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On the Content of Banking in Contemporary Capitalism

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This paper considers the character and social content of banking in contemporary capitalism. Based on a survey of the operations of nine leading international banks, it documents the marked differences between contemporary banking and the traditional business of taking, making loans to enterprises, and making profits from the difference in interest-rates between them. Notably, the operations of the world's top banking organisations are shown to centre on various forms of credit to individual wage-earners and on mediating access to financial markets by corporations and, increasingly, individuals. In order to characterise the social content of such activities, the paper seeks to apply, and where necessary extend, existing Marxist analyses of banking, capital-markets, and their relationship to capitalist accumulation. This includes advancing a number of elements of a distinctive Marxist interpretation of capital-market operations to theorise financial-market mediation-relations between banks, corporations, and the mass of retail-savers. The analysis pursued helps identify the distinctive and exploitative content of the relations banks maintain with ordinary wage-earners through consumer- and mortgage-lending, as well as through the provision of pension-related saving services.
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© Koninklijke Brill NV, Leiden, 2009 DOI: 10.1163/156920609X436171
Historical Materialism 17 (2009) 1–34 brill.nl/hima
On the Content of Banking in Contemporary
Capitalism
Paulo L. dos Santos
Department of Economics
School of Oriental and African Studies
ps45@soas.ac.uk
Abstract1
is paper considers the character and social content of banking in contemporary capitalism.
Based on a survey of the operations of nine leading international banks, it documents the marked
di erences between contemporary banking and the traditional business of taking, making loans
to enterprises, and making profi ts from the di erence in interest rates between them. Notably,
the operations of the world’s top banking organisations are shown to centre on various forms of
credit to individual wage-earners and on mediating access to nancial markets by corporations
and, increasingly, individuals. In order to characterise the social content of such activities the
paper seeks to apply, and where necessary extend, existing Marxist analyses of banking, capital
markets, and their relationship to capitalist accumulation. is includes advancing a number of
elements of a distinctive Marxist interpretation of capital-market operations to theorise fi nancial
market mediation relations between banks, corporations, and the mass of retail savers. e
analysis pursued helps identify the distinctive and exploitative content of the relations banks
maintain with ordinary wage-earners through consumer and mortgage lending, as well as
through the provision of pension-related saving services.
Keywords
[please supply keywords]
Introduction
By many historical measures, the current fi nancial crisis is without precedent.
It originated from neither an industrial crisis nor an equity market crash. It
was precipitated by the simple fact that increasing numbers of largely black,
1. I would like to thank the participants of the International Workshop on the Political
Economy of Financialisation at Kadir Has University in Istanbul, and the participants of the
Crisis of Financialisation Conference at SOAS earlier this year. A special acknowledgement is
owed to Professor Makoto Itoh for his detailed and prescient comments on this draft. All
remaining errors and one-sidedness are my own.
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2 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
Latino and working-class white families in the US have been defaulting on
their mortgages. at this caused Bear Sterns and Lehman Brothers to collapse,
bringing the entire fi nancial system to the brink, and continues to generate
losses for banking giants like Citibank and UBS, underscores the fundamental
changes to the practices, class and social content of banking that have taken
place over the past twenty-fi ve years.
Banking has become heavily dependent on lending to individuals, and the
direct extraction of revenues from ordinary wage-earners. It has also become
enmeshed with capital markets, where banks mediate nancial market
transactions involving bonds, equity, and derivative assets, and where they
increasingly obtain funding. And it increasingly relies on inference-based
techniques for the estimation of risk of capital-market instruments and banks
own fi nancial position. e current fi nancial crisis is, in many ways, a crisis of
banking as it has emerged through these dramatic changes. Identifying the
origins, content and contradictions of contemporary banking is, consequently,
an important part of understanding the current crisis, as well as the broader
character of contemporary capitalism.
Contemporary banking is very di erent from the traditional business of
taking deposits from corporations and the general public, making loans to
enterprises, and making profi ts from the di erence in interest rates between
them. It is also di erent from the ‘fi nance-capital’ described within the Marxist
tradition by Hilferding in 1910. Nevertheless, Marxist political economy has
a unique and important contribution to make to the analysis of the social and
historical signifi cance of contemporary banking and its relationship to
accumulation. is paper seeks to make empirical and analytical contributions
to this task.
Empirically, it considers macro-level data, centrally from the US, on banking
and capital markets. It also considers in detail the operations of nine of the
largest international commercial banks, based on their annual corporate
disclosures.2 ese are leading US, European and Japanese banks which, by
the end of 2007 collectively controlled more than US$16 trillion in assets
across every region of the globe. Even in 2007, when most of them took
2. e banks examined are Citigroup, HSBC, Bank of America, RBS, Barclays, Santander,
BNP Paribas, Dresdner Bank, and Sumitomo Mitsui Financial Group. e fi rst two banks have
the most prominent and extensive international operations. e list includes the top two US and
top three British commercial banks. Santander is the top bank from Spain, with extensive
international operations, notably in Latin America. Dresdner bank was chosen over Deutsche as
a representative German bank as the latter is principally an investment bank. BNP Paribas and
SMFG are leading French and Japanese banks. See appendix for details on extraction of data
from corporate reports.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 3
considerable losses, their average return on equity was still a relatively high
14.87 per cent.
Firm-level inquiry reveals how central lending to individuals has become
for the world’s largest banking organisations. It also reveals the relative
importance of di erent nancial-market mediation activities, each of which
embodies di erent social relations. Notably, revenues from fund management
and profi ts on trading and proprietary accounts appear as important sources
of bank profi ts, particularly for European banks.
In order to characterise these activities, the paper advances a series of
analytical elements pertaining to the di erent major functions of contemporary
banking, drawing on Marx, Itoh and Lapavitsas, and most directly from
Hilferding.3 Particular attention is given to the characterisation of nancial-
market mediation functions. is includes advancing a distinctive appreciation
of the social content of capital markets and investment banking, building
critically on Hilferding’s 1910 analysis.
On these bases, the paper argues that contemporary banking centres, on
one hand, on mutually benefi cial, arms-length relationships with corporations
based on investment-banking services. At the same time, banks have developed
historically new, exploitative modes of appropriation from the independently
secured income of wage-earners. ose have developed in the political climate
created by signifi cant class defeats su ered by the working-class movement, in
which the provision of a growing share of necessary goods and services became
or remained private.
Private provision of education, housing, and health make access to money
a growing requirement for present and future consumption. Against a setting
of stagnant real wages and rising income inequality, this has pushed wage-
earners onto fi nancial markets as an integral part of their basic reproduction.
Banks mediate access to housing, durable consumer goods, education, and
increasingly health care, though insurance, mortgage and other individual
loans, drawing profi ts from wage income that are increasingly central to their
operations.
e gradual privatisation of pension provision has also helped banks develop
other avenues of appropriation founded on wage income. Pension and other
investment funds have generated rising fee incomes for banks. e associated
unprecedented money infl ows into capital markets have also enhanced the
scope for various corporate ‘fi nancial engineering’ measures in which banks
play a central role. In contrast to the relationship between corporations and
banks, these activities bear the mark of the profound social inequality between
3. Marx 1909, Itoh and Lapavitsas 1999, Hiferding 1981.
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4 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
wage-earners seeking to secure future consumption and banks seeking to
maximise profi ts, as glaring and arguably systematic disadvantages to the
former. It may be usefully understood as possessing an exploitative content.
e rest of the paper proceeds as follows. Section 2 lays out the broad
changes to the composition and character of banking incomes and discusses
the regulatory, technological and capital-market setting that has shaped them.
Section 3 turns to the changes to conventional lending and money-dealing
activities of banks. Sections 4 and 5 consider the signifi cance and social content
of nancial-market mediation functions performed by banks. Section 4 focuses
on fund management, derivative assets and proprietary gains. Section 5 o ers
distinctive Marxist analytical elements for an approach to the social content of
capital markets and traditional investment-banking functions. Section 6 o ers
a brief concluding discussion.
2. New sources and types of bank income
A number of studies have documented and discussed the changes in banking
over the past three decades.4 e broad empirical contours highlighted by
those studies are clear. e income banks receive from interest-rate spreads has
steadily diminished in importance. Households have shifted their assets away
from bank deposits in favour of various investment funds, and the importance
of bank lending to enterprises has fallen signifi cantly. Banks have responded
by developing new revenue streams in fees, commissions and other non-
interest gains from activities associated with ‘fi nancial-market mediation’.
ese involve facilitating the participation of others in fi nancial markets
through investment-banking services to corporations, brokerage and,
increasingly, through the management of investment, mutual, pension and
insurance funds for retail investors. Banks have also increased lending to
individuals through consumption loans and mortgages.
ese trends are evident in macro-level data for advanced economies.5 Bank
non-interest income has increased in signifi cance throughout the OECD
countries.
