the selection of other banks ; and, as he deemed others to be necessary, at certain important points, in consequence of the present enormous surplus, he inserted the provision authorizing the selection of other banks. The senator has not stated the provisions of the bill accurately ; so far from not authorizing, it expressly authorizes the selection of other banks where there are now none ; but I presume he intended to limit his remarks to places where there are no existing banks of deposile.
Thus limited, the fact is as he states ; but it by no means explains the extraordinary omission (for such I must consider it) of not extending the regulations to the existing banks, as well as to those hereafter to be selected. If the public service requires additional banks at New-York and other important points, in consequence of the vast sums deposited there (as I readily agree it does), if no disposition is to be made of the surplus, it is certainly a very good reason for enlarging the provisions of the bill, by authorizing the secretary to select other banks at those points ; but it is impossible for me to comprehend how it proves that the regulations which the amendment proposes to impose should be exclusively limited to such newly-selected banks. Nor do I see why the senator has not observed the same rule, in this case, as that which he adopted in reference to the compensation the banks ought to pay for the use of the public money.
He omitted to provide for any compensation, on the ground that his amendment
proposed to dispose of all the surplus money, leaving in the possession of the
banks a sum barely sufficient to meet the current expenditure, for the use of
which he did not consider it right to charge a compensation. On the same
principle, it was unnecessary to provide for the selection of additional banks
where there are now banks of deposite, as they would be ample if the surplus
was disposed of. In this I understood the senator himself to concur.
But It is not only in the important point of extending the regulations to the
existing banks of deposite that the bill and the amendment differ. There is a striking difference between them in reference to the authority of Congress over the banks of deposite embraced both in the bill and the amendment. The latter, following the provision in the charter of the late Bank of the United States, authorizes the secretary to withdraw the public deposites, and to discontinue the use of any one of the banks whenever, in his opinion, such bank shall have violated the conditions on which it has been employed, or the public funds are not safe in its vaults, with the simple restriction, that he shall report the fact to Congress.
We know, from experience, how slight is the check which this restriction imposes. It not only requires the concurrence of both houses of Congress to
overrule the act of the secretary, where his power may be improperly exercised, but the act of Congress itself, intended to control such exercise of power,
may be overruled by the veto of the President, at whose will the secretary
holds his place ; so as to leave the control of the banks virtually under the control of the executive department of the government. To obviate this, the bill
vests the secretary with the power simply of withdrawing the deposites and
suspending the use of the bank as a place of deposite ; and provides that,
if Congress shall not confirm the removal, the deposites shall be returned to the bank after the termination of the next session of Congress.
The next point of difference is of far less importance, and is only mentioned as
tending to illustrate the different character of the bill and the amendment. The
former provides that the banks of deposite shall perform the duties of commissioners of loans without compensation, in like manner as was the duty of the late Bank of the United States and its branches, under its charter. Among
these duties is that of paying the pensioners — a very heavy branch of disbursement, and attended with considerable expense, and which will be saved to the government under the bill, but will be lost if the amendment should prevail.
Another difference remains to be pointed out, relating to the security of the
deposites. With so large an amount of public money in their vaults, it is important that the banks should always be provided with ample means to meet
their engagements. With this view, the bill provides that the specie in the vaults of the several banks, and the aggregate of the balance in their favour with other specie-paying banks, shall be equal to one fifth of the entire amount of their notes and bills in circulation, and their public and private deposites — a sum, as is believed, sufficient to keep them in a sound, solvent condition.
The amendment, on the contrary, provides that the banks shall keep in their own
vaults, or the vaults of other banks, specie equal to one fourth of its notes and bills in circulation, and the balance of its accounts with other banks payable on demand.
I regret that the senator has thought proper to change the phraseology, and
to use terms less clear and explicit than those in the bill. I am not certain
that I comprehend the exact meaning of the provision in the amendment. What
is meant by specie in the vaults of other banks ? In a general sense, all deposites are considered as specie ; but I cannot suppose that to be the meaning in this instance, as it would render the provision in a great measure inoperative.
I presume the amendment means special deposites in gold and silver in other
banks, placed there for safe keeping, or to be drawn on, and not to be used by
the bank in which it is deposited. Taking that to be the meaning, what is there
to prevent the same sum from being twice counted in estimating the means of
the several banks of deposite? Take two of them, one having $100,000 in
specie in its vaults, and the other the same amount in the vaults of the other bank, which, in addition, has, besides, another $100,000 of its own ; what is there to prevent the latter from returning, under the amendment, $200,000 of specie in its vaults, while the former would return $100,000 in its own vaults, and another in the vaults of the other bank, making, in the aggregate, between them, $400,000, when, in reality, the amount in both would be but $300,000 ?
But this is not the only difference between the bill and amendment, in this
particular, deserving of notice. The object of the provision is to compel the
banks of deposite to have, at all times, ample means to meet their liabilities, so that the government should have sufficient assurance that the public moneys in their vaults would be forthcoming when demanded. With this view, the bill
provides that the available means of the bank shall never be less than one fifth
of its aggregate liabilities, including bills, notes, and deposites, public and private ; while the amendment entirely omits the private deposites, and includes
only the balance of its deposites with other banks. This omission is the more
remarkable, inasmuch as the greater portion of the liabilities of the deposite
banks must, with the present large surplus, result from their deposites, as every one who is familiar with banking operations will readily perceive.
I have now presented to the Senate the several points of difference which I
deem material between the bill and the amendment, with such remarks as to
enable them to form their own opinion in reference to the difference, so that they may decide how far the assertion is true with which I set out, that, wherever they differ, the amendment favours the banks against the interests of the public, and the executive against the banks.
The senator, acting on the supposition that there would be a permanent surplus
beyond the expenditures of the government, which neither justice nor regard to
the public interest would permit to remain in the banks, has extended the provisions of his amendment, with great propriety, so as to comprehend a plan to withdraw the surplus from the banks. His plan is to vest the commissioners of the sinking fund with authority to estimate, at the beginning of every quarter, the probable receipts and expenditures of the quarter ; and if, in their opinion, the receipts, with the money in the treasury, should exceed the estimated expenditure by a certain sum, say $5,000,000, the excess should be vested in state stocks ; and if it should fall short of that sum, a sufficient amount of the stocks should be sold to make up the deficit. We have thus presented for consideration the important subject of the surplus revenue, and with it the question so anxiously and universally asked, What shall be done with the surplus ? Shall it be expended by the government, or remain where it is, or be disposed of as proposed by the senator ? or, if not, what other disposition shall be made of it ? questions, the investigation of which necessarily embraces the entire circle of our policy, and on the decision of which the future destiny of the country may depend.
But before we enter on the discussion of this important question, it will be
proper to ascertain what will be the probable available means of the year, in
order that some conception may be formed of the probable surplus which may
remain, by comparing it with the appropriations that may be authorized.
According to the late report of the Secretary of the Treasury, there was de-
posited in the several banks a little upward of $33,000,000 at the termination
of the first quarter of the year, not including the sum of about $3,000,000 deposited by the disbursing agents of the government. The same report stated
the receipts of the quarter at about $11,000,000, of which lands and customs
yielded nearly an equal amount. Assuming for the three remaining quarters an
equal amount, it would give, for the entire receipts of the year, $44,000,000.
