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MegaBank Tax Scam Hits Europe With Startling Similarities to Securitization

livinglies.me | January 27, 2020

"Organized white-collar crime of unimaginable magnitude.”

"Suffice it to say, the goal was to fool the financial system so that two investors could claim refunds for dividend taxes that were paid just once."

The unwillingness to see securitization as the largest economic crime in human history has produced policies and court decisions that run against basic doctrines of fairness and due process that evolved centuries ago. This latest scam is fairly well described in a New York times article. While mentioning securitization it fails to draw the lines between the dots.

Madoff and this tax scam cheated governments and investors out of about $60 billion each. That is about $120 billion total.

Securitization, as practiced, cheated governments and investors and consumers out of around $15 trillion. So is the moral of the story that if you cheat bigger that everyone else you get away with it?

Maybe. But I think the larger moral of the story is that this is what happens when people who hold public office are more responsive to personal opportunity than the principles and institutions that gave them the job in the first place. Our tolerance of this behavior, as voters, is what makes this possible.

See It May Be the Biggest Tax Heist Ever. And Europe Wants Justice

Here are some quotes from the article that are descriptive of the double refund scam but which could equally applied to how investment banks twisted securitization into an illegal scheme.

“The biggest tax theft in the history of Europe.” From 2006 to 2011, these two and hundreds of bankers, lawyers and investors made off with a staggering $60 billion, all of it siphoned from the state coffers of European countries.

The scheme was built around “cum-ex trading” (from the Latin for “with-without”): a monetary maneuver to avoid double taxation of investment profits that plays out like high finance’s answer to a David Copperfield stage illusion. Through careful timing, and the coordination of a dozen different transactions, cum-ex trades produced two refunds for dividend tax paid on one basket of stocks.

The role played by Americans, both individual investors and branches of United States investment banks in London, including Morgan Stanley, JPMorgan Chase and Merrill Lynch Bank of America.

German prosecutors say they will now pursue 400 other suspects, unearthed in 56 investigations. Banks large and small will be ordered to hand over cum-ex profits, which could have serious consequences for some. Two have already gone bust.

Dozens of law firms and lawyers may face penalties, too, having drafted highly priced opinions contending there was no law explicitly prohibiting cum-ex and thus it was perfectly legal.

Officials in Germany say the trade was a form of theft, one so obviously illicit that forbidding it — which was tried twice, with ineffectively worded laws — was hardly necessary. In September, the justice minister of the state of North-Rhine Westphalia, Peter Biesenbach, went so far as to liken cum-ex players to mobsters.

Academics have struggled for years to explain the trade and say its impenetrability is part of what made it so successful — as though someone had found a way to weaponize string theory. At the Bonn trial, defendants spent days walking judges through cum-ex’s nuances, with one baffling slide after another.

Suffice it to say, the goal was to fool the financial system so that two investors could claim refunds for dividend taxes that were paid just once.

The trade was pure theater and required a huge cast: stock lenders, prime brokers, custodians, accounting firms, asset managers and inter-dealer brokers. It also required vast quantities of stock, most of which was sourced from American shareholders.

Some of the best legal minds in Europe spent much of their working hours writing opinions declaring cum-ex within the bounds of the law.

“He just told me a lot of nonsense,” Mr. Tibo said. “He said he had this toolbox of financial instruments and he’s in the middle of these trades, and that sometimes he doesn’t even know who he is trading with.”

Prosecutors have reportedly opened investigations into transactions handled by Bank of America, JPMorgan Chase, Morgan Stanley and many others. Dozens of German banks participated in cum-ex deals, too, gobbling up German taxpayer money at the same time they received a rescue package worth more than $500 billion.

It was a realm beyond morality, he said: all male, supremely arrogant, and guided by the conviction that the German state is an enemy and German taxpayers are suckers.

Merrill Lynch earned hundreds of millions of dollars over the previous seven years from cum-ex trades.

“Anyone who stood in the way of this trade was swept aside, and those who enabled it were promoted,” the whistle-blower said in a follow-up phone call. “But it was widely regarded as insanity inside the bank for it to be extracting money from sovereign treasuries, particularly after the entire sector had been supported by the public purse.”

American investors joined in, too. German efforts to stamp out cum-ex with legislation, in 2007 and 2009, left holes through which certain types of financial players could still crawl. This included private pension plans in the United States, a niche financial product for wealthy people who want the kind of privacy, and exotic investment options, that Fidelity doesn’t offer.

“These U.S. pension plans became the holy grail for cum-ex trading,”

Editor's note: I know it sounds like conspiracy theory --- but some conspiracies are more than theory.

 

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Back to January 2020 Archive

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