4. See Allen and Santomero 1997, 2001, Erturk and Solari 2007, Leyshon and rift 1999,
Lapavitsas and dos Santos 2008, for instance.
5. e observations here also broadly apply to the other OECD economies for which
comparable data is available. See <www.oecd.org>.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 5
Table 1: Non-interest income as percentage of total bank revenues
1980 1985 1990 1995 2000 2005
United States 24.9 30.5 30.3 32.1 39.7 40.7
(West) Germany 20.4 20.6 26.8 21.0 35.8 34.2
Spain 14.9 15.6 18.2 23.1 35.8 33.2
France 22.6 45.5 60.9 62.2
Calculated from OECD Bank Income Statement and Balance Sheet Statistics
Bank lending has correspondingly declined in importance. It has also changed
in composition, shifting from lending to real-sector fi rms towards individual
consumption and mortgage loans. In Germany, non-mortgage bank lending
to non-banks declined from 68.2 per cent of GDP in 1972 to 26.8 per cent in
2003. In Britain, resident banks’ lending to individuals rose from 11.6 to 40.7
per cent of total lending between 1976 and 2006, with lending to nancial
intermediaries also rising from 20.3 to 32.4 per cent. In the US, bank lending
to commercial and industrial enterprises fell from 10.8 to 8.2 per cent of
GDP. Although belated, the corresponding fall in Japan has been sudden, with
bank lending to non-fi nancial enterprises moving from 61 per cent of GDP at
the end of 1997 to 39.2 per cent in the autumn of 2007.6
2.1. e rise of the institutional investor
A number of interrelated processes and innovations have created the context
for these changes. Technical innovation has been instrumental in the orientation
of banks to individual credit. Credit-scoring methods have made mass retail
lending possible by yielding quantitative (and problematic) estimates of the
creditworthiness of individual borrowers, and of large, securitised pools of
loans to individuals. Technological change has also created new money-dealing
services, such as ATMs and ebanking, whose costs banks appear to have been
passed on to retail depositors.7
State policy in favour of fi nancial liberalisation, and secular changes in the
nancial behaviour of corporations and households, have been particularly
important. Most directly, the relaxation and repeal of Glass-Steagall restrictions
in the US, and the acceptance of the provision of various insurance services by
6. Percentages calculated from Bank of England, US Flow of Funds, Financial Accounts for
Germany, Bank of England and Bank of Japan data.
7. See Lapavitsas and dos Santos 2008.
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6 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
banks in Europe have widened the scope for commercial-bank intervention
into capital markets.
More fundamentally, the rising importance of corporations’ own retained
earnings, and the gradual privatisation of pension provision have had a major
impact on both sides of capital markets. On the demand side, increased
volumes of money have sought to buy securities. On the supply side, the scope
for capital gains generated from various ‘fi nancial engineering’ measures has
increased. And, across both sides, the scope for fee and other income from
nancial-market mediation has been greatly enhanced.
As state pensions have been eroded across the OECD countries, trillions of
dollars entered capital markets in the form of various retirement-related
investment funds. e late 1970s and early 1980s saw a raft of measures that
both degraded public pensions and encouraged private-retirement savings in
the US. Access to tax sheltered Individual Retirement Accounts was steadily
broadened in the 1970s, and 401(k) plans were implemented in the early
1980s. e 1981–3 Greenspan Commission on Social Security endorsed these
measures and led the charge against the quality of public pensions by imposing
income tax on benefi ts over a very low level.8 As a result, the holdings of
8. See Greenspan Commission 1983 and Investment Company Institute 2006, 2007.
160
140
120
100
Percentage
80
60
40
20
0
1946
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Figure 1. US Household Holdings of Pension and Mutual Fund, percent of GDP
(1946–2007)
Calculated from Flow of Funds of the United States, Board of Governors of the
Federal Reserve System
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 7
pension and mutual funds by US households exploded, from a post-war
average around 40 per cent of GDP to the 120–140 per cent average of the
last ten years.
Japanese households also accumulated signifi cant nancial assets over the
same period, including a high level of insurance reserves, which include
pension savings.
Table 2: Japan household mutual fund holdings and insurance reserves,
per cent of GDP
1980 1985 1990 1995 2000 2005
21.8 36.2 54.6 72.3 83.5 88.3
Calculated from OECD Data
Similarly, across a range of OECD countries, total holdings of open- and closed-
end investment funds and insurance reserves rose from 41.9 to 73.4 per cent
of GDP between 1995 and 2005.9 By 2006, these increases had helped take
the worldwide total of assets in managed funds to a total of US$63.8 trillion,
more than twice the combined GDP of the US and EU for that year.10
e rise of these institutional funds created new ‘buy-side’ opportunities for
banks. ey could earn fees from directly managing investment funds. In
addition, they could earn fees by assisting independent insurance, hedge and
other investment funds in their securities transactions.
2.2. Changes in corporate fi nancial behaviour
e new funds also helped create new ‘sell-side’ revenues for banks by fueling
a tremendous increase in capital market issuance, particularly in the US. e
issuance of US corporate liabilities, notably bonds, grew in tandem with new
money infl ows, rising from a postwar average of around four per cent of GDP
to well over 30 per cent in 2001.
Evidence for US non-fi nancial corporations suggests this increase in the
issuance of marketable corporate liabilities signalled fundamental changes
in their relationship with capital markets. Since the early 1970s, their net
xed investment has tended to fall, with cyclical fl uctuations, in relation
to profi ts. In the 25 years to the end of 1984, the net xed investment of
9. Figures calculated from OECD data for Belgium, Canada, Denmark, France, Germany,
Italy, Japan, Netherlands, Spain and the United Kingdom.
10. Watson Wyatt 2007.
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8 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
Figure 2. US Corporate Capital Raised as Percentage of GDP (1960–2001)
Calculated from Securities Industry Association Factbook, 2002
40
35
30
25
Percentage
20
15
10
5
0
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Total Capital Debt Capital
US non-fi nancial corporations averaged 23.7 per cent of their actual profi ts.
In the 25 years that followed, they averaged 17.7 per cent, despite the dot.com
investment boom of 1995 to 2000. In this context, the increase in corporate-
security issuance was not associated with increased productive investment,
which could increasingly be funded with internal funds.
Instead, it was associated with a dramatic increase in ‘fi nancial engineering’
operations aimed to secure capital gains. As bond issuance grew in importance
for non-fi nancial corporations,11 its relationship with net equity ows
underwent a fundamental structural change. In pure statistical terms, bond
nance ows displayed a clear positive correlation with equity nance fl ows
between 1946 and 1983, suggesting they were alternative sources of funds.
Since 1983, the correlation become negative, as did net equity fl ows.
In words, the increased corporate bond borrowing over this period appears
to be closely related to the withdrawal of equity, which typically takes the form
of ‘fi nancial engineering’ operations like share buybacks, private-equity
purchases, mergers and acquisitions. ese operations have become increasingly
important to the relationship of non-fi nancial corporations and nancial
markets, at least in the US. As discussed in detail below, the potential capital
11. Rising from 46.7 per cent of their borrowing in 1983 to 70 per cent by 2007.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 9
gains achieved by such operations are greatly enhanced in a setting of increasing
volumes of money entering capital markets. Commercial banks have developed
signifi cant revenue streams by managing, advising, underwriting and nancing
these fi nancial operations.
rough all these changes, banks have been able not only to maintain, but
actually to increase the signifi cance of their profi ts in the advanced economies.