I agree with the senator, that this sum is too large. The customs will probably average an amount throughout the year corresponding with the receipts
of the first quarter, but there probably will be a considerable falling off in
the receipts from the public lands. Assuming $7,000,000 as the probable
amount, which I presume will be ample, the receipts of the year, subtracting that sum from $44,000,000, will be $37,000,000 ; and subtracting from
that $11,000,000, the receipts of the first quarter, would leave $26,000,000 as
the probable receipts of the last three quarters. Add to this sum $33,000,000,
the amount in the treasury on the last day of the first quarter, and it gives
$59,000,000. To this add the amount of stock in the United States Bank, which,
at the market price, is worth at least $7,000,000, and we have $66,000,000,
which I consider as the least amount at which the probable available means of
the year can be fairly estimated. It will, probably, very considerably exceed
this amount. The range may be put down at between $66,000,000 and
$73,000,000, which may be considered as the two extremes between which
the means of the year may vibrate. But, in order to be safe, I have assumed
the least of the two.
The first question which I propose to consider is, Shall this sum be expended by the government in the course of the year ? A sum nearly equal to the
entire debt of the war of the Revolution, by which the liberty and independence
of these states were established ; more than five times greater than the expenditure of the government at the commencement of the present administration,
— deducting the payments on account of the public debt — and more than four
times greater than the average annual expenditure of the present administration,
making the same deduction, extravagant as its expenditure has been. The
very magnitude of the sum decides the question against expenditure. It may
be wasted, thrown away, but it cannot be expended. There are not objects on
which to expend it ; for proof of which I appeal to the appropriations already
made and contemplated. We have passed the navy appropriations, which, as
liberal as they are admitted to be on all sides, are raised only about $2,000,000 compared with the appropriations of last year. The appropriations for fortifications, supposing the bills now pending should pass, will amount to about $3,500,000, and would exceed the ordinary appropriations, assuming them at
$1,000,000, which I hold to be ample, by $2,500,000. Add a million for ordnance, seven or eight for Indian treaties, and four for Indian wars, and supposing the companies of the regular army to be filled as recommended by the war department, the aggregate amount, including the ordinary expenditures, would be between thirty and thirty-five millions, and would leave a balance of at least
$30,000,000 in the treasury at the end of the year.
But suppose objects could be devised on which to expend the whole of the
available means of the year, it would still be impossible to make the expenditure without immense waste and confusion. To expend so large an amount, regularly and methodically, would require a vast increase of able and experienced disbursing officers, and a great enlargement of the organization of the government, in all the branches connected with disbursements. To effect such an enlargement, and to give a suitable organization, placed under the control of skilful and efficient officers, must necessarily be a work of time ; but, without it, so sudden and great an increase of expenditure would necessarily be followed by inextricable confusion and heavy losses.
But suppose this difficulty overcome, and suitable objects could be devised,
would it be advisable to make the expenditure ? Would it be wise to draw off
so vast an amount of productive labour, to be employed in unproductive objects,
in building fortifications, dead walls, and in lining the interior frontier with a large military force, neither of which would add a cent to the productive power of the country ?
The ordinary expenditure of the government, under the present administration, may be estimated, say at $18,000,000, a sum exceeding by five or six millions what, in my opinion, is sufficient for a just and efficient administration
of the government. Taking eighteen from sixty-six would leave forty-eight
millions as the surplus, if the affairs of the government had been so administered as to avoid the heavy expenditures of the year, which I firmly believe, by early and prudent management, might have been effected. The expenditure of this sum, estimating labour at $20 a month, would require 200,000 operatives, equal to one third of the whole number of labourers employed in producing the great staple of our country, which is spreading wealth and prosperity over the land, and controlling, in a great measure, the commerce and manufactures of the world. But take what will be the actual surplus, and estimate that at half the sum which, with prudence and economy, it might have been, and it would require the subtraction of 100,000 operatives from their present useful employment, to be employed in the unproductive service of the government. Would it, I again repeat, be wise to draw off this immense mass of productive labour, in order to employ it in building fortifications and swelling the military establishment of the country ? Would it add to the strength of the Union, or give increased security to its liberty, or accelerate its prosperity 1 the great objects for which the government was constituted.
To ascertain how the strength of any country may be best developed, its peculiar state and condition must be taken into consideration. Looking to ours with this view, who can doubt that, next to our free institutions, the main source of our growing greatness and power is to be found in our great and astonishing increase of numbers, wealth, and facility of intercourse 1 If we desire to see our country powerful, we ought to avoid any measure opposed to their development, and, in particular, ought to make the smallest possible draught, consistent
with our peace and security, on the productive powers of the country. Let these
have the freest possible play. Leave the resources of individuals under their
own direction, to be employed in advancing their own and their country's wealth
and prosperity, with the extraction of the least amount required for the expenditure of the government ; and draw off not a single labourer from his present productive pursuits to the unproductive employment of the government, excepting such as the public service may render indispensable. Who can doubt that such a policy would add infinitely more to the power and strength of the country than the extravagant schemes of spending millions on fortifications and the increase of the military establishment ?
Let us next examine how the liberty of the country may be affected by the scheme of disposing of the surplus by disbursements. And here I would ask.
Is the liberty of the country at present in a secure and stable condition ? and,
if not, by what is it endangered ? and will an increase of disbursements augment or diminish the danger ?
Whatever may be the diversity of opinion on other points, there is not an intelligent individual of any party, who regards his reputation, that will venture to deny that the liberty of the country is at this time more insecure and unstable than it ever has been. We all know that there is in every portion of the Union, and with every party, a deep feeling that our political institutions are undergoing a great and hazardous change. Nor is the feeling much less strong, that the vast increase of patronage and influence of the government is the cause of the great and fearful change which is so extensively affecting the character of our people and institutions. The effect of increasing the expenditures at this time, so as to absorb the surplus, would be to double the number of those who live, or expect to live, by the government, and in the same degree augment its patronage and influence, and accelerate that downward course which, if not arrested, must speedily terminate in the overthrow of our free institutions.
These views I hold to be decisive against the wild attempt to absorb the immense means of the government by the expenditures of the year. In fact, with the exception of a few individuals, all seem to regard the scheme either as impracticable or unsafe : but there are others, who, while they condemn the attempt of disposing of the surplus by immediate expenditures, believe it can be
safely and expediently expended in a period of four or five years, on what they
choose to call the defences of the country.
In order to determine how far this opinion may be correct, it will be necessary first to ascertain what will be the available means of the next four or five
years ; by comparing which with what ought to be the expenditure, we may
determine whether the plan would, or would not, be expedient. In making the
calculation, I will take the term of five years, including the present, and which will, of course, include 1840, after the termination of which, the duties above twenty per cent, are to go off, by the provisions of the Compromise Act, in eighteen months, when the revenue is to be reduced to the economical and just
wants of the government.
