Shadow Banking after the Crisis: The Dutch Case

Introduction

When Lehman Brothers filed for bankruptcy, many knew it was going to be a huge event but few that it would become as big as it did. Nine years later, the failure of Lehman Brothers still stands as the immediate trigger of the largest financial crisis since the 1920s, the largest bank failure ever as well as the largest bankruptcy ever. Less well known is the fate of its subsidiary, Lehman Brothers Treasury BV, domiciled in Amsterdam, fully owned by Lehman Brothers Holding UK, regulated by the Irish central bank and used by London-based Lehman Brothers International Europe Ltd. as a passive funding interface for the global Lehman group.

Established in 1995, it was one of four such funding vehicles used by the Manhattan-based banking group to finance its operations by selling almost 4000 structured financial products – so called ‘linked notes’ ranging in size from $300,000 to $115 million, referencing a wide range of different financial assets – in return for funding that was immediately passed through to one of Lehman Brothers’ operational units, generating legal obligations from these units to Lehman Brothers Treasury BV and from Lehman Brothers Treasury BV to the institutional investors and private individuals who bought them. In short, Lehman Brothers Treasury BV was a typical shadow banking entity: nominally a non-bank financing vehicle and hence outside the scope of national banking regulators but in practice tightly coupled to a licensed and thus regulated bank.

In 2008, the Dutch funding vehicle had become by far the largest. According to its 2007 annual report, it had $34 billion in notes outstanding, turning Lehman Brothers Treasury BV into the single largest claimant on the Lehman holding after its bankruptcy. Tellingly, managing an annual cash flow of well over $11 billion, with a balance sheet of $34 billion, generating taxes of $4 million over profits of $31 million (12% in a jurisdiction with a nominal corporate tax rate of 25%) did not require any employees. Two of its managing directors were Dutch frontmen employed by trust firm Equity Trust that took care of all the legal-administrative obligations, while the other three were legal officials from the Swiss and German subsidiaries of Lehman Brothers.

The Lehman case is typical for the way in which the Dutch offshore ‘infrastructure’ – originally established and developed at the behest of Dutch multinational corporations to prevent double taxation and subsequently ‘discovered’ by non-Dutch multinationals for ‘tax management’ purposes (OECD, 2013; Palan et al., 2009) – has since the mid-1990s started to ‘double’ as a financial ‘transfer haven’ serving the arbitrage and funding purposes of global banking groups (see also Fernandez and Wigger, 2017). This had everything to do with the increasing importance of short-term interbank funding to finance the day-to-day operations of large integrated banks in an attempt to increase revenues and profits in a low-interest-rate environment by building ever larger balance sheets on ever smaller slices of equity – a development Hardie et al. (2013) have described as the rise of ‘market-based banking’ (see also Ertürk and Solari, 2007; Engelen et al., 2011).

As such, off-shore jurisdictions like the Netherlands, Luxembourg and Ireland have been instrumental for the financialization of global capitalism by providing crucial infrastructural services to large financial agents, in the form of tax avoidance, regulatory arbitrage and the facilitation of what is called ‘financial innovation’, as is indicated by the widespread use of securitization techniques to repackage mortgages, student loans, car loans and credit card debts as well as standardized tax avoiding products such as the ‘double Irish with a Dutch sandwich’ being globally sold by the likes of EY, PwC, Deloitte and KPMG to their multinational customers. The ‘commercialization of sovereignty’ this implies is no exception but the condition of possibility of global financialized capitalism (Urry, 2014; Palan, 2002).

According to the latest available data (2011), there are 66 foreign banking group-related special purpose vehicles active in the Netherlands, managing a combined balance sheet of €276 billion (SEO, 2013: 226). While, for privacy reasons, these data cannot be traced to specific banks, anecdotal evidence points to many of the largest global banks. As the UK-based NGO Actionaid has shown, British banks and insurers collectively own hundreds of shell companies in the Netherlands. Barclays has eight, HSBC 12, ICAP nine, Legal & General seven, Lloyds Banking Group 23, Prudential 10, RSA Insurance Group seven, Schroders five, Standard Chartered 13 and RBS, partly as a result of the takeover of ABN Amro in 2008, no less than 71 (Actionaid, 2013).

A total of 28,000 billable hours and a record €7.5 million in fees later, investors had been reimbursed for 7.73 per cent of total claims of $34 billion, of which 20 to 30 per cent is ultimately expected to be recouped. The political point of this story is that it unexpectedly uncovered the importance of the Dutch jurisdiction for the ‘shadowy’ world of global interbank lending. What the failure of Lehman Brothers and the ensuing credit crunch did for the ‘discovery’ of the vulnerability of ‘market-based banking’ to bank-runs through the backdoor of interbank lending, the revelation of the role of Lehman Brothers Treasury BV did for the comforting storyline that the credit crunch originated in the US and had nothing to do with European (shadow) banking (see also Fligstein and Habinek, 2014; Hardie et al., 2013). For, if that story were true, how could Lehman, unbeknownst to the Dutch regulator, have channelled a sizeable part of its funding (7%) and leveraging up (building a $700 billion balance sheet on a mere $23 billion of equity) through a single Dutch shell company?