Table 3: Bank profi ts as percentage of GDP
Country 1980 1988 2005
United States 0.72 0.74 1.62
(West) Germany 0.53 0.81 1.35
Spain 0.84 1.42 1.77
France 0.96 1.53
Calculated from OECD Bank Income Statement and Balance Sheet Statistics
Figure 3. US Non-fi nancial Corporations’ Net Finance Flows, percent of GDP
(1951Q1–2008Q2)
Calculated from Flow of Funds of the United States, Board of Governors of the
Federal Reserve System
6
4
2
Percentage
0
-2
-4
-6
-8
1951Q4
1953Q1
1954Q2
1955Q3
1956Q4
1958Q1
1959Q2
1960Q3
1961Q4
1963Q1
1964Q2
1965Q3
1966Q4
1968Q1
1969Q2
1970Q3
1971Q4
1973Q1
1974Q2
1975Q3
1976Q4
1978Q1
1979Q2
1980Q3
1981Q4
1983Q1
1984Q2
1985Q3
1986Q4
1988Q1
1989Q2
1990Q3
1991Q4
1993Q1
1994Q2
1995Q3
1996Q4
1998Q1
1999Q2
2000Q3
2001Q4
2003Q1
2004Q2
2005Q3
2006Q4
2008Q1
Bonds Equity
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10 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
3. Economic relations of bank lending and money-dealing
Changes in banking operations and social relations have included important
changes in bank lending and money dealing functions. Marxist political
economy has long o ered compelling accounts of the nature and social content
of these banking activities.12 ose can be readily extended to o er insights
into the particular forms these activities take in contemporary banking:
lending to individuals, and rising banking and credit-card account fees paid
by retail-bank clients.
rough both channels, banks have come to mediate increasing proportions
of consumption, drawing revenue from the independently secured wage
income of their clients. As such, they constitute historically novel avenues for
the fi nancial expropriation of wage-earners. is section tackles these changes
in bank behaviour, o ering an empirical and analytical discussion of the
importance and distinct social content of these new channels of appropriation.
3.1. Lending to enterprises
Classical-Marxist analysis of bank lending is founded on the distinctive concept
of interest-bearing (or loanable) capital. Interest-bearing capital is a peculiar
type of capital that is distinct from industrial and commercial capital. It
originates from idle pools of money-capital that appear in the rst instance
over the course of the circuit of industrial and merchant capital. Such pools
are mobilised and transformed into loanable money-capital by the credit
system, which channels it back into circulation in the form of loans to capitalist
enterprises.13 Trading in interest-bearing capital involves credit relations, that
is, the advance of value against a promise of repayment with interest. In this
light, banks are capitalist enterprises that specialise in all aspects of dealing in
interest-bearing capital, accruing revenues from the di erence in the price
paid for deposits and that paid on loans.
Loanable money-capital receives not profi ts but repayments with interest.
To Marx,14 the level of the rate of interest contains an element of irrationality:
it is the price – or expression of value in money – of a future fl ow of money. It
also reveals no underlying socio-economic relationship or inherent material
aspect of social reproduction, not least because it is not the price of a produced
commodity. e rate of return on loanable money-capital is determined simply
through the interaction of supply and demand. To Marx, competition between
buyers and sellers, however, tends to maintain the rate of interest between zero
12. Best developed in Hilferding 1981.
13. See Itoh and Lapavitsas 1999.
14. Marx 1894. See Part 5.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 11
and the rate of profi t during ordinary periods. eir relative detachment
from the material realities of production makes relations defi ned over loanable
money-capital highly susceptible to the infl uence of broader patterns of socio-
political power.15
In lending to capitalist enterprises, the payment of interest is generally a
share of the profi t generated by capital applied to production or circulation of
commodities. At the broadest level, the systematic basis for the payment of
interest in this context is the increased turnover of total capital achieved by the
mobilisation of idle money and its application to functioning circuits of capital
through lending. More concretely, individual fi rms will be able to increase the
returns on their own capital by leveraging it through borrowing, so long as the
return on applied capital exceeds the rate of interest. Finally, given that debt
holders must be paid in order to avoid bankruptcy, high levels of debt may be
used as a lever to keep enterprise costs down, most often by lowering or
keeping down total wage payments.16
Under normal conditions, loanable money-capital advanced to a capitalist
enterprise will help generate the source of its own repayment with interest, by
circulating in the borrower’s circuit and expanding through the appropriation
of surplus-value. Finally, the relationship between capitalist lender and
borrower is at this level of abstraction one between social equals who both
enter the transaction on the basis of a profi t-maximising calculus. An important
expression of this equality is the hiring of fi nancial o cers, whose very jobs are
to ensure the rm secures outside nance on the most advantageous terms
possible. e social relations defi ned by lending to individuals are fundamentally
di erent in most of these regards.
3.2. Lending to individuals
Lending to individuals has became a major part of banks’ overall lending
activities. is is evident for the banks surveyed here, particularly the top two
US banks.
Table 4: Loans to individuals as percentage of total loan portfolio,
Dec 2006
HSBC Citigroup B of A RBS Barclays Paribas Dresdner SMFG
40.5 77.7 76.3 24.0 44.0 33.0 20.1 26.8
15. Lapavitsas 2003.
16. is appears to be an increasingly common practice, particularly in fi rms controlled by
private-equity groups aiming for fairly quick gains in market capitalisation.
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12 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
Yet, even these gures understate the importance of this type of lending for
the world’s largest fi nancial groups. e very organisation of Citibank, HSBC
and Bank of America reveals their orientation to individual credit. Citibank’s
‘Global Consumer’ business segment generated profi ts of US$12.1 billion, or
56 per cent of all profi ts, in 2006. Revenues from credit cards and consumer
lending stood at US$13.5 billion, or 31.6 per cent of all revenues. at
same year HSBC’s ‘Personal Financial Services’ segment, which focuses on
consumption and mortgage credit, generated US$9.5 billion in profi ts,
42.9 per cent of the total, ahead of commercial and investment-banking
divisions, which accounted for 27.3 and 26.3 per cent of profi ts respectively.
Central to this performance is HSBC’s credit-card network of over 120 million
cards worldwide. Bank of America’s ‘Global Consumer and Small Business’
segment, which focuses centrally on consumption and mortgage-credit and
retail accounts, accounted for 65.6% of net interest income that year.
is type of lending has a distinctly exploitative social content. Money
loaned out to individuals for consumption or mortgages does not ordinarily
generate the value from which it is to be repaid with interest.17 Interest
payments are generally made from subsequent wage receipts by borrowers,
representing an appropriation of value borrowers have secured independently
of the loan. Recent innovations in consumer lending involving the international
operations of banks like HSCB and Citibank o er a congealed expression of
this direct appropriation. Along with other banks across Latin America, these
banks o er wage- and pension-linked loans that often include a legal agreement
by the borrower’s employer or the state to deduct loan repayments directly
from payroll.
At least two concrete factors condition the exploitative character of lending
to individuals. First, the relationship is profoundly unequal. It involves on one
hand a specialist in managing money fl ows trying to maximise profi ts, on the
other an ordinary wage-earner trying to secure access to consumption. A range
of patterns deemed ‘irrational’ by mainstream economic analysis follow,
including the tendency for consumers to continue using the rst card they
ever obtained, regardless of its comparative rates.18 Also, lending rates are often
10 to 20 percentage points above base rates. e high relative profi tability of
this type of credit suggests high rates of interest do not arise from lower
repayment rates. HSBC, for instance, generated 42.8 per cent of its profi ts
from lending to individuals and related fees in 2006, while allocating only
17. e obvious and partial exception to this relates to residential real-estate bubbles, which
open the possibility for temporary leveraged capital gains in housing assets for some households.
e instability, inequity and destructive power of this type of bubble needs no explanation at
this point.
18. Gruber and McComb 1997 point to evidence of this for the US economy.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 13
29.4 per cent of its total assets to such activities. Signifi cant economies of scale
in credit-scoring methods compound these e ects, reducing the scope for
competition.19
Second, the scope for exploitation through lending to individuals has
increased in the past two decades. e privatisation of provision for a number
of basic social necessities has increasingly forced ordinary individuals into
debt, transferring growing shares of their incomes to banks and other fi nancial
enterprises. e most obvious example is housing, where provision for the
working class and poor has become synonymous with facilitating private
ownership through the development of mortgage securitisation markets. As
Table 5 shows, mortgage lending accounts for a very high fraction of lending
to individuals for these banks.20
Table 5: Mortgage loans as percentage of total loans to individuals,
Dec 2006
HSBC Citigroup B of A RBS Barclays Paribas Dresdner SMFG
53.6 33.1 59.1 72.9 73.0 N/A 33.3 98.1
Another signifi cant item is education, where growing costs have increasingly
fallen directly on individual students and their families across a range of
countries. is has opened yet another avenue for direct exploitation by banks.
In 2006, Citibank reported US$220 million in profi ts from its US student-
loans division alone.
Credit cards are another important part of this lending. And, here, banks in
the US moved aggressively to concentrate the industry as it grew in size and
profi tability in the 1990s. In 1995, they held no more than 25 per cent of
credit-card receivables in the US.21 As late as 1999, the top ten US issuers
controlled 55 per cent of the market; many of them were independent credit-
card companies.22 Since then, large banks bought their way into dominant
market share, acquiring Associates, Bank One, British-based MBNA, and
Providian. After 2004, the top ten US issuers controlled over 90 per cent of
the market, and counted only one independent, non-bank enterprise.23
19. Mester 1997.
20. ese fi gures include home-equity withdrawals, which are best understood as consumer
credit. Even in Britain, where such withdrawals were exceptionally high, they never amounted to
more than 20 per cent of mortgage credit.
