Banks such as INI possessed some of the most powerful data management systems on the planet, which left poorly equipped investigators, whose resources were to all intents non-existent, almost powerless.
INI with its private banking and wealth management units were, like other such institutions, answerable to none, with their business bases dispersed in a numerous and often conflicting jurisdictions. Giants like HSBC, which according to Forbes was the world’s fourteenth largest business enterprise, conducted its business in four sectors: Retail Banking and Wealth Management, Commercial Banking, Global Banking and Markets, and Global Private Banking, with more than six thousand agencies in seventy or more countries. A quarter of a million employees serving its fifty million customers, managing assets valued at two and a half trillion dollars; more than the entire national wealth of Russia or Brazil. HSBC’s shareholders numbered more than two hundred thousand and were scattered across more than one hundred and thirty countries and territories.
This went a long way to explaining how HSBC could menace, or blackmail, the British government, by threatening to quit the UK, moving its headquarters to Hong Kong, Shanghai, Paris or even the US. What was at stake was their freedom to do as they liked and with less regulation. The danger was, if HSBC quit the City of London, who would follow?
Banks protected themselves by the fragmentation of data on multiple and sometimes incompatible computer systems, some of which were based offshore, an opaque screen designed to prevent intruders and non-authorised personnel from accessing the movement of funds. What men like Fitzwilliams and his partners feared most were moles, insiders such as Hervé Falciani, who had delivered a mass of information to financial authorities concerning non-resident account holders with HSBC in its Swiss holding.
To complicate matters, whenever their interests were in danger, governments obstructed enquiries. Every contract signed, every commercial accord and every defence agreement involved payments, commissions and the transfer of funds, not forgetting the funding for delicate or covert missions, without which nothing would work.
John Francis, a respected academic, was far from being a conspirationalist, but it was evident that international finance had by definition certain goals. The first was its raison d’etre, profit; the second, optimisation of fiscal efficiency, that is to say, no tax; and the third, free movement of capital. All this implied operating in the most favourable environment, wherever conditions were propitious to profitability. Such conditions were assured by the complaisance of politicians who perpetuated the opacity of the system.
The average man’s knowledge as to how international finance functioned was extremely vague to say the least. The public saw the economic crisis as being the fault of banks, fat cats, traders and crooks in the City, all of whom were out to swindle them, and naturally the bonus system - and in a certain manner of speaking they were right. The international finance system was in fact a transnational institution, parallel to elected government, and beyond its control, a system with its own rules, dedicated to profit and by whatever means it took to make it.
Behind the vast machine that moved capital around the clock were men like Fitzwilliams, Tarasov and Kennedy, in other words bankers, financiers and powerful businessmen. They were aided and abetted by politicians who smoothed the way, bent the rules, starving the very services set up to fight corruption and fiscal evasion of the means necessary to carry out their mission.
A PROPERTY BOOM
London was booming. Suddenly, almost unannounced the good times were back, almost six years after the fatal bank run at Northern Rock, and the collapse of Mercian Finance, another important mortgage lender. Those events were since recognised as having been the precursors of the most severe economic crisis the world had experienced since the thirties, a crisis that economists were calling The Great Recession.
Spring had arrived, flowers bloomed in London’s parks and gardens, the trees took on their fresh green mantle as the leaves burst from their buds, and as Pat Kennedy set off for a Saturday morning jog he couldn’t help remarking the girls looked particularly pretty. The past week had not been simply good, but excellent. The Footsie had gained twelve percent since the beginning of year and seventeen percent over the previous twelve months.
He rubbed his hands with pleasure and breathed in the fresh morning air of Battersea Park. Things were definitely looking up as INI prepared to move into its new London headquarters in the Gould Tower. The bank had become bigger, better, and certainly more prosperous. At the same time Pat Kennedy had seen a spectacular rise in his own earning and investments, which was not the case for many other Britons, most of whom had seen their incomes fall in real terms.
The FTSE had been boosted by buoyant European markets and the belief the crisis that had racked the eurozone was finally over. It seemed that cash rich investors who had been watching from the sidelines, waiting for a sign, had finally taken the plunge and were investing heavily into European equities.
The INI Europa Fund, a private investment fund, specialised in real estate in the UK and for certain selected assets in France, Germany and the US, had raised raised over two billion pounds for investments in commercial and residential real estate. The Gould Tower counted amongst its major investments followed by new residential developments in the City, the West End and peripheral districts of London.
However, in spite of the general optimism of the promoters, Tom Barton, manager of the Europa Fund, had seen the BTL boom and crash in the period leading up to the 2008 crash, and had not forgotten the lessons learnt. Seriously concerned by the potential glut of prime residential property, with nearly a decade’s supply of homes in the pipeline, he started to discretely withdraw plans to invest in what he saw as speculative projects.