Even more important was what it revealed about the role of the Dutch jurisdiction in international finance. Potentially embarrassing – and when caught up in an international backlash extremely inconvenient for the three largest Dutch banks (Rabobank, ING and ABN Amro) who rely for the large-scale securitization of their mortgage portfolios on that very same ‘infrastructure’ – the revelation met a concerted attempt by Dutch elites to preempt precisely such a backlash. This paper describes in detail the rhetorical stratagems used by Dutch elites in response to a number of high-profile reports produced by the Basle-based Financial Stability Board to protect the Dutch ‘transfer haven’.

The theoretical point of the story is twofold. First, it highlights the need to dust off earlier elite theories – from Mosca (1933) to Mills (1956) and Lukes (2005) – to throw light on elite manoeuvring in response to changing conjunctures. Power has increasingly shifted away from the demoi of classic democratic theory to the rich, privileged and well-positioned (Streeck, 2013; Mair, 2013), inviting a return to older conceptualizations of elite power.

These will have to be adapted, though, to our current context, which has been described as ‘post-democratic’ by Crouch (2004). This is a condition in which the ‘political formulas’ from Mosca’s epigraph adorning this paper, i.e. the ‘doctrines and beliefs that are generally recognized and accepted’ and served as ‘the legal and moral basis on which the power of the elite rests’ (1933: 69), have lost their integrating powers. Instead, elites increasingly engage in ritualistic modes of politicking, while behind the scenes thinly-veiled stories of sectoral interests serve as the cognitive mobilizers of cross-elite coalitions hiding behind a supranational technocracy that is fundamentally about ‘democracy dodging’ (Urry, 2014: 14).

While largely accepting this description of our current political situation, the paper argues for a more conjunctural reading, rather than a purely epochal one. Post-democracy depends crucially on time and policy domain. As the Dutch case shows, the Great Financial Crisis delegitimated the story of the benefits of financial market deregulation, putting elites in the uncomfortable position post-crisis of having to protect financial practices that were highly beneficial to the few without possessing a narrative, or ‘political formula’ in Mosca’s terms, to convince or silence the many. This provided observers, such as the author of this paper, with a unique chance to observe the construction of new narratives in action.

The setup is straightforward. The first section presents the case and discusses in some detail the construction of a counter-narrative by Dutch elites to protect their ‘transfer haven’ from international damage. The second section uses recent discussions of ‘discursive power’ to analyse the rhetorical stratagems used by Dutch elites and the sectoral interests behind them. The third section draws theoretical conclusions and discusses their meaning for the current state of elite theory. The paper ends with a brief discussion of whether this implies conspiracy theory.

Damage Control

The story begins at the Centralbahnplatz 2, in Basel, Switzerland, home of the Bank of International Settlements, the global banking regulator, as well as the Financial Stability Board, responsible for global financial stability (Helleiner, 2010). Even before the failure of Lehman Brothers, insiders worried about the increasing complexity of the global interbank market. The first to coin the term ‘shadow banking’ was Paul McCulley of bond investor Pimco, who used it to refer to the special investment vehicles, conduits and special-purpose vehicles that banks used to securitize and offload their assets, attract funding and arbitrage around regulation (McCulley, 2007).

After the bankruptcy of Lehman Brothers had demonstrated the vulnerability of banks to bank-runs in what quickly became known as the ‘shadow banking system’, the G20 decided in the fall of 2010 that there was an urgent need to complement new capital standards for banks (also known as Basle 3) with better overview of the scale, scope and shape of shadow banking to keep track of its interaction with regular banking activities. As the communique stated:

With the completion of the new standards for banks, there is a potential that regulatory gaps may emerge in the shadow banking system. Therefore, we called on the Financial Stability Board to work in collaboration with other international standard setting bodies to develop recommendations to strengthen the regulation and oversight of the shadow banking system by mid-2011. (G20, 2010)

The first such annual monitoring report, ‘Shadow Banking: Strengthening Oversight and Regulation’, was presented at the G20 Summit of November 2011 (FSB, 2011b). It provided a rough sketch of the growth of shadow banking over time, its size vis-à-vis regular banking, insurance and asset management sectors, its composition and its geographical distribution. The results made quite a splash in the international business press. Its size – $60 trillion, a little over half of total banking assets of the G20 and Eurozone banks – compared to one time global GDP, as did the fact that the value of shadow assets had hardly budged during the crisis, while banking assets had steeply declined. Its complexity, protean nature and interconnectedness with the long and fragile credit intermediation chains controlled by global banking groups were a further cause for concern. The observation that the Netherlands was the third largest shadow banking jurisdiction, after the US and the UK, at the time largely escaped the Dutch press; only two small reports were dedicated to the topic, with no follow-up.