The available means of the present year, as I have already shown, will equal
at least $66,000,000. That of the next succeeding four years (including 1840)
may be assumed to be twenty-one millions annually. The reason for this assumption may be seen in the report of the select committee at the last session, which I have reviewed, and in the correctness of which I feel increased confidence. The amount may fall short of, but will certainly not exceed, the estimate in the report, unless some unforeseen event should occur. Assuming,
then, $21,000,000 as the average receipts of the next four years, it will give an aggregate of $84,000,000, which, added to the available means of this year,
will give $150,000,000 as the sum that will be at the disposal of the government for the period assumed. Divide this sum by five, the number of years, and it will give $30,000,000 as the average annual available means of the period.
The next question for consideration is. Will it be expedient to raise the disbursement during the period to an average expenditure of $30,000,000 annually ? The first, and strong objection to the scheme is, that it would leave in the
deposite banks a heavy surplus during the greater part of the time, beginning
with a surplus of upward of thirty millions at the commencement of next year,
and decreasing at the rate of eight or nine millions a year till the termination
of the period. But, passing this objection by, I meet the question directly. It
would be highly inexpedient and dangerous to attempt to keep up the disbursements at so high a rate. I ask. On what shall this money be expended ? Shall it be expended by an increase of the military establishment ? by an enlargement of the appropriations for fortifications, ordnance, and the navy, far beyond what is proposed for the present year ? Have those who advocate the scheme reflected to what extent this enlargement must be carried to absorb so great a sum ? Even this year, with the extraordinary expenditure upon Indian treaties and Indian wars, and with profuse expenditure in every other branch of service, the aggregate amount of appropriations will not greatly exceed $30,000,000, and that of disbursements will not, probably, equal that sum.
To what extent, then, must the appropriations for the army, the navy, the
fortifications, and the like, be carried, in order to absorb that sum, especially with a declining expenditure in several branches of the service, particularly in the pensions, which, during the period, will fall off more than a million of dollars ? But, in order to take a full view of the folly and danger of the scheme, it will be necessary to extend our view beyond 1842, in order to form some opinion of what will be the income of the government when the tariff shall be so reduced, under the Compromise Act, that no duty shall exceed twenty per cent, ad valorem. I know that any estimate made at this time cannot be considered much more than conjectural ; but still, it would be imprudent to adopt a system of expenditure now, without taking into consideration the probable state of the revenue a few years hence.
After bestowing due reflection on the subject, I am of the impression that
the income from the imposts, after the period in question, will not exceed
$10,000,000. It will probably fall below, rather than rise above, that sum. I
assume, as the basis of this estimate, that our consumption of foreign articles
will not then exceed $150,000,000. We all know that the capacity of the country to consume depends upon the value of its domestic exports, and the profits of
its commerce and navigation. Of its domestic exports it would not be safe to
assume any considerable increase in any article except cotton. To what extent the production and consumption of this great staple, which puts in motion so vast an amount of the industry and commerce of the world, may be increased between now and 1842, is difficult to conjecture ; but I deem it unsafe to
suppose that it can be so increased as to extend the capacity of the country ,to
consume beyond the limits I have assigned. Assuming, then, the amount which
I have, and dividing the imports into free and dutiable articles, the latter, according to the existing proportion between the two descriptions, would amount
in value to something less than $70,000,000. According to the Compromise Act, no duty, after the period in question, can exceed twenty per cent., and the rates would range from that down to five or six per cent. Taking fifteen per cent, as the average, which would be, probably, full high, and allowing for the expenses of collection, the nett income would be something less than $10,000,000.
The income from public lands is still more conjectural than that from customs. There are so many, and such various causes in operation affecting this source of the public income, that it is exceedingly difficult to form even a conjectural estimate as to its amount, beyond the current year. But, in the midst of this uncertainty, one fact may be safely assumed, that the purchases during the last year, and thus far this, greatly exceed the steady, progressive demand for public lands, from increased population, and the consequent emigration to
the new states and territories. Much of the purchases have been, unquestionably, made upon speculation, with a view to resales, and must, of course, come
into market hereafter in competition with the lands of the government, and to
that extent must reduce the income from their sales. Estimating even the demand for public lands from what it was previous to the recent large sales, and taking into estimate the increased population and wealth of the country, I do not consider it safe to assume more than $5,000,000 annually from this branch of the revenue, which, added to the customs, would give for the annual receipts between fourteen and fifteen millions of dollars after 1842.
I now ask whether it would be prudent to raise the public expenditures to the sum of $30,000,000 annually during the intermediate period, with the prospect that they must be suddenly reduced to half that amount ? Who does not see the fierce conflict which must follow between those who may be interested in keeping up the expenditures, and those who have an equal interest against an increase of the duties as the means of keeping them up ? I appeal to the senators from the South, whose constituents have so deep an interest in low duties, to resist a course so impolitic, unwise, and extravagant, and which, if adopted, might again renew the tariff, so recently thrown off by such hazardous and strenuous efforts, with all its oppression and disaster. Let us remember what occurred in the fatal session of 1828. With a folly unparalleled, Congress then raised the duties to a rate so enormous as to average one half the value of the imports, when on the eve of discharging the debt, and when, of course, there would be no objects on which the immense income from such extravagant duties could be justly and constitutionally expended. It is amazing that there was such blindness then as not to see what has since followed — the sudden discharge of the debt, and an overflowing treasury, without the means of absorbing the surplus ; the violent conflict resulting from such a state of things ; and the vast increase of the power and patronage of the government, with all its corrupting consequences. We are now about, I fear, to commit an error of a different character : to raise the expenditure far beyond all example, in time of peace, and with a decreasing revenue, which must, with equal certainty, bring on another conflict, not much less dangerous, in which the struggle will not be to find objects to absorb an overflowing treasury, but to devise means to continue an expenditure far beyond the just and legitimate wants of the country. It is easy to foresee that, if we are thus blindly to go on in the management of our affairs, without regard to the future, the frequent and violent concussion which must follow from such folly cannot but end in a catastrophe that will ingulf our political institutions.
With such decided objections to the dangerous and extravagant scheme of
absorbing the surplus by disbursements, I proceed to the next question. Shall
the public money remain where it now is ? Shall the present extraordinary
state of things, without example or parallel, continue, of a government, calling
itself free, extracting from the people millions beyond what it can expend, and
placing that vast sum in the custody of a few monopolizing corporations, selected at the sole will of the executive, and continued during his pleasure, to be used as their own from the time it is collected till it is disbursed ? To this question there must burst from the lips of every man who loves his country and its institutions, and who is the enemy of monopoly, injustice, and oppression, an indignant no. And here let me express the pleasure I feel that the senator from New-York, in moving his amendment, however objectionable his scheme, has placed himself in opposition to the continuance of the present unheard-of and dangerous stale of things ; and I add, as a simple act of justice, that the tone and temper of his remarks in support of his amendment were characterized by a courtesy and liberality which I, on my part, shall endeavour to imitate. But I fear, notwithstanding this favourable indication in so influential a quarter, the very magnitude of the evil (too great to be concealed) will but serve to perpetuate it. So great and various are the interests enlisted in its favour, that I greatly fear that all the efforts of the wise and patriotic to arrest it will prove unavailing. At the head of these stand the depository banks themselves, with their numerous stockholders and officers ; with their $40,000,000 of capital, and an equal amount of public deposites, associated into one great combination extending over the whole Union, under the influence and control of the treasury department. The whole weight of this mighty combination, so deeply interested in the continuance of the present state of things, is opposed to any change.
