The world's most exclusive club has eighteen members.
They gather
every other month on a Sunday evening at 7 p.m. in conference room E
in a circular tower block whose tinted windows overlook the central
Basel railway station. Their discussion lasts for one hour, perhaps
an hour and a half. Some of those present bring a colleague with
them, but the aides rarely speak during this most confidential of
conclaves.
The meeting closes, the aides leave, and those remaining
retire for dinner in the dining room on the eighteenth floor,
rightly confident that the food and the wine will be superb. The
meal, which continues until 11 p.m. or midnight, is where the real
work is done. The protocol and hospitality, honed for more than
eight decades, are faultless.
Anything said at the dining table, it
is understood, is not to be repeated elsewhere.
Few, if any, of those enjoying their haute cuisine and grand cru
wines - some of the best Switzerland can offer - would be recognized by
passers-by, but they include a good number of the most powerful
people in the world. These men - they are almost all men - are central
bankers.
They have come to Basel to attend the
Economic Consultative
Committee (ECC) of the Bank for International Settlements (BIS),
which is the bank for central banks.
Its current members (as of
2013) include,
-
Ben Bernanke, the chairman of the US Federal Reserve
-
Sir Mervyn King, the governor of the Bank of England
-
Mario Draghi,
of the European Central Bank
-
Zhou Xiaochuan of the Bank of China
-
the central bank governors of Germany, France, Italy, Sweden,
Canada, India, and Brazil
Jaime Caruana, a former governor of the
Bank of Spain, the BIS's general manager, joins them.
In early 2013, when this book went to press,
Mervyn King, who is due to
step down as governor of the Bank of England in June 2013, chaired
the ECC.
The ECC, which used to be known as the G-10 governors'
meeting, is the most influential of the BIS's numerous gatherings,
open only to a small, select group of central bankers from advanced
economies.
The ECC makes recommendations on the membership and
organization of the three BIS committees that deal with the global
financial system, payments systems, and international markets. The
committee also prepares proposals for the Global Economy Meeting and
guides its agenda.
That meeting starts at 9:30 a.m. on Monday morning, in room B and
lasts for three hours.
There King presides over the central bank
governors of the thirty countries judged the most important to the
global economy. In addition to those who were present at the Sunday
evening dinner, Monday's meeting will include representatives from,
for example, Indonesia, Poland, South Africa, Spain, and Turkey.
Governors from fifteen smaller countries, such as Hungary, Israel,
and New Zealand are allowed to sit in as observers, but do not
usually speak. Governors from the third tier of member banks, such
as Macedonia and Slovakia, are not allowed to attend. Instead they
must forage for scraps of information at coffee and meal breaks.
The governors of all sixty BIS member banks then enjoy a buffet
lunch in the eighteenth-floor dining room.
Designed by Herzog & de Meuron, the Swiss architectural firm which built the
"Bird's Nest"
Stadium for the Beijing Olympics, the dining room has white walls, a
black ceiling and spectacular views over three countries:
-
Switzerland
-
France
-
Germany
At 2 p.m. the central bankers and
their aides return to room B for the governors' meeting to discuss
matters of interest, until the gathering ends at 5.
King takes a very different approach than his predecessor,
Jean-Claude Trichet, the former president of the European Central
Bank, in chairing the Global Economy Meeting.
Trichet, according to
one former central banker, was notably Gallic in his style:
a
stickler for protocol who called the central bankers to speak in
order of importance, starting with the governors of the Federal
Reserve, the Bank of England, and the Bundesbank, and then
progressing down the hierarchy.
King, in contrast, adopts a more
thematic and egalitarian approach: throwing open the meetings for
discussion and inviting contributions from all present.
The governors' conclaves have played a crucial role in determining
the world's response to the global financial crisis.
"The BIS has
been a very important meeting point for central bankers during the
crisis, and the rationale for its existence has expanded," said
King.
"We have had to face challenges
that we have never seen before. We had to work out what was
going on, what instruments do we use when interest rates are
close to zero, how do we communicate policy. We discuss this
at home with our staff, but it is very valuable for the
governors themselves to get together and talk among
themselves."
Those discussions, say central bankers, must be confidential.
