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Lehman Brothers in the Dutch offshore financial centre: the role of shadow banking in increasing leverage and facilitating debt



Credit intermediation outside the regular banking system, or shadow banking, has increased immensely over the past decade. This paper situates this increase against the backdrop of the structural problem of overaccumulation, and thus the absence of profitable reinvestment opportunities in the production sphere, in addition to the scarcity of high-quality collaterals. Zooming in on Europe’s offshore world and Dutch conduit structures in particular, the paper illustrates, on the basis of the Amsterdam-based Lehman Brothers subsidiary (and others), how shadow banking enables regular banks to increase leverage and take on excessive debt. It will be argued that the continued expansion of debt at the systemic level, inter alia facilitated by shadow banking, heralds the prospect of a crisis far more dramatic than the one we are currently witnessing.
Lehman Brothers in the Dutch offshore financial centre: The role of shadow banking in
increasing leverage and facilitating debt
Rodrigo Fernandez and Angela Wigger
Rodrigo Fernandez, Department of Geography, University of Leuven, Celestijnenlaan 200 E, B
3001 Heverlee, Belgium. E-mail:
Angela Wigger, Institute of Management Research (IMR), Radboud University Nijmegen,
Thomas van Aquinostraat 5.1.3, P.O. Box 9108, 6500 HK Nijmegen, The Netherlands. E-mail:
Credit intermediation outside the regular banking system, or shadow banking, has increased
immensely over the past decade. This paper situates this increase against the backdrop of the
structural problem of overaccumulation, and thus the absence of profitable reinvestment
opportunities in the production sphere, in addition to the scarcity of high-quality collaterals.
Zooming in on Europe’s offshore world and Dutch conduit structures in particular, the paper
illustrates how, on the basis of the Amsterdam-based Lehman Brothers subsidiary (and others),
shadow banking enables regular banks to increase leverage and take on excessive debt. It will be
argued that the continued expansion of debt at the systemic level, inter alia facilitated by shadow
banking, heralds the prospect of a crisis far more dramatic than the one we are currently
Keywords: shadow banking, overaccumulation, debt-led accumulation, offshore financial
centres, Lehman Brothers, The Netherlands.
Shadow banking has been an integral part of the global financial architecture for quite some time
but it has only been brought into the limelight in the wake of the 2007/2008 global economic
crisis. Frequently associated with money, repo and derivatives markets, shadow banking refers
to borrowing and lending by non-depository financial institutions - so-called non-banks or
quasi-banks. Shadow banking expanded dramatically in the first decade of the new millennium,
both before and after the eruption of the current crisis. Estimates by the Financial Stability
Board (FSB) suggest a rise from US$ 26 trillion in 2002 to US$ 71 trillion in 2012, which is
equivalent to almost half of the size of the regular banking system (FSB, 2013b). This
expanding parallel financial universe in the shadow of regular banks usually builds on far
higher leverage, and thus higher risk taking when issuing debt. The prudential standards for
capital requirements, liquidity and trading rules - the backstops that usually ensure the
resilience of the traditional banking sector - do not apply, which is why shadow banking has
been declared a breeding ground for financial instability at the G20 meetings in 2010 in Seoul
and 2011 in Cannes. Ever since, the financial industry has put greater efforts into unshackling
the term from its connotation of being a nefarious practice and into the portrayal of shadow
banking as a ‘modern, sophisticated, and complementary way to share risks efficiently’ (see for
example, Hakkarainen, 2014). Lobby efforts by the financial industry seem to have been
successful. Non-bank credit intermediation is no longer proclaimed a cause of but a solution to
the current crisis. The proposed Capital Markets Union (CMU) by the European Commission is
testimony to this. The Commission’s Green Paper refers to ‘high-quality securitization’ as a
simple, transparent and safe financial technique. According to the Commission, shadow
banking ‘performs important functions in the financial system’ as it creates ‘additional sources
of funding’ and offers ‘investors alternatives to bank deposits’ (European Commission, 2012a,
2015). Shadow banking is thus considered an efficient way to match supply and demand for
financial services outside conventional banking structures (see also FSB, 2011a, 2012a).
A range of scholars has challenged the allegedly efficient brokerage role of non-banks
and argued that shadow banking rather needs to be understood as one of the root causes of the
current crisis (Bengtsson, 2013; Lysandrou & Nesvetailova, 2014; Nesvetailova, 2015; Palan &
Nesvetailova, 2013; Rixen, 2013; Thiemann, 2014). The fact that such bank-like activities have
fallen off the radar of state regulation is particularly highlighted. Explanations for their
unregulated nature are generally sought in reductionist concepts such as ‘regulatory arbitrage’ or
‘cognitive capture’. For example, Rixen (2013) and Thielmann (2014) ascribe the absence of
‘effective’ regulation and the presence of regulatory loopholes to competition among
jurisdictions, arguing that domestic regulators have been ‘cognitively captured’ by yield-seeking
financial investors. Similarly, Lysandrou and Nesvetailova (2014) refer to ‘unregulated financial
innovation’ and ‘external pressures on the banking system’. Even though this literature provides
trenchant empirical insights on institutional responses to investor demands, it is also incomplete
in what it highlights. The prevalence of debt-led accumulation patterns and the wider dynamics
of financialised capitalism are either ignored or mentioned in passing only. Shadow banking
tends to be defined merely as financial intermediation, thereby disregarding its fundamental role
in the issuance of debt by regular banks. Moreover, there seems to be an implicit assumption that
had shadow banking been regulated ‘effectively’, there would be no crisis today.
This paper seeks to bring ‘capitalism’ back in by linking the rise of shadow banking to
the recurring structural problem of overaccumulation, which refers to the lack of attractive
possibilities to reinvest past profits in the production sphere at a particular historical juncture and
location (Harvey, 2006). Consequently, shadow banking should not be understood as one of the
root causes of the crisis but rather as a temporary solution that provides new opportunities for
profitability in the absence of sufficient outlets for surplus capital in the real economy. At the
same time, shadow banking not only absorbs surplus capital that cannot be profitably invested
elsewhere, it also provides one of the mechanisms for large systemic banks to increase leverage
and manufacture new credit/debt as part of their profit base. Shadow banking, it will be argued,
constitutes a central node in the spiral of ongoing debt-led accumulation patterns of today’s
advanced economies.
Contrary to what is often claimed, this paper argues furthermore that the facilitation of
credit/debt through shadow banking does not take place in an unregulated environment but in
fact prospers due to state regulation. To begin with, the rise of shadow banking is premised on
states creating the necessary regulatory infrastructure that enlarges the capacity of the wider
economy to take on more debt, including household debt through credit cards, student or car
loans, or the expansion of mortgages based on rising real estate prices (Aalbers, 2008; Fernandez
& Aalbers, 2016; Turner, 2015). European governments, in various ways, often promote
consumer credit/debt as a strategy for economic growth (Marron, 2012). Similarly, the
aforementioned EU plan to create the CMU seeks to facilitate the expansion of mortgage debt
through the regulation of securitization, which forms part of shadow banking. Moreover, as will
be shown in the case of the Amsterdam-based Lehman Brothers subsidiary, state regulation has
been integral for the massive intra-company debt of Lehman Brothers. Shadow banking did not
randomly spread across space as some authors seem to suggest (see for example, Thielmann,
2014) but is spatio-temporally condensed in state-regulated offshore financial centres (OFCs)
and tax havens. While the bankruptcy of Lehman Brothers, as the apex of the 2007/2008 crisis,
has been widely discussed, how its excessive credit structures have become possible is often
only poorly understood. Through shadow banking, various debt instruments can be reused
multiple times as collateral. Lehman Brothers sold debt instruments basically at will through a
vast network of shell companies interconnecting various OFCs with financial centres revolving
around the New York/London axis, also referred to as NYLON. Importantly, and also in the
post-Lehman Brothers era, the very same mechanisms continue to be a daily practice in the
offshore world, for example, rendering the Netherlands in 2011 the largest FDI receiver
worldwide (if measured in relation to its GDP). The analysis presented here builds on annual
reports, prospectuses of debt instruments, interviews with policymakers and investors and
Reuters company data. In addition to various primary and secondary sources, macro-level data
retrieved from the OECD, IMF, UNCTAD and FSB have been used.