To this powerful combination must be added the numerous and influential body
who are dependant on banks to meet their engagements, and who, whatever may be their political opinions, must be alarmed at any change which may limit their discounts and accommodation. Then come the stock-jobbers, a growing and formidable class, who live by raising and depressing stocks, and who behold in the present state of things the most favourable opportunity of carrying on their dangerous and corrupting pursuits. With the control which the Secretary of the Treasury has over the banks of deposite, through transfer warrants, with the power of withdrawing the deposites at pleasure, he may, whenever he chooses, raise or depress the stock of any bank, and, if disposed to use this tremendous power for corrupt purposes, may make the fortunes of the initiated, and overwhelm in sudden ruin those not in the secret. To the stock-jobbers must be added speculators of every hue and form ; and, in particular, the speculators in public lands, who, by the use of the public funds, are rapidly divesting the people of the noble patrimony left by our ancestors in the public domain, by giving in exchange what may, in the end, prove to be broken credit and worthless rags. To these we must add the artful and crafty politicians, who wield this mighty combination of interests for political purposes.
I am anxious to avoid mingling party politics in this discussion ; and, that I may not even seem to do so, I shall not attempt to exhibit, in all its details, the fearful, and, I was about to add, the overwhelming power which the present state of things places in the hands of those who have control of the government, and which, if it be not wielded to overthrow our institutions and destroy all
responsibility, must be attributed to their want of inclination, and not to their want of means.
Such is the power and influence interested to continue the public money where
it is now deposited. To these there are opposed the honest, virtuous, and patriotic of every party, who behold in the continuance of the present state of things almost certain convulsion and overthrow of our liberty. There would be found on the same side the great mass of the industrious and labouring portion of the community, whose hard earnings are extracted from them without their knowledge, were it not that what is improperly taken from them is successfully used as the means of deceiving and controlling them. If such were not the case —
if those who work could see how those who profit are enriched at their expense — the present state of things would not be endured for a moment ; but as it is, I fear that, from misconception, and consequent want of union and co-operation, things may continue as they are, till it will be too late to apply a remedy. I trust, however, that such will not be the fact ; that the people will be roused from their false security ; and that Congress will refuse to adjourn till an efficient remedy is applied. In this hope, I recur to the inquiry, What shall
that remedy be 1 Shall we adopt the measure recommended by the senator from New- York, which, as has been stated, proposes to authorize the commissioners of the sinking fund to ascertain the probable income of each quarter, and, if there should be a probable excess above $5,000,000, to vest the surplus in the purchase of state stocks ; but, if there shall be a deficiency, to sell so much of the stock previously purchased as would make up the difference ?
I regret that the senator has not furnished a statement of facts sufficiently full to enable us to form an opinion of what will be the practical operation of his scheme. He has omitted, for instance, to state what is the aggregate amount of stocks issued by the several states : a fact indispensable in order to ascertain how the price of the stocks would be affected by the application of the surplus to their purchase. All who are in the least familiar with subjects of this kind, must know that the price of stocks rises proportionably with the amount of the sum applied to their purchase. I have already shown that the probable surplus at the end of this year, notwithstanding the extravagance of the appropriations, will be between thirty and thirty-five millions ; and before we can decide understandingly whether this great sum can with propriety be applied as the senator proposes, we should know whether the amount of state stocks be sufficient to absorb it, without raising their price extravagantly high.
The senator should also have informed us, not only as to the amount of the
stock, but how it is distributed among the states, in order to enable us to determine whether his scheme would operate equally between them. In the absence of correct information on Ifoth of these points, we are compelled to use such as we may possess, however defective and uncertain, in order to make up our mind on his amendment.
We all know, then, that while several of the states have no stocks, and many a very inconsiderable amount, three of the large states (Pennsylvania, Ohio, and
New-York) have a very large amount, not less in the aggregate, if I am correctly informed, than thirty-five or forty millions. What amount is held by the rest of the states is uncertain, but I suppose that it may be safely assumed that,
taking the whole, it is less than that held by those states. With these facts,
it cannot be doubted that the application of the surplus, as proposed to be applied by the senator, would be exceedingly unequal among the states, and that
the advantage of the application would mainly accrue to these states. To most
of these objections, the senator, while he does not deny that the application of
the surplus will greatly raise the price of stocks, insists that the states issuing them will not derive any benefit from the advance, and, consequently, have no interest in the question of the application of the surplus to their purchase.
If by states he means the government of the states, the view of the senator may be correct. They may, as he says, have but little interest in the market value of their stocks, as it must be redeemed by the same amount, whether that be high or low. But if we take a more enlarged view, and comprehend the people of the state as well as the government, the argument entirely fails. The senator will not deny that the holders have a deep interest in the application of so large a sum as the present surplus in the purchase of their stocks. He will not deny that such application must greatly advance the price ; and, of course, in determining whether the' states having stocks will be benefited by applying the surplus as he proposes, we must first ascertain who are the holders. Where do they reside ? Are they foreigners residing abroad ? If so, would it be wise to apply the public money so as to advance the interests of foreigners, to whom the states are under no obligation but honestly to pay to them the debts which they have contracted ? But if not held by foreigners, are they held by citizens of such states ? If such be the fact, will the senator deny that those states will be deeply interested in the application of the surplus, as proposed in his amendment, when the effects of such application must be, as is conceded on all sides, greatly to enhance the price of the stocks, and, consequently, to increase the wealth of their citizens ? Let us suppose that, instead of purchasing the stocks of the states in which his constituents are interested,
the senator's amendment had proposed to apply the present enormous surplus to the purchase of cotton or slaves, in which the constituents of the Southern senators are interested, would any one doubt that the cotton-growing or slave-
holding states would have a deep interest in the question ? It will not be denied that, if so applied, their price would be greatly advanced, and the wealth of their citizens proportionably increased. Precisely the same effect would result from the application to the purchase of stocks, with like benefits to the citizens of the states which have issued large amounts of stock. The principle is the same in both cases.
But there is another view of the subject which demands most serious consideration. Assuming, what will not be questioned, that, the application of the surplus, as proposed by the amendment, will be very unequal among the states, some having little or none, and others a large amount of stocks, the result would necessarily be to create, in effect, the relation of debtor and creditor between the states. The states whose stocks might be purchased by the commissioners would become the debtors of the government ; and as the government would, in fact, be but the agent between them and the other states, the latter would, in reality, be their creditors. This relation between them could not fail to be productive of important political consequences, which would influence all the operations of the government. It would, in particular, have a powerful bearing upon the presidential election ; the debtor and creditor states each striving to give such a result to the elections as might be favourable to their respective interests ; the one to exact, and the other to exempt themselves from the payment of the debt. Supposing the three great states to which I have referred, whose united influence would have so decided a control, to be the principal debtor states, as would, in all probability, be the fact, it is easy to see that the result would be, finally, the release of the debt, and, consequently, a correspondent loss to the creditor, and gain to the debtor states.