It had not escaped the attention of the international regulatory community. The second monitoring report, which was presented at the November 2012 ministerial G20 meeting in Mexico, gave a much more detailed overview of shadow banking, breaking down the aggregate figures for each jurisdiction and providing figures of the assets and liabilities of shadow banks in those jurisdictions (FSB, 2012). This report was even more pronounced in showing the eccentric nature of the Netherlands in global shadow banking.

Together with the US, the Netherlands was the only jurisdiction where the balance sheets of shadow banks were larger than those of regular banks. Moreover, compared to an average shadow banking size to GDP of 111 per cent, the Netherlands (together with Hong Kong, the UK, Singapore and Switzerland, where it was five times GDP) clearly was an outlier. Finally, the Netherlands stood out for the peculiar composition of its shadow banking sector. Approximately 95 per cent of it consisted of shell companies known as ‘Special Financial Institutes’ (SFIs), which was an administrative category typical for the Dutch jurisdiction, and represented almost 5 per cent of the $67 trillion global shadow banking industry in 2011. It was for these reasons that the board had commissioned a separate case study on the Netherlands, based on micro data from the Dutch Central Bank (DNB), which was added as an annex.

The Dutch case study was written by two central bank officials and was explicitly meant to downplay the size and riskiness of Dutch shadow banking. The authors admitted that there were at least 14,000 shell companies operational in the Netherlands, but noted that most were owned by multinational corporations and were used for what was euphemistically called ‘tax management’ purposes. Moreover, while these shell companies were formally not regulated by the Dutch Central Bank, they were subject to ‘consolidated supervision abroad if they are part of financial groups’, according to the study. Finally, the authors claimed that the ten largest companies, capturing almost 95 per cent of assets, reported detailed annual balance sheets as well as monthly transaction flows to the Dutch Central Bank, albeit on a voluntary basis. Hence, the conclusion that ‘the majority of SFIs do not fall under the FSB definition of shadow banking’ (p. 11) and those that do are either supervised by the central bank (‘securitization vehicles’) or are subject to annual and even monthly reporting requirements (‘funding vehicles’).

Although the Dutch press by and large missed the report and its annex, they did take up the longer version that the Dutch Central Bank published nine days later on its website under the tagline: ‘Shadow banking less substantial than assumed’ (my translation). Using the same data, its message was similar albeit phrased in more explicit language: the excessive size of Dutch shadow banking was primarily due to its role as an international tax transfer hub. The report, which was penned by the same authors that were responsible for the annex, started with a summary of the literature on shadow banking, gave a brief overview of the mapping exercise of the Financial Stability Board (pp. 11–22), then embarked on a more detailed deconstruction of the aggregate Dutch figures (pp. 23–35) and concluded with an overview of the policy measures (pp. 36–42), followed by some annexes (pp. 43–9) (DNB, 2012). It is the detailed deconstruction that is most interesting, for it is there that the nascent rhetorical strategy to deflect the concerns over Dutch shadow banking was first developed.

While acknowledging that, according to the broad metrics employed by the Financial Stability Board, shadow banking in the Netherlands was large, the report stressed that these metrics were ‘crude’ and should be taken as gross initial estimates, not as accurate measures of its true size, let alone of its risks for Dutch (not global!) financial stability. Using a functionalist definition of shadow banking (do the entities at stake conduct bank-like services, i.e. credit intermediation, maturity transformation [borrowing short term, lending long term], risk transformation [buying high-risk assets, selling low-risk assets], liquidity transformation [buying illiquid assets, selling liquid assets]?), the authors identified five types of entities that had shadow bank-like properties, i.e. financial shell companies, securitization vehicles, financing vehicles, money market funds and hedge funds.

On the basis of that typology, the authors concluded that only one-quarter of what was identified by the Financial Stability Board as shadow banking was actually involved in bank-like activities. With a total balance sheet of €988 billion, this was still substantial (1.7 times GDP), but not nearly as alarming as the earlier estimate of €3000 billion (five times GDP). As a result, the Netherlands could be deleted from two of the alarming lists drawn up by the Financial Stability Board: it was no longer a jurisdiction where shadow banking was larger than regular banking (four times GDP), and it was no longer a jurisdiction with an oversized shadow banking sector to the tune of five to six times GDP, as were Hong Kong, the UK, Singapore and Switzerland.

In fact, by far the largest category of financial shell companies or ‘special financial institutes’ consisted of holdings and/or financing corporations that were fully owned by foreign multinational corporations, resulting in the oxymoron of ‘non-financial special financial institutes’ (emphasis added), although the authors were completely oblivious to the paradoxical nature of that denotation. According to the authors, these legal entities were mainly established in the Netherlands because of its extensive network of bilateral tax and investment treaties as well as its ‘well-developed financial infrastructure’ (p. 29). It was the continuing growth of these non-financial SFIs that largely accounted for the growth of Dutch shadow banking. The report concluded that almost three-quarters of ‘special financial institutes’ were linked to non-financial multinationals and were hence ‘almost by definition wrongly included in shadow banking’ by the Financial Stability Board (p. 33, emphasis added).