This paper seeks to communicate simultaneously with (rationalist) institutionalist
accounts on shadow banking and the wider (critical) political economy literature on debt, tax
havens and offshore financial centres. Much has been written about debt-led accumulation
structures and facilitating state regulation (Boyer, 2000; Crotty, 2008, 2009; Stockhammer,
2004), or what has been referred to as ‘privatised Keynesianism’ (Crouch, 2009), ‘debtfare
states’ (Soederberg, 2014), ‘debt imperialism’ (Graeber, 2011), or ‘financialisation’ more
generally (Froud et al., 2007; Krippner, 2011; Langley, 2008; Montgomerie, 2008). This
literature provides excellent (macro-level) explanations for the prevalence of debt-led
accumulation patterns; yet the specific role of shadow banking in facilitating credit/debt is often
not accounted for. Similarly, shadow banking is not prominently discussed in the literature on
OFCs (Donaghy & Clarke, 2003; Maurer, 2008; Picciotto, 1999; Roberts, 1995, 1994; Wójcik,
2013; exceptions are Palan, 1999, 2002; Palan & Nesvetailova, 2013; Rixen, 2013). Relatively
little has been written about the specialised work division and complementary shadow-banking
practices among different offshore financial hubs, while broader trends within capitalism such as
overaccumulation and debt-led accumulation structures tend to be ignored (an exception is
Bryan et al., 2016). Thus, we seek to fill this gap and offer a broader understanding of shadow
banking. In the current context of lingering scarcity of high-quality collaterals as a ground for
the issuance of new debt, shadow banking is likely to expand further in the future. This is
immensely problematic as the current pace of debt creation cannot be maintained endlessly, and
a similar recapitalization of so-called banks of systemic importance (‘too big to fail’) with
taxpayers’ money will not only be politically unfeasible but also de facto impossible. Thus, the
next crisis heralds the prospect of being far more dramatic than what we have seen since 2007/8.
Arguably, the destruction of fictitious capital in a bloated financial sector may seem desirable at
first glance; however, it is likely to be accompanied by fierce social struggles and massive
repercussions for Western welfare systems that have come to rely on debt-led accumulation
The paper is structured as follows: the first section theorizes how shadow banking and by
extension, the creation of credit/debt as fictitious capital, provides a temporary solution to
overaccumulation. The second section offers a primer on shadow banking, while the third
section zooms in on the mechanisms of debt creation and shows how the Amsterdam-based
Lehman Brothers’ subsidiary interconnected the Dutch tax haven with other European OFCs.
The third section shows that the same Lehman Brothers’ practices continue on a daily basis. The
section preceding the conclusions locates the rise of shadow banking within the context of
capitalist development and outlines empirically, how overaccumulation has become manifest.
Theorizing the crisis-ridden nature of capital accumulation
Capital must circulate continuously or die. (Harvey, 2014, p. 73)
Before locating the role of shadow banking in the current crisis, it is important to point out that
capital, understood as accumulated wealth that can be used to accumulate more wealth, is not a
fixed entity but through its development and global spread ‘constantly reconfigures itself from
different angles’ (Van der Pijl & Yurchenko, 2015, p. 496). Shadow banking is testimony to this
continuous reconfiguration of capital as it facilitates the extension of credit far beyond the
conventional banking system. Credit (and its flipside debt) as a circulating form of fictitious
capital is not rooted in what has already been produced but lays a claim to the appropriation of a
portion of the production of future surplus value, thereby linking the present to the future.
Claims to future surplus production can be made infinitely in theory, particularly if the issuance
of credit/debt is unregulated or if there are hardly any constraints. Finance capital thrives
however, not only on extracting (future) surplus created in the sphere of economic production -
the primary circuit of capital, but it can also attain ephemeral value through mere circulation and
thus appear seemingly unrelated to productive activity (see also Lapavitsas, 2013, p. 264).
Trading all sorts of risks and securitization practices, in the form of packaging illiquid assets
such as loans and selling them to investors, are cases in point. Speculative contracts that contain
expectations about the future ‘are the very expression of value-in-flux’ created in a financial
system that primarily thrives on the basis of interconnected self-referentiality (De Goede, 2015,
p. 365). More concretely, in the modern financial system, credit is no longer issued on the basis
of existing saving deposits but instead appears as fictitious capital on the borrower’s account - at
almost no cost for the creditor. Licenced private institutional creditors such as banks not only
intermediate already existing money as credit but also create credit ex nihilo, de novo (Sgambati,
2016). By making use of financial operations, banks capitalize debtors’ obligations by turning
‘debt into a security that accrues on the asset side of the bank’s balance sheet’ (ibid., p. 283).
Rather than relying on actual (physical) collaterals, various forms of pooled-debt instruments
serve as an ‘intangible security for the undertaking of the bank’s own debt’ (ibid.). As will be
shown below, shadow banking is crucial for this debt extension. As Nesvetailova (2015, p. 447)
poignantly put it, shadow banking provides an ‘overcrowded future’ by offering an
‘infrastructure for mining, enhancing and shifting debt and its related products into the future’.
Whenever the scarcity of finance capital is (temporarily) offset by permissive regulation,
the extension of credit and credit products can create an alternative capital circuit in parallel to
existing structures of accumulation, such as trade and commodity production (see also Krippner,
2011, p. 27-28). Credit/debt-led accumulation structures can even come to prevail as part of the
continued circulation of capital. This can be the case when surplus capital cannot be
recapitalized and thus reactivated through profitable reinvestment in the real production
economy. The ‘capital surplus absorption problem’ has also been referred to as the structural
problem of overaccumulation (Clarke, 2001; Harvey, 2006, 2010). Investments in the financial
circuit can become more profitable than investments in the production sphere. Other possible
outlets for overaccumulated surplus capital can be investments in land or nature, real estate or
mergers and acquisitions. Analogous to Harvey’s (1985) notion of ‘spatial fix’, referring to the
‘urbanization of capital’ and the spatial expansion of capitalism, shadow banking therefore can
be seen as a ‘financial fix’: it offers a machinery that facilitates a growing pool of tradable debt
alongside the credit provision of the regular banking system. The creation and circulation of
fictitious capital, however, can only temporarily solve some of the paradoxes of capital
accumulation. The prevalence of the circulation above the production sphere, and thereby debt-
led capital accumulation, reaches its limits once it becomes evident – through defaults and
bankruptcies – that debt cannot be sustained on an aggregate scale. Or as Harvey (2011)
explained, whenever the accumulation of capital and the accumulation of debt get too out of
sync, a capitalist crisis emerges. Financial crises are thus never fully detached from the
production sphere but rooted in the real economy and its inability to produce actual surplus.
Shadow banking as part of the wider debt-led accumulation structure is certainly linked to the
current crisis but it is not its root cause. As long as the economy is capable of taking on and
honouring increasing levels of debt, shadow banking will continue to prosper. States and state
regulation are a constant and constitutive element in the expansion and reproduction of capital,
making it possible for financial institutions to provide credit, and for the wider economy to take
on ever-more debt. Consequently, credit - whether provided through shadow banking or not -
never emerges ‘naturally from a harmoniously functioning (efficient and equilibrating) market’
(Soederberg, 2014, p. 37). Financial markets, including shadow banking, are constructed by law,
while financial assets are contractual commitments that are legally enforceable through the
courts. Hence, shadow banking does not exist in a legal vacuum outside the reach of the state
(see also Pistor, 2013). As will be shown in the following section, by making use of the legal
settings of OFCs, shadow banking is all about financial transactions moving ‘in’ rather than ‘out’
of the state regulatory realm.