But there is another view of the subject still more deserving, if possible, of
attention than either of those which have been presented. It is impossible not
to see, after what has been said, that the power proposed to be conferred by the
amendment of the senator, of applying the surplus in buying and selling the
stocks of the states, is one of great extent, and calculated to have powerful influence, not only on a large body of the most wealthy and influential citizens
of the states which have issued stocks, but on the states themselves. The next question is. In whom is the exercise of this power to be vested ? Where shall we find individuals sufficiently detached from the politics of the day, and whose virtue, patriotism, disinterestedness, and firmness can raise them so far above political and sinister motives as to exercise powers so high and influential exclusively for the public good, without any view to personal or political
aggrandizement ? Who has the amendment selected as standing aloof from politics, and possessing these high qualifications ? Who are the present commissioners of the sinking fund, to whom this high and responsible trust is to be confided ? At the head stands the Vice-president of the United States, with whom the Chief-justice of the United States, the Secretary of State, the Secretary of the Treasury, and the Attorney-general, are associated ; all party men, deeply interested in the maintenance of power in the present hands, and having the strongest motives to apply the vast power which the amendment would confer upon them, should it become a law, to party purposes. I do not say it would be so applied ; but I must ask. Would it be prudent, would it be wise, would it be seemly, to vest such great and dangerous powers in those who have so strong a motive to abuse it, and who, if they should have elevation and virtue enough to resist the temptation, would still be suspected of having used the power for sinister and corrupt purposes ? I am persuaded, in drawing the amendment, that the senator from New-York has, without due reflection on the impropriety of vesting the power where he proposes, inadvertently inserted the provision which he has, and that, on review, he will concur with me, that, should his amendment be adopted, the power ought to be vested in others, less exposed to temptation, and, consequently, less exposed to suspicion.
I have now stated the leading objections to the several modes of disposing of
the surplus revenue which I proposed to consider ; and the question again recurs, What shall be done with the surplus ? The Senate is not uninformed of my
opinion on this important subject. Foreseeing that there would be a large surplus, and the mischievous consequences that must follow, I moved, during the
last session, for a select committee, which, among other measures, reported a
resolution so to amend the Constitution as to authorize the temporary distribution of the surplus among the states ; but so many doubted whether there would be a surplus at the time, that it rendered all prospect of carrying the resolution hopeless. My opinion still remains unchanged, that the measure then proposed was the best ; but so rapid has been the accumulation of the surplus, even beyond my calculation, and so pressing the danger, that what would have been then an efficient remedy, would now be too tardy to meet the danger, and, of course, another remedy must be devised, more speedy in its action.
After bestowing on the subject the most deliberate attention, I have come to
the conclusion that there is no other so safe, so efficient, and so free from objections as the one I have proposed, of depositing the surplus that may remain
at the termination of the year, in the treasury of the several states, in the manner provided for in the amendment. But the senator from New-York objects to the measure, that it would, in effect, amount to a distribution, on the ground,
as he conceives, that the states would never refund. He does not doubt but that they would, if called on to refund by the government ; but he says that Congress will, in fact, never make the call. He rests this conclusion on the supposition that there would be a majority of the states opposed to it. He admits, in case the revenue should become deficient, that the Southern or staple states would prefer to refund their quota rather than to raise the imposts to meet the deficit ; but he insists that the contrary would be the case with the manufacturing states, which would prefer to increase the imposts to refunding their quota, on the ground that the increase of the duties would promote the interests of manufactures. I cannot agree with the senator that those states would assume a position so entirely untenable as to refuse to refund a deposite which their faith would be plighted to return, and rest the refusal on the ground of preferring to lay a tax, because it would be a bounty to them, and would, consequently, throw the whole burden of the tax on the other states. But, be this as it may, I can tell the senator that, if they should take a course so unjust and monstrous, he may rest assured that the other states would most unquestionably resist the increase of the imposts ; so that the government would have to take its choice, either to go without the money, or call on the states to refund the deposites. But I so far agree with the senator as to believe that Congress would be very reluctant to make the call ; that it would not make it till, from the wants of the treasury, it should become absolutely necessary ; and that, in order to avoid such necessity, it would resort to a just and proper economy in the public expenditures as the preferable alternative. I see in this, however, much good instead of evil. The government has long since departed from habits of economy, and fallen into a profusion, a waste, and an extravagance in its disbursements, rarely equalled by any free state, and which threatens the most disastrous consequences.
But I am happy to think that the ground on which the objection of the senator stands may be removed, without materially impairing the provisions of the bill. It will require but the addition of a few words to remove it, by giving to the deposites all the advantages, without the objections, which he proposes by his plan. It will be easy to provide that the states shall authorize the proper officers to give negotiable certificates of deposite, which shall not bear interest till demanded, when they shall bear the usual rates till paid. Such certificates would be, in fact, state stocks, every way similar to that in which the senator proposes to vest the surplus, but with this striking superiority : that, instead of being partial, and limited to a few states, they would be fairly and justly apportioned among the several states. They would have another striking advantage over his. They would create among all the members of the confederacy, reciprocally, the relation of debtor and creditor, in proportion to their relative weight in the Union ; which, in effect, would leave them in their present relation, and would, of course, avoid the danger that would result from his plan, which, as has been shown, would necessarily make a part of the states debtors to the rest, with all the dangers resulting from such relation.
The next objection of the senator is to the ratio of distribution proposed in the bill among the states, which he pronounces to be unequal, if not unconstitutional. He insists that the true principle would be to distribute the surplus among the states in proportion to the representation of the House of Representatives, without including the senators, as is proposed in the bill, for which he relies on the fact, that, by the Constitution, representation and taxation are to be apportioned in the same manner among the states.
The Senate will see that the effect of adopting the ratio supported by the
senator would be to favour the large states, while that in the bill will be more
favourable to the small.
The state I in part represent occupies a neutral position between the two.