What had in the meantime caught the attention of the international regulatory community was the extent to which shadow banking, interbank funding and tax avoidance overlapped. The arbitrage infrastructure provided by offshore financial centres appeared to serve multiple functions. It was no coincidence that places like Ireland, Luxembourg, the City of London, Singapore, Hong Kong and the Netherlands popped up both in reports of the Financial Stability Board on shadow banking and in the reports that the Paris-based Organization for Economic Cooperation and Development was drawing up on aggressive tax planning (see OECD, 2013). As a result, the Dutch elites linked to this infrastructure (bankers, accountants, tax advisers, lawyers, owners and employees of trust firms, politicians, high-ranking civil servants in the Ministry of Finance, as well as public and private think tanks) suddenly faced the disconcerting prospect of coming under international regulatory pressure from two sides.

Traditionally the Secretary of State for Fiscal Affairs of the Dutch Ministry of Finance serves as the public guardian and official representative of the Dutch ‘transfer haven’ industry, no matter his or her political affiliation. The tried and trusted tactic was to use information asymmetries to accuse NGOs and other critics of scaremongering while insiders (especially tax advisers from EY, KPMG, PwC and Deloitte, who generate 25 to 36% of the turnover of the ‘Big Four’ in the Netherlands) have easy access to officials from the Ministry of Finance and serve regularly as ‘experts’ on official, tax-related committees (see Oxfam/Novib, 2016: 22ff.), using every opportunity to set the record ‘straight’: through commissioned and non-commissioned reports, media appearances, lectures, privately-funded ‘professorships’, participation in public panels and debates, and op-ed pieces in Dutch newspapers (in most cases signed off as professor in tax law, not as partner of one of the ‘Big Four’).

In the post-crisis era of austerity-induced recession, this tactic failed to work. The political willingness to stomach aggressive corporate tax avoidance while having to shoulder the full fiscal burden of rescuing banks quickly faded, resulting in a notable rise in the political salience of corporate tax issues, both nationally and internationally (see the 2014–16 media storms over #taxleaks, #luxleaks, #swissleaks and most recently #panamapapers, unleashed by the International Consortium of Investigative Journalism). Hence, when the announcement of the Financial Stability Board in 2012 to clamp down on certain parts of shadow banking coincided with a similarly G20-mandated clampdown on tax avoidance, it became obvious to the Dutch elite that a change of tactics was needed.

In comes Holland Financial Centre, a public-private partnership set up in 2007 on behalf of a traumatized Dutch banking elite, which had just witnessed the dramatic takeover of ABN AMRO (the largest, most global and most venerable Dutch banking group), to further the ambitions of the Netherlands to build ‘a world class international financial platform’, as its website stated, and partly bankrolled by Dutch taxpayers through the involvement of the Ministry of Finance and the municipality of Amsterdam. In July 2012, Holland Financial Centre commissioned a for-profit economic think tank, the Economic Research Foundation, loosely affiliated to the University of Amsterdam, to investigate the Dutch trust industry, its functions, its relationship with shadow banking as well as its costs and benefits, both for Dutch taxpayers and for developing economies. The investigation would be fully supported by the trust industry itself, the municipality of Amsterdam and the Dutch Central Bank, and would be coordinated by the Ministry of Finance.

According to the Secretary of State for Fiscal Affairs, it was meant to finally put public debate on a ‘fact-based footing’ and end ‘misinformed’ political bickering. In other words, this study was to have the final authoritative say in a public debate marred by strong opinions and little fact – thus the Secretary of State. Academically-trained economists would take over where claims-making by self-interested insiders was perceived as biased and unreliable by an increasingly suspicious electorate. When the widely anticipated report was finally published in July 2013, its main conclusions were that tax avoidance provided the Dutch economy with more benefits than expected, caused less damage to developing economies than feared, and generated less risk in Dutch shadow banking than anticipated. Like the earlier report of the Dutch Central Bank, the Foundation for Economic Research downplayed the size of Dutch shadow banking, especially compared to the monitoring exercises of the Financial Stability Board. While the report did identify some systemic risks flowing from increased complexity and lack of transparency, it concluded that those risks were concentrated in only a small part (9%) of Dutch shadow banking (financing corporations such as Lehman Brothers Treasury BV) and that the remainder was relatively safe and hence did not warrant further regulation (2013: 26).

The report also stressed that, despite the moniker ‘shadow’, there was actually extensive indirect regulation, although most of it came in the form of ‘reporting duties’. A paragraph further down, the report noted that there were good reasons for ‘light touch’ regulation in this specific area, since shadow banks do not service retail customers falling under an explicit guarantee scheme (p. 40) – thereby suggesting that regulation was only required if Dutch taxpayer money was at stake and demonstrating a stunning lack of concern for global systemic risk issues. That the head and tail of the credit intermediation chains which passed through the Dutch transfer haven were located outside the Dutch jurisdiction was apparently sufficient to proclaim that there were no risks at all.