21. Allen and Santomero 2001.
22. Land, Mester, and Vermilyea 2007.
23. JP Morgan, Citigroup, Bank of America, the independent Capital One, HSBC and
Washington Mutual held the top seven spots at the time. See Akers et al. 2005.
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14 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
e broader signifi cance of this orientation to individual lending cannot
be overstated. In the US, against a background of stagnant real wages, the
nancial obligations of households is estimated to have increased from 15.36
to 19.35 per cent of disposable income between 1980 and 2007.24 e volume
of transfers from households to the fi nancial sector on this account is
unprecedented. And as the current nancial crisis shows, this lending has
introduced a distinct, new source of instability to fi nancial markets.
3.3. Money-dealing fees
Banks have always earned income from the plain handling of money, such as
operating the payments system, transmitting money abroad and undertaking
foreign-exchange transactions. Banks are money-dealers, or commercial enterprises
that specialise in managing money flows and hoards.25 Money-dealing and
account-related fees are very important sources of income for contemporary
banks. ey have also generated considerable controversy, including in Britain,
where the O ce of Fair Trading has for a number of years been trying to curb
overdraft and related bank fees widely perceived to be excessive and opaque.
e gures for fee income from card and account services for the surveyed
banks tell their own story, particularly for Bank of America and British banks.
Table 6: Card and other account service charges, 200626
Bank 2006 2007
US$ billion Revenue Share US$ billion Revenue Share
HSBC 9.00 12.8% 10.86 12.4%
Citigroup 6.78 7.6% 7.22 8.8%
Bank of America 22.51 30.5% 22.99 33.8%
RBS 9.1 17.7% 10.08 16.2%
Barclays 11.10 27.9% 12.73 27.6%
BNP Paribas 2.53 7.2% 3.07 7.2%
Dresdner 0.33 3.9% 0.35 4.7%
Santander 1.53 5.5% 1.95 5.7%
SMFG 1.58 9.6% n/a
24. See Federal Reserve, Household Debt Service and Financial Obligations Ratio.
25. See Lapavitsas 2007.
26. See appendix for explanation of categories used in di erent corporate reports to obtain all
data reported in this section. e gure given in this table for RBS also includes retail fee revenues
not associated with money dealing.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 15
Bank of America and Citigroup together received almost US$30 billion in
fees from money-dealing services to individual accounts in 2007. In Britain,
Barclays received more than a quarter of its revenues in 2007 from banking
and credit fees, a slight decrease in signifi cance in relation to 2006, when the
British O ce of Fair Trading implemented rules limiting late and overdraft
fees.27 Together with HSBC it made out with a total of US$23.607 billion in
fees from money-dealing activities in 2007.
An important part of these revenues relates to credit to individuals. Overdraft
charges, late-payment fees, credit-card charges, etc are levied as fees but are
part of consumer lending. Bank of America attributed the signifi cant rise in its
non-interest income between 2005 and 2006 to its purchase of British-based
credit-card issuer MBNA, which resulted in increases in excess servicing, cash
advance, and late fees. Similarly, Furnace reports that total US late credit-card
fees rose from insignifi cant levels in 1990 to over US$1 billion in 1996, and
to almost US$9 billion in 2003.28 As such, they should also be understood as
exploitative.
Other account-related fees relate to account management and other money-
dealing services. Some of these are new and relate to new access services, such
as ATMs, phone and internet-banking facilities. Banks have incurred signifi cant
xed costs in establishing these new facilities, and their introduction is yet to
translate into reductions in overhead costs. Bank clients have become heavy
users of the new technologies, increasingly using cards and making frequent
ATM withdrawals to access consumption.29 Growing money-dealing fees,
thus, may in part amount to payments by ultimate users of new, expensive,
technologies. But their persistence and opacity, the magnitudes involved, and
their intrusion into the very process of consumption suggest the presence of
exploitative elements in them.
While further research is necessary on this particular account, it is clear
that, in both lending and money-dealing services, banks have re-oriented to
private-wage income as a source of revenues. e resulting relations contain
important exploitative elements. Signifi cant as the resulting profi ts are, they
do not exhaust the current scope for bank appropriation of wage earnings.
e growing scope of nancial-market mediation activities have a orded
banks additional avenues for bank profi ts grounded on wages. e next two
sections turn to those activities and the social content of contemporary capital
markets.
27. Shareholders can be reassured that the ensuing losses in revenue were at least partially
made up for with growth in Barclaycard international. See Barclays 2008, p. 30.
28. Furnace 2004.
29. See Berger and Mester 2003 and Lapavitsas and dos Santos 2008.
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16 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
4. Financial-market mediation
Facilitating access to capital markets has emerged as an important activity for
commercial banks over the past twenty years. As Table 7 shows for 2006,
revenues from these activities are very important for the surveyed banks,
particularly European ones. e nine banks grossed US$113 billion on this
account that year.
Table 7: Revenues from fi nancial-market mediation as percentage of
total revenues, 2006
HSBC Citi B of A RBS Barclays Paribas Sant’dr Dresd’r SMFG
19.5% 14.6% 16.6% 30.5% 37.8% 58.1% 19.0% 50.8% 6.6%
ese revenues arise from a range of activities, from conventional investment-
banking functions of underwriting, brokerage and corporate advisory services
to investment- and insurance-fund management and the issuance and dealing
in derivate assets. Associated with all these activities are the increasingly
signifi cant capital gains made by banks on their trading and own accounts.
e view motivated in the next two sections is that, through these functions,
banks appropriate fractions of existing loanable money-capital ultimately
owned by the mass of all investors. As with ordinary lending, the social
character of the relationship banks have with capitalist clients is fundamentally
di erent from that of their relationship with retail savers. In the current
setting, there is scope for systematic mutual gains in arms-length relationships
between investment banks and corporations and other nancial intermediaries.
ose gains are ultimately funded by fl ows of loanable money-capital owned
by the mass of investors, who are increasingly ordinary savers. In contrast, the
relationship between banks and average retail investors appears in the present
context as exploitative, as banks systematically appropriate value by mediating
future retirement consumption.
In order to establish these points it is necessary to characterise the functioning
of capital markets and the intervention in them by banks. is requires the
extension of existing Marxist theory. No signifi cant Marxist contribution has
been made to this analysis in the hundred years since Hilferding’s 1910 seminal
work. And despite its many insights, Finance Capital presents problems in its
approach to the concept of founder’s profi t as well as in the contemporary
relevance of its core concept of nance-capital, both of which lie at the heart
of Hilferding’s conceptualisation of the integration of corporations, capital
markets and investment banks.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 17
Section Five below o ers initial analytical elements of a Marxist approach
to the contemporary form of those social relations. Before that, this section
documents the relative importance of revenues from fund management,
proprietary gains, and derivatives trading for top international banks.
4.1. Fund management
As already mentioned, managed funds held a total of US$63.8 trillion in assets
at the end of 2006. Even small management fees on such volumes can lead
to appropriations of very large volumes of loanable money-capital. In the
US alone, mutual-fund management fees have grown considerably since 1980.
Table 8: Total mutual-fund fees paid by holders in US, US$ billion
1980 1985 1990 2000 2001 2002 2003 2004 2005 2006
0.0 0.2 1.1 3.4 11.0 8.9 9.1 10.3 10.6 11.8
Source: Investment Company Institute
In the US, investment banks and brokerage houses were the fi rst rms to
profi t from the new mass-retail investment funds. In 1980, the top ten New
York investment banks earned less than one per cent of their revenues from
asset-management fees. By 2004, top investment banks earned 7.5 per cent of
their revenues from such fees.30 After the 1988 partial relaxation of Glass
Steagall restrictions, US commercial banks were o ering mutual-fund shares,
albeit selling them for an ‘administrative fee’ and not an ‘underwriting
commission’ or ‘brokerage fee’.31 In 1989, commercial banks already had 7 per
cent of US mutual-fund assets under their management. By 1995, this had
risen to 15 per cent.32 Worldwide, the nine banks surveyed and their fi nancial
group partners controlled at least 10.2 per cent of the entire managed-fund
market in 2006, a share on par with the combined total for investment banks
UBS, Credit Suisse, JP Morgan, Goldman Sachs, and Deutsche.33 e
importance of these activities is evident in the banks’ revenue fi gures.
30. See Morrison and Wilhelm 2007.
31. McGrath 1989.
32. Neely 1995.
33. Insurance companies and independent intermediaries controlled 50 per cent at the end
of that year. Calculated from Watson Wyatt 2007.
