Japan’s SoftBank: Tech Parasitism

The two Sons shake on $45bn

Masayoshi Son faced a dilemma in October: should the Japanese businessman go to an investment conference in Riyadh, Saudi Arabia? The guy running that conference had promised Son’s Vision Fund $45bn – that’s not a misprint, that’s forty-five thousand million US dollars – so not showing up would look more than a little ungrateful. He was also the Crown Prince of Saudi Arabia, next in line for the Saudi throne, and a person not known for taking lightly any lack of due respect. Yet the same guy had just been implicated in the murder and dismemberment of a journalist he did not like. While you and I would let this go as being just one of those things, the media and the political class of some powerful countries had shown themselves to be unhappy with the event. If Son attended the conference it could put his investment company SoftBank, and its Vision Fund, in an unfavourable light.

It was all so unfair. Nobody of any importance had complained about Crown Prince Mohammad bin Salman’s exploits in Yemen that were killing off a whole population! Why make a fuss about a minor journalist being disappeared in the Saudi Consulate in Istanbul? It was evidently all a matter of big power politics, and who was allowed to do what to whom and when. But the dilemma was nonetheless real for Masayoshi Son, given the risk of negative publicity for his investments in projects for the tech-wonderland future. After much consideration, he decided on a diplomatic compromise. He travelled to Riyadh to talk to the oil oligarch, but did not attend the conference itself.

Most people will not have heard of the Vision Fund, or of SoftBank, not least because both names sound like they were suggested by a bored publicist suffering business cliché indigestion on a dull afternoon. But it is worth paying them attention for the light they throw upon today’s imperialist world economy and how innovation becomes entrapped by a parasitic machine. SoftBank itself does not rank highly in the list of global corporations, with a stockmarket capitalisation of just $82bn at end-October. Yet its Vision Fund is the world’s largest ‘venture capitalist’. It specialises in investments in the technology sector and is reported to have investment funds available of nearly $100bn – of which more below.

The rising Son

In 1981, Masayoshi Son founded SoftBank in Japan, but for many years the company was almost unknown outside the country. It began as a distributor of packaged software, also getting into computer magazine publishing and running business events. By 1998, it had become big enough to have its shares listed on the First Section of the Tokyo Stock Exchange, and in 1999 it became a pure holding company aiming to expand its presence in other areas of the Internet and mobile technology sector. From the mid-1990s, SoftBank did a number of very profitable deals in Japan with US web services provider Yahoo, including one with Yahoo Japan of around $9bn which gave SoftBank 43% of the company. It also bought Vodafone’s Japanese mobile operation for $15bn in 2006 and, from the late 1990s, it began to make its first significant deals outside Japan.

SoftBank’s most successful investment has been in Alibaba of China. In 2000, SoftBank advanced a mere $20m for a 29% stake in Jack Ma’s fledgling company, plus a modest later investment. The value of this holding soared to $60bn when Alibaba went public in 2014, and is now valued at around $100bn. Other major SoftBank investments have been in 2012, when it invested $23bn in Sprint, the fourth largest mobile network operator in the US, in 2016 with the $31bn takeover of ARM Holdings, a UK-based chip designer for smartphones, and in 2017 with the $9bn or so put into the US ride-hailing company Uber for a 15% stake.

None of these have gone anywhere near as well for SoftBank as Alibaba. For example, Sprint, 83% owned by SoftBank, after losing market share and subscribers is now in the process of being rescued by a merger with T-Mobile US, owned by Deutsche Telekom. If that goes ahead, SoftBank will own 27% of the new business.

There have been many reorganisations and name changes of companies in the SoftBank group. Its portfolio of holdings has also increased dramatically in recent years, with investments ranging from a complete or near-complete takeover of another company to deals that involve SoftBank owning perhaps only 5-10% of its shares. The prices SoftBank paid for these have not always been clear, since it has often been part of a consortium of other funds that have bid for a stake in the particular venture.