She cannot be considered either a large or a small state, forming, as she does,
one twenty-fourth part of the Union ; and, of course, it is the same to her whichever ratio may be adopted. But I prefer the one contained in my amendment,
on the ground that it represents the relative weight of the states in the government. It is the weight assigned to them in the choice of the President and
Vice-president in the electoral college, and, of course, in the administration of the laws. It is also that assigned to them in the making of the laws by the action of the two houses, and corresponds very nearly to their weight in the judicial department of the government, the judges being nominated by the President and confirmed by the Senate. In addition, I was influenced, in selecting the ratio, by the belief that it was a wise and magnanimous course, in case of doubt, to favour the weaker members of the confederacy. The larger can always take care of themselves ; and, to avoid jealousy and improper feelings,
ought to act liberally towards the weaker members of the confederacy. To which may be added, that I am of the impression that, even on the principle assumed by the senator, that the distribution of the surplus ought to be apportioned on the ratio with direct taxation (which maybe well doubted), the ratio which I support would conform in practice more nearly to the principle than that which he supports. It is a fact not generally known, that representation in the other
house, and direct taxes, should they be laid, would be very far from being equal, although the Constitution provides that they should be. The inequality would result from the mode of apportioning the representatives. Instead of apportioning them among the states, as near as may be, as directed by the Constitution, an artificial mode of distribution has been adopted, which, in its effects, gives to the large states a greater number, and to the small a less than that to which they are entitled. I would refer those who may desire to understand how this inequality is effected, to the discussion in this body on the apportionment bill under the last census. So great is this inequality, that, were a direct tax to be laid, New-York, for instance, would have at least three members more than her apportionment of the tax would require. The ratio which I have proposed would, I admit, produce as great an inequality in favour of some of the small states, particularly the old, whose population is nearly stationary ; but among the new and growing members of the confederacy, which constitute the greater portion of the small states, it would not give them a larger share of the deposites than what they would be entitled to on the principle of direct taxes. But the objection of the senator to the ratio of distribution, like his objection to the condition on which the bill proposes to make it, is a matter of small comparative consequence. I am prepared, in the spirit of concession, to adopt either, as one or the other may be more acceptable to the Senate.
It now remains to compare the disposition of the surplus proposed in the bill
with the others I have discussed ; and, unless I am greatly deceived, it possesses great advantages over them. Compared with the scheme of expending the surplus, its advantage is, that it would avoid the extravagance and waste which must result from suddenly more than quadrupling the expenditures, without a corresponding organization in the disbursing department of the government to enforce economy and responsibility. It would also avoid the diversion of so large a portion of the industry of the country from its present useful direction to unproductive objects, with heavy loss to the wealth and prosperity of the
country, as has been shown, while it would, at the same time, avoid the increase
of the patronage and influence of the government, with all their corruption and
danger to the liberty and institutions of the country. But its advantages would
not be limited simply to avoiding the evil of extravagant and useless disbursements. It would confer positive benefits, by enabling the states to discharge their debts, and complete a system of internal improvements, by railroads and canals, which would not only greatly strengthen the bonds of the confederacy, but increase its power, by augmenting infinitely our resources and prosperity.
I do not deem it necessary to compare the disposition of the surplus which is proposed in the bill with the dangerous, and, I must say, wicked scheme of leaving the public funds where they are, in the banks of deposite, to be loaned
out by those institutions to speculators and partisans, without authority or control of law.
Compared with the plan proposed by the senator from New-York, it is sufficient, to prove its superiority, to say that, while it avoids all of the objections to
which his is liable, it at the same time possesses all the advantages, with
others peculiar to itself. Among these, one of the most prominent is, that it
provides the only efficient remedy for the deep-seated disease which now afflicts the body politic, and which threatens to terminate so fatally, unless it be speedily and effectually arrested.
All who have reflected on the nature of our complex system of government, and the dangers to which it is exposed, have seen that it is susceptible, from its structure, to two dangers of opposite character, one threatening consolidation,
and the other anarchy and dissolution. From the beginning of the government, we find a difference of opinion among the wise and patriotic to which the government was most exposed : one part believing that the danger was that the
government would absorb the reserved powers of the states, and terminate in
consolidation, while the other were equally confident that the states would absorb the powers of the government, and the system end in anarchy and dissolution. It was this diversity of opinion which gave birth to the two great, honest, and patriotic parties which so long divided the community, and to the many political conflicts which so long agitated the country. Time has decided the controversy. We are no longer left to doubt that the danger is on the side of this government, and that, if not arrested, the system must terminate in an entire absorption of the powers of the states.
Looking back, with the light which experience has furnished, we now clearly see that both of the parties took a false view of the operation of the system. It was admitted by both that there would be a conflict for power between the government and the states, arising from a disposition on the part of those who, for the time being, exercised the powers of the government and the states, to enlarge their respective powers at the expense of each other, and which would
induce each to watch the other with incessant vigilance. Had such proved to be the fact, I readily concede that the result would have been the opposite to what has occurred, and the Republican, and not the Federal party, would have been mistaken as to the tendency of the system. But so far from this jealousy, experience has shown that, in the operation of the system, a majority of the
states have acted in concert with the government at all times, except upon the
eve of a political revolution, when one party was about to go out, to make room
for the other to come in ; and we now clearly see that this has not been the result of accident, but that the habitual operation must necessarily be so. The misconception resulted from overlooking the fact, that the government is but an
agent of the states, and that the dominant majority of the Union, which elect and control a majority of the State Legislatures, would elect also those who
would control this government, whether that majority rested on sectional interests, on patronage and influence, or whatever basis it might, and that they would use the power both of the General and State Governments jointly, for aggrandizement and the perpetuation of their power. Regarded in this light, it is not at all surprising that the tendency of the system is such as it has proved itself to be, and which any intelligent observer now sees must necessarily terminate in a central, absolute, irresponsible, and despotic power. It is this fatal tendency that the measure proposed in the bill is calculated to counteract, and which, I believe, would prove effective if now applied. It would place the states in the relation in which it was universally believed they would stand to this government at the time of its formation, and make them those jealous and vigilant guardians of its action on all measures touching the disbursements and expenditures of the government, which it was confidently believed they would be ; which would arrest the fatal tendency to the concentration of the entire power of the system in this government, if any power on earth can.
But it is objected that the remedy would be too powerful, and would produce an opposite and equally dangerous tendency. I coincide that such would be the danger, if permanently applied ; and, under that impression, and believing that the present excess of revenue would not continue longer, I have limited the measure to the duration of the Compromise Act. Thus limited, it will act sufficiently long, I trust, to eradicate the present disease, without superinducing one of an opposite character.
But the plan proposed is supported by its justice, as well as these high considerations of political expediency. The surplus money in the treasury is not
ours. It properly belongs to those who made it, and from whom it has been
unjustly taken. I hold it an unquestionable principle, that the government has
no right to take a cent from the people beyond what is necessary to meet its
legitimate and constitutional wants. To take more intentionally would be robbery ; and, if the government has not incurred the guilt in the present case, its
exemption can only be found in its folly — the folly of not seeing and guarding
against a vast excess of revenue, which the most ordinary understanding ought to have foreseen and prevented. If it were in our power — if we could ascertain from whom the vast amount now in the treasury was improperly taken, justice would demand that it should be returned to its lawful owners. But, as that is
impossible, the measure next best, as approaching nearest to restitution, is that which is proposed, to deposite it in the treasuries of the several states, which will place it under the disposition of the immediate representatives of the people, to be used by them as they may think fit till the wants of the government may require its return.
But it is objected that such a disposition would be a bribe to the people. A
bribe to the people ! to return it to those to whom it justly belongs, and from
whose pockets it should never have been taken. A bribe ! to place it in the
charge of those who are the immediate representatives of those from whom we
derive our authority, and who may employ it so much more usefully than we can.