Shadow banking - a primer
Shadow banking comprises a system of non-banks, such as non-depository or investment banks,
asset management firms, hedge and private equity funds, or financial holding corporations that
interconnect from across various jurisdictions, making use of a broad range of products and
markets. Shadow banking involves maturity or liquidity transformations without having to
comply with regulatory requirements such as capital reserves and other (trading) rules. These
maturity transformations concern non-deposit based short-term liquid liabilities used for long-
term illiquid assets. Short-term liabilities are usually drawn from money-market funds, hedge
funds and repo transactions (FSB, 2011; New York Fed, 2010). Long-term assets are often high-
grade fixed-income products (bonds) and a variety of structured asset-backed papers (ECB,
2012; Pozsar, 2011). Shadow banking relies on liquid markets of tradable credit/debt products
and money-market funds, as well as new sorts of creative schemes such as layered derivatives,
off-balance sheet leverages, hedging and re-hedging of investments with credit derivatives, or re-
hypothecated securities. Based on different forms of repackaged debt sold as a commodity,
almost unrestricted leverage can be built in, which again allows for pumping out credit in the
form of fictitious paper claims to future wealth. As these debt instruments are often bought to be
sold and resold to investors many times over, the leverage of single assets is also often spawned
several times. Shadow banking thereby creates non-productive forms of capital valorisation
through the mere circulation of finance capital, spurring ever riskier debt-based investments.
Shadow banking is all about what Harvey (2010, p. 30) described as surplus fictitious capital
created within the banking system is absorbing the surplus.
Rather than merely involving an aggregate of atomized financial players in the shadow of
regular banks, the conventional banking sector is closely enmeshed. Large systemic banks in
advanced economies operate as powerful nodes by sponsoring or owning non-banks in order to
exploit leverage opportunities beyond domestic deposit or liquidity requirements. At the same
time, non-bank credit intermediation often depends on traditional banks for funding (Pozsar &
Manmohan, 2011). As Nesvetailova (2014, p. 3) observed, behind the facade of banking
conglomerates ‘there is a plethora of entities, transactions and quasi-legal cells, many of which
are ‘orphaned’ from the visible part of the bank by complex legal and financial operations [...].’
Shadow banking is thus not ‘something parallel to and separate from the core banking system,
but deeply intertwined with it’ (Turner, 2012). As will be outlined below, the largest Wall Street
investment banks have been among the main designers of shadow banking. In their capacity as
dealers, brokers and underwriters, extracting profits through commissions and rents, they
externalised their credit creation to off-balance sheet vehicles. The Lehman Brothers’ case is
telling for how debt-issuance practices in OFCs are being practiced, and most notably, how the
bank could sell its claims and risks and build in leverage in the issuance of new debt without
being limited by reserve requirements.
Lehman Brothers in the offshore world
When Lehman Brothers - one of the largest Wall Street investment banks - collapsed on 15
September 2008, it left behind a highly complex web of unwound internal company debt,
derivative transactions and financing programmes by subsidiaries from around the world. The
ultimate owner of the Lehman Brothers’ empire was Lehman Brothers Holding Inc.,
incorporated in Delaware - a well-documented tax haven. Underneath this holding, a host of
entities operated independently of each other. The geography of Lehman Brothers’ subsidiaries
illustrates clearly how shadow banking consists of a complex network of financial intermediaries
that link major financial centres to OFCs according to a particular hierarchy and functional
differentiation. OFCs - notorious for tax avoidance by non-financial corporations since the 1950s
- can be ‘a country or jurisdiction that provides financial services to non-residents on a scale that
is incommensurate with the size and the financing of its domestic economy’ (Zoromé, 2007).
Financial-market players settled in OFCs particularly from the 1990s onwards, seeking higher
profit margins than those possible in the traditional banking sector, in addition to avoiding taxes.
Estimates suggest that today, about half of the global stock of money passes through OFCs
(Palan & Nesvetailova, 2013, p. 1).
OFCs generally host a highly specialized and professional services industry consisting of
consultants, marketing experts, lawyers, accountants and tax avoidance experts, offering tailor-
made services to all sorts of corporations (Bassens & van Meeteren, 2015). These services
include setting up trusts and investment vehicles, so-called special purpose entities (SPEs),
which are complex legal constructs that operate as pass-through entities for shifting profits and
eroding tax bases (Maurer, 2008; Palan, 2002; Palan et al., 2010; Rixen, 2011; Wójcik, 2013).
Often set up within a few days ‘by filling in online forms, or instantly, over the phone in some
cases’ (Sayer, 2015, p. 256), SPEs can be wholly owned subsidiaries or form part of a more
complex and opaque ownership structure, serving the purpose of removing activities such as
risky debt from the parent company’s balance sheet. Frequently, the core business of SPEs is
group financing and holding activities of assets and liabilities in other countries, which is why
SPEs generally have little or no physical presence in host jurisdictions (OECD, 2013).
Nesvetailova (2015, p. 432) distinguishes three types of SPEs in the shadow-banking industry:
bank-owned SPEs that transform bank loans into securities; structured investment vehicles
sponsored by commercial banks or investments that transform securities into CDOs; and
conduits owned or sponsored by regular banks.
Lehman Brothers Holding Inc. had subsidiaries in both prime financial centres and in the
offshore world. Subsidiaries in financial centres generally employed a large staff housed in
iconic buildings to display Lehman Brothers’ status as one of the world’s major investment
banks, while offering a wide range of services to a broad clientele. For example, Lehman
Brothers Inc., one of the largest brokerage companies in the US, acted as a primary broker for
the Federal Reserve Bank of New York. Another example was Neuberger Berman Inc., a New
York-based investment advisory firm, managing assets worth US$ 140 billion, that catered for a
wide range of activities like tax planning, trust services, mutual funds, institutional and private
asset management. Similarly, London-based entities provided services ranging from private
banking, brokerage and underwriting to investment banking, whereas the Frankfurt-based
Lehman Brothers Bankhaus AG, a fully-licensed German bank was active in corporate finance
and securities dealing, while owning its own London-based affiliate. In addition, Lehman
Brothers Holding Inc. comprised a wide range of SPEs scattered across many jurisdictions and
mostly without employees, rental contracts or ownership of real estate, and hence without major
operational costs. These shell structures were highly specialized and interacted almost
exclusively with other Lehman Brothers subsidiaries, fulfilling the function of booking or pass-
through entities, or issuing vehicles. Most of these type of Lehman Brothers entities (over 70 in
total) were based in Delaware, others in the Cayman Islands (with over 30 entities), Hong Kong,
Singapore, Switzerland, the Dutch Antilles, Luxembourg and Ireland, as well as the Netherlands.
For example, two entities in Luxembourg specialized as repo counterparts and issuance vehicles
for securities hedged by other Lehman Brothers’ entities; the Swiss subsidiary was the central
vehicle in the booking of the equity derivatives, including OTC transactions and a broad range of
other derivatives; or the subsidiary incorporated in the Dutch Antilles, a fully owned subsidiary
of Lehman Brothers’ Asia Holdings, was primarily issuing equity and debt certificates.
The Amsterdam-based subsidiary Lehman Brothers Treasury B.V. (LBTBV), established
in 1995, was a classic shell or mailbox company with no employees or offices. It was fully
owned by Lehman Brothers UK holdings (Delaware) Inc., which in turn was fully owned by
Lehman Brothers Holding Inc., the ultimate parent company. LBTBV operated legally in the
Netherlands, and could profit from the Dutch offshore environment that exempts non-resident
investors from taxes on capital gains and withholding taxes for dividend payments. LBTBV
complied with Dutch substance requirements through Intertrust, a Dutch trust company, which
supplied two external directors (out of a total of four managing directors); conducted services
concerning taxation and other compliance duties; and arranged external audits (LBTBV, 2008a).
Other Lehman Brothers subsidiaries did the actual work. The Swiss Lehman Brothers Bank SA,
for example, provided the treasury function (holding and moving capital across accounts), while
the secretarial work was conducted by the London-based LB Holdings Plc. (LBTBV, 2007).