Given SoftBank’s promoted image, a natural assumption is that all of its investments are in the ‘technology’ sphere. This would suggest e-commerce, mobile communications, online services and so forth. But often the investments extend into other areas that have little or no connection with these and may be just an online application to contact a service. Although the latter is a pervasive feature of the economy today, it is not so far removed from telephoning a company to make a booking, rather than being a sign of ‘hi tech’. Notable in this respect is WeWork, a US company leasing out office space in which SoftBank (and its Vision Fund arm) has already invested more than $4bn, and the $300m invested in the US-based Wag, a dog walking service! I will not mention SoftBank’s investment in a Japanese baseball team, the Fukuoka SoftBank Hawks.

Elements of this remind me of the dotcom equity market bubble of the late 1990s. One anecdote from that time was that a laundry company saw its share price soar once it had changed its name to laundry.com or something similar. SoftBank is not the laundry company, but its share price had also boomed in that market bubble, to around ¥19,000 in early 2000, but by November 2002 it had slumped to just ¥300. Happily for Mr Son and his shareholders, SoftBank’s equity price has since risen and was at around ¥9,000 by end-October. But the vulnerability of the company to changing fashions is seen in the 20% drop through that month, partly prompted by the declining fortunes of another ‘son’, Mohammad bin Salman. Such volatility is not uncommon in the markets for financial securities, but an examination of SoftBank’s accounts, and the new Vision Fund, shows that there is a lot going on behind the headlines.

No, not this robot dog, a real dog!

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Assets, debt liabilities, income

SoftBank’s annual report for the year to end-March 2018 gives the basic picture for its assets, liabilities and income that still holds today. Two features stand out. Firstly, the company’s cash revenues have derived mainly from its telecom operations in Japan and the US; secondly, it has a lot of debt.

The telecom operations have the advantage of generating an inflow of cash, with regular subscriber payments and sales of mobile phones, and in the annual 2018 report these accounted for just over 70% of net sales and over 90% of adjusted earnings before interest, tax payments, etc, for the group as a whole. This cash comes in handy for SoftBank’s appetite to invest in other companies, but most of SoftBank’s requirements are instead met by its loans from banks or its issue of bonds. This has led Softbank to accumulate an unusually high level of debt, amounting to $160.4bn by the end of March 2018.

Financial markets focus on a measure of how much interest-bearing debt that the company has outstanding and compare that to the equity investment of the company’s owners in the company itself. This ‘debt-equity ratio’ is one indicator of a company’s ability to pay back its debt liabilities if its operations get into trouble. Outstanding debt levels and also the debt-equity ratio will be different for different kinds of company, but industrial and commercial companies rarely have a debt-equity ratio above 1 or 100%. In other words, their outstanding debt is not greater than how much equity the owners have invested in the company.

The debt-equity ratio is not necessarily high for companies in the tech sector. Even startups usually get funds from equity investors, rather than depending much, if at all, on long-term bank loans and issues of bonds. For example, in 2017 Alphabet-Google’s debt-equity ratio was less than 3% while Amazon’s, although higher, was still below the 100% level at 89%. In 2015, the year before SoftBank took it over, ARM Holdings had no outstanding debt at all. By stark contrast, SoftBank’s own debt-equity ratio in March 2018 was 271%, and a still high 220% counting only the long-term debt of $130.1bn.

This level of debt is a problem for SoftBank because the funds have been used to invest in a wide range of tech (and not so tech) companies, as already noted. As their market value changes, so will the value of these assets on SoftBank’s books, which makes the company very vulnerable to a change in financial market sentiment on the outlook for these ventures. Meanwhile, the debt remains until it is paid off, and until then it has to be serviced. In the year to March 2018, SoftBank’s net income from continuing operations was $11.7bn, but this figure had been reduced by the interest paid on its debt of $5.1bn.

How could SoftBank continue to expand its investment in tech companies when it already had high levels of debt? One way was to sell off some existing assets as a means to raise cash. An example earlier this year was the $4bn sale of its holding in Flipkart of India to the US giant retailer Wal-Mart, registering a gain of some $1.5bn. Back in April, SoftBank also used its stake in Alibaba as collateral for a bank loan of $8bn. Furthermore, there is a plan for the public sale of some shares in SoftBank’s mobile business in Japan, hoping to get as much as $30bn, although that hope is undermined by Japan’s regulator forcing mobile companies to cut their charges by as much as 40%. But the real scope for expansion lies with the venture noted at the beginning of this article: the Vision Fund.