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18 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
Table 9: Fund-management commissions and fees
Bank 2006 2007
US$ billion Revenue Share US$ billion Revenue Share
HSBC 2.98 4.2% 2.59 3.1%
Citigroup 1.44 1.6% 1.97 2.4%
Bank of America 4.21 5.7% 3.38 5.0%
RBS 9.1 17.7% 10.08 16.2%
Barclays 2.83 7.1% 3.58 7.8%
BNP Paribas 2.37 6.8% 2.91 6.8%
Dresdner 0.42 4.9% 0.45 6.1%
Santander 2.24 8.0% 2.59 7.6%
e revenue share is broadly higher for banks operating in Europe, where
banks and insurance companies overwhelmingly control the market.
Independent funds still maintain a signifi cant market share in the US.34
Mutual-fund holdings, at least in the US, are widespread among middle-
class professionals as well as ordinary working-class wage-earners. As of 2006,
53 per cent of households owning mutual-fund shares had a total annual
income below US$75,000; 28 per cent earned less than the median of
approximately US$50,000.35 e attraction of mutual funds for small holders
of loanable money-capital, for whom direct access to capital markets is too
costly, time-consuming, or complicated, is access to rates of return higher than
those available through commercial bank deposits or mostly safe government
securities. Yet the social realities of the relationship cannot be escaped. Retail
investors are various types of wage-earners approaching it on the basis of
securing future (typically retirement) consumption. Fund managers are well-
connected fi nancial professionals seeking to maximise profi ts.
e results are startling. e Economist (1 March, 2008) has reported on
research by top US fund-management fi rm Vanguard showing that, between
1980 and 2005, the S&P 500 share index returned 12.3 per cent per year on
average. Over the same period, the average equity mutual fund yielded only
10 per cent. e average investor gained only 7.3 per cent on average per year,
34. See BCG 2003.
35. Investment Company Institute 2007. For reference, in May 2007, a household with a
full-time assembly line worker and a full-time teaching assistant, each making average earnings,
would have earned US$ 49,300. See Bureau of Labor Statistics, <www.bls.gov>.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 19
largely due to the strong tendency of retail investors to buy high and sell low.
e return realised by the average equity mutual fund investor is not much
higher than rates available for long-term savings deposits. Over the same period,
US six-month T-bills yielded an average 6.00 per cent, while US municipal
and local government 20-year bonds yielded an average 6.92 per cent.36
e signifi cance of these di erences can be illustrated by considering a
hypothetical investment of $100 made in 1980.37 If it were invested in safe
T-bills, by 2005 the investor would hold $454.94. In contrast, had it been
invested in S&P index securities, it would have grown to $2,041.14. e
total premium for investing in equity over T-bills over this period stood, thus,
at $1,559.20. Now consider a wage-earner hoping to save for retirement
who tried to take advantage of those potential gains by investing $100 in an
equity mutual fund in 1980. Earning only the average return received by equity
mutual-fund investors over this period, her investment would have only grown
to $624.59 by 2005. is represents a gain over the safe T-bill investment of
$169.65, or a mere 10.9 per cent of the total potential gains from equity
investment!
e remaining 89.1 per cent were appropriated by fund managers and other
nancial-market fi rms. is includes appropriation through commissions and
fees on investment funds as well as the trading and proprietary gains discussed
below. Unsurprisingly, fund management is remarkably profi table. In an
international survey of money-fund managers’ performance in the lean year of
2002,38 Boston Consulting Group 2003 found that 64 per cent of the funds
reported pre-tax profi t margins above 20 per cent. A full 42 per cent of the
funds reported profi t margins higher than 30 per cent. Funds targeting retail
investors were reportedly the most profi table.39
Although the thought experiment pursued here is no substitute for
more comprehensive empirical study, its results suggest these activities have a
strong exploitative element, particularly given the high profi tability of fund
management. By providing pension-savings services that used to be provided
by the state, fund managers mediate future consumption and appropriate
loanable money-capital originating in the wages of ordinary retail investors.
As discussed in Section 5 below, the bases for these systematic fl ows of value
arising in the sphere of exchange in capital markets ultimately lie in the
36. Calculated with monthly data from Federal Reserve’s Selected Interest Rates.
37. Assuming each instrument paid its average annual return over the period every year.
38. Including seven of the top ten fund managers by asset, plus another 33 who collectively
controlled over one-fi fth of the world market.
39. Morrison and Wilhelm 2007 discuss extensively the signifi cant economies of scale present
in retail investment fund management.
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20 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
fundamental class di erences between retail investors on one hand, and banks
and corporate managers on another.
4.2. Proprietary trading
Commissions and fees from fund management are only one of the ways in
which banks performing investment-banking and fund-management services
can profi t at the expense of investors, particularly retail ones. Investment-
banking and fund-management activities naturally pose opportunities for
banks to make capital gains on securities. Underwriting requires banks to
make investments in the securities being issued. Brokers often stand in as
counterparty for client transactions with volumes that could alter market
prices, in which case banks charge clients a margin on the security’s current
price. And banks increasingly invest in the companies they advise, on which
they have intimate knowledge.40 Finally, when retail investors buy high and
sell low, the counterparty to the transaction is the bank’s trading account. To
the extent that the bank possesses better knowledge about capital markets and
has the fi nancial clout to withstand and take advantage of even moderate
downturns, it will profi t handsomely from such transactions.
is is a controversial issue, as it is rightly perceived to pose potential
confl icts of interest between the bank and its clients, and to be fertile ground
for the manipulation of markets at the expense of other investors.41 Banks are
generally reluctant to report which transactions are carried out for clients and
which are carried on a principal basis. Further complicating matters, this type
of gain can accrue not only on listed own investment, but also on securities
held for trading as part of brokerage services for both institutional and retail
clients. e combined fi gures for gains on those accounts gives a good sense of
the importance of this type of revenue for commercial banks.
Collectively, the nine banks surveyed made profi ts of US$58 billion in
2006 from such gains. For its part, Goldman Sachs made over US$25 billion
on this account that year, more than enough to cover the employee
compensation bill of just over US$16 billion.42
e sub-prime crisis also highlighted the importance of these activities.
While some of the surveyed banks su ered losses in outright mortgage and
other consumer loans, centrally in US markets, the main impact on these
banks took place through their trading-account holdings of subprime mortgage
40. See Morrison and Wilhelm 2007.
41. See, for instance, Blackburn 2006 for accounts of a number of instances of market
manipulation.
42. For an average of just under US$622,000 per employee.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 21
CDOs. e 2007 trading account losses in credit or structured products
for Citigroup, Bank of America and Dresdner stood at US$ 21.806 billion,
5.176 billion, and 468 million, respectively. While posting net overall trading
account gains, RBS, Barclays, and HSBC registered net trading losses in credit
instruments amounting to US$2.861 billion, 823 million, and 419 million.
Some of these losses were associated with holdings for trading, as these banks
mediated purchases by many hedge funds investing in subprime mortgage
CDOs.43 But the sheer volume of losses suggests these holdings were to a
signifi cant extent proprietary in that they were motivated by the hope of
returns on holding these assets.
4.3. Derivatives
Investment and commercial banks have engaged heavily in issuing, trading,
and market-making for derivative assets. Markets for over-the-counter (OTC)
interest-rate and foreign-exchange derivatives have grown tremendously in the
past twenty years, reaching almost US$400 trillion in notional amounts
outstanding in June of 2007, according to the Bank for International
Settlements. Although insignifi cant as recently as the end of last century,
43. Dodd 2007.
Table 10: Own and trading account gains
Bank 2006 2007
US$ billion Revenue Share US$ billion Revenue Share
HSBC 8.86 12.6% 13.89 15.9%
Citigroup 5.76 6.4% 8.00
Bank of America 5.57 7.5% 3.92
RBS 11.48 22.2% 12.39 19.9%
Barclays 8.42 21.2% 9.96 21.6%
BNP Paribas 11.22 32.0% 14.17 33.4%
Dresdner 3.57 41.7% 0.66
Santander 2.70 9.6% 4.10 12.1%
SMFG 1.08 6.6% n/a
UBS 10.97 33.2% 6.96
Goldman Sachs 25.56 67.9% 31.23 67.9%
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22 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
the volume of credit default swaps has also increased dramatically in the past
seven years.