The starting prices of the fifty thousand homes planned or under construction, situated in an area between Earl’s Court and Tower Bridge and from Regents Park to the South Bank, stood at half a million pounds for a studio flat, whilst the average appartment price stood at around one million pounds or more.
Jonathan Plimpton had urged caution, informing Barton that a mere four thousand homes in that kind of price range had been sold in the same area during the whole of 2013.
The question remained as to who would buy those properties and what would happen to prices.
Promoters seemed to ignore the risk as they fought over development land, pushing prices up and margins down. Most had planned on attracting new foreign investors from China, Hong Kong and South East Asia, as well as Russians and buyers from the former republics of the former Soviet Union. They, along with the more traditional Middle Eastern investors, sought a haven far from the dangers that stalked their respective worlds, a last resort if things went badly wrong at home.
It was perhaps why promoters had opted for a majority of two-bedroom apartments in the skyscraper towers springing up across the capital. The newcomers would not be looking at their investment in the same way as the typical UK BTL buyer would, since it was improbably they would see the kind of returns promised by the promoters’ sales agents.
Jonathan Plimpton described them as buy-to-leave investors, interested in safe deposit boxes and not returns, in the same manner as wealthy middle-class Chinese left the appartments they bought in Beijing, Canton and Shanghai unoccupied.
Come what may, the Londoners forced out of the capital’s central districts were not the kind of buyers targeted by Gutherie Plimpton and their likes: the average Londoner could not even dream of acquiring such properties, not to speak of the top end of the range products: reserved for those who could pay millions for penthouse appartments overlooking Hyde Park, or large detached homes surrounded by landscaped gardens in the St Johns Wood kind of district.
The cost of being a global city was hard on London’s grass roots population which was being progressively priced out of the market.
Amongst the INI Europa Property Fund’s different portfolios were those that attracted the interest of sovereign wealt
h funds seeking long-term investments in prime property developments. These included investment possibilities in developments such as London’s Hyde Park Barracks, on offer by the Ministry of Defence at not far off one billion dollars, or the Royal Albert Dock or the Ram Brewery development in Wandsworth.
Even Boris Johnson, the Mayor of London, had become a salesman, heading a trade delegation to Malaysia, Singapore and Indonesia, to promote London residential property. He insisted the schemes were targeted at the regeneration of run-down London districts that offered an attractive investment for foreign buyers.
The idea that everything was up for sale was confirmed by the presence of Malaysia’s housing minister, Datuk Rahman Dahlan, who inaugurated a Battersea Power Station residential development set around a garden aptly named Malaysia Square.
The Thames skyline was being transformed by soulless Dubaiesque architecture, which in the long term would make London indistinguishable from any one of a growing number of glass and aluminium cities spring up across the face of the planet, each country vying with the other to build the highest symbol of national pride.
*
Barton managed INI’s Europe Fund composed of different portfolios specialised in different property strategies. From an initial investment of a few million pounds its capital had grown two billion over the course of five years with assets under management exceeding five billion. The property fund had gone from strength to strength, over the remarkably propitious 2010-2014 period, returning over forty percent in five years, charging sky-high fees with an annual two percent on capital plus twenty five percent on profits. As fund manager Barton’s profit related earnings rocketed as property returned extraordinarily high gains in the world’s most global of global cities.
The fund, domiciled offshore in the Cayman Islands, as were sixty percent of other such funds, escaped control of the financial regulatory authorities and of course the inland revenue. As such it was one of the many funds that controlled a total of more than three trillion dollars in assets world wide, though its management unit, based in the UK, was subjected to regulatory controls.
The majority of the shares were owned by Barton and other individuals, including Michael Fitzwilliams, Pat Kennedy and Sergei Tarasov, the remainder by other high wealth individual investors and funds.
The risks were relatively low; mostly related to economic and property cycles, on the other hand it was not a simple matter if a shareholder or shareholders wanted for some reason to withdraw their capital, since properties owned by the fund could not be easily disposed of, unlike shares that could be bought or sold at the press of a button. To prevent being forced into a property fire sale, a gate prevented shareholders from pulling out at short notice, suspending redemptions and forcing funds shareholders to wait for properties to be disposed of in an orderly manner.
Each property was acquired by a company specifically set up by the fund for that purpose. The company received income from rents paid, which were distributed as income, and growth that came from increases in value of the properties. The fund avoided the problematic of managing the day to day functioning of properties by subcontracting this task to specialised firms.
Liam Clancy’s role was that of managing residential sector investments, that is to say units in prime property developments in London and other selected sites.
Almost all investments in Barton’s portfolio were speculative, short term, designed to capitalise on the rise of super prime property prices, which he did not see falling in view of the volatility and the volume of hot money seeking a shelter.
The fact was, Barton, as the general manager of the fund, a private investment vehicle, could do as he wished providing he informed the investors in advance of his strategy.