Double Vision: $28bn becomes $72bn

SoftBank’s Vision Fund was set up in 2017 after being announced the previous year. It is included in SoftBank’s reports as a division that aims to target ‘long-term investments in companies and foundational platform businesses that seek to enable the next age of innovation’. While there are many other hyperbolic statements with which the Fund describes itself, and details of its structure can be confusing, I would recommend keeping the following points in mind to clarify what is going on.

The logic behind the fund’s existence is the limit on expansion that SoftBank faced with its high level of debt. Otherwise there would have been little reason for SoftBank to make big efforts to attract outside investors. Related to this, an important aspect of the Fund is that it has now given Masayoshi Son huge resources from these outside investors over which he has complete control. Meanwhile, SoftBank has not limited itself from undertaking any investments it likes outside of the Vision Fund set up.

…

SoftBank’s investment in the Vision Fund is reported as $28bn, with the other, external investors providing $72bn, to make up the $100bn when all funds are committed. That makes a good headline, but all is not what it seems. Not simply because most funds are committed rather than having yet been allocated, and the number does not yet quite add up to $100bn anyway. Let us assume that all the commitments will turn up. Instead, the main issue to puncture the headline bubble is that more than $15bn of the capital, and perhaps as much as $25bn or so, is not a pile of new cash waiting to be invested. It simply represents the value of existing investments held by SoftBank that the company has transferred from its main accounts to sit now under the Vision Fund heading.

At end-September 2018, the value of Vision Fund investments was $35.8bn, with an acquisition cost recorded at $28.1bn. A big chunk of this, represented by acquisition cost, consists of previous investments made by SoftBank. For example, a little over $8bn for 25% of SoftBank’s ownership of ARM Holdings, $5bn from its stake in Nvidia, a couple of billion from its stake in WeWork and some smaller investments, including in Wag. SoftBank’s $9bn holding of Uber will also be transferred to the Vision Fund, but this had not happened by end-September.[1]

These SoftBank ‘investments’ in the Vision Fund are not new cash that it can use to invest in other things. So its firepower is significantly less than the $100bn number promoted in the headlines, although it is still clearly a big number. The key point, however, is that by establishing the Vision Fund, SoftBank can get control of up to around $70bn more from the funds committed by other investors.

Under refurbishment: Vision Fund London office

Vision investors, debt and equity

SoftBank’s 28% of the Vision Fund would appear to give a higher weight to the external investors, who have 72%. But there is another complication: whether the investors have an equity stake in the fund or whether they buy the ‘preferred’ units of the Vision Fund that will pay them an annual coupon, as if they owned a debt security. According to a Financial Times report in June, the Vision Fund set up is where the external investors have 62% of debt and 38% of an equity stake in the Fund for every billion they put in. SoftBank therefore has a majority equity stake in the Vision Fund, given that all its 28% investment is for equity.

External investors in the Vision Fund are of two kinds, and each has a different motivation that I will give myself the freedom to speculate upon.

The first kind is the Gulf investors with $60bn of commitments: $45bn from the politically-devalued Crown Prince, allocated from Saudi Arabia’s Public Investment Fund, and another $15bn from Abu Dhabi’s Mubadala Investment Company. These are funds that aim to boost the wealth of the already rich Gulf states by investing in something other than the low-yielding government bonds issued by the major powers.

It is not difficult for the Gulf investors in this venture to feel they are smart money capitalists when all they have to do is get a better return than on US Treasuries. The Vision Fund will have looked an attractive option, one full of a high tech optimism that helps obscure the reactionary reality back home, and doing so with a promised high return – for details of which see the next section.

The second kind of external investor is a group of four companies not new to the world of tech exploitation – Apple, Qualcomm, Foxconn and Sharp . They will offer $5bn in total to the Fund. For them, the amount is trivial, but it may give a reasonable return and it will also give them a valuable overview and early insight into developments that could impact their businesses.