"When
you are at the top in the number one post, it can be pretty lonely
at times. It is helpful to be able to meet other number ones and
say,
'This is my problem, how do you deal with it?'" King continued.
"Being able to talk informally
and openly about our experiences has been immensely
valuable.
We are not speaking in a public
forum. We can say what we really think and believe, and we
can ask questions and benefit from others."
The BIS management works hard to ensure that the atmosphere is
friendly and clubbable throughout the weekend, and it seems they
succeed.
The bank arranges a fleet of limousines to pick up the
governors at Zürich airport and bring them to Basel.
Separate
breakfasts, lunches, and dinners are organized for the governors of
national banks who oversee different types and sizes of national
economies, so no one feels excluded.
"The central bankers were more
at home and relaxed with their fellow central bankers than with
their own governments," recalled Paul Volcker, the former chairman
of the US Federal Reserve, who at- tended the Basel weekends.
The
superb quality of the food and wine made for an easy camaraderie,
said Peter Akos Bod, a former governor of the National Bank of
Hungary.
"The main topics of discussion
were the quality of the wine and the stupidity of finance
ministers. If you had no knowledge of wine you could not
join in the conversation."
And the conversation is usually stimulating and enjoyable, say
central bankers.
The contrast between the Federal Open Markets
Committee at the US Federal Reserve, and the Sunday evening G-10
governors' dinners was notable, recalled Laurence Meyer, who served
as a member of the Board of Governors of the Federal Reserve from
1996 until 2002.
The chairman of
the Federal Reserve did not always
represent the bank at the Basel meetings, so Meyer occasionally
attended.
The BIS discussions were always lively, focused and
thought provoking.
"At FMOC meetings, while I was at the Fed, almost
all the Committee members read statements which had been prepared in
advance.
They very rarely referred to statements by other Committee
members and there was almost never an exchange between two members
or an ongoing discussion about the outlook or policy options.
At BIS dinners people actually
talk to each other and the discussions are always
stimulating and interactive focused on the serious issues
facing the global economy."
All the governors present at the two-day gathering are assured of
total confidentiality, discretion, and the highest levels of
security.
The meetings take place on several floors that are usually
used only when the governors are in attendance. The governors are
provided with a dedicated office and the necessary support and
secretarial staff.
The Swiss authorities have no jurisdiction over
the BIS premises.
Founded by an international treaty, and further
protected by the 1987 Headquarters Agreement with the Swiss
government, the BIS enjoys similar protections to those granted to
the headquarters of the United Nations, the International Monetary
Fund (IMF) and diplomatic embassies.
The Swiss authorities need the
permission of the BIS management to enter the bank's buildings,
which are described as "inviolable."
The BIS has the right to communicate in code and to send and receive
correspondence in bags covered by the same protection as embassies,
meaning they cannot be opened. The BIS is exempt from Swiss taxes.
Its employees do not have to pay income tax on their salaries, which
are usually generous, designed to compete with the private sector.
The general manager's salary in 2011 was 763,930 Swiss francs,
while head of departments were paid 587,640 per annum, plus generous
allowances.
The bank's extraordinary legal privileges also extend to
its staff and directors. Senior managers enjoy a special status,
similar to that of diplomats, while carrying out their duties in
Switzerland, which means their bags cannot be searched (unless there
is evidence of a blatant criminal act), and their papers are
inviolable.
The central bank governors traveling to Basel for the
bimonthly meetings enjoy the same status while in Switzerland.
All
bank officials are immune under Swiss law, for life, for all the
acts carried out during the discharge of their duties. The bank is a
popular place to work and not just because of the salaries. Around
six hundred staff come from over fifty countries. The atmosphere is
multi-national and cosmopolitan, albeit very Swiss, emphasizing the
bank's hierarchy.
Like many of those working for the UN or the IMF,
some of the staff of the BIS, especially senior management, are
driven by a sense of mission, that they are working for a higher,
even celestial purpose and so are immune from normal considerations
of accountability and transparency.
The bank's management has tried to plan for every eventuality so
that the Swiss police need never be called.