But what is to be done ? If not returned to the people, it must go some-how ; and is there no danger of bribing those to whom it may go 1 If we disburse it, is there no danger of bribing the thousands of agents, contractors, and
jobbers, through whose hands it must pass, and in whose pockets, and those of
their associates, so large a part would be deposited ? If, to avoid this, we leave it where it is, in the banks, is there no danger of bribing the banks in whose custody it is, with their various dependants, and the numerous swarms of speculators which hover about them in hopes of participating in the spoil? Is there no danger of bribing the political managers, who, through the deposites, have the control of these banks, and, by them, of their dependants, and the hungry and voracious hosts of speculators who have overspread and are devouring the land?
Yes, literally devouring the land. Finally, if it should be vested as proposed
by the senator from New-York, is there no danger of bribing the holders of state stocks, and, through them, the states which have issued them ? Are the agents, the jobbers, and contractors ; are the directors and stockholders of the banks ; are the speculators and stock-jobbers ; are the political managers and holders of state securities, the only honest portion of the community ? Are they alone incapable of being bribed ? And are the people the least honest, and most liable to be bribed? Is this the creed of those now in power? of those who profess to be the friends of the people, and to place implicit confidence in their virtue and patriotism ?
I have now (said Mr. Calhoun) stated what, in my opinion, ought to be done with the surplus. Another question still remains : not what shall, but what Will be done with the surplus ? With a few remarks on this question, I shall conclude what I intended to say.
There was a time, in the better days of the Republic, when to show what ought to be done was to ensure the adoption of the measure. Those days have passed away, I fear, forever. A power has risen up in the government greater than the people themselves, consisting of many, and various, and powerful interests, combined into one mass, and held together by the cohesive power of the vast surplus in the banks. This mighty combination will be opposed to any change ; and it is to be feared that, such is its influence, no measure to which it is opposed can become a law, however expedient and necessary, and that the public money will remain in their possession, to be disposed of, not as the public interest, but as theirs may dictate. The time, indeed, seems fast approaching, when no law can pass, nor any honour be conferred, from the chief magistrate to the tide-waiter, without the assent of this powerful and interested combination, which is steadily becoming the government itself, to the utter subversion of the authority of the people. Nay, I fear we are in the midst of it ; and I look with anxiety to the fate of this measure as the test whether we are or not.
If nothing should be done — if the money which justly belongs to the people be left where it is, with the many and overwhelming objections to it — the fact will prove that a great and radical change has been effected ; that the government is subverted ; that the authority of the people is suppressed by a union of the banks and executive — a union a hundred times more dangerous than that of Church and State, against which the Constitution has so jealously guarded. It would be the announcement of a state of things from which, it is to be feared, there can be no recovery — a state of boundless corruption, and the lowest and basest subserviency. It seems to be the order of Providence that, with the exception of these, a people may recover from any other evil. Piracy, robbery, and violence of every description may, as history proves, be followed by virtue, patriotism, and national greatness ; but where is the example to be found of a degenerate, corrupt, and subservient people, who have ever recovered their virtue and patriotism ? Their doom has ever been the lowest state of wretchedness and misery : scorned, trodden down, and obliterated forever from the list of nations. May Heaven grant that such may never be our doom !
venerdì 9 dicembre 2016
Olafur Hauksson, the man who jailed Iceland’s bankers
Olafur Hauksson, the man who jailed Iceland’s bankers
How did a police chief from a tiny Icelandic town bring down the country’s top bankers?
Visiting Iceland today, it’s hard to imagine how a tiny fishing nation without a tradition of big banking became synonymous with the idea of “Viking capitalism”. About a decade ago corporate raiders embarked on a high street spending spree funded by the country’s largest banks, which built up assets 10 times the size of the country’s economy. Among the trophy assets they acquired were the famous toy shop Hamleys and the Premier League football club West Ham United.
The frenzy didn’t end there. Across the nation’s population of 330,000, even fishermen became full-time traders, while the consumption of luxury goods soared. In his book Frozen Assets Armann Thorvaldsson claims that, in 2006, Bang and Olufsen sold more televisions and sound systems in Reykjavik than in any other store outside of Moscow.
Then, in the autumn of 2008, as the world dealt with its biggest financial crisis in 80 years, Iceland went pop more spectacularly than anywhere else, staving off bankruptcy only by letting its big three banks — Glitnir, Kaupthing and Landsbanki — fail.
As protesters streamed on to the streets in their thousands — on one occasion throwing snowballs, eggs and yoghurt at the parliament — the role of special prosecutor was created to look into rumours of epic financial wrongdoing. Nobody applied. When, the following year, a small-town policeman more used to handing out parking fines took the job, conspiracy theorists smelled a rat: clearly, they thought, the problem was being buried.
They were wrong. Olafur Hauksson may not draw recognition from other diners as he strolls into the Hilton hotel just outside the centre of Reykjavik at noon, but he is responsible for one of the most impressive feats accomplished in the post-crisis world. For Hauksson, 52, now Iceland’s district prosecutor in charge of investigating all major crimes on the island, is the only person in the west to have jailed a big bank’s chief executive.
And not just one. His first big conviction came just after Christmas in 2012 when Larus Welding, former chief executive of Glitnir, was found guilty of fraud. The verdict was later overturned but soon the floodgates opened. Welding was sentenced to five years in jail for breach of trust in December 2015, and in a separate case last month to one year in jail. Both convictions are likely to be appealed to the supreme court. This was followed by two more chief executives Hreidar Mar Sigurdsson of Kaupthing and Sigurjon Arnason of Landsbanki, who were each handed two separate convictions and jail terms.
Hauksson has chosen the Hilton’s buffet over the trendy city-centre eateries nearer his office because, he says, “it has a little of everything, so it suits everyone”. A big man — today dressed in a brown suit, white shirt and black-and-brown striped tie — he looks like he is not entirely a stranger to all-you-can-eat lunches.
We get stuck in straight away. The buffet is indeed an impressive spread and good value compared with the prices elsewhere in Iceland, inflated by an extraordinary boom in tourism since the crisis due to a weaker currency and cheap flights. We stock up on sushi, salad and a Chinese takeaway-style box filled with chicken noodles.
At our table, which looks out on a car park and busy main road, Hauksson quickly brings me up to date on his record so far. Of his financial cases, 14 have reached the supreme court for judgment, bringing 11 convictions, two acquittals and a retrial.
I ask how it was to start with what was essentially a blank sheet of paper and no roadmap from elsewhere on how to proceed. Picking up a piece of sushi, Hauksson answers: “That’s the question that is a bit compelling today. It’s why others didn’t do the same when there was the same situation there as there was in Iceland.”
He pauses to dip his sushi in soy sauce. “The worst thing is that these questions will not be answered ever. You will always have this obstacle in gaining trust in the financial sector again,” he adds.
In other countries, there have been convictions for financial crisis misdemeanours. Tom Hayes, a former UBS banker, was jailed for 11 years in 2015 for manipulating Libor, the benchmark interest rate, despite arguing that his bosses knew what he was doing. Jérôme Kerviel was sentenced to three years in prison in France in 2010 after amassing €50bn in hidden trades at Société Générale.
But such cases targeted, in Hauksson’s words, “the keyboard person” — the underling who performed the trade, rather than someone up the food chain.
Hauksson, by contrast, has concentrated on the big fish. Many of the cases have been highly complex, alleging market manipulation or breach of fiduciary duty through the use of shell companies to prop up the banks’ share prices or loans where the lenders bore all the risk.