‘Eat yourself’ returns and SoftBank upside

So what is the return for investors in the Vision Fund? These investors, and SoftBank itself, get paid in different ways, and this highlights that it is called the Vision Fund for a good reason.

Those who have equity stakes in the fund get the relevant portion of the returns from the portfolio of investments made, but that is after money has been deducted to pay for the annual 7% coupon on the Vision Fund debt securities purchased by external investors. While this 7% coupon looks attractive compared to other debt securities in the financial markets today, it may have escaped the external investors’ attention that this coupon payment will also reduce the return they will get from their equity stake. If the Vision Fund debt component amounts to $44.6bn (62% of the external $72bn), then around $3bn per annum will be deducted from the profits made on Vision Fund assets to deliver the external investors their coupon payments. They look to be protected from any downside in the equity and revenue performance by their fixed 7% coupon, but that leaves the tricky question of who will pay them the coupon money if the Fund’s return is insufficient.

The external investors will have noticed that they are paying SoftBank a management fee of around 1% for the privilege of running the Vision Fund, which could be up to $720m per annum. SoftBank will also cream off 20% of any return on investment over 8%. In the world of ‘venture capital’ investment funds, however, these conditions are, if anything, low cost.

Overall, the Vision Fund gives SoftBank a vast amount to finance future tech investments, and it gets around some of the constraints posed by SoftBank’s high debt levels. If there are difficulties paying the fixed 7% coupon, then that may be a Vision Fund problem with its investors, not a SoftBank problem of default on its bond liabilities.

Another important point is that the Vision Fund’s investments have delivered it very little in operating profit. Its recorded ‘income’ from its assets is overwhelmingly made up from capital gains on their market value, including unrealised gains. In the six months to end-September 2018, the operating income from the Vision Fund was around $5.5bn, but $1.5bn was from the gain on the sale of Flipkart and another $4bn or so was from increases in the value of Nvidia and some other assets. This points to problems that Mr Son’s venture will have in generating enough income when the market turns down.

Parasitic vision

In an interview with TechCrunch in September, a Vision Fund managing director set out the Fund’s investment policy. He explained that it was a ‘late stage growth fund’. It did not aim to give early advice to tech startups, but instead wanted to see how far they could become a key player in the market. If they were happy with a company’s plans, they would invest a minimum of $100m to finance its growth.

This reveals perhaps more than he realised. Yes, the Vision Fund provides a tech company with funds, but only after it has passed the difficult, uncertain, early stages of growth when survival is at risk, and when it now looks like the only barrier to dramatic expansion is a lack of funds. This is not so different from what a regular bank would do, except that the Vision Fund will make sure that it has an equity stake in what it hopes will be a rapidly growing business, rather than a bank that simply sees good market prospects as giving it confidence that a loan will be repaid. Far from being the daring investor backing ‘the next stage of innovation’, the Vision Fund is more like a money capitalist bean counter that will first ensure that all its boxes are ticked.

Another aspect of the Vision Fund shows that it understands the nature of the imperialist world market today, at least as it applies to the technology sector. The minimum $100m investment is to finance a big increase in the scale of operations of its chosen tech companies, both within their national sphere and internationally. A key feature of businesses that have communications technology as a core element is economies of scale. Here, much the same cost infrastructure is needed to service tens of millions of customers as for tens of thousands, except perhaps the need for a bigger computer server and some better software. Costs per customer will tend to fall rapidly and net revenues can rise sharply.

This is also something that leads to monopolisation of markets. Companies that are backed with funds to invest and expand when they have no operating profit and, like Uber, may be running at a loss, can still invest to sideline competitors. SoftBank and the Vision Fund are involved in this process. One example is the likelihood that SoftBank will play a part in carving up the ride hailing market, given its stake in Uber and in a number of other companies in that area, notably DiDi of China, but also Ola in India and Grab in Singapore. Recent business media reports suggest that these companies, which are often rivals in the same markets as well as having stakes in each other, could decide to ‘cooperate’.

