26.02.2009

As ye sow . . .

James Turley examines the unravelling Stanford affair

When he first entered British consciousness in any serious way, Allen Stanford was hard to miss. Here was a Texan billionaire, ostentatiously arriving in a monogrammed helicopter to discuss - of all things for a Texan billionaire - a sponsorship deal with the England and Wales Cricket Board (ECB).

It was not hard to find grandees of English cricket at the time who objected to the involvement of Stanford in the sport.

Then, however, their complaints were about sporting matters. Now, trifling concerns about 20 tournaments have been dwarfed by the almost overnight fall of his financial company into receivership amid fraud charges. Stanford stands accused of “a fraudulent, multi-billion-dollar investment scheme”, in the words of the American financial regulator, the Securities and Exchange Commission.¹

The events since the initial SEC investigations have been nothing if not dramatic. On February 17, there was a full-scale raid on the Stanford Financial Group’s Houston and Memphis offices, and signs displayed in the windows announcing the company had been taken into receivership - that is, placed under the control of an individual other than the property owner. Stanford then attempted to flee the country - but was unable to procure a private jet to take him to Antigua, where he is also a citizen. He was nonetheless off the map for several days, before being tracked down by FBI agents at his girlfriend’s house in Virginia. His assets are frozen, and he has surrendered his passport to the authorities.

After his American operation was effectively seized by the state, the other wings of his business empire were rapidly taken over where they existed. In Antigua, unsurprisingly, he owned a major bank - simply called Bank of Antigua - which has now ‘fused’ with the Eastern Caribbean Central Bank. Further seizures followed in Venezuela and Panama; Ecuador and Peru suspended the local Stanford branches, while the Mexican government is investigating its own Stanford operation. Perhaps unsurprisingly under such circumstances, the ECB has cancelled all its contracts with the fallen tycoon.

The sudden and tumultuous collapse of this financial empire, worth $8 billion, is reminiscent in many ways of the Bernie Madoff affair last year. Madoff used a number of the now infamous, barely comprehensible financial instruments and processes - some legal, some illegal - to operate what amounted to a $50 billion Ponzi scheme. This type of scam involves the conman paying ‘dividends’ to investors out of the money invested, in the hope (usually justified) that these ‘profits’ will be re-invested in the apparently very successful scheme. Because of this, a Ponzi scheme can last far longer than cruder scams such as the classic ‘pyramid’ model.

Madoff’s success was so great that it was not until he actually admitted as much to his sons - who turned him in to the authorities - that he was caught.² The breadth of individuals and organisations affected was breathtaking - from Spanish film auteur Pedro Almodovar to innumerable charities, to several Zionist political organisations (the American Jewish Congress lost around two thirds of its total financial income by some estimates) ... to a certain Allen Stanford, one of whose many alleged misdemeanours was to falsely claim that his investments were unconnected to Madoff’s.

Madoff’s scheme, of course, dwarfs Stanford’s in terms of its total value. He also is guilty of a far more thorough fraud, whose elaborate construction had to conceal what is one of the most well known investment cons in existence. Stanford’s alleged criminal activities seem positively modest in comparison - he apparently presented ‘hypothetical’ investment figures as factual records of actual investments; he persistently fibbed to boost the standing of his company and reassure investors, down to claiming that the SEC investigations were simply “routine”.³

There is one question on the lips of every bourgeois commentator on the Stanford and Madoff scandals, as well as other similar scams that have been exposed recently - how did they get away with it for so long? Communists, and others with a more cynical attitude towards the activities of the ruling class, have a second question: why is it that only now such frauds have been exposed? The key factor in both of these enigmas is the nature of the business cycle - and, in particular, the back end of it, the final years of profitability and the subsequent crisis.

In the early part of the business cycle, as economies begin to grow rapidly again after a bust, capital investment tends towards expanding material production. As production rises beyond the point where commodities can find buyers on the market, and thus realise their value, capital’s incessant drive for profit increasingly forces it away from the productive sector to financial investments. The credit system and associated financial institutions, which play largely functional roles in the first phase, become the most attractive means of realising profits.

The difficulty is that more and more of what is invested exists as numbers on a sheet of paper (or, in this era, a computer hard drive) - fictitious capital, in Marxist terms. In order for this money to ‘return to reality’, so to speak, a great deal of it must be destroyed - and such destruction is inevitable. Mass destruction of capital - even fictitious - is in nobody’s short-term interests, and capitalism attempts endlessly to defer the reckoning, through ever more elaborate financial ‘instruments’, packaging and repackaging of assets and debts alike. The derivatives trade is the most astonishing element of this - as the current crisis set in, there were thought to be over $500 trillion worth of financial derivatives in circulation.

In this phase of the cycle, the trouble mostly stays under the bonnet. Brief wobbles and localised recessions aside, it looks like everyone is prospering. In such circumstances, it is easy enough for directly fraudulent operations to succeed for long periods of time (Madoff apparently began cutting corners in the 70s). When the high-finance ziggurat finally collapses, however, things begin to look very different. The (fictitious) expansion turns into a contraction, and financial concerns across the board begin to suffer dramatically.

At the end of World War II, Heinrich Himmler attempted to evade arrest by forging himself a complete set of identity documents under an assumed name. He failed - precisely because he was the only man in the British-occupied town that had such perfectly complete papers. It is likewise with investment cons - Madoff’s fund made about 6% profit out of companies registered on the S&P US stock exchange index at a time when the S&P 500 was losing about 38% of its share value. The continued apparent profitability of these schemes serves precisely to heighten suspicions.

That fraudulent investment schemes are tied in so closely with the fate of the economy in general indicates another important feature they have - that is, they differ from perfectly legal financial fads in a technical rather than a fundamental way. Until 2007, the populace of the United Kingdom - especially the middle classes - were being hectored constantly, by economists and developers, journalists and politicians, to the effect that the housing boom was here to stay; that house prices would continue to advance ever skyward. On a personal note, I remember trying to convince members of my family that this, if it were true, would be completely unique through all capitalist history - but they simply could not believe it.

This fad convinced hundreds of thousands, even millions, to buy ever more houses on ever larger mortgages. It encouraged the liquidation of the social housing stock through ‘right to buy’ legislation. Today, we harvest the bitter crop - foreclosures, bankruptcies, financial collapse. And, indeed, the whole thing bears a close resemblance to a Ponzi scheme, which works because people throw their ‘profits’ back into it, thus keeping the cash available to keep the scam going. Climb the property ladder, we were told - invest, invest, invest!

Who will be placed under house arrest for this, like Madoff? Who will have their passports confiscated and assets seized, like Stanford? The questions answer themselves - there is literally nobody to blame; the emergence of these scams, whether in the form of standard cons or economic bubbles, is a structural feature of capitalism. It is an objective factor that cannot be laid at the door of convenient scapegoats - however much the ruling class may try.

For this reason, it is mistaken to view the high-profile fraudsters as the exceptions, or even as excrescences. The kind of frauds perpetrated by Stanford are absolutely typical of the financial practices as the top of the capitalist system - the picture that emerges from his downfall is similar in some respects to the 2001 Enron collapse. Madoff, as we have seen, simply operated as an individual the same scam the financial sector and their outlying ideologists inflicted on the public at large in the same period. Far from being ‘bad’ capitalists who should be replaced with ‘good’ ones, these men are yet two more object lessons in the system’s innate corruption, and the need to replace it.

1. news.bbc.co.uk/1/hi/world/americas/7895505.stm
2. www.bloomberg.com/apps/news?pid=newsarc hive&sid=