So how did he go about pursuing the people at the very top? He says it was mostly about following the document trail very carefully — particularly in times of stress and crisis, emails can be especially revealing.
It was also, he tells me, about keeping going to the logical conclusion rather than stopping. “It’s finding out who is responsible. That’s a totally different thing. In some ways, it was clear where this all came from. It was important to make the employees aware that if they cannot point to someone else, they will be the one to blame,” he says.
It is a simple point but it makes me stop. I spent several months at the end of 2015 reporting on Volkswagen’s emissions scandal. So far at the German carmaker — just like at the big US and European banks — there has been plenty of talk of big fines but only relatively junior employees have been fingered for potential criminal responsibility.
Getting people at the top is essential to restoring trust in the system, I suggest. “Yes, it is. And it has maybe come out on other countries too that this was a mistake not to try.”
I mention some of the cases from other countries, such as VW and Wells Fargo, where bank employees opened accounts without customers’ authorisation. Hauksson pushes aside his plate. “This is one of the problems,” he starts, “you have some kind of culture, everything has been done this way for long periods of time. And that’s why it’s a bit difficult sometimes to point at some specific order from the top.”
Returning to his Icelandic cases, which have, for instance, shown that the banks themselves accounted for up to 80 per cent of the trade in their own shares on some days, he says: “The executives, they have some tools to control things. They have reports: for example, how much the bank itself was actually buying up its own shares, so they couldn’t deny what had actually been happening . . . They were obligated to react on that.”
Some have argued that it was easier for Iceland to be aggressive because of its small size, whereas the big US and European banks were more systemically important. Eric Holder, the former US attorney-general, said in 2013 that it was difficult to prosecute large banks “when we are hit with indications that if you do prosecute . . . it will have a negative impact on the national economy, perhaps even the world economy.” He later backtracked but no chief executive at a big US bank has yet been prosecuted.
Iceland’s rapid rise and sudden crash was certainly devastating. Stefan Olafsson, an Icelandic professor, has called it “probably the most rapid expansion of a banking system in the history of mankind”.
Its collapse caused Iceland’s currency to plummet, which in turn led to inflation and loan repayments soaring. Many Icelanders who had taken out loans in yen or Swiss francs at a lower rate of interest found they were now facing penury.
“Almost everyone was affected by the crisis one way or another,” Hauksson reflects now, yet he is clear about the imperative to investigate. “It’s a bad thing, whether a society is small or big, to have these matters unsolved. These are the most serious economic crimes that have ever been committed in Iceland. Taking into account how many people it touches, how it affects the economy, if this behaviour had not been dealt with, it would have been a fault for the system,” he says.
“Let’s have some more,” he says eagerly and, minutes later, we return from the buffet with our small plates laden with lamb, chicken, salmon, potatoes and mushrooms. Hauksson has taken some more sushi as well. “One time is never enough.”
Brought up in Reykjavik, the fourth of five children in a middle-class family, Hauksson’s eldest brother was handicapped from birth so he and his sisters helped look after him.
“In a way my whole life I have been working,” he explains. “During some prosecutions we are more at work than home. It is bad, working late hours and weekends, and it wears people out. We have had incidents at work where we have actually had our employees very badly ill. I have four times seen one of my employees going into an ambulance. That’s not an easy thing, so you actually feel a little bit the pressure that comes with the job.”
After law school he rose through the ranks to become head of police in Akranes, a sleepy town of 6,500 people across the bay from Reykjavik. His biggest investigations were “attempted murder or a drug case”, he says. His main tasks included collecting taxes and dealing with family affairs. He also issued parking fines and broke up drunken brawls. He had no financial experience.
The role of special prosecutor must have seemed a thankless task on an island where the elite is small and interconnected? “No one wanted it,” he says, recalling his decision to belatedly throw his hat into the ring. “Maybe I was too narrow-minded when I decided to apply. Maybe everyone else knew that this would be horrific. I don’t know. But I found it appealing,” he says.
Hauksson was provided with advice on how to set up the special prosecutor’s office by Eva Joly, a Norwegian-born, French investigating judge known for her cases against Elf Aquitaine and Crédit Lyonnais. He was also aided by the Icelandic parliament’s special investigation commission — a kind of “truth and reconciliation” report on the crisis published in 2010.
Hauksson started off with a staff of three and “no computers, no phones, nothing”. By 2013, under a centre-left government that came to power after the popular uprising known as the “pots and pans revolt”, the special prosecutor had 109 people working for him. Two years later, with the party that was in power before the crisis back in office, his budget and staff was slashed again. Yet he ploughed on, securing conviction after conviction and even securing a retrial in one case due to a lack of impartiality from one judge, who then proceeded to attack him in no uncertain terms.
As we tuck into the chicken, I ask Hauksson about where he gets the personality to withstand the pressure. “The stubbornness?” he asks with a smile. “Of course, I have been in this system for a long period of time and in a way you know your way around, you know what’s proper, what’s decent . . . You have to be persistent and you have to be very much self-driven because there is no one else driving the case to the court.”
He argues the crimes themselves are simple matters such as embezzlement, merely with a complicated “wrapping” of financial jargon around them. Is it like gang crime, I ask, where you know one of a group did the crime but you can’t work out who? “It’s maybe more that you are almost looking into some well-organised criminality,” he replies.
There’s time for one more trip to the buffet, this time to collect a selection of desserts, and in my case some cheese. Hauksson orders a coffee and immediately sets off on a long anecdote about a fishing trip the previous week, his first for a long time. “I found myself a bit rusty. I was doing poorly at the beginning of the day. It’s always interesting to know how nature can teach us lessons, because in the last hour I got a bite.
“I fought with that fish for 40 minutes and it went up and down. And I thought that it was either me or the fish,” he says, pausing to eat some dessert. “It ended that the fish won. It broke the line. Most often I would have been raging but this time I felt humbled . . . I will be in better shape next time.”
Hauksson may have been clearing up financial wrongdoing, but Iceland is still struggling on the political side. Its prime minister was forced to resign in April after appearing in the Panama Papers’ revelations about offshore companies. The anti-establishment Pirate party were the big gainers in early elections held in October and may still end up in government. Still, trust in Iceland’s parliament is one of the very lowest in Europe. Did the politicians miss a chance to rebuild trust? “Maybe the work of our politicians should be more transparent, there should have been fewer scandals, and more focus on re-establishing the trust,” Hauksson says.
With the restaurant thinning out of the few tourists who have been eating alongside us, I ask Hauksson about the recent extraordinary boom in foreigners visiting Iceland. The number of tourists has jumped from about 500,000 in 2010 to an expected 2.4m next year, raising fears of another bust to come like the financial one.
Hauksson says such booms and busts have long been in Iceland’s nature as a nation depending on the vicissitudes of the sea. “The fish is coming and going, and if it is coming you try everything possible to get it, and when it’s going it’s not out there any more and you have to take the hard times. It’s always tops and bottoms.”
Richard Milne is the FT’s Nordic and Baltic correspondent
Illustration by James Ferguson
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