The ‘special purpose’ of LBTBV was to issue the European Medium Term Note Program
(EMTN), a debt instrument that mobilized funds and issued notes that were ‘irrevocably and
unconditionally’ guaranteed by Lehman Brothers Holding Inc., while the London-based Lehman
Brothers International Europe operated as the arranger and dealer throughout the entire note
programme (EMTN, 2001, 2008). It was through the EMTN that debt was being emitted,
repackaged and resold as an asset that promised to yield income from future interest payments.
The promised income from future interest payments provided the basis for adding leverage. In
other words, EMTN was pivotal to boost the ability of Lehman Brothers Holding Inc. to extend
its overall leverage and produce tens of billions of dollars of debt. The programme initially had a
specified maximum of debt issuance but the debt ceiling was increased several times. The largest
and also the last increase was in 2007, extending the maximum from US$ 60 to 100 billion (see
Figure 1). Even though these limits were not reached when Lehman Brothers Holding Inc. went
bankrupt - LBTBV had a total of US$ 34 billion in complex long-term debt on its balance sheet,
involving large derivative transactions - the debt facility offered by LBTBV still reveals how
Lehman Brother Holding Inc. could secure its long-term funding.
[Insert Figure 1]
The role of EMTN in the overarching Lehman structure can best be understood on the basis of
the developments that resulted in Lehman Brothers’ bankruptcy. As can be seen in Table 1, the
bank’s balance sheet increased rapidly in the years before 2007: the total assets more than
doubled from 2003 to 2007, funded primarily by long-term and short-term borrowing and to a
lesser extent by stockholders’ equity. Short-term borrowing consisted largely of repo-
transactions (securities sold under agreement to repurchase), totalling US$ 149 billion on 30
November of 2007 (SEC, 2008, p. 6). The ever-larger balance sheet is a direct result of the use of
higher leverage through LBTBV. As retrieved from the 2008 balance sheet (after bankruptcy had
been filed), in August 2007, the note programme was responsible for 85 per cent (or US$ 100
billion) of the planned long-term debt of Lehman Brothers Holding Inc. The stock of long-term
debt (in Table 1 labelled ‘long-term capital’) together with equity was a strategic pillar of the
Lehman Brothers’ balance sheet: it formed the bedrock of increasing leverage on the basis of
risky short-term debt such as repo-transactions that had to be refinanced on a day-to-day basis.
When real estate prices started to decline, the book value of Lehman Brothers assets
dropped, after which the ratio of shareholders’ equity to debt became increasingly skewed. As
Zingales (2008, p. 12) explained: ‘While commercial banks are regulated and cannot leverage
their equity more than 15 to 1, at the beginning of the crisis Lehman had a leverage of more than
30 to 1, i.e. only $3.30 of equity for every $100 of loans [...]. With this leverage, a mere 3.3%
drop in the value of assets wipes out the entire value of equity and makes the company
insolvent.’ On the eve of the subprime crash, on 30 November in 2007, Lehman Brothers had on
its balance sheet equity worth US$ 23 billion and US$ 691 billion of assets of which US$ 89
billion worth of ‘mortgage and asset-backed securities’ and US$ 22 billion of ‘real estate for
sale’ (SEC, 2008, p. 24).
[Insert Table 1]
When the subprime crisis erupted and financial market conditions deteriorated rapidly, the
procyclical shadow banking-based funding dried up immediately, and the balance between
equity and debt became untenable. In a last-minute attempt to avert bankruptcy, Lehman
Brothers manipulated its balance sheet and removed US$ 50 billion through refined repo-
transactions. The transaction (‘repo 105’), which violated US accounting rules, was operated by
the London-based Lehman Brothers International Europe - the lead manager of the LBTBV
emitted notes (see also Wiggins & Metrick, 2014). Through the complexity of cross-border
internal Lehman transactions, the bank made use of a gap in financial reporting (ibid., p. 6).
More generally, although LBTBV was domiciled in the Netherlands, it was not supervised by
Dutch authorities (DNB, 2012). Forming part of the consolidated Lehman structure, LBTBV was
formally subjected to the regulatory scrutiny of the US Securities and Exchange Commission -
the SEC (EMTN, 1995, 2000). However, as Wiggins et al. (2014) have pointed out, the complex
reality of cross-border interconnections created ‘regulatory gaps that ignored the systemic risks
posed by large global firms like Lehman’.
The Lehman Brothers’ case illustrates how a broader archipelago of shell structures and
shadow-banking circuits facilitated the extension of debt. It shows moreover that OFCs are not
separate, stand-alone hubs but part of a wider hierarchical network of first-tier financial centres
like NYLON. While OFCs may not offer the higher value-added services, they still constitute
critical outposts in the circulation of financial capital, often routing large capital flows through
different OFCs in the process. The Dutch conduit structure has been and continues to be used
regularly by NYLON-based financial institutions and banks. It usually involves the collaboration
of two or more global banks operating from London, while relying on exchanges in Ireland or
Luxembourg to list the securities. For example, the shell company Morgan Stanley Investment
Management Coniston B.V. constructed CDOs with Morgan Stanley as the manager of the
collateral, the London branch of the Deutsche Bank as the collateral administrator and CitiGroup
Global Markets Limited as the arranger (see Morgan Stanley Investment Management Coniston
B.V., 2007). Similarly, an Amsterdam-based Morgan Stanley entity issued notes backed by a
collateral of CDOs, and relied on Lehman Brothers Europe as an arranger, the London branch of
Deutsche Bank as collateral administrator alongside an Irish exchange listing (Morgan Stanley
Investment Management Mazzano B.V., 2007). In all cases, the corporate structure of banks
consisted of a myriad of SPEs that made it possible to hide behind levels of complexity, and to
obscure a clear-cut separation of entities, responsibilities, assets and liabilities and leverage. That
Lehman Brothers-type of mechanisms continue to be a current daily practice as can be seen from
the vast expansion of shadow banking in the Netherlands. As the next section shows, the number
of SPEs, as well as the size of capital flows attracted by SPEs, has increased dramatically in the
The rise of shadow banking in the Dutch OFC
Shadow banking in Europe is disproportionately concentrated in the United Kingdom (29 per
cent), Luxembourg (17 per cent), the Netherlands (15 per cent) and Ireland (8 per cent)
(European Commission, 2012b, p. 11). The largest Eurozone economies are relatively small
players with Germany and France accounting for a mere 7 per cent and Italy for 4 per cent
(ibid.). Most of the literature so far has focused on London as Europe’s main offshore hub,
particularly since the re-emergence of capital mobility in the 1980s (Helleiner, 1994; Palan,
1999; Palan & Nesvetailova, 2013; Strange, 1996, 1998), and the tax avoidance opportunities
offered by the historical debris of the British Empire and its offshore interconnections (Maurer,
2008; Roberts, 1994; 1995). Comparatively less attention has been paid to the highly specialized
subsidiaries and trusts located in the OFCs of Ireland, the Netherlands and Luxembourg, and the
function of these OFCs as pass-through jurisdictions or ‘conduit centres’ (a notable exception is
Palan et al., 2010).