Tech in the machine

What we find today are many examples of technical inventions and innovation, but all of these get bound up in the monopoly machine of imperialist economics and finance. Rather than communications technology being developed to benefit humanity, any good outcomes that may result depend first upon whether the innovation can meet the machine’s demands.

Paradoxes also abound, highlighted especially by how some of the most reactionary regimes in the world put up many billions of dollars to fund ‘progress’. One acute observer of the tech world, Evgeny Morozov, speculated that the ‘disruptive innovation’ backed by Saudi Arabia would include killer robots and the ability to smoothly dispose of dissidents’ bodies. But one must not lose sight of how these regimes are also part of the imperial money-go-round, with full backing from the US and the UK.

The tens of billions of dollars allocated to SoftBank’s Vision Fund are only a small sample of the massive funds potentially available worldwide to address everything from debilitating diseases, to malnutrition and environmental destruction. Instead they are advanced with a beady-eyed parasitism to find the right profitable niche in the market and monopolise it. Even then, the decisions on how the world’s resources will be used rest with a small number of multi-billionaires and the states that back them.

Tony Norfield, 5 November 2018

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[1] In 2016, Saudi Arabia’s Public Investment Fund had already invested $3.5bn in Uber, which faced strong competition from one of SoftBank’s other ride-hailing investments, in DiDi (which eventually took over Uber’s China operation, but also gave Uber a stake in the merged company). It has been reported that to avoid Saudi embarrassment of funding a competitor to Uber when it put money into the Vision Fund, SoftBank made sure that the DiDi holding was kept in a separate fund. This is shown in SoftBank accounts as the ‘Delta Fund’, but DiDi is its sole component as a $5bn investment.

Warren Buffett & Imperial Economics

Warren Buffett is one of the wealthiest people in the world. He is also Chairman of the Board, President and Chief Executive Officer of Berkshire Hathaway, a huge US investment conglomerate. Looking at Berkshire’s investment policy reveals some important features of the economics of imperialism today and the role of money capitalists. Buffett’s public image as a kindly old gentleman – the Sage of Omaha – who favours increasing taxes on the rich and donates to charitable causes, does not sit well with evidence that he is a predatory gouger of profit. But these are the times in which we live.[1]

Berkshire’s nondescript name belies the fact that it is the fifth or sixth largest publicly quoted company by market capitalisation, at more than $500bn. It owns an extraordinarily wide range of companies, from insurance and banking, to specialist engineering, consumer electronics, news media, real estate, energy, railroads and airlines. Berkshire has more than 240 subsidiaries, but in addition to these it has large and small equity stakes in many other companies. Some are enterprises that few have heard of; others are household names. Six big companies account for nearly 70% of its $180bn portfolio of equity holdings: Apple, Coca Cola, Kraft Heinz, American Express, Bank of America and Wells Fargo bank.

Warren Buffett’s business strategy has not always been successful. He has made a number of duff investments, not least an early one in the textiles business that gave his company its name. Subsequent failures include investments in IBM and Tesco, and he was quite late into the boom in ‘technology’ stocks, having viewed these with a traditionalist’s scepticism. But his fund has nevertheless registered dramatic returns over a long period, well above those that would have been gained from investing in a broad index of companies. Like some other companies reviewed on this blog, Berkshire Hathaway does not pay dividends to its investors, instead relying upon an increasing share price to keep them happy. So far they have been content: from close to $100,000 in early 2010, the share price had risen to more than $300,000 by early 2018, to become the most expensive share in history.[2]

As one might expect, Berkshire Hathaway uses its financial strength to negotiate deals to its advantage. There are two guiding themes for its investments. Firstly, Berkshire looks for companies with brand loyalty and potential or actual monopolistic positions that are likely to keep future profits secure. Secondly, as far as possible, it wants only to allocate money capital and not to get involved in business operations.

Monopoly sectors and Berkshire investments

The market power of a monopolist is a wonderful thing – if you are the monopolist. There is rarely only one supplier unchallenged by rivals. But being one of very few suppliers, or having a government contract that guarantees high prices for your product, or using advertising and brand recognition to cement market domination, or building a commercial barrier to limit what competitors can do, or using patents to stall their development, are all means of building a favourable position in the market. These are the kinds of company, big and small, that Berkshire Hathaway seeks.