Even more striking was the fact that the report gave a much more positive spin to the functionalities of shadow banking than either the Dutch Central Bank or the Financial Stability Board had until then dared to do, as was already indicated by the title of the report: ‘Out of the Shadow of Banking’. This played both on the political role the report was supposed to play – depoliticizing the issue by throwing light on what was hidden and hence frightening, to show that there was nothing to be frightened of – and on the presumed role of credit intermediation by non-banks to complement the credit channel of licensed banks. ‘Out of the Shadow of Banking’ hints at the need to further develop something that is misperceived as ‘shadowy’ and risky into a mature, self-standing credit intermediation channel. As the report states:

One misconception is that shadow banking is about regulatory arbitrage. Such a perspective fails to perceive the functions that shadow banking fulfils. Securitisation is one. Providing alternative funding sources to help banks overcome the constraints of their funding gaps is another. This ensures more competition, lower prices for capital and hence more efficient credit intermediation markets. A further benefit of shadow banking is its contribution to more effective risk management. (SEO, 2013: 11–12, emphasis added)

Since then, any incipient contestation over shadow banking has petered out everywhere. The scarce Dutch media reports on shadow banking failed to gain any political traction, while the launch in the fall of 2014 of a so-called Capital Markets Union by the European Commssion to develop a European carbon copy of the American non-bank financial ecosystem suggests that European regulators have by and large adopted Carney’s clever reframing of ‘shadow banking’ as ‘sustainable market-based finance’ (EC, 2015; Engelen and Glasmacher, 2016). Eight years after the crisis, shadow banking has mutated into the solution par excellence for a broken bank-based credit intermediation system, while its problematic, after a brief stint in the public limelight, has again moved to the seminar rooms and conference chambers of the global regulatory technocracy and its economically trained aides.

It is in large part the effect of the recognition by central banks and financial regulators that the idealized distinction between bank-dominated Europe and the market-dominated US no longer holds after the rise of ‘market-based banking’, which denotes a financial ecosystem of mutually dependent banks and shadow non-banks (Hardie et al., 2013). The subsequent discursive shift to ‘market-based finance’ followed almost organically, and gradually travelled from the US (Adrian and Shin, 2009) to the UK (Carney, 2014) and on to Basel, where the last FSB report on shadow banking was presented under the title: ‘Progress Report on Transforming Shadow Banking into Resilient Market-Based Financing’ (FSB, 2014).

Power, Stories, Interests

The puzzle here is strong incentives for political action producing inaction. To put it differently, why was the response to such a large, costly and discrediting event like the Great Financial Crisis so timid? Any answer will have to start with a distinction between preferences and interests. As Lukes (2005) has shown, without such a distinction it becomes impossible to conceptualize the exercise of elite power through manipulation and other discursive means. The ability to produce political inaction hinges crucially on unequally distributed discursive power resources which allow elites to manipulate citizens into believing that elite interests serve their preferences (Foucault, 1971; Hall, 1982).

It is in the interstices between preferences and interests that the burgeoning literature on ‘framing’ (Lakoff and Jonson, 1980; Lakoff, 2014 [2004]), ‘the manufacturing of consent’ (Burawoy, 1979; Herman and Chomsky, 1988), ‘the politics of misinformation’ (Edelman, 1967, 1977, 2001), ‘agnotology’ or the intentional production of ignorance (Proctor and Schiebinger, 2008; Oreskes and Conway, 2010; Slater, 2014) and ‘political (non) decision making through storytelling’ (Engelen et al., 2011; Froud et al., 2012) is situated. The ability to suppress or deflect the political articulation of some interests depends crucially on elite capabilities to tell convincing (or distracting or confusing) stories. And what is perceived as convincing does not so much depend on the ‘truth value’ of these stories as on their ability to tap into preconceived ideas or claim academic authority.

This is clearly in evidence here. Take the caption with which the 2012 Central Bank Report was presented on its website: ‘Shadow Banking Less Substantial than Assumed’. This is a textbook example of a so-called ‘litote’, a figure of speech which negates its opposite (‘substantial’) to suggest the reverse, i.e. that Dutch shadow banking is negligible and that those who claim otherwise, for instance the Financial Stability Board, are misinformed. Or take the rider ‘almost’ before the claim that the ‘tax management’ stratagems of multinationals fall outside the definition of ‘shadow banking’: ‘almost by definition’, so not fully, completely or really? Which causal relationship is being obscured here?

Similar rhetorical techniques were used to qualify the ‘shadowy’ nature and riskiness of Dutch shadow banking. Both reports claimed that ‘shadow banking’ was a misnomer, for most entities were at least ‘indirectly’ regulated, and even the unsupervised parts provided ‘voluntary’ data on an annual and even monthly basis. Moreover, the responsibility for dealing with these risks lay outside the remit of the Dutch regulator and was hence the responsibility of others.