The Dutch legacy as an entrepôt economy for trading goods and financial capital dates
back to the 16th century (Arrighi, 1994; Braudel, 1984; Wallerstein, 1979). Today, the
Netherlands attracts a disproportionate share of capital flows, which is due first to its specific
legal framework consisting of tax exemption laws, liberal withholding tax regime for royalties
and interest income; second, its extensive network of bilateral double taxation and investment
treaties; and third, its highly competitive professional-services industry specialised in tax and
regulatory arbitrage (Engelen, 2016; SEO, 2013). Moreover, the municipality of Amsterdam - in
close collaboration with pension funds, banks, the Amsterdam Stock Exchange, the Dutch
Central Bank, and the Dutch Ministry of Finance - designed a financial centre with lax
requirements for incorporation (Fernandez, 2011). A key characteristic of the Dutch financial
centre is trust firms, whose emergence dates back to nineteenth century Amsterdam. Back then,
trust firms acted as the administrative back office for traders on the Amsterdam Stock Exchange,
who already back then conducted securitization practices in the form of repackaging non-liquid
future income streams into tradable financial assets (Veenendaal, 1996). In the 1940s and
particularly in the 1960s, a number of smaller but highly successful trust firms started to
diversify into tax arbitrage services in the Dutch Antilles (Van Geest et al., 2013). These
offshore activities were brought back ‘onshore’ in the 1980s, primarily serving domestic
transnational corporations (TNCs) such as Unilever and Royal Dutch Shell. Soon foreign TNCs,
initially from the oil, automobile and telecommunications industry, also chose the Netherlands as
their new domicile for tax purposes (DNB, 2003, 2008). Trust sector activities centred on setting
up holding structures, managing dividend and royalty payments of foreign subsidiaries and intra-
firm funding vehicles for non-financial TNCs, as well as arbitrage related business services.
When the significance of the Amsterdam stock market faded due to new digital trading
technologies and enhanced competition by global brokerage firms (Engelen, 2007), the
Amsterdam financial centre was eager to find alternatives to the traditional financial
intermediation practices and increasingly offered the services designed for non-financial TNCs
to the financial sector. Financial market players nested in the Netherlands from the 1980s
onwards, not only for reasons of tax arbitrage but also because of the high degree of self-
regulation of the trust sector with respect to overseeing SPEs (and thus without involving official
supervisory institutions like the Dutch Central Bank). When in the late 1990s securitization took
off, and cross-border financial flows increased at a previously unseen pace, shadow banking in
the Netherlands expanded dramatically with banks and other financial institutions using the
‘Holland Route’ on a large scale. As a side effect, the once highly diversified Amsterdam
financial centre gradually transformed into a satellite of the City of London (Fernandez, 2011).
The increase of registered SPEs confirms the significance of shadow banking in the
Netherlands. Alongside the liberalisation of capital movements in 1983, the number of SPEs
doubled within a year: from 2,000 in 1983 to 4,000 in 1984 (DNB, 2000). In 1993, there were
6,000, and in 1999, 10,000 SPEs (ibid.). The gross capital flows (inward and outward combined)
routed through the Netherlands increased from roughly EUR 800 billion in 1996 to EUR 1.5
trillion in 1999, doubling to EUR 3 trillion by 2000 and reaching EUR 4.5 trillion in 2001, which
at the time was equivalent to 1,000 per cent of the Dutch GDP (ibid., 2003). These flows reached
a peak in 2008 of EUR 10.5 trillion, representing 1,750 per cent of the Dutch GDP (DNB, 2011).
In 2011, the Netherlands was the largest FDI receiver worldwide (if measured in relation to its
economy), attracting 14 per cent of the global stock of inward FDI flows (about US$ 3.3
trillion), followed by Luxembourg (US$ 2.7 trillion), the United States (US$ 2.6 trillion) and
China (US$ 1.9 trillion) (IMF, 2016). Looking at the outward FDI stock, the Netherlands ranked
second with US$ 2.3 trillion after the United States (US$ 2.8 trillion), followed by the United
Kingdom (US$ 2.2 trillion) and Luxembourg (US$ 1.8 trillion) (ibid.). While the United States
hosts the world's largest economy, the Netherlands and Luxembourg are clearly only pass-
through jurisdictions within a longer chain of financial transactions. The extremely large size of
the Dutch OFC can only be understood on the basis of its favourable regulatory and institutional
conditions that facilitate both FDI entry and exit (Fernandez et al., 2013; Palan et al., 2010).
FDI, often perceived as the transfer of equity or ownership titles of more than 10 per cent
of all shares (OECD, 2008), arguably encompasses a broad category of capital flows. In the
context of shadow banking, it is important to understand that ever-larger parts of global FDI
stock consist of so-called ‘debt instruments’. Figure 2 shows the composition of the inward and
outward FDI flows to and from SPEs domiciled in the Netherlands from 2004 to 2011. As can be
seen, these flows are much larger than the stock of FDI discussed earlier. In fact, these flows
consist almost exclusively of debt instruments, intra-firm loans and external funding, while
traditional FDI, equity transfers (‘participation’) accounts for a small part only. In 2013, 26 per
cent of the inward stock of FDI in the Netherlands was composed of such debt instruments (IMF,
[Insert Figure 2]
The magnitude of the ‘Holland Route’ can also be revealed by looking exclusively at US
investments in holdings in the Netherlands, taking investment flows into SPEs as a proxy. Data
from the Bureau of Economic Analysis of the US Department of Commerce shows that the
Netherlands is by far the largest recipient of US FDI into SPEs. Figure 3 entails FDI flows from
the United States to the Netherlands from 1990 onwards. There is no data on FDI in holdings
available prior to 2004, but from 2004 to 2010, there has been an increase from 62 to 78 per cent
of total direct investments. Neither the bursting of the 2000 dot-com bubble nor the 2007/8
financial crisis could interrupt the ever-increasing FDI flows from the US. These flows sharply
contrast with the steep decline of global FDI flows after 2000, and again after the collapse of
Lehman Brothers (UNCTAD, WIR database). This vast discrepancy suggests that capital flows
into SPEs were out of touch with FDI flows that reflect macroeconomic cycles, and in tune with
the expanding universe of financialized capitalism.
[Insert Figure 3]
As the next section demonstrates, the immense growth of shadow banking needs to be
understood in the context of the structural problem of overaccumulation and the emerging debt-
led accumulation structures since the early 1980s in the Western industrialised world.
Shadow banking in the context of global overaccumulation
Seen from a broader perspective, the rise of shadow banking epitomizes the transformation from
the macroeconomic demand-management of regulated capitalism of the Keynesian era to the
supply-side oriented debt-led accumulation regime of the neoliberal era in the Western
industrialised world. This transformation is rooted in the great stagflation crisis of the 1970s,
which brought the long wave of post-war Fordist growth to a halt: markets in the advanced
economies were saturated; production grew faster than demand, leading to overcapacity in
manufacturing sectors, and eventually a major profit squeeze and sharp decreases in output and
exports. Once inflation-based Keynesian interventions proved unsuccessful, neoliberal policies
were adopted in the hope of restoring corporate profits. Market barriers of all sorts were
dismantled, corporate taxes reduced, labour markets flexibilised, wages repressed, and in
addition to a monetarist focus of keeping inflation low, financial markets were deregulated and
lending standards relaxed. The clear-cut national architecture of finance centred on banks and
capital markets of the Bretton Woods era was replaced by a scattered landscape of a broad range
of cross-border intermediation channels. Against the backdrop of declining wages, easily
available credit became key to stabilising demand and indebtedness as a mass phenomenon.
The set of neoliberal policies implied that less surplus from the productions sphere had to
be redistributed, and that ever-more capital was freed for the circulation sphere. To give but a
few examples: the decline of the wage share of GDP from 64 per cent in 1980 to 54 per cent in
2002 translated into an annual transfer of 10 per cent of global GDP from labour to capital
(UNCTAD, 2013, p. 14). The reduction of the average OECD corporate income tax rate from 49
per cent in 1981 to 27 per cent in 2007 culminated in a growing corporate ‘savings glut’ from the
2000s onwards (OECD Tax Database; The Economist, 2005). Corporations in advanced
economies transformed from net borrowers in the 1970s (with up to 15 per cent per year), into
net savers from 2000 onwards, hoarding financial assets at a rate of 3 per cent of GDP in G7
countries per year (IMF, 2006, p. 135). The OECD estimated that in 2011, corporate savings in
the range of US$ 1.7 trillion were stashed in OFCs (OECD, 2013, p. 68). The global ‘savings
glut’ expanded further alongside large current account surpluses in emerging markets and oil-
producing economies (Bernanke, 2011), while quantitative easing by central banks added
another US$ 4 trillion in 2013 (Fender & Lewrick, 2013, p. 68); and one might add to this the
growing reserves of the super-rich: private-wealth management topped US$ 42 trillion in 2011
(TheCityUK, 2012, p. 1). At the same time - alongside saturated markets, lingering overcapacity
and slowly growing aggregate demand - investments in the real economy stagnated. New
profitable outlets were found in the circulation sphere where new financial products and higher
risk-taking in the form of leverage ratios of sometimes over 1:30 came to prevail, as illustrated in
the case of Lehman Brothers. Sovereign wealth funds provided short-term liquidity to banks and
other financial institutions in prime financial centres and OFCs. The assets of institutional
investors almost quadrupled in the period from 2001 to 2013, from US$ 26 trillion to 97 trillion
(OECD, 2016), or in other words, the ‘rentier’ or ‘money-dealing’ fraction of capital associated
with speculative investment prospered (Van der Pijl & Yurchenko, 2015).
