UK Economists Rally Behind Cayman Islands

by Phillip Morton, Investors Offshore.com

22 June 2009

‘Don’t blame the Cayman Islands for the financial crisis’ is the resounding message within a comprehensive analysis of the current economic crisis by the London based Institute of Economic Affairs, in a letter signed by leading UK economists.

Placing the blame squarely on the shoulders of world governments and central bankers, the IEA experts urged that: “No significant changes are needed to the regulatory environment surrounding hedge funds, short selling, offshore banks, private equity or tax havens.”

The letter states:

“The prevailing view amongst the commentariat (reflected in the recent deliberations of the G20) that the financial crash of 2008 was caused by market failure is both wrong and dangerous. Government failure had a leading role in creating the conditions that led to the crash.”

The letter instead underlines the economists’ prevailing consensus that instead the financial crisis was caused by government policy, and urges an end to the assault on offshore and on hedge funds and private equity. Within the letter the economists underline what they believe to be the cause of the crisis:

• Central banks created a monetary bubble that fed an asset price boom and distorted the pricing of risk.
• US government policy encouraged high-risk lending through support for Fannie Mae and Freddie Mac (which had explicit government targets of providing over 50% of mortgage finance to poor households) and through the Community Reinvestment Act and related regulations.
• Regulators and central bankers failed to use their considerable powers to stop risks building up in the financial system and an extension of regulation will not make a future crash less likely.
• Much existing banking regulation exacerbated the crisis and reduced the effectiveness of market monitoring of banks. The FSA, in the UK, has failed in its statutory duty to "maintain market confidence".
• The tax and regulatory systems encourage complex and opaque methods of increasing gearing in the financial system.
• Financial institutions that have made mistakes have lost the majority of their value. On the other hand, regulators are being rewarded for failure by an extension of their size and powers.
• Evidence suggests that serious systemic problems have not arisen amongst unregulated institutions.

“As such, no significant changes are needed to the regulatory environment surrounding hedge funds, short-selling, offshore banks, private equity or tax havens,” underline the economists.

“A revolution in financial regulation is needed. The proposals of the G20 governments and the EU are wholly misconceived. Specific and targeted laws and regulations could restore market discipline.” According to the economists, these should include:

• Making bank depositors prior creditors. This will provide better incentives for prudent behaviour and make a call on deposit insurance funds less likely.
• Provisions to ensure an orderly winding up, recapitalisation or sale of systemic financial institutions in difficulty. Banks must be allowed to fail.
• Enhancing market disclosure by ensuring that banks report relevant information to shareholders.

This should be reinforced, the economists urge, with central bank action to ensure that:

• Proper use is made of lender-of-last-resort facilities to deal with illiquid banks.
• The growth of broad money is monitored together with the build-up of wider inflationary risks.

Anthony Travers OBE, Chairman of the Cayman Island’s Financial Services Authority concludes:

“Hopefully the message is getting through that the Cayman Islands has a full and effective network of tax transparency treaties and is a totally transparent tax regime which has co-operated fully with the UK, EU and US Governments. We are astonished at the ill-founded comparisons with the opaque regimes still made by Prime Minister Gordon Brown, Lord Wallace of Saltaire and Senator Levin. The truth of the matter is that the real reason for the unwarranted attacks on the Cayman Islands can have nothing whatsoever to do with tax evasion. The concern of those politicians and the OECD can only relate to the increasingly high levels of tax in their respective countries, especially the 50% proposal in the UK. They know that there will be a stampede of individuals and companies attempting to escape their punitive taxes.”

He concluded:

“President Obama would be better advised to focus his attention nearer to home in the Vice-President’s State, Delaware, where an office at 1209 North Orange Street, Wilmington, houses the grand total of 217,000 companies.”

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