The same is true for what is the main trope of the two reports, namely that the excessive nature of ‘Dutch’ shadow banking is not caused by ‘shadow banking’ per se but by tax planning, and that there is thus no reason for concern. This borders on the malign. In financialized capitalism the distinction between financial and non-financial firms is semantic at best, as Krippner and others have shown (Krippner, 2005, 2012; Epstein and Jayadev, 2005). For non-financial firms, playing financial markets has become almost as important a source of profit as it has been for banks and other financial firms. Moreover, the cash pools kept outside home jurisdictions for tax purposes by multinational firms such as Apple, Starbucks, Google, GlaxoSmithKline and others, and which have now reached levels of $1.7 trillion for US firms, have – as has been documented by researchers from the IMF (Poszar, 2011) – increasingly served as liquidity providers to the shadow banking system, and have predominantly been able to do so through the Dutch ‘transfer haven’, which accounts for 17 per cent of the offshore annual profits of US multinationals (Zucman, 2015).

Claiming that Dutch shadow banking is not shadow banking per se but rather the harmless management of offshore cash pools is either a token of ignorance – extremely worrying in the case of a supervisor – or of ‘agnotology’, i.e. the intentional production of ignorance, with the Dutch Central Bank in the role of ‘merchant of doubt’. Here ‘storytelling’ joins the ‘white coat’ effect of professionally-trained economists using their academic prestige to sow doubt over the pernicious nature of shadow banking – just as tobacco firms such as Philip Morris and RJR Nabisco used ‘science’ to contest the causal link between smoking and lung cancer (Proctor, 1995).

That aim was even more obvious in the case of the report that was commissioned by Holland Financial Centre. It explicitly claims that shadow banking furthers financial innovation and perfects still imperfect financial markets. As such, it reproduces the pre-crisis tenets of mainstream finance with its almost religiously held belief in the benevolence of markets (Nelson, 2001; Sedlacek, 2011). This is unsurprising, given the professional profile of the think tank that authored the report. Established in 1949, the Foundation for Economic Research started out as an economic policy research unit in the progressive tradition of Dutch econometrics established by Nobel prize-winner Jan Tinbergen. Its list of directors reads as a family tree of the great and the good in Dutch economics, which is tight knit, technocratic and mainstream in orientation (Klamer and Van Dalen, 1996; Van Dalen et al., 2015).

Since its ‘privatization’ in the early 1980s, the foundation has become a quasi-independent for-profit organization with extra-academic employment contracts, doing applied economic research for a growing range of public and private agents. This resulted in a gradual drift away from its earlier, progressive roots. Instead it adopted the neoconservative, neoliberal paradigm of public choice theory, with its sharp distinction between state and market, its use of market allocation as the theoretical zero-point of any analysis and its assumption that states only have a role to play in the case of ‘market failures’. Under its last four directors, it became one of the loudest cheerleaders for neoliberalism, as a recent reconstruction by the Dutch Scientific Council for Government Policy (WRR) of the privatization programmes of the 1990s in the Netherlands has indicated (WRR, 2012).

Recently, the political scientists Carstensen and Schmidt have minted a threefold analytical distinction between ‘power through ideas’, ‘power over ideas’ and ‘power in ideas’ which overlaps with the common-sensical distinction between persuasion (‘power through ideas’), manipulation (‘power over ideas’) and socialization (‘power in ideas’) (Carstensen and Schmidt, 2015). The relevant point here is that in many policy domains, especially complicated and highly technical ones such as banking and financial market regulation, the opportunity for elites to pretend to play the game of persuasion while actually playing the manipulation game is rife. First, because information asymmetries between insiders and outsiders mean that the chances to be found out are minimal. The audience frontstage simply has no access to the backstage. ¹ Second, because most knowledgeable outsiders (academic economists) have been coopted through lucrative private and public sector commissions and other perks. This implies that elite narratives in these domains serve to make insiders sing from the same hymn book and can do so with only minimal references to common goods or public interests. ²

Of course, the distinction between consent caused by socialization and consent manufactured by manipulation also implies a distinction between preferences and interests – a distinction, moreover, which should be empirically observable, if only by the absence of political contestation despite visible grievances. In this particular case it is not hard to identify the true interests of Dutch citizens: a safe, less complex, smaller banking system which contrasts sharply with the large, complicated, highly-leveraged banking system from before the crisis, which Dutch taxpayers were forced to bail out to the tune of €130 billion, equivalent to a quarter of GDP, and was directly responsible for historically unprecedented austerity measures to the tune of €52 billion. The absence of political contestation over shadow banking can hence reasonably not be ascribed to willing consent but suggests domination by manipulation. Nor is it difficult to identify the interests of the Dutch financial elite: a return to the highly profitable (for insiders) business as usual pre-crisis as quickly as possible with as little onerous regulation as possible. Clearly, the reports at stake here provide a storyline that serves the interests of financial elites and goes against those of citizens. First, by throwing doubt on worries voiced by foreign actors (e.g. the Financial Stability Board) and, second, by reframing ‘shadow banking’ as ‘non-bank finance’.