The BIS headquarters has
high-tech sprinkler systems with multiple back-ups, in-house medical
facilities, and its own bomb shelter in the event of a terrorist
attack or armed conflagration.
The BIS's assets are not subject to
civil claims under Swiss law and can never be seized.
The BIS strictly guards the bankers' secrecy. The minutes, agenda,
and actual attendance list of the Global Economy Meeting or the ECC
are not released in any form. This is because no official minutes
are taken, although the bankers sometimes scribble their own notes.
Sometimes there will be a brief press conference or bland statement
afterwards but never anything detailed.
This tradition of privileged
confidentiality reaches back to the bank's foundation.
"The quietness of Basel and its absolutely nonpolitical character
provide a perfect setting for those equally quiet and nonpolitical
gatherings," wrote one American official in 1935.
"The regularity of
the meetings and their almost unbroken attendance by practically
every member of the Board make them such they rarely attract any but
the most meager notice in the press." 8
Forty years on, little had
changed.
Charles Coombs, a former foreign exchange chief of the New
York Federal Reserve, attended governors' meetings from 1960 to
1975.
The bankers who were allowed inside the inner sanctum of the
governors' meetings trusted each other absolutely, he recalled in
his memoirs.
"However much money was
involved, no agreements were ever signed nor memoranda of
understanding ever initialized. The word of each official
was sufficient, and there were never any disappointments."
What, then, does this matter to the rest of us?
Bankers have been
gathering confidentially since money was first invented. Central
bankers like to view themselves as the high priests of finance, as
technocrats overseeing arcane monetary rituals and a financial
liturgy understood only by a small, self-selecting elite.
But the governors who meet in Basel every other month are public
servants. Their salaries, airplane tickets, hotel bills, and
lucrative pensions when they retire are paid out of the public
purse. The national reserves held by central banks are public money,
the wealth of nations.
The central bankers' discussions at the BIS,
the information that they share, the policies that are evaluated,
the opinions that are exchanged, and the subsequent decisions that
are taken, are profoundly political.
Central bankers, whose
independence is constitutionally protected, control monetary policy
in the developed world. They manage the supply of money to national
economies. They set interest rates, thus deciding the value of our
savings and investments.
They decide whether to focus on austerity
or growth.
Their decisions shape our lives...
The BIS's tradition of secrecy reaches back through the decades.
During the 1960s, for example, the bank hosted the London Gold Pool.
Eight countries pledged to manipulate the gold market to keep the
price at around thirty-five dollars per ounce, in line with the
provisions of the Bretton Woods Accord that governed the post-World
War II international financial system.
Although the London Gold Pool
no longer exists, its successor is the
BIS Markets Committee, which
meets every other month on the occasion of the governors' meetings
to discuss trends in the financial markets. Officials from
twenty-one central banks attend.
The committee releases occasional
papers, but its agenda and discussions remain secret.
Nowadays the countries represented at the
Global Economy Meetings
together account for around four-fifths of global gross domestic
product (GDP) - most of the produced wealth of the world - according to
the BIS's own statistics.
Central bankers now,
"seem more powerful
than politicians,"
wrote The Economist newspaper,
"holding the
destiny of the global economy in their hands."
How did this happen?
The BIS, the world's most secretive global financial institution,
can claim much of the credit. From its first day of existence, the BIS has dedicated itself to furthering the interests of central
banks and building the new architecture of transnational finance.
In
doing so, it has spawned a new class of close-knit global
technocrats whose members glide between highly-paid positions at the BIS, the IMF, and central and commercial banks.
The founder of the technocrats' cabal was Per Jacobssen, the Swedish
economist who served as the BIS's economic adviser from 1931 to
1956.
The bland title belied his power and reach. Enormously
influential, well connected, and highly regarded by his peers, Jacobssen wrote the first BIS annual reports, which were
- and
remain - essential reading throughout the world's treasuries. Jacobssen was an early supporter of European federalism.
He argued
relentlessly against inflation, excessive government spending, and
state intervention in the economy.
Jacobssen left the BIS in 1956 to
take over the IMF. His legacy still shapes our world. The
consequences of his mix of economic liberalism, price obsession, and
dismantling of national sovereignty play out nightly in the European
news bulletins on our television screens.