Table 11: Credit Default Swaps, notional amounts outstanding at
year-end, US$ trillion44
2001 2002 2003 2004 2005 2006 2007
0.92 2.19 3.78 8.42 17.10 34.42 42.58
Sources: International Swaps and Derivatives Association Market Survey, BIS
Banks were naturally placed to lead the way as derivative markets developed.
ey were the fi rst enterprises a ected by the increased risks posed by interest-
and exchange-rate liberalisation starting in 1973. ey became pioneers in
deploying hedging techniques with interest-rate and foreign-exchange
derivative contracts as part of their own risk management. It is di cult to
identify the revenues banks raise from issuing these assets and gains they make
on their trading accounts as they are not reported separately. What is clear is
that six of the nine commercial banks surveyed have prominent market
positions. According to Emm and Gay, Citigroup, Bank of America, BNP
Paribas and RBS have been recently among the top seven dealers of derivative
assets worldwide. HSBC and Barclays also have a solid presence in US markets.45
Table 12: Selected OTC derivatives dealers in United States by market
share, June 2007
Bank US, 2007 Ranking
JP Morgan 51.3% 1
Citigroup 20.7% 2
Bank of America 19.5% 3
HSBC 2.9% 4
Wachovia 2.7% 5
ABN Amro 0.8% 13
Barclays 0.4% 19
US O ce of the Comptroller of the Currency, Quarterly Report on Bank Derivatives
Activities
44. Except in 2007, for which the end of June fi gure is given.
45. Emme and Gay 2005.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 23
e investment-banking functions of these banks naturally placed them in a
position to sell derivative contracts to corporate clients. As discussed below,
those assets may help improve capital-market perceptions of a corporation’s
liabilities, thus lowering their cost of capital and creating the basis for the
payment of issuance fees. Despite the fact that non-fi nancial corporations
make heavy use of these assets,46 nancial intermediaries account for the bulk
of OTC markets, particularly for credit default swaps.
Table 14: OTC derivative contracts with fi nancial fi rms, per cent of
total, June 2007
Foreign Exhange Interest Rate Credit Default Swaps
78.8% 86.9% 97.9%
Source: Calculated from BIS Semiannual OTC derivatives statistics
As with corporations, fi nancial intermediaries may acquire derivative assets to
improve market perceptions of their position and liabilities. Banks increasingly
use credit default swaps, as part of holding and dealing in structured debt
products like CDOs, as well as to lower the regulatory capital cost of holding
debt securities under Basle II capital adequacy conventions.47 Insurance
companies, investment and hedge funds regularly acquire derivative assets
from dealers in order to conform their positions with the expectations and
requirements of customers and regulators. Gains made from these
improvements provide the foundation for payments of fees for obtaining
derivative contracts. It should be noted here that the most important function
of a derivative asset in this connection is not necessarily to change the prospects
of the buyer, but to change the perception of those prospects by other capital-
market players.48
Whether bought for hedging or pure speculation, derivative assets yield fees
to issuing banks. Like good bookies, issuers generally maintain a neutral
position to either side of all markets. Issuance fees represent various
appropriations of existing loanable money-capital, centrally from institutional
46. e International Swaps and Derivatives Association reports well over 90 per cent of the
world’s top 500 corporations regularly use over-the-counter derivatives.
47. By reducing the measured risk of an asset holding and, thus, lowering the corresponding
risk-weighted capital reserves.
48. Millo and MacKenzie 2007 eloquently emphasise this aspect of derivative markets,
particularly in relation to the prevalence of pricing models based on the basic models of Black
and Scholes 1973 and Merton 1973 whose mathematical foundations yield easily authoritative
prices, regardless of their empirical purchase on reality.
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24 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
investors drawing funds from the mass of retail investors. As such, bank profi ts
from this issuance also represent systematic transfers of value from the mass of
retail investors to the fi nancial sector.
5. Capital markets, investment banking and Marxist theory
e increasing signifi cance of fi nancial-market mediation to capitalism in
general and for commercial banks in particular poses a considerable analytical
challenge for Marxist political economy. ese activities can be highly complex,
and many of them are historically novel. Identifying their social content
requires development and extension of Marxist theory.
Building on Marx,49 Hilferding o ers the best developed Marxist approach
to capital markets. Yet, despite its important insights, the book’s approach to
the integration of corporations, banks and capital markets is defi ned by the
concepts of nance-capital and founder’s profi t. Subsequent developments in
capitalism have pointed to empirical and analytical weaknesses in both
concepts. As the discussion above suggests, contemporary capitalism is not
characterised by the merger of banking and industrial capital.
e concept of founder’s profi t, as formulated by Hilferding, also poses
di culties. It refers to a peculiar capital gain realised by a corporations
founders when equity is issued and sold because buyers expect and receive
only the basic rate of interest as a return on their investment. In this, he
followed very closely on the steps of Marx, for whom the rate of interest
represented the general mode of appropriation for all holders of money-capital,
regardless of the instruments employed.
Yet, historically, expected and realised equity returns have exceeded returns
on bills and bonds over long periods of time.50 More importantly, this view
makes it impossible to characterise the social content of relations defi ned by
investment-banking activities.51 Put most simply, if corporations can directly
raise capital at the rate of interest, there is no reason for them to engage the
49. Marx 1909.
50. A wide literature documents the superior returns on equity over bonds in the US
throughout the twentieth century. In the postwar period, US equity returns have yielded an
average excess return of 5.5 per cent over bills (DeLong and Magin 2007). Besser 1999 also
presents evidence from Germany between 1870 to 1995 showing that equity returns, while
highly volatile, have been consistently higher than bond returns over long investment horizons.
51. In Hilferding, these relationships are rather simple. Banks fused with and controlled
industrial capital and the resulting nance-capital appropriated the totality of founder’s profi ts,
and increasingly dominated economic, social and political life within rival national imperialist
blocs.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 25
costly services of investment banks and little content to fi nancial-market
mediation.
Starting from these appreciations, and the most general and compelling
foundations of Hilferding’s approach to capital markets, this section aims to
make a modest and preliminary contribution to a Marxist theorisation of
capital markets, investment banking and nancial-market mediation. e
discussion a ords a general characterisation of the socially necessity and
inherent contradictions of capital markets and investment banking in
capitalism, as well as an elucidation of their parasitic class content in the
concrete historical setting prevalent since the early 1980s.
5.1. Capital markets, risk and investment banking
Capital markets are markets for securities: rights to di erent future cash fl ows
paid by corporations. In the fi rst instance, corporations enter capital markets
to raise funds for investment. Loanable money-capital enters capital markets
seeking self-expansion through the future cash fl ows associated with securities
and possible capital gains. Two broad types of securities are traded, bonds and
equity. Bonds are debt claims and holders are entitled to the payment of
interest. Equity represents a claim on residual profi ts of enterprise in the form
of dividends; it may also legally represent voting rights at corporate meetings.
Capital gains may be realised on any security when a holder sells it for a price
higher than its purchase price.
Capital markets e ect a socialisation sui generis of debt and of capital itself,
with potential benefi ts for the capitalist class as a whole. In the purchase of any
non-marketable enterprise liability, the value advanced by the buyer loses the
exibility and general acceptability it had when it was in the form of loanable
money-capital. Loanable money-capital is transformed into commodities in
the enterprise’s circuit of capital, and its transformation into more value hinges
on the vicissitudes of that circuit over time. is loss of liquidity can be
ameliorated through developed capital markets. Liquid markets for corporate
securities allow security holders readily to realise value into money, which is
not only the most fl exible, independent and socially recognised embodiment
of value, but the very purpose of the advance of loanable money-capital.
Increased liquidity will attract larger volumes of money seeking a security,
generally reducing the cost of outside fi nance.
Bonds and equity give holders rights to uncertain future ows of money. As
with ordinary loans, their prices are irrational from the perspective of Marxist
political economy in that they are money expressions of the value of future
money. Prices are determined unanchored, through the competitive interaction
of supply and demand. In the capitalist setting of competitive individual
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26 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
appropriation, this relative detachment poses a range of di culties, including
problems of trust and confi dence between parties in a setting of anarchic
uncertainty about the economic future.
It is in relation to these di culties that corporate ‘fi nancial engineering’ and
investment banking acquire social signifi cance by possibly assisting a corporation
to reduce its nancing costs or generate capital gains. In general, all
developments that increase the profi tability of an enterprise will also increase
equity prices higher rates of exploitation, leadership in the installation of
new techniques of production, increased control of markets, and so forth.