The ‘smoking gun’ is the ‘Out of the Shadow of Banking’ report. ³ The first thing to note is that this was the third report in a row on tax avoidance authored by the Foundation of Economic Research. The earlier two had been commissioned by the trust industry itself which, as manager of the 14,000 shell companies the Netherlands houses, stands to lose most from any restrictions on the highly profitable Dutch ‘transfer haven’, with its concentrated benefits (approximately €3 billion annually or 0.5% of Dutch GDP) and diffuse costs (€5.4 billion in forgone taxes for other jurisdictions; Oxfam/Novib, 2013; SEO, 2008, 2011a). The earlier reports were meant to help the trust industry to make an ‘objective’ case for political protection because of its substantial contribution to Dutch GDP and employment. In their wake, its main author and then-director has given numerous presentations (to journalists, government agents, Members of Parliament, policy makers, industry insiders) in which the economic benefits of tax management for the Netherlands are stressed (and the costs are downplayed), even advising the trust industry ‘to be good and tell it’, with ‘good’ referring to abstaining from money laundering and terrorism financing (SEO, 2011b).

Unsurprisingly, the fingerprints of the financial elite (banks, law firms, tax advisers, accountants, trust industry) are all over its pages. The investigation was conducted under the responsibility of a so-called sounding board. Of its 14 members one came from the banking industry (Rabobank), one from the Dutch Ministry of Finance, two from Holland Financial Centre, two from commercial law firms, two from the trust industry, while no less than five were partners of accountancy firms (PwC, KPMG) specializing in tax management. Some of these doubled as chairs of sectoral interest organizations such as the National Council of Tax Advisers and Holland Questor, the national representative of Dutch trust firms.

The dominance of sectoral interests comes even more starkly to the fore in the list of interviewees (SEO, 2013: 31–2). More than half (18 out of 34) came from the financial elite: banks (4), accountants (4), trust offices (5) and law firms (5); 12 were high-ranking civil servants, of which seven worked for the Central Bank, the rest for the Ministry of Finance, while only three represented NGOs known to be critical of shadow banking and tax avoidance. Three interviewees were picked from the sounding board (the two fiscal specialists and one trust official who doubled as sectoral interest representatives), granting them two channels of influence. The remainder represented Tommy Hilfiger, one of the few examples of a multinational that started out as a shell company to become a full-fledged subsidiary, to demonstrate the ‘hatching’-effect of the Dutch trust industry – another legitimating story constructed by economists serving as ‘organic intellectuals’ for the Dutch ‘transfer haven’.

It indicates an organized, well-coordinated attempt by identifiable parts of the Dutch financial elite to construct a cross-sectional coalition behind a technocratic tale (‘shadow banking is non-bank finance’) that is served up as argumentative persuasion (‘sustainable growth and jobs’) while it is in fact about discursive domination (i.e. concealing risk, leverage, complexity and excessive profits for insiders). The audience here was not so much the demos of classic democratic theory but rather domestic and foreign members of the very same regulatory community. Hence the absence of any post-democratic ‘spectacle’ in parliament or the media.

While the attempt ultimately proved superfluous due to the reframing of shadow banking in non-bank finance in New York, London and Basel by the global regulatory elite, the episode illustrates the importance of storytelling, the strong network linkages between financial elites, academic economists, the Central Bank and the Ministry of Finance in the Netherlands, as well as the gullibility of the Dutch business press. ⁴ Not a single Dutch journalist publicly raised doubts about the ‘objectivity’ of the SEO report in the light of the composition of its sounding board, its list of interviewees and its history of backing the trust industry. They remained silent, looked the other way, or mindlessly repeated the elite frame.

Lessons for Elite Theory

What lessons can be drawn from this case study? At the surface, it simply confirms what we already know from similar case studies conducted in the US (Johnson and Kwak, 2010), the UK (Moran, 1991; Froud et al., 2012) and the EU (Engelen et al., 2011): elites manipulate electoral preferences by telling quasi-academic stories and making superficial references to public goods while actually serving private interests in maintaining a pre-crisis status quo that allowed them to claim an excessive share of social resources.

In itself, this is a welcome contribution to the literature, which allows us, despite obvious confirmation biases, to redraw the boundaries of our population and suggest again that the current conjuncture requires social scientists to dust off earlier elite theories of the likes of Robert Michels (1911), Vilfredo Pareto (1935 [1916]), Gaetano Mosca (1933) and C. Wright Mills (1956), as Savage and Williams already called for in 2008 (see also the Introduction to this special issue). Nevertheless, I do feel that the case has more to offer to elite theory than merely extending its scope conditions. In particular, it highlights the need to take temporality seriously, as is suggested by the two epigraphs adorning this paper.