The BIS's defenders deny that the organization is secretive.
The
bank's archives are open and researchers may consult most documents
that are more than thirty years old. The BIS archivists are indeed
cordial, helpful, and professional. The bank's website includes all
its annual reports, which are downloadable, as well as numerous
policy papers produced by the bank's highly regarded research
department.
The BIS publishes detailed accounts of the securities
and derivatives markets, and international banking statistics.
But
these are largely compilations and analyses of information already
in the public domain. The details of the bank's own core activities,
including much of its banking operations for its customers, central
banks, and international organizations, remain secret.
The Global
Economy Meetings and the other crucial financial gatherings that
take place at Basel, such as the Markets Committee, remain closed to
outsiders. Private individuals may not hold an account at BIS,
unless they work for the bank.
The bank's opacity, lack of
accountability, and ever-increasing influence raises profound
questions - not just about monetary policy but transparency,
accountability, and how power is exercised in our democracies.
* * *
WHEN I EXPLAINED to friends and acquaintances that I was writing a
book about the Bank for International Settlements, the usual
response was a puzzled look, followed by a question:
"The bank for
what...?"
My interlocutors were intelligent people, who follow current
affairs.
Many had some interest in and understanding of the global
economy and financial crisis. Yet only a handful had heard of the BIS. This was strange, as the BIS is the most important bank in the
world and predates both
the IMF and the World Bank.
For decades it
has stood at the center of a global network of money, power, and
covert global influence.
The BIS was founded in 1930. It was ostensibly set up as part of the
Young Plan to administer German reparations payments for the First
World War.
The bank's key architects were Montagu Norman, who was
the governor of the Bank of England, and Hjalmar Schacht, the
president of the Reichsbank who described the BIS as "my" bank.
The BIS's founding members were the central banks of,
Shares
were also offered to the Federal Reserve, but the United States,
suspicious of anything that might infringe on its national
sovereignty, refused its allocation.
Instead a consortium of
commercial banks took up the shares:
The real purpose of the BIS was detailed in its statutes:
to "promote the cooperation of central banks and to provide additional
facilities for international financial operations."
It was the
culmination of the central bankers' decades-old dream, to have their
own bank - powerful, independent, and free from interfering
politicians and nosy reporters.
Most felicitous of all, the BIS was
self-financing and would be in perpetuity. Its clients were its own
founders and shareholders - the central banks.
During the 1930s, the BIS was the central meeting place for a cabal of central bankers,
dominated by Norman and Schacht. This group helped rebuild Germany.
The New York Times described Schacht, widely acknowledged as the
genius behind the resurgent German economy, as "The Iron-Willed
Pilot of Nazi Finance." During the war, the BIS became a de-facto
arm of the Reichsbank, accepting looted Nazi gold and carrying out
foreign exchange deals for Nazi Germany.
The bank's alliance with Berlin was known in Washington, DC, and
London.
But the need for the BIS to keep functioning, to keep the
new channels of transnational finance open, was about the only thing
all sides agreed on. Basel was the perfect location, as it is
perched on the northern edge of Switzerland and sits al- most on the
French and German borders. A few miles away, Nazi and Allied
soldiers were fighting and dying. None of that mattered at the BIS.
Board meetings were suspended, but relations between the BIS staff
of the belligerent nations remained cordial, professional, and
productive. Nationalities were irrelevant.
The overriding loyalty
was to international finance.
-
The president, Thomas McKittrick,
was an American
-
Roger Auboin, the general manager, was French
-
Paul Hechler, the assistant general manager, was a member of the Nazi
party and signed his correspondence "Heil Hitler"
-
Rafaelle Pilotti,
the secretary general, was Italian
-
Per Jacobssen, the bank's
influential economic adviser, was Swedish
-
His and Pilotti's deputies
were British
After 1945, five BIS directors, including
Hjalmar Schacht, were
charged with war crimes. Germany lost the war but won the economic
peace, in large part thanks to the BIS.
The international stage,
contacts, banking networks, and legitimacy the BIS provided, first
to the Reichsbank and then to its successor banks, has helped ensure
the continuity of immensely powerful financial and economic
interests from the Nazi era to the present day.