Tom had learnt from his long experience in property that the cycles repeated themselves, never in exactly the same fashion, but rising and falling with almost clockwork regularity. In the long term prices always rose, a simple glance at prices over the past one and a half to two centuries showed a relentless climb. There were many reasons: at the time of the Battle of Waterloo the population of the British Isles stood at five or six million, two centuries later it had increased more than ten fold and continued to grow.
However, there were short term cycles with sharp rises and falls, linked to punctual economic conditions and events. And as always homes were never built fast enough, it was not in the interest of industry to create oversupply, the same went for most other sectors of public and commercial properties. The only exception to this rule was industry, which was built for future production and future profits.
Tom Barton did not believe in end of the world crashes, on the other hand, he knew an imprudent investor could be wiped out in a flash, as had happened in 2007 to the Northern Rock and the West Mercian Finance in 2008.1
His strategy had always been to monitor the market closely, which was a full time, stressful, task and the principal reason why he had contemplated quitting the rat race, or at least search for a more satisfying life.
In the years he had got to know Fitzwilliams and his close entourage he developed solid friendships with Pat Kennedy, Sergei Tarasov, John Francis and of course Steve Howard who had pulled him out of his Bangkok impasse.
Seven years had passed since that fateful day at the end 2007, when he boarded a flight for Dubai on a voyage that was to last seven years. During which time his view of the world at large had not changed, but he had learnt to see his own life more objectively.
1. West Mercian crash see Death of a Financier written by the author published in 2009
A SCAPEGOAT
Barton reservations about the origin of certain monies invested in the Europa Property Fund continued to worry him. The fund, based in the Cayman Islands, held a variety of properties in its portfolio, most of which were registered to a cascade of offshore companies.
The Europa fund’s earnings grew as the flow of investment capital from Russia surged with the Ukrainian confrontation and Putin’s annexation of the Crimea. Then as China’s property market cooled and a crackdown on corruption sent rich Chinese in search of a shelter, the flow continued, as investors scrambled to put their wealth beyond the reach of their authorities.
It was certain that a good proportion of the funds was derived from graft, corruption and tax evasion, making Europa a possible accomplice in the eyes of the UK National Crime Agency, which had voiced its reservations about the origin of money flowing in from Russia, China and other countries.
Barton’s greatest nightmare came in the form of the US Federal authorities, which had nailed HSBC for similar affairs. At moments he imagined himself in an orange jumpsuit, like a felon, behind the bars of a Federal prison after being extradited to the US by a complaisant British government.
The City had become a key platform in a system of money laundering through the purchase of prime London property. Assets were sequestered through a series of offshore shell companies registered as legal owners, a process that led to price inflation, stimulating speculative investment and construction. All of which was indirectly encouraged by government as a growth factor and source of tax revenues, inevitably leading to a distortion in the property market and the flight of working and middle-class Brits from their traditional boroughs in London.
Barton had observed the development of media instigated witch hunts; the investigation of historic crime had started with accusations of sexual abuse, then war crime in Northern Ireland, followed by the wars in Iraq and Afghanistan. With whistle blowers were digging for dirt they were certain to find it and Barton had no intention of hanging around waiting for the finger to point at him.
He would be a ready-made scapegoat, diverting attention from the high and mighty, that is Hainsworth and his political friends, whose incestuous links to City & Colonial, if discovered would certainly be their undoing.
PART FIVE 2015
HONG KONG
To describe Pat Kennedy’s feelings, embarrassment was perhaps the word.
Though Lili’s family had closed ranks it was not clear where he stood. For the first time he understood what loss of face meant, not that he hadn’t experienced loss of face before. In the past his mishaps had been economically painful, even life threatening. This time there was no threat to his economic well-being. From his home, looking out over Hong Kong Harbour, Kowloon and the hills beyond, his material future was assured. Not only was Pat a rich man in his own right, but his wife was the daughter of a rich and powerful Cantonese family, whose political connections reached out to Beijing and even the Central Committee.
Pat had been relieved of his position as Chief Executive Director of International Operations of the INI Banking Corporation and Managing Director of INI Hong Kong Ltd., effective immediately. The word ‘relieved’ troubled him; he did not feel in the slightest way relieved.
His ejection followed the sudden takeover of the bank by City & Colonial, and sudden it was. It was a decision taken without the least notice late Sunday evening, before financial markets opened in the City of London, when the British Prime Minister, presiding over an emergency Cabinet meeting, had authorised the Chancellor of the Exchequer, in coordination with the Bank of England, to approve a shotgun marriage. It was deemed necessary to prevent a disastrous collapse of the INI Banking Corporation and pre-empt the risk of another Lehman scenario.
The news was announced shortly before the opening bell of the Hong Kong Stock Exchange on the first day following the traditional Chinese New Year break. Simultaneously Pat had been informed of his unceremonious ejection. His ‘resignation’ he was told would be cushioned by a substantial pay-off and the preservation of his pension rights, conditioned by a confidentiality agreement to be drawn up by the bank’s lawyers.
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