But the detachment of capital-market prices from underlying realities of
accumulation creates other potential sources of capital gains (or losses) that
have no direct relationship to underlying real investments or profi tability. A
generalised expectation of future security-price rises will often in itself increase
demand, leading to further price rises that, for some time, yield considerable
profi ts and appear to validate expectations. Sheer manipulation, including by
investment banks, has often been an integral part of such processes. Capital
markets and investment banking inherently create the possibility of such
speculative bubbles and their devastating consequences.52
Yet capital markets also create a systematic foundation for investment-
banking functions and profi ts that does not by itself involve swindles, bubbles
or manipulation: potential improvements to the social perceptions of the risks
associated with the self-expansion of value through a particular corporate
security. ese may lower the cost of raising capital and generate capital gains
that sustain investment-banking fees and profi ts.
As generally noted by Hilferding,53 investors’ perceptions of risks associated
with security returns play a defi ning role in the demand for securities.
Specifi cally, security buyers will try to assess the potential problems posed by
its future cash fl ows and its reconversion into money. us the perceived
creditworthiness and liquidity of a security are central determinants of
demand.
e less creditworthy or liquid a security is perceived to be, ceteris paribus,
the smaller demand for it will be. Resulting security prices will be lower, and
the expected future cash fl ows accruing to holders will represent a higher yield
on initial investment. Similarly, two securities with di erent expected potential
future cash fl ows, but with the same perceived creditworthiness and liquidity,
52. E ects are often compounded by leveraging of investments made on the basis of such
self-fulfi lling expectations. Returns may be astronomical while the bubble lasts, making jumping
into it very di cult in the context of general competition in capital markets. See Kindleberger
and Aliber 2005 for a good historical account of such crises.
53. Hilferding 1981, p. 108.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 27
will see their present prices move until both yield the same expected return. As
a result, systematic ‘risk premia arise in capital markets: a general positive
association between expected returns on a security and the perceived risks to
the self-expansion of loanable money-capital it poses.
e potential benefi ts of investment banking operations in this regard are
most clear when considering the issue of a new corporate security. Neither its
liquidity nor its creditworthiness can be guaranteed a priori. Investment banks
help redress this situation in the rst instance through underwriting. ey
commit to buy the new security at a particular price, assuring buyers of its
ready reconversion into money and signalling the bank’s confi dence in its
creditworthiness.
As argued and historically illustrated by Morrison and Wilhelm, investment
banks are able to do this given their position and relations within social and
business networks of corporate managers, individual investors, and managers
of institutional funds.54 On the security selling side, the banks are responsible
for ‘due diligence’ on the issuer’s conditions, making use of their specialisation
in credit enhancement. On the buying side, the bank engages in ongoing
consultations with a network of close private and institutional investors,
gathering knowledge of prices those buyers would pay for the issue, and any
aspects of the issue and issuer they may wish to see changed. Buyers agree to
discuss these issues with the bank on the understanding they will be o ered
preferential access to the resulting security issue. Banks also advise corporations
on a range of issue-related and broader corporate-fi nance matters that may
increase improve market perceptions of a corporation’s securities. is often
includes advising on the management of total security supply, or selling
derivative assets to its corporate clients to reduce perceptions of risks associated
with the issuer.
All insiders generally gain as a result of these activities. e initial buyers,
who are individual or institutional clients of the bank, get a fi rst shot at buying
securities that, if the bank has done its job well, will likely appreciate
signifi cantly in the short run. e issuer faces a lower cost of capital. And the
bank receives fees, typically in the form of a discounted price on the issued
security in relation to the o er price.55
Corporate managers and investment banks may also try to generate capital
gains on old issues of equity by employing similar methods. Whether the
securities are new or old, all such gains are funded from the loanable money-
capital of outside buyers. ose buyers accept higher security prices because
54. Morrison and Wilhelm 2007.
55. Chen and Ritter 2000 report this discount is usually around seven percent of the listed
price.
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28 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
they come to perceive better prospects or fewer risks associated with ownership
of the security in question.
e uncertainty, competitiveness and relative detachment of capital-market
operations ensure they are directly shaped by historically concrete social
conventions and sustained practices among market participants.56 is
includes perceptions about securities, which may be generally shared and
sustain transactions even while at considerable variance from the realities
underpinning the value of securities.57 is gives rise not only to potential
instability, but also to possible systematic advantages to market participants
better able to shape and apply capital-market conventions and practices.
5.2. Bonds, equity, and capital-market returns
Capital-market competition imposes general constraints to potential gains
from these activities, as well as certain tendencies in the quantitative relationship
between capital-market and real-accumulation rates of return. It is useful to
consider separately bonds and equity in this regard.
Bonds embody credit relations, not fundamentally di erent from those
created by bank loans. eir rate of return is a rate of interest, which is a
sharing of profi ts. Its level will depend on the quantity and characteristics of
other bonds, the relative perceived risk of the individual bond, and the amount
of loanable money-capital seeking self-expansion in bond markets. Private
bonds ordinarily pay higher interest yields than state paper regarded as safe.
Bond rates are typically measured as premia above returns on state bonds.58
e expected rate of return on a bond e ectively demanded by buyers may
account for expected capital gains on the bond. ose could arise as the relative
riskiness of the corporation’s debt falls, or as overall demand for bonds
increases. ese are unlikely to be systematic as the management of corporations
will not generally try specifi cally to increase the price of outstanding bonds.
Equity possesses a distinct relationship to the process of accumulation,
returns realised through dividend payments and capital gains. Equity-capital
56. See MacKenzie 2003, for instance.
57. e current crisis has exposed a range of such cases in the credit-scoring models used in
mortgage lending, and in the estimation of future cash ows associated with mortgage-backed
CDOs. e methods used were adequate for convincing successive layers of security buyers, but
not for actually describing the objective characteristics of the security. See Lapavitsas and dos
Santos 2008.
58. e existence of a large, liquid market for state securities generally deemed as risk-free is
an important underpinning in the development of liquid private bond markets. e rise in
volumes of private marketable debt since the early 1980s was accompanied by an equally
impressive rise in the volume of outstanding marketable US Treasury bonds, notes and bills.
ose rose from just over 20 per cent of GDP in 1980, to almost 45 per cent by 1997.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 29
(in Marx’s words, ‘fi ctitious capital’) does not represent an aliquot of real
circulating capital. It entitles the holder to a pro-rata claim on future streams
of dividends drawing on the profi ts generated by the circulation of capital.
is is clear from the divergence of a corporation’s market capitalisation and
net asset values. Capital engaged in industrial or merchant circuits appreciates
through the rate of profi t, established through mediations involving struggles
at the point of production, the composition of capital, and competition in
input and output markets. Equity-capital appreciates according to the rate of
return, established through competition in capital markets. While related,
each of these rates represents fundamentally di erent social relations.
At purchase, the expected rate of return on a corporation’s equity will
generally be higher than the rate of interest on its bonds. Debt repayment is
generally more secure than residual gains on equity. In this important regard,
the position articulated here di ers from that o ered by Hilferding, who
argued that competition among buyers of equity would take returns on equity
down to the rate of interest. Hilferding understood quite well the existence of
risk premia across di erent securities. But in his approach to capital-market
securities he followed closely on Marx’s own exposition in Chapter 23 of
Volume III of Capital on the returns to loanable money-capital.59 And while
Marx’s exposition on the matter elucidates the objective foundation of interest
payments in the generation of profi ts by real capital, it also advances the rate
of interest as the general return on all loanable money-capital, regardless of the
nancial and social relationship between the buyer and the seller or the type
of security in question. It is impossible to approach risk premia, which
inherently involve individual securities and their returns, on such a basis.
e rate of return expected by new buyers of equity will depend on their
perceptions of present profi tability, their confi dence in the security, as well as
on their expectations of the future evolution of these factors.60 Investment
banking and ‘fi nancial engineering’ operations can a ect these perceptions and
expectations, reducing the expected rate of return demanded by new equity
buyers, and thus generating price rises and capital gains for incumbent owners.
e scope for gains from such activities will generally depend on the
evolution of demand for securities in relation to supply, and on the capacity of
59. I owe this important observation on the origins of Hilferding’s approach to Makoto Itoh.
60. Earlier versions of this article considered the simple case of equity issued by a corporation
not expected to experience capital gains and paying out all profi ts as dividends. In that case,
returns on equity will not normally be higher than the corporations rate of profi t. Market
capitalisation will typically be much lower than the price of the corporation’s assets. Eventually,
either the corporation will buy back cheap equity, or it will be bought up and liquidated. Either
way, the situation is unlikely to last very long.