In more than thirty years of neoliberal predominance, financial markets expanded, over-
leveraged and grew out of proportion relative to the real economy. Even the most conservative
estimates suggest more than a threefold expansion of the ratio of global financial assets to global
GDP (Farrell et al., 2008). When the supply of safe assets to invest in, typically government-
backed assets, became increasingly scarce (Moreira & Savov, 2014), and when the growing
stock of assets relative to GDP could not be in invested in equity alone, debt instruments, often
based on property markets as an ultimate collateral, provided an outlet. This is where the rise of
shadow banking needs to be located: banks tapped into a diverse set of funding structures other
than deposits, including interbank-borrowing and borrowing from outside the banking sector
through money market funds or repo-markets. Shadow banking provided the credit/debt
infrastructure: producing financial assets on one hand, and extending credit on the other. Thus,
shadow banking generated new assets that allowed for offloading surplus capital profitably, and
for recycling existing assets, such as the extensive use of repo-transactions for short-term debt,
as illustrated in the case of Lehman Brothers.
The neoliberal era has culminated in one of the biggest lending booms in history
(McCulley, 2009). Importantly, the credit crunch and current crisis did not interrupt the growth
of credit extension. Overall debt (public, private and corporate) increased from U$ 142 trillion in
2007 (269 per cent of world GDP) to US$ 199 trillion in 2015 (286 per cent of world GDP)
(McKinsey & Company, 2015, p. 1). Through overleveraging and borrowing from other
financial institutions, banking today is more indebted than any other economic sector (Turner,
2015: 24). The current debt bubble is more than twice the size of that in 1915 and 1935 (based
on credit-to-GDP data from 1870 to 2010) (Jordà et al., 2014). In a similar vein to previous
credit crazes, real estate constitutes the primary collateral. The average mortgage debt across
developed economies increased from 50 in 1980 to 120 per cent of GDP in 2010 (Jordà et al.,
2014Table 2 shows the growth of total private credit by deposit banks and shadow bank entities
combined in a selected group of countries. From the 1980s onwards, total private debt increased
massively, except for Germany and Japan. The stock of debt grew faster than the overall
economy, before and after the great financial crisis. Particularly affected were economies that
had witnessed a housing boom, such as Spain, Ireland, the United Kingdom and the Netherlands.
Due to declining real wages and the privatisation of previously public goods, access to debt has
become essential to ensuring the material conditions of existence and the reproduction of labour.
The share of citizens who resort to debt out of necessity rather than out of convenience or a
hedonistic lifestyle has been on the rise ever since.
[Insert Table 2]
This paper has argued that the rise of shadow banking needs to be understood against the
backdrop of overaccumulation and the wider dynamics of financialised capitalism, most notably
the debt-led accumulation patterns of advanced economies. The capital absorption problem or
overaccumulation has become manifest in the growing cash pools searching for yield. With
high-quality collaterals, such as sovereign bonds and mortgage-backed assets being increasingly
scarce, shadow banking provides alternative funding conduits for recycling tradable financial
assets. Thus, in a world awash with cash looking for yield, shadow banking offers a financial fix
to capitalism’s capital absorption problem. At the same time, it also offers new opportunities for
large systemic banks to increase leverage on the basis of the production of debt instruments and
hence, opportunities to issue new debt. As a matter of fact, after the brief interruption of 2008,
debt levels have kept rising in tandem with the size of shadow-banking assets. Shadow banking
thrives largely on residential real estate as collateral, and is bound by the ability of the wider
economy to take on more debt, which in turn is premised on the state regulatory framework
facilitating indebtedness and disciplining debt servicing. That shadow banking is not the result of
market forces ‘moving out’ of but rather ‘moving in’ to the state regulated territory is
furthermore revealed by the offshore jurisdictions operating as complementary stepping-stones
for the first-tier financial centres. The spatial condensation and the various functional differences
of OFCs are being continuously facilitated and thus reproduced by the state regulatory apparatus,
also including the conclusion of bilateral tax or investment agreements, tax laws, and the wider
legal prerequisites for incorporation. The case of Lehman Brothers Holding Inc. illustrated that
shadow banking is not a parallel financial universe but is deeply intertwined with traditional
financial intermediaries, primarily the banking sector, albeit camouflaged by high levels of
complexity and multiple legal shell constructs. More research is needed to unpack the variegated
nature of different types of shell structures designed by a network of professional service
providers, such as lawyers, accountants, trusts and fiduciary services, as well as the web of
dealers, fund managers and customers in the prime financial centres of NYLON. Moreover, it is
not sufficient to point to regulatory arbitrage and banks making use of funding channels off the
radar of regulatory scrutiny when seeking to understand why shadow banking structures are
spatially organized the way they are. In addition to bringing capitalism back to the centre of the
analysis, we need to create a deeper understanding of the statecraft that produces the re-scaled
financial architecture that allows for debt creation in the hegemonic financial core.
The growing global balance sheet, with growing debt levels on the one hand, and assets
accumulated by capital owners on the other hand, cannot be a long-term solution to the problem
of chronic overaccumulation. As a result of the expanding credit/debt creation, claims on surplus
value are being pushed ever-further into the future. In the history of capitalism, capital owners
mastered the spatial disciplining of debtors through outright colonialism, imperialism and gun-
boat diplomacy, or as exemplified by the Greek tragedy, through the immense structural power
of finance capital today. The future remains uncertain: as claims grow larger and the spatial
organization of the debt/credit infrastructure becomes more diffuse alongside OFCs, the
institutional complex to safeguard the ownership of future claims becomes ever-harder to
imagine. The winners of today, the asset owners, mainly corporations and pension funds from
advanced economies, may indeed become the losers of tomorrow; but the bursting of the bubble
is likely to be accompanied by fierce social struggles. The future will tell.
We would like to thank Caroline Metz, Ewald Engelen, Thomas Eimer and all members of the
research group the Real Estate/Financial Complex at the University of Leuven, in particular,
Manuel Aalbers, Jannes van Loon and Mirjam Büdenbender, as well as the anonymous
reviewers, for their valuable comments and suggestions on earlier versions. The work of Rodrigo
Fernandez is part of The Real Estate/Financial Complex research project, supported by the
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Rodrigo Fernandez is a postdoc at the University of Leuven and associate researcher at the
Centre for Research on Multinational Corporations (SOMO) in Amsterdam. At the University of
Leuven, he is partaking in a project on the Real Estate-Financial Complex, investigating the
relationship between finance and real estate developments across different national institutional
models. At SOMO he is researching the interface of corporate tax avoidance, tax havens and
shadow banking. In addition to books, book chapters and reports, he has published in journals
like Antipode, Competition and Change, Economic Geography, and Socio-Economic Review.
Angela Wigger is Associate Professor Global Political Economy and International Relations at
the Radboud University, The Netherlands. She is specialized in capitalist competition and its
regulation. Her current research focuses on the global economic crisis, crisis responses and
power configurations with respect to political resistance. In addition to book chapters, she has
co-authored the book The politics of European competition regulation: A critical political
economy perspective (Routledge, 2011), and published in journals like New Political Economy,
Review of International Political Economy, Journal of Common Market Studies and Capital and
Figure1 EMTN maximum debt issuance
Source: LBTBV, 2008, p 10.
