Sabotage: The Business of Finance

by Anastasia Nesvetailova, Ronen Palan

Financial malpractice, we're told, is an the actions of a few bad apples deviating from the norms of a market-governed process and gaming the system. In Sabotage, political scientists Anastasia Nesvetailova and Ronen Palan blow this fiction apart, showing that sabotage is not an anomaly, but part of the business model of finance - and always has been.Abusive lending practices, misleading investors, manipulating prices, deliberately falsifying figures, cheating, obstruction and taking advantage of 'the dumbest person in the room' - they're actually the main source of profitability in finance, and the surest way to a bonus. If you want to make money in the industry, you need to find ways of sabotaging either your clients, your competitors or the government (or all three), and above all, the market itself. Talking to industry insiders, economists and high net worth customers, examining the history of finance and its workings today, the authors show us how the idea of sabotage not only makes sense of all past economic crises, but must also be at the heart of all future regulations.

Genres: Economics, Nonfiction, Finance, Politics, Business

219 pages, Kindle Edition

First published January 28, 2020

Reviews

[Marc · Rating 1 out of 5]

Truly disappointing. The authors take a very simple idea (perfectly competitive markets don't allow large profits, the finance industry enjoys large profits, therefore the finance industry is not perfectly competitive) and spin it out to book length by way of anecdote after anecdote, none of which tell you anything you couldn't grasp from a cursory reading of the FT over the last decade.

There's no real economic theory here, beyond quoting Veblen a couple of times, very little in terms of citations when they get into economic prehistory and no real insight either. It's more a case of renaming existing concepts than showing new insights. In fact, there are times when the authors make claims that are so staggeringly wrong that they suggest they aren't familiar with the material about which they are writing (e.g. there is no evidence that banks are better capitalised than they were in 2007, or that economists don't believe in the concept of equilibrium in a market with imperfect competition). I'm surprised their publisher, who are responsible for a number of really good economics books let that sort of thing slide.

If you want to know about the systemic failures of finance in the GFC read Crashed by Adam Tooze. If you want to know about scams read Lying for Money by Dan Davies. This was sold as something of a cross of the two and it's really not half as good as either.

[Buikpijn · Rating 2 out of 5]

Dit boek legt het heel goed uit hoe alle complexe financiële instrumenten en crisis werkt. Helaas vind ik dat de concept sabotage wat "shallow" is. Ik heb wat meer diepte verwacht. Sabotage vind ik nog niet goed genoeg uitleg om te verklaren waarom zulke complexe financiële instrument en crisis bestaan.

[Brian · Rating 3 out of 5]

Veblen doesn't get enough credit or recognition as an important economist these days, and I appreciate the revival of one of his key hypotheses. Simply put, major businesses are able to make profits through controlling markets, rather than competing in them. They control markets through a variety of means to sabotage the competitive functioning fo the market. The authors revive Veblen's 1919 hypothesis and test it against the 2007-9 financial crisis.

The model fits. The financial sector makes profits by betting against its customers, both large and small. They show that conflicts of interest are a major source of banks' profitability. Mergers and acquisitions do little to increase efficiency, but are able to give the institutions monopoly power, stifle competition, and gain political influence. The banks are highly leveraged through various financial instruments, many of which increase financial risk rather than reduce it. By becoming "too big to fail" they are able to shift risks to their customers and the government, while pocketing considerable profits. Investment vehicles have become increasingly opaque and complex. Finally, the globalization of finance has become a way to dodge regulations and evade taxes, blunting any governmental action to regulate or tax the institutions.

I appreciated how they made the case. However, there are a few holes. One is that their analysis did not take into account the barriers to entry in the financial sector. Theoretically, anyone with a computer, a phone, and a desk can start a finance company. That's not the case. One of the ironies is that governmental regulations are themselves anti-competitive. Does that mean to do away with Sarbanes-Oxley and other efforts to address the issue? No, it means that the regulatory regime is not able to deal with the complexity and changing technology. Similarly, the section on cybercurrency is lacking. Finally, they should have read and cited John Kenneth Galbraith's /The Great Crash/, which was a masterpiece that explored the same question for the 1929 stock market crash and ensuing Great Depression.

[Ian Fraser · Rating 5 out of 5]

Anastasia Nesvetailova and Ronen Palan's ‘Sabotage’ is an astonishing indictment of a global finance sector that’s effectively gone rogue. The authors claim that at least half of what banks and other finance firms do is socially useless if not actively destructive. They say most financial firms are dependent for up to half of their profits on four types of sabotage – the sabotage of clients, the sabotage of competitors, the sabotage of government, and sabotage of the market itself. Many who work in the world of finance will say they “don’t recognise” such claims, but Nesvetailova and Palan make a well-evidenced case that such thinking is baked into the business models of most banks.

The book opens by outlining the ideas of Norwegian-American economist, Thorstein Veblen (1857-1929). Veblen, famous for coining the phrase “conspicuous consumption”, was among the first academics to expose, and try to explain, malpractice in the worlds of business and finance. Writing in the run up to the Wall Street Crash of 1929, he revealed that US businesses were using “obstruction, friction, lying, impairing and even the use of force” in order to maximise profits, with little regard for who got trampled in the process. The authors conclude that the primary reason today’s banks are able to consistently churn out turbocharged profits is because they have become so adept at replicating such behaviour, including taking advantage of the ‘dumbest person in the room’.”