On the big side is Apple. Although he was late to the party, Buffett started jumping into Apple’s shares in 2016, after its price had fallen over the previous year. By late 2017, Berkshire had accumulated more than $20bn in Apple shares, some 2.5% of the company. The rationale for this investment was that Apple had an ‘ecosystem’ and level of brand loyalty that meant consumers were not very sensitive to the exorbitant charges it makes for its products, particularly the iPhone – as revealed in Apple’s confidence when putting a premium price on the iPhone X.

Other large companies include not only the well-known ones like Coca Cola and Kraft Heinz, noted above, but also those that usually remain out of sight. Take energy distribution, for example.

Berkshire owns 99% of Berkshire Hathaway Energy. In addition to its businesses in the US and Canada, this subsidiary owns two of the fourteen ‘distribution network operators’ in the UK. Each of these UK operators is a regional monopoly; there are five other holding companies owning the remaining twelve. Berkshire’s are managed by its Northern Powergrid company, with operations in Yorkshire and the North East of England.

When people complain about high costs of gas and electricity, it is usually the energy producing companies that get the blame, not the distributors. But the latter are often responsible for something like 25% of a household’s energy bill through the distribution prices they charge the producers. In 2016-17, Northern Powergrid (Yorkshire)’s total revenues were £417m and a high proportion of those, nearly half, were its operating profit of £199m.

Berkshire also invests in many smaller companies, often those in a strong niche position. Examples are Precision Castparts (metal components and castings), IMC Group (tungsten carbide metal cutting tools) and Lubrizol (specialist chemicals). These are an important component of the holding company’s returns.

Berkshire’s funds come from its direct subsidiaries and from its portfolio of equity investments and interest bearing securities. Its many investments give a claim on revenues from all areas of the economy, both nationally (in the US) and internationally.[3] This is shown by the breakdown of its $25.9bn earnings (profits) before taxes in 2016. Insurance underwriting brought in $2.1bn, with an additional $4.6bn of earnings from the portfolio investments of its insurance division. BNSF, its railroad freight division, brought in $5.7bn, Berkshire Hathaway Energy $3.0bn, its manufacturing subsidiaries $6.2bn, and the remainder came from a variety of other businesses and investments.

Being a money capitalist

Many big corporations today do as little production themselves as they can get away with. Instead they monopolise design, technology patents and marketing, while the producers of the goods and services they control become part of their ‘value chains’. Owning many producing, transport and servicing companies, Berkshire Hathaway would not seem to be doing this. But it has its own way of working, as spelled out in its latest annual report:

“operating businesses are managed on an unusually decentralized basis. There are essentially no centralized or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there is minimal involvement by Berkshire’s corporate headquarters in the day-to-day business activities of the operating businesses.”

In other words, Berkshire may buy out a company and allocate extra capital for investment, but, although it may choose the Chief Executive of the operating business, the holding company stays clear of directly managing anything. This shows Berkshire’s role as money capitalist, even for its operating businesses, quite apart from those companies in which it just holds a portfolio stake.

The funds for Berkshire’s investments are mainly held by its insurance division – a large volume of mostly US dollar-denominated cash, cash equivalents and US Treasury Bills, which amounted to $71bn at end-2016 (total cash, etc, available was $86bn). A portion of those funds may be required to meet payments on insurance and reinsurance policies. More importantly, this is also a store of cash to use for the opportunistic gouging of other capitalists, especially in times of crisis when cash is king.

Berkshire has often acted as a lender of last resort to selected companies in trouble. They are willing to pay a premium cost for its funds, not only because they have little choice, but also because backing from a big, well-known investor helps restore some financial market confidence in their business. In this type of investment, Berkshire has purchased ‘preference shares’ paying a high fixed rate of interest and which can only be bought back by the company at a premium, usually around 10%. As part of these preference shares, the company may also issue Berkshire long-dated options to buy the company’s stock at very favourable prices.