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30 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
corporate managers and investment bankers to devise ways to increase the
confi dence in the security by potential buyers. is will hinge on historically
specifi c practices and conventions that have acquired general acceptance in
shaping capital-market perceptions,61 as well as on the specifi c composition of
investors seeking to make gains from securities.
e steady privatisation of pension provision and other necessities since the
early 1980s created a unique setting in capital markets. It not only greatly
increased demand for securities, but also added a growing mass of ordinary
savers onto capital markets. e class implications have been dramatic. On
one side, we have seen corporate managers and investment bankers nestled in
extensive social and business networks of capitalist investors and managers,
organised professionally with the explicit purpose of maximising returns by
shaping market perceptions. On the other side, we have seen atomised
individual savers whose engagement with capital markets is primarily dictated
by trying to access consumption retirement, a child’s education, a down
payment on a house, and so on.
It should not be surprising that the results of this encounter have proven
systematically unfavourable to retail savers. e relative detachment of
capital-market operations from underlying realities of production, and their
susceptibility to perceptions, conventions and – more recently – highly
technical practices, tend to favour the well-connected capitalist relative to
retail savers. e dramatically di erent outcomes of capital-market trading for
retail investors and for fi nancial intermediaries are not usefully understood as
the product of the ‘irrationality’ of retail investors. After all, nancial
intermediaries have amply proven their own capacity for ‘irrationality’.
Systematic uneven capital-market outcomes are simply an expression of the
class content of contemporary capital markets.
While more analytical and empirical work are needed in this regard, it is
clear that the foundation of the recent astronomical profi ts associated with
investment-banking activities have ultimately been funded from the
investments of ordinary savers. In a setting where these activities have not
been generally associated with securing increased real investment – which
could lead to general increases in productivity, wages, and standards of living –
in investment banking during this period appears as monumental and
crystallised class parasitism.
61. Such as derivative assets. See Milo and MacKenzie 2007.
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P. L. dos Santos / Historical Materialism 17 (2009) 1–34 31
6. Some concluding observations
A number of secular, policy and technological developments have fundamentally
changed banking and its relationship to accumulation. Particularly in the US,
non-fi nancial corporations have become less reliant on outside fi nance in
general and bank loans in particular for their operational investments. eir
relationship with capital markets has consequently changed, and to a signifi cant
extent consists of ‘fi nancial engineering’ operations aimed at capital gains and
involving the withdrawal of equity and bond borrowings. e privatisation of
pensions provision has facilitated this change by triggering unprecedented
infl ows of loanable money-capital into capital markets in the form of retirement
savings. Banks have placed themselves at the heart of these processes, o ering
mutually benefi cial, arms-length investment-banking services to corporations.
ey have also pursued the provision of various investment-fund instruments
to ordinary savers, who systematically receive very unfavourable terms in those
services.
More signifi cantly, the steady privatisation of the provision of a growing
number of social necessities has increasingly made access to money a
precondition for the basic reproduction of ordinary wage-earners, including
access to housing, education and health care. Particularly in a setting of
stagnant real wages and rising social inequality, this has forced wage-earners
onto fi nancial markets to secure mortgage, education and consumer credit as
well as private insurance services. e relationships banks establish with them
through those activities involve large and systematic appropriations of value
drawing on individual income. As such, they are exploitative. While these
changes are most clearly pronounced in the US and Britain, the micro-level
evidence discussed in this paper suggests the new banking practices are
spreading, distinctively, to other advanced capitalist economies.
e current nancial crisis may be usefully understood as a crisis of this
type of banking and attendant nancial activities. Regulatory arbitrage and
rising degrees of leveraging of fi nancial intermediaries have played important
roles in the crisis. Positivist hubris about the power of new, inference-based
estimations of risk also played their part, as capital-market players came to
believe that derivative assets and their inference-based pricing formulas could
actually describe and account for all market eventualities. And competition
among intermediaries ensured that even though many of them knew subprime
mortgage lending was going to lead to losses, they could hardly a ord to miss
out on the boom.62 To borrow from former Citigroup boss Chuck Prince III,
when the music stopped, most banks were caught dancing.
62. HSBC 2007, p. 8, noted in March 2007 that much of its US subprime mortgage portfolio
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32 P. L. dos Santos / Historical Materialism 17 (2009) 1–34
Yet, underpinning all of these factors was the drive by banks and broader
nancial system to increase the scope for nancial expropriation. Unsurprisingly,
problems arose as this expansion started to include historically oppressed
layers of the US population with very low and insecure wage incomes. e
unfolding economic depression is adding to the systems problems as increasing
volumes of ‘prime’ mortgages and other consumer debt go bad.
It was contemporary banking created the current nancial crisis and is
responsible for the consequent devastation of the lives of millions of people. It
is also central to contemporary capitalism. Whatever happens over the next
period, it is unlikely that bank appropriation of value at the expense of ordinary
wage-earners will collapse by the power of its own contradictions. e revenues
have been far too signifi cant, and the benefi ciaries far too central to the socio-
political fabric of the di erent advanced capitalist economies. e weakening
of trade-union and of broader social organisations of ordinary people over the
past thirty years facilitated the growing intrusion of the fi nancial system into
the everyday lives of ordinary wage-earners. It is the re-awakening of those
organisations that can once again place on the agenda the social provision for
housing, retirement, education, health and other necessities, as well as the
broader desirability of conscious, democratic economic planning.
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Appendix on Bank Corporate Reports
Unless otherwise noted, all information concerning individual banks was obtained from their
respective Annual Reports for 2006 and 2007. e only exception is SMFC, for which the report
for fi scal 2006–7 was used. Given the signifi cant accounting conventions across national
regulators and individual institutions, it is necessary to specify the sources for particular data
reported above. is is done by reported area of activity in the explanations below, which also
include pertinent caveats and di culties.
Credit-card and account-service charges
For all banks, these are fees from credit and banking cards, and account services. For RBS, total
non-interest income from retail operations is provided, which includes fund-management fees.
For BNP Paribas, net commission income not measured at fair value is given, which is a residual
estimate of money-dealing commission and fees.
Financial-market mediation
e percentages are an understatement for SMFG and RBS, neither of which reported separate
fund-management revenues. SMFG does not report narrow investment banking revenues either.
e fi gure given is exclusively for gains on own and trading account.
Fund-management and related commission fees
e fi gures relate to net fees and or commissions on management of investment, pension, mutual
and other funds. e exceptions are Citgroup, for which net income of Smith Barney and Private
Banking divisions is given, and RBS for which fees earned at retail level are given, which also
include money-dealing fees.
Own and trading account gains
For HSBC the fi gures are the sum of ‘Net trading income and Net income from fi nancial
instruments’. For Citibank, they relate to ‘Principal transactions’ total revenue (the reported loss
for credit instrument tallied at US$21.8 billion). For Bank of America and SMFG, they
correspond to ‘Trading account profi ts’ plus equity-investment income and gains on sales of debt
securities. e bank’s trading account loss for 2007 stood at US$5.13 bilion. e fi gures for RBS
include net gains from trading plus gains from investments, asset-backed activities, and rental.
e fi gures for Barclays are from ‘Principal transactions’ and include net trading and investment
incomes. Santander’s ‘resultados netos de operaciones nancieras’ are reported. Paribas reports
prominently on its net gains on nancial instruments at fair value and on available-for-sale
nancial assets. e fi gures for UBS and Goldman Sachs are, respectively, for net trading income
and trading and principal investments income.
HIMA 17,2_f9_1-34.indd 34HIMA 17,2_f9_1-34.indd 34 3/27/2009 5:18:57 PM3/27/2009 5:18:57 PM
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... In view of the changing financing patterns of firms, banks turned increasingly to the household sector in their lending business (dos Santos 2009). On the one hand, households partially finance consumption goods through consumer credit; on the other hand, they finance the acquisition of housing through credit. ...
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The chapter provides an overview of the way in which the dependency research program was adopted and adapted in the European academia. In the 1970s and 1980s, dependency theories inspired the analysis of uneven development and developmental strategies with a central focus in Southern Europe. The crisis of 2008 onwards has contributed to a rediscovery of the dependency approach with a new focus on Central and Eastern Europe. Thereby, the European Dependency School (EDS) further developed and adapted the dependency approach by linking it to other theoretical traditions such as regulation theory in order to explain the crises that hit the European peripheries particularly hard. More recently, academics in Europe have started using the dependency approach to better understand the conditions of policymaking within the European Union (EU) and to discuss possible strategies to overcome dependency and promote development. The chapter offers a detailed presentation of two mechanisms of dependency—dependent industrialization and dependent financialization—and their evolution in the EU.
... Financialization in the periphery also operates through transformations of banking systems and the financial sector more generally. Thus, according to a study of large transnational banks [63], bank profits are increasingly generated from consumer credit to individuals, from financial investments and from services, including investment banking. Thus, bank profits are generated mainly in the sphere of circulation and, to a lesser extent, in the sphere of production. ...
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