* * *
FOR THE FIRST forty-seven years of its existence, from 1930 to 1977,
the BIS was based in a former hotel, near the Basel central railway
station.
The bank's entrance was tucked away by a chocolate shop,
and only a small notice confirmed that the narrow doorway opened
into the BIS. The bank's managers believed that those who needed to
know where the BIS was would find it, and the rest of the world
certainly did not need to know.
The inside of the building changed
little over the decades, recalled Charles Coombs.
The BIS provided
the,
"the spartan accommodations of a
former Victorian-style hotel whose single and double
bedrooms had been transformed into offices simply by
removing the beds and installing desks."
The bank moved into its current headquarters, at 2, Centralbahnplatz,
in 1977.
It did not go far and now overlooks the Basel central
station. Nowadays the BIS's main mission, in its own words, is
threefold:
"to serve central banks in their pursuit of monetary and
financial stability, to foster international cooperation in these
areas, and to act as a bank for central banks."
The BIS also hosts
much of the practical and technical infrastructure that the global
network of central banks and their commercial counterparts need to
function smoothly.
It has two linked trading rooms: at the Basel
headquarters and Hong Kong regional office.
The BIS buys and sells
gold and foreign exchange for its clients. It provides asset
management and arranges short-term credit to central banks when
needed.
The BIS is a unique institution:
-
an international organization
-
an
extremely profitable bank
-
a research institute founded, and
protected, by international treaties
The BIS is accountable to its
customers and shareholders - the central banks - but also guides their
operations.
The main tasks of a central bank, the BIS argues, are to
control the flow of credit and the volume of currency in
circulation, which will ensure a stable business climate, and to
keep exchange rates within manageable bands to ensure the value of a
currency and so smooth international trade and capital movements.
This is crucial, especially in a globalized economy, where markets
react in microseconds and perceptions of economic stability and
value are almost as important as reality itself.
The BIS also helps to supervise commercial banks, although it has no
legal powers over them.
The Basel Committee on Banking Supervision,
based at the BIS, regulates commercial banks' capital and liquidity
requirements. It requires banks to have a minimum capital of eight
percent of risk-weighted assets when lending, meaning that if a bank
has risk-weighted assets of $100 million it must maintain at least
$8 million capital.
The committee has no powers of enforcement, but
it does have enormous moral authority.
"This regulation is so
powerful that the eight percent principle has been set into national
laws," said Peter Akos Bod. "It's like voltage. Voltage has been set
at 220. You may decide on ninety-five volts, but it would not work."
In theory, sensible housekeeping and mutual cooperation, overseen by
the BIS, will keep the global financial system functioning smoothly.
In theory.
The reality is that we have moved beyond recession into a deep
structural crisis, one fueled by the banks' greed and rapacity,
which threatens all of our financial security.
Just as in the 1930s,
parts of Europe face economic collapse.
The Bundesbank and the
European Central Bank, two of the most powerful members of the BIS,
have driven the mania for austerity that has already forced one
European country, Greece, to the edge, aided by the venality and
corruption of the country's ruling class. Others may soon follow.
The old order is creaking, its political and financial institutions
corroding from within. From Oslo to Athens, the far right is
resurgent, fed in part by soaring poverty and unemployment. Anger
and cynicism are corroding citizens' faith in democracy and the rule
of law.
Once again, the value of property and assets is vaporizing
before their owners' eyes. The European currency is threatened with
breakdown, while those with money seek safe haven in Swiss francs or
gold.
The young, the talented, and the mobile are again fleeing
their home countries for new lives abroad. The powerful forces of
international capital that brought the BIS into being, and which
granted the bank its power and influence, are again triumphant.
The BIS sits at the apex of an international financial system that
is falling apart at the seams, but its officials argue that it does
not have the power to act as an international financial regulator.
Yet the BIS cannot escape its responsibility for the Euro-zone
crisis.
-
From the first agreements in the late 1940s on multilateral
payments to the establishment of the Europe Central Bank in 1998,
the BIS has been at the heart of the European integration project,
providing technical expertise and the financial mechanisms for
currency harmonization.