Figure 2 Composition of transactions by SPEs domiciled in the Netherlands (in billions of Euro)
Source: DNB, 2012.
2004 2005 2006 2007 2008 2009 2010 2011
participation intra:firm"loan securities"and"derivatives external"funding
Figure 3 FDI from the US to the Netherlands, 1990-2010
Source: Bureau of Economic Analysis, FDI data, 2012.
Table 1. Selected financial indicators (in billions of US$)
Net revenues
Net income
Total assets
Long-term borrowing
Stockholders’ equity
Total long-term capital
Source: Annual Report Lehman Brothers Holding Inc. 2007
Table 2. Total Private Credit as % of GDP in Selected Countries
Source: World Bank, Global Financial Development Database, 2016.
... State regulation is a constant and constitutive element in the expansion and reproduction of capital (Jessop and Sum, 2006;Fernandez and Wigger, 2016). It mediates whether, how, when and the extent to which the structural problem of overaccumulation is being resolved through the secondary and quaternary circuit of accumulation, as well as whether or not secondary exploitation intensifies. ...
... As the growth of credit-to-GDP was not matched by domestic deposit bases, non-deposit-based finance and the inflow of foreign capital became more pronounced in the Netherlands (Fernandez and Aalbers, 2016: 79). This can also be seen in the fact that Dutch mortgages have attracted so-called non-banks, which are non-depository financial institutions funded through shadow banking mechanisms that provide credit without having to comply with the same prudential standards for capital requirements, liquidity and trading rules as ordinary banks (Fernandez and Wigger, 2016). In 2019, every fifth mortgage in the Netherlands has been financed by a non-bank operating in the shadow of the regular banking system, while market shares of traditional banks have shrunk (Kuijpers et al., 2019;DNB, 2019). ...
Many major cities around the world have undergone a steep housing price appreciation in recent years, creating windfall profits for some, while for others, the costs of living have risen considerably faster than their income. The resulting social stratification effects have received much scholarly scrutiny, and also raised discussions on whether or not we have to abandon ‘older models’ of class. By extending Marx's notion of surplus populations from primary work-related exploitation to housing-centred secondary exploitation, this article argues that older models are perfectly equipped to account for the various strata of 'asset-haves' and 'asset-have-nots'. Focusing in particular on the 'asset-have-nots’, the article utilizes the Dutch city of Amsterdam as a case study to illustrate how the acceleration of housing as a site of accumulation not only co-creates surplus populations but also an increasing share of people who find themselves at the frontiers of becoming surplus populations. The city of Amsterdam is particularly interesting as it has undergone one of the highest and most rapid real estate price increases in Europe in recent years, which has not only decreased the affordability and accessibility of housing for the low- but increasingly also middle-income strata. The article shows that the accelerated accumulation in the realm of housing, and the concomitant creation of surplus populations, are not mechanical law-like regularities of financialised capitalism. Instead, various forms of state regulation have facilitated and mediated the scale, timing and the way in which overaccumulated surplus capital has been absorbed through housing.
... Since the financial crisis, banks have significantly cut back on international lending. In their stead, market-based lending by asset managers, funds, and other intermediaries has risen sharply in recent years, particularly to borrowers in emerging economies (Fernandez and Wigger 2016;Lane and Milesi-Ferretti 2017;CGFS 2021, 5). Multinational non-financial firms significantly add to the increasing opacity. ...
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The discipline of comparative political economy (CPE) relies heavily on aggregate, country level economic indicators. However, the practices of multinational corporations have increasingly undermined this approach to measurement. The problem of indicator drift is well-documented by a growing critical literature and calls for systematic methodological attention in CPE. We present the case for a rocky but ultimately rewarding middle road between indicator fatalism and indicator faith. We illustrate our argument by examining two important cases-Sweden's recent export success and the financialization of non-financial corporations in France. A careful parsing of the data suggests corrections to common characterizations of the two cases. Swedish exports have been reshaped by intragroup trade among foreign subsidiaries of domestic corporations. The growth of financial assets held by French firms is attributable to the growth of foreign direct investment and to cumulative revaluation effects, while what remains of financialization is concentrated among the very largest firms. Based on these findings, we propose a methodological routine that parses data by zooming in on the qualitative specifics of countries, sectors, and firms, while using all available options for disaggregation.
... This mutual interdependence seems to have accelerated the process of financialisation, with monetary policy becoming 'a constitutive part of financialized capitalism' (Walter and Wansleben, 2020, 646) and with central banks-'the elephant in the room of financialization', acting as 'decisive catalysts for the crucial development at the heart of financialization', namely the rise of shadow banking (Braun and Gabor, 2020, 242). Shadow banking has, in turn, contributed a great deal to the increased leverage and excessive debt of the early 2000s (Fernandez and Wigger, 2016). In short, central banks in the Western capitalist world have played a central role in promoting financialisation and the accompanying shift in gravity away from the productive economy and towards the financial sphere (see also Krippner, 2011;Lapavitsas and Mendieta-Muñoz, 2016). ...
This paper argues that ‘spatial monetary policy’ may be needed to achieve more territorially balanced economic development. Central banks have been key in fostering financialised economies while also preventing their collapse in times of crisis—a role further strengthened by the coronavirus pandemic. Central banks have thus become the most powerful economic policy-making institutions, just when spatial disparities are likely to deepen. In the context of crisis-ridden financialised capitalism, regional development policies should consider the spatial implications of central bank interventions and recognise monetary policy as a key element of spatial policy. Simultaneously, monetary policy should embrace an explicit spatial agenda.
... First, it gave rise to discussions on the purpose and regulation of the financial system as a whole, thereby tangentially touching upon taxation. Although traditional banks were the most prominent actors in the financial crisis, shadow-banking entities, offshore financial centres and tax havens were seen as part of the systemic risks to the global financial system and framed as enablers of the risky and complex financial operations that were at the core of the crisis (Palan, et al., 2009;Fernandez & Wigger, 2016). Second, the crisis resulted in substantial changes in global economic governance: 'the rise and consolidation of the G20 Leaders' Forum is the most obvious institutional consequence of the financial crisis with significant implications for the global tax regime' (Eccleston, 2013, p. 86). ...
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EU corporate tax policy has long consisted solely in eliminating fiscal barriers. This changed after the financial and Eurozone crises when the European Commission proposed ‘market-correcting’ provisions to increase tax transparency and ‘fairness’, which were partially adopted by the Council. Analyses of EU responses to the crisis have largely ignored taxation issues. This article fills this gap and explains the substantive re-orientation of EU corporate tax policy through the concept of politicization. Based on 19 expert interviews, it details the politicization process of corporate taxation resulting from changes in global governance, media tax scandals, and the work of non-governmental organizations (NGOs). Through the politicization dynamic, new institutional and discursive opportunities were exploited by the European Commission, Parliament and NGOs to induce policy change. We explore this reciprocal interaction between social forces and supranational actors to demonstrate that ‘politicization at the top’ can facilitate a more progressive deepening of European integration.
... It is estimated that nearly 10% of the global GDP is in offshore accounts (Piketty, 2014, p. 466); the OECD in 2011 estimated that the corporate "savings glut" hidden away in offshore tax havens totaled US$1.7 trillion (Fernandez & Wigger, 2016). ...
This article examines how the news media framed the allegations made in 2016 against Cristiano Ronaldo for evading taxes through offshores, and how audiences discussed this online, in Portugal, where he is originally from, and Spain, where he played football at the time. These countries were amidst an ‘austerity culture’ justifying welfare cuts, promoting entrepreneurialism as ‘success’, and presenting neoliberal policies as ‘common sense’. Our analysis reveals Ronaldo portrayed as a member of the economic elite criticized for the high earnings of football players and celebrity tax privileges; as an ungrateful immigrant who does not contribute enough to society; and as ‘one like us’ manoeuvring to evade taxes. The comparative analysis shows audiences had double standards based on their feelings towards the celebrity, and they interpreted this case positively or negatively in relation to the inefficiency of the fiscal and justice systems in Southern Europe.