Examples of such deals include Berkshire investing $5bn in the preferred stock of Goldman Sachs back in 2008. This stock yielded an annual interest rate of 10%. Goldman bought it back in 2011, but had to pay $5.5bn. Berkshire also gained from the stock options it received. Similarly, Berkshire bought $5bn of Bank of America’s preference stock in 2011, although market conditions were not quite so bad and the yield was 6%. Other companies that have been through this Berkshire process include General Electric, Dow, Wrigley, Kraft Heinz and Home Capital.

Buffett and the law of value

Berkshire Hathaway’s business is an example of how a big corporation is often much bigger than you think. Its fortunes derive from the operation of hundreds of companies it owns directly and from its myriad of investments that stake a claim on the value produced worldwide, even though most of Berkshire’s business looks US-based. Its mode of operation also responds to how the imperialist world economy works today. Do not just look for a ‘good company’ to invest in, but find the ones with a more protected niche in the market. Do not just lend to a company with ‘good prospects’, but wait to pounce on those with a future that are desperate enough to accept your terms.

Warren Buffett is quite abstemious and gets a relatively small salary for being the Chairman and CEO of a major corporation. Nevertheless, he is one of the top 10 richest people on the planet, with a large income from his personal investments as well as the wealth represented by his Berkshire holdings. Buffett owns some 18% of Berkshire Hathaway’s shares and, like some of his plutocrat peers, he has also organised the company’s shareholdings so that his voting power is higher than this, at nearly 32% of the total.[4]

He has many fans and receives the kinds of accolade that would go to a sports team with a great track record. But this is not a game. It is the world economy, and Buffett’s fund is a prime example of the power of parasitism today. Berkshire ‘puts money to work’ by relying upon the work of others, and it siphons off the product of social labour into the fortunes of private investors.

Tony Norfield, 23 January 2018

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[1] This review of Berkshire Hathaway extends the list of corporations covered on this blog. Earlier ones were: Apple, Alibaba, Amazon, Facebook and Alphabet/Google. I do not plan to give a comprehensive overview of Berkshire’s operations, for which see Wikipedia and other Internet sources. Here I want to focus on key points that illustrate the nature of imperial economics today. Information cited is mainly from Berkshire’s accounts.

[2] This is the price of the main Class A shares. See footnote 4 for further details.

[3] When looking at the details, I was surprised that little of Berkshire’s revenue seems to come directly from non-US sources. A lot of Buffett’s attention seems to have been spent scouring the nooks and crannies of the domestic US economy for profitable openings and to buy into cheapened assets. Berkshire owns stakes in airlines, regional newspapers, real estate brokerages and automobile dealerships, among other things.

[4] Berkshire’s Class A shares are the ones that are priced around $300,000 each. The company also has Class B shares that are priced around 1,500th of the A shares, but have only one 10,000th of the voting power. There are 1.65bn Class A shares authorised and 3.225bn Class B shares.

The City: London and the Global Power of Finance

My new book, The City: London and the Global Power of Finance, will be published by Verso Books on 12 April 2016. Below I note reviews that it has received so far and give a full list of the contents. Details for ordering the book, which will be available both in hardback (price £20 or less) and as an ebook (around £14), are available on the Verso website and on Amazon.

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“Tony Norfield has provided a strikingly original take on the international financial system by placing it systematically within the world imperialist structure of power. He rejects the currently fashionable path of interpreting the ascent of finance by looking at how the leading financial sector agents, operating by way of banks, hedge funds, private equity firms, and the like, manipulate the political-economic game to increase their own personal wealth, while downplaying any useful economic functions they might be fulfilling. He insists, on the contrary, that finance be understood as a form of power deriving from the economic-cum political capacity to compete at the highest levels of global capitalism, which simultaneously endows a limited group of countries and corporations disproportionate access to the world s resources and operates as the system's indispensable nerve center. Norfield's unusual clarity as both an analyst and expositor is reflected in his ability to lay out for his readers an easy-to-grasp introduction to how finance works today in the process of offering a detailed historically-rooted account of the multiple hierarchies and privileged relationships through which global economic domination is constructed and reproduced. The City is a tour de force, which will soon be recognized as a formidable challenge to conventional wisdom and an essential contribution in its own right.”