-
During the 1950s, it managed the European
Payments Union, which internationalized the continent's payment
system. The BIS hosted the Governors' Committee of European Economic
Community central bankers, set up in 1964, which coordinated
trans-European monetary policy.
-
During the 1970s, the BIS ran the
"Snake," the mechanism by which European currencies were held in
exchange rate bands.
-
During the 1980s the BIS hosted the Delors
Committee, whose report in 1988 laid out the path to European
Monetary Union and the adoption of a single currency.
The BIS
midwifed the European Monetary Institute (EMI), the precursor of the
European Central Bank.
The EMI's president was Alexandre Lamfalussy,
one of the world's most influential economists, known as the "Father
of the euro." Before joining the EMI in 1994, Lamfalussy had worked
at the BIS for seventeen years, first as economic adviser, then as
the bank's general manager.
For a staid, secretive organization, the BIS has proved surprisingly
nimble.
It survived,
-
the first global depression
-
the end of
reparations payments and the gold standard (two of its main reasons
for existence)
-
the rise of Nazism
-
the Second World War
-
the Bretton Woods Accord
-
the Cold War
-
the financial crises of the
1980s and 1990s
-
the birth of the IMF and World Bank
-
the end of
Communism
As Malcolm Knight, manager from 2003-2008, noted,
"It is
encouraging to see that - by remaining small, flexible, and free from
political interference - the Bank has, throughout its history,
succeeded remarkably well in adapting itself to evolving
circumstances."
The bank has made itself a central pillar of the global financial
system.
As well as the Global Economy Meetings, the BIS hosts four
of the most important international committees dealing with global
banking:
-
the Basel Committee on Banking Supervision
-
the Committee
on the Global Financial System
-
the Committee on Payment and
Settlement Systems
-
the Irving Fisher Committee, which deals
with central banking statistics
The bank also hosts three
independent organizations:
two groups dealing with insurance and the
Financial Stability Board (FSB).
The FSB, which coordinates national
financial authorities and regulatory policies, is already being
spoken of as the fourth pillar of the global financial system, after
the BIS, the IMF and the commercial banks.
The BIS is now the world's thirtieth-largest holder of gold
reserves, with 119 metric tons - more than Qatar, Brazil, or Canada.
Membership of the BIS remains a privilege rather than a right.
The
board of directors is responsible for admitting central banks judged
to,
"make a substantial contribution to international monetary
cooperation and to the Bank's activities."
China, India, Russia, and
Saudi Arabia joined only in 1996.
The bank has opened offices in
Mexico City and Hong Kong but remains very Eurocentric. Estonia,
Latvia, Lithuania, Macedonia, Slovenia, and Slovakia (total
population 16.2 million) have been admitted, while Pakistan
(population 169 million) has not. Nor has Kazakhstan, which is a
powerhouse of Central Asia.
In Africa only Algeria and South Africa
are members - Nigeria, which has the continent's second-largest
economy, has not been admitted.
(The BIS's defenders say that it
demands high governance standards from new members and when the
national banks of countries such as Nigeria and Pakistan reach those
standards, they will be considered for membership.)
Considering the BIS's pivotal role in the transnational economy, its
low profile is remarkable.
Back in 1930 a New York Times reporter
noted that the culture of secrecy at the BIS was so strong that he
was not permitted to look inside the boardroom, even after the
directors had left. Little has changed. Journalists are not allowed
inside the headquarters while the Global Economy Meeting is
underway.
BIS officials speak rarely on the record, and reluctantly,
to members of the press.
The strategy seems to work:
The Occupy Wall
Street movement, the anti-globalizers, the social network protesters
have ignored the BIS.
Centralbahnplatz 2, Basel, is quiet and
tranquil.
There are no demonstrators gathered outside the BIS's
headquarters, no protestors camped out in the nearby park, no lively
reception committees for the world's central bankers.
As the world's economy lurches from crisis to crisis, financial
institutions are scrutinized as never before. Legions of reporters,
bloggers, and investigative journalists scour the banks' every move.
Yet somehow, apart from brief mentions on the financial pages, the BIS has largely managed to avoid critical scrutiny.
Until now...