The Mosca quote talks about how, under conditions of mass democracy (‘populous societies that have attained a certain level of civilization’), power bases are never self-evident but are always in need of legitimation. The ‘political formulas’ Mosca talks about provide precisely such legitimation in the form of an appeal to a set of widely accepted norms and principles. The Crouch quote, on the other hand, defines the post-democratic condition as one where high political references to these norms frontstage have been turned into mere ‘spectacle’ because globalization, offshoring and financialization have created a technocratic world backstage which benefits the few and harms the many.

While both quotes hint at an epochal reading – from an age of mass democracy to an age of post-democracy – I want to use the case presented here to propose a more conjunctural reading instead. The domain of finance and banking seems to have shifted in rapid succession from a working ‘political formula’ to a broken one, with the frantic attempts by national and international elites to repair it using the discursive power of elite ‘domination-through-manipulation’ post-crisis being the subject of the paper.

Under conditions of mass financialization, where households are increasingly dependent on financial markets for their assets (pensions, real estate) as well as their liabilities (mortgage debt, student loans), debt governs mass politics, to play on Lazzarato’s book title (2015 [2013]): ‘financialization simply is the universalization of indebted man’. Before the crisis the story of ever more perfect financial markets delivering prosperity to the many (albeit more to the few) was by and large true. This is the point of ‘privatized Keynesianism’ (Crouch, 2009) or debt-driven growth models (Stockhammer and Wildauer, 2015). Pre-crisis, financial interests and electoral preferences were more or less aligned. Both favored easy and generous credit: bankers to generate the raw material for their securitization machines that paid for their profits and bonuses; the average voter to feed ever more liquidity into housing markets to perpetuate the housing bubble s/he was riding. Once the crisis broke, the dream turned into a nightmare. The need to use taxpayers’ money to bail out insolvent banks revealed that the interests of citizens-as-debtors are, at root, at odds with those of the financial elite-as-creditors, as the phrase ‘privatizing gains, socializing losses’ nicely captures.

Nine years after the crisis it is unsurprising that easy credit is again the preferred elite solution to the macroeconomic problems caused by the debt overhang from the previous housing cycle. Quantitative easing, subsidies for first time home buyers, tax deductions for parents buying student lofts for their children, together with attempts under the so-called Capital Markets Union to resuscitate securitization markets in Europe to steer funding again to mortgage markets (see Engelen and Glasmacher, 2016) have stopped the fall of house prices and have set in motion a new housing cycle which feeds economic recovery in the UK and the Netherlands. What has changed is the storyline: backstage it is about calibrating risk measures and capital ratios based on the ideological presumption that there was nothing intrinsically wrong with finance pre-crisis and that it is all a matter of technocratically preventing excesses, while frontstage it is about ‘sustainable growth and jobs’, knowing full well that voters don’t care as long as their real estate ‘produces’ equity.

This suggests that the need for elite storytelling is not constant over time but is subject to conjunctures. What is self-evident in the upswing may become highly contested and in need of intelligent design during the downswing. What can be left to the cold politics of ‘output legitimacy’ (Scharpf, 1999) and the perpetuum mobile of There-Is-No-Alternative (TINA) to globalization/financialization/off-shoring when everything goes according to plan, is desperately in need of elite intervention in times of crisis. That is what this case study shows: the manoeuvring of domestic and supranational elites in times of crisis to construct a new ‘political formula’ that may then initiate a next phase of politics on autopilot, relying on mere output legitimacy. Until the next crisis breaks, of course. And especially in the domain of finance, which under conditions of financialized capitalism encapsulates an increasing slice of the social fabric (Lapavitsas, 2014).

Does this imply conspiracy? Ascribing harmful intentions to elites immediately seems to suggest as much. However, the interests ascribed here to the Dutch financial elite do not imply a blueprint for a total makeover of society in the manner of the strategic capacities sometimes ascribed to the Bilderberg group (Richardson et al., 2011) or the Mont Pèlerin Society (Mirowski and Plehwe, 2009). What it does imply is that elites have a strong incentive to reproduce their positions over time, through whatever means available. Here, this means that they will defend their privileged positions linked to business models that have increasingly become contested after the crisis. While this is done intentionally, implying foresight and a modicum of rationality, it does not automatically presume the level of knowledge and long-term planning capacity that is typical of conspiracy theories.

Elsewhere we have distinguished between rationality and bricolage, the latter referring to a mode of action that is opportunistic, short-term oriented and only partially cognitive (Engelen et al., 2010). Although in this case there were bankers involved in financial innovation, it fits the wider case of elites involved in story construction just as well. For here too it is about a new assemblage of existing practices (shadow banking, securitization, tax avoidance) with new/old/radicalized storylines as add-ons – this time, not of perfecting still imperfect markets, as was the case pre-crisis, but of ‘sustainable growth and jobs’, helping small-and-medium-sized enterprises and funding the real economy. Moreover, this is not about a ‘great transformation’ (Blyth, 2002) but about preventing one, which arguably requires much less strategic capacity. So no conspiracy. But it remains a case of intentional elite manipulation and coordination, as can be deduced from the striking similarities of the soundbites on shadow banking as market-based finance. They come from the same hymn book.