... This payment is often used to reduce taxation in a state that has a high tax rate; the high tax rate entity makes a payment to the low tax rate entity for use of the intangible asset, as in the US state of Delaware for instance (Dyreng, Lindsey & Thornock, 2011). Delaware, a well-documented tax haven (Fernandez & Wigger, 2016), does not impose a state corporate income tax on income relating to intangible assets held by companies registered in the state (Berkhout, 2016b). ...
Conference Paper
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This paper explored the tax avoidance schemes of European oil and gas multinational corporations (MNCs) with operations in South Africa, to investigate whether the South African tax legislation is effective in curbing these tax avoidance schemes. South African tax legislation was applied to model situations of identified tax avoidance methods. The model situations are hypothetical situations in the South African context, based on international tax avoidance schemes. These instances of tax avoidance were classified into four different schemes  royalty payments, intra-group loans, dividends tax or controlled foreign operations. The findings revealed that avoidance of South African tax by MNCs is possible and that loopholes may exist within the legislation. This paper contributes to tax avoidance research in South Africa by identifying loopholes in the legislation of the taxation of dividends where a dividend is transferred onwards to the shareholder via a resident trust. The scope of this study was limited to the selected sample in the South African context.
This paper’s main argument is that housing financialisation can be understood as a set of intertwined digital/material processes, and that resisting housing financialisation requires activism that recognises and capitalises on this dynamic. Drawing from Desiree Fields’ (2017a) work on urban struggles with financialisation, this conceptual argument is unpacked through a case study of post-crash Dublin, an urban space reshaped by housing financialisation and struggles resisting it. Housing has been a key subject of contention in post-crash Dublin and activists’ digital/material struggles illustrate how digital technologies and platforms can be and are appropriated to resist housing financialisation. The paper traces the intertwining of housing financialisation, resistance, and the digital in post-crash Dublin and argues that future research on platform real estate, urbanism, and automated landlord practices must take seriously the ambivalent opportunities, agency, and counter narratives that housing activists create through their digital/material practices.
The last two decades have witnessed a growing trend of traditional onshore banks establishing affiliates and subsidiaries offshore, along with increased globalization and competition in international financial markets. We examine whether subsidiary operations in offshore financial centers (OFCs) facilitate bank risk-taking. We construct an international sample of banks with and without OFC operations during 2001−2018 and employ various proxies for bank risk-taking. Our results reveal that banks with OFC operations take more risk than banks without OFC operations. Focusing on banks with OFC operations, we find that those with more intensive operations in OFCs exhibit higher risk. Our results also indicate that more intensive operations in OFCs with more regulatory arbitrage opportunities are associated with higher bank risk, and that restrictive bank capital regulations in home countries foster banks’ risk-taking via OFC operations. Our findings are consistent with the view that onshore banks exploit OFCs’ loose regulations, poor transparency, and lack of oversight to pursue riskier activities. These findings have important implications for the international business literature and provide regulators around the world with useful insights into overseeing bank operations in OFCs.
We revisit the theory of financial crises using a predator-prey metaphor, highlighting the relationship between greed, risk aversion and debt accumulation and aggregating concepts from economics, finance and psychology. We argue that regulations that are implemented inefficiently, with weak enforcement or at the wrong time can have deleterious effects on the market, worsening the ailment they initially intended to correct and leaving a spray of prey in their wake. To illustrate our hypothesis, we examine the role of regulations in the years leading up to and during the Global Financial Crisis (GFC) in the United States, when the Federal Reserve tried to restrain the over-heated housing market propelled by the predatory mortgage frenzy and the increased use of securitization in risk-hiding financial tools such as Collateralized Debt Obligations (CDOs). Our results indicate that deleterious government interventions may act as a chemotherapy of sorts, causing harm followed by a slow recovery. This understanding can help governments draft better regulations to lower market frictions and better protect investors.
From the Cayman Islands and the Isle of Man to the Principality of Liechtenstein and the state of Delaware, tax havens offer lower tax rates, less stringent regulations and enforcement, and promises of strict secrecy to individuals and corporations alike. In recent years government regulators, hoping to remedy economic crisis by diverting capital from hidden channels back into taxable view, have undertaken sustained and serious efforts to force tax havens into compliance. In Tax Havens, Ronen Palan, Richard Murphy, and Christian Chavagneux provide an up-to-date evaluation of the role and function of tax havens in the global financial system-their history, inner workings, impact, extent, and enforcement. They make clear that while, individually, tax havens may appear insignificant, together they have a major impact on the global economy. Holding up to $13 trillion of personal wealth-the equivalent of the annual U.S. Gross National Product-and serving as the legal home of two million corporate entities and half of all international lending banks, tax havens also skew the distribution of globalization's costs and benefits to the detriment of developing economies. The first comprehensive account of these entities, this book challenges much of the conventional wisdom about tax havens. The authors reveal that, rather than operating at the margins of the world economy, tax havens are integral to it. More than simple conduits for tax avoidance and evasion, tax havens actually belong to the broad world of finance, to the business of managing the monetary resources of individuals, organizations, and countries. They have become among the most powerful instruments of globalization, one of the principal causes of global financial instability, and one of the large political issues of our times.
Anton R. Valukas, the Lehman Brothers court-appointed bankruptcy examiner, produced a 2,200-page report detailing possible claims that the estate might pursue, and he identified several, from company officers to its independent auditors. The most startling revelation of the report, however, was that, during its last year, Lehman had relied heavily on an unusual financing transaction—Repo 105. The examiner concluded that Lehman’s aggressive use of Repo 105 transactions enabled it to remove up to $50 billion of assets from its balance sheet at quarter-end and to manipulate its leverage ratio so that it could report more favorable numbers. This case considers in-depth Lehman’s questionable use of Repo 105 transactions and its impact.
This paper develops the building blocks for a legal theory of finance. LTF holds that financial markets are legally constructed and as such occupy an essentially hybrid place between state and market, public and private. At the same time, financial markets exhibit dynamics that frequently put them in direct tension with commitments enshrined in law or contracts. This is the case especially in times of financial crisis when the full enforcement of legal commitments would result in the self-destruction of the financial system. This law-finance paradox tends to be resolved by suspending the full force of law where the survival of the system is at stake; that is, at its apex. It is here that power becomes salient.
As inequalities widen and the effects of austerity deepen, in many countries the wealth of the rich has soared. Why we can’t afford the rich exposes the unjust and dysfunctional mechanisms that allow the top 1% to siphon off wealth produced by others, through the control of property and money. Leading social scientist Andrew Sayer shows how the rich worldwide have increased their ability to create indebtedness and expand their political influence. Winner of the 2015 British Academy Peter Townsend Prize, this important book bursts the myth of the rich as specially talented wealth creators. It shows how the rich are threatening the planet by banking on unsustainable growth. The paperback includes a new Afterword updating developments in the last year and forcefully argues that the crises of economy and climate can only be resolved by radical change to make economies sustainable, fair and conducive to well-being for all.
This chapter addresses a central theme which recurs through many analyses, particularly on the left, of the current crisis of world capitalism, which see this crisis in terms of the erosion of national forms of economic regulation by the internationalization of capital, and the corresponding failure to develop new trans- or inter-national forms of regulation. I want to argue, from within a Marxist perspective, that the contradiction between the global character of capital accumulation and the national form of the state is not a new phenomenon, but has been a characteristic of capitalism since the earliest stages of commercial capitalism, underlying the historical development of capitalist states within the international state system. In periods of sustained accumulation on a world scale this contradiction is suspended, as the internationalization of capital opens up opportunities for capital and for the state. In periods of crisis, the contradiction re-emerges. From this point of view, the present crisis is not a manifestation of a transition from one stage of capitalism to another, but is rather an expression of the contradictory form of the capitalist mode of production, which manifests itself most dramatically in periodic crises.