Overall 'Sabotage' lifts the lid on some shocking, systematic abuses, of which every user of financial services needs to be aware. It ought to be required reading for every civil servant, regulator and politician in the UK and elsewhere, especially when you consider that, bamboozled by Hayekian thinking and duped by the banks’ perfidious lobbying, so many of them are on a mission to stick up for bankers.

[Molly Parsons-O'Connor · Rating 3 out of 5]

This book was an interesting read for me because I know very little about financial services. However, I saw this book described as 'required reading for every civil servant, regulator and politician in the UK and elsewhere' and decided it was high time I educated my self. The book starts with a simple enough premise; since perfectly competitive markets don't allow large profits and the finance industry enjoys large profits, the finance industry must not be a perfectly competitive market. Nesvetailova and Palan believe that the reason for this is that in finance, the biggest profits come from taking advantage of or sabotaging someone else, be they a customer, a fellow financial institution or a government. This book was very heavy on anecdote (the point that some people who worked in banks did very bad things indeed had been made sufficiently emphatically by chapter 3). However, I found the section on the future of regulation very interesting. They posit that in order to prevent large-scale economic crises going forward, the prevention of sabotage must be at the heart of the future regulatory agenda and present the recommendations of the 1932 Precora Commission as a starting point. While I definitely wouldn't say this is a light read, I did find it very interesting and reasonably straightforward to understand even for someone who didn't know much about this area prior to starting the book.

[John Poole · Rating 5 out of 5]

Sabotage does a good job of unpacking some complex ideas. While you might be able to find these hidden within economic theory, it combines a decent overview of market control and its implications with short anecdotes and stories to back it up. It's not an academic book - you won't pour through it for complex tables on economic theory - but it is a big that explains it main point very well: all the theory and systems in the world don't stand up to human behaviour and when it comes down to it, it's the money and control that matters.

[Alex N. · Rating 4 out of 5]

A very competent book that gives a good overview of different sabotages techniques used in finance, eventually building to drawing to systemic understanding of the problem. The Crypto section is sadly quite out of date, through no fault of the authors, but their conclusions hold true for this sector as well. I would have liked a little more agrumentation of their policy propositions, but this is not really the aim of the book either way.

[Frank Ashe · Rating 4 out of 5]

Sabotage (in its broadest meaning) is examined as a fundamental tool of the finance industry to ensure it can make extraordinary profits.
Don't look at the fine words, just look at what the industry does.

Thoroughly enjoyable, and easy reading.

[David Knorr · Rating 5 out of 5]

Good examples of how firms avoid competition to preserve their profit margins at the expense of each other, their customers, and the government.

Not too long-winded of a read made it a very approachable read.

[Vasil Kolev · Rating 3 out of 5]

This could've been a lot better and more detailed. It lacks depth, and the blockchain/cryptocurrency chapter makes this very obvious. It reads a lot more like a bunch of sensational journalistic writings, not like a proper research.

Still it manages to get its point through and to give enough evidence for it.

[Pedro L. Fragoso · Rating 5 out of 5]

The financial business reality so eloquently addressed in this book is as repulsive as it gets. I read the book in a constant state of outrage and revulsion. It is an extremely important piece of rational and intellectual reasoning.

"With the growing sophistication of the financial system, regulators increasingly adopted the notion that the ‘financial system’ could remedy its own problems. Self-interested financial actors would balance each other and ensure that the ‘market’ would root out unsavoury behaviour. Financial institutions, keen to maintain credibility and market reputation, would navigate the risks prudently. It became fashionable to believe that egotism and self-interest will ensure an optimal playing field. Financial innovation has been celebrated in the name of democratizing finance, expanding credit and improving the techniques of mediating between capital markets and borrowers.

The real scandal of the costs of deregulated finance is not that it unravelled amid the financial fiasco of 2007–9. It is that its origins had been uncovered and dealt with back in the 1930s, practically to the last detail. Then, during the two decades that led up to the repeal of the Glass–Steagall Act in 1999 and certainly during the decade that followed, sabotage in finance ceased to be a regulatory concern. The behaviour itself, however, did not go away. How could it? How else, asks our friend the ex-Goldman trader, could you make money in this business?"

Reflect on this, if you will, knowing that both Dimon and Blankfein have become billionaires on the wake of the GFC of 2008: "In the free, transparent and competitive market, superprofits are unattainable. Businesses will do whatever is necessary to isolate themselves from the workings of the free market and competition, employing a variety of strategies and tools to sabotage and control the market. In the business of finance, these strategies work through sabotage of clients, competitors and the state."

In the end, the professors try to impart a measure of optimism, but it doesn't work. Time's due for the pitchforks, probably...

[Juliane · Rating 2 out of 5]

interesting argument based on provocative idea by economist Thorstein Veblen, but ultimatley remained too anecdotal for me, it needed more depth - perhaps sole focus on chapter 12 (crypto/fintech) or chapter 13 (updating Precora's 1934 report) might have worked better