Robert Brenner, author of The Economics of Global Turbulence

“This book does the seemingly impossible: rendering finance's mysteries transparent to the average reader, and at the same time delivering a penetrating analysis of the global economic system that will enlighten even experts. Tony Norfield has written a truly exciting and important book.”

Paul Mattick, author of Business as Usual

"It is not every day you read a book about global finance by a banker who quotes Lenin approvingly on page two. Unlike many of those who produce Marxist critiques of financial capitalism, Norfield writes from a position of experience: he has worked in the belly of the beast, and the book is the better for it... Just after the financial crisis, Rolling Stone magazine called Goldman Sachs the “vampire squid wrapped around the face of humanity”. In this book, Norfield extends the metaphor to call London the “vampire’s blood bank”. In The City, he has done the research and pulled together the financial statistics that explain how the bloodsucking works.”

Brooke Masters, Financial Times*

“The City is a valuable addition to the critical analysis of the financialisation of our world. And Tony Norfield is an experienced and radical guide to London's role in this process. This book should be required reading for both bankers and activists alike.”

Joris Luyendjik, author of Swimming with Sharks: My Journey into the World of the Bankers

TABLE OF CONTENTS

Preface

Chapter 1            Britain, Finance and the World Economy

World economic and financial power

Britain’s invisible empire

Understanding finance and imperialism

Insights, conspiracies and policy contingencies

The ‘End of History’ revisited

History wakes up

‘New Deal’ and no deal

The system

Chapter 2            The Anglo-American System

British or American finance?

Anglo-American financial relationships in transition

Building beyond the Empire

New York versus London

The Anglo-American euromarket

British capitalism, finance and official policy

Eurobonds and London’s international role

Historical logic

Chapter 3            Finance and the Major Powers

Regime change

British imperial strategy and the pound

State policy on financial markets from 1979

Finance and the major powers

Gravity and the global system

Chapter 4            Power and Parasitism

Money-capitalists and financial institutions

Interest-bearing capital

Banks

Brokers

Asset managers

Insurance companies

Pension funds

Bank credit creation

Financial securities and economic power

The flexible noose

Finance and the rule of capital

Financial parasitism

Global parasitism, investment, trade and finance

Who reaps the returns?

Finance as a normal part of the system

Chapter 5            The World Hierarchy

The premier league

Capitalism and the state

The state and finance

Monopoly and imperialism

Monopoly today

World projection of power

Chapter 6            Profit and Finance

Return on equity and leverage

Comparing profits

Financial assets and derivatives

Financial revenues, surplus value and securities

Trading revenues

The rate of profit and capital’s limits

Outcomes

Profits, financial and global developments

Moribund capitalism

Chapter 7            The Imperial Web

Currency, trade and seigniorage

‘Exorbitant privilege’

Running the world banking system: US dollar power

Financial services exports

Equity markets, financial power and control

Carving up the market

The daily grind

Chapter 8            Inside the Machine

Number crunching

The surplus from City dealing

Global capitalism’s financial broker

UK financial account: FDI, portfolio flows and bank funding

UK assets, liabilities and returns

The City’s global network, tax havens and global finance

Nice work, if you can get it

Chapter 9            Eternal Interests, Temporary Allies

‘Open for business’

Economics and domestic politics

Islamic finance and the City

China, BRICS and the Anglo-American system

Finance and the rule of capital

List of Tables

3.1       UK, Germany, France – patterns of trade, 1980 and 90 (% of total)

3.2       Financial market shares of major powers, 1980-2001 (% of total)

5.1       Corporate control by controlling company, 2007

6.1       UK monetary financial institutions’ financial balance sheet

7.1       Financial services export revenues, 2000-2013

7.2       Equity market capitalisation and turnover, 2013

8.1       UK current account balance and components, 1987-2014

8.2       External positions of banks, end-2014

8.3       Foreign exchange turnover, 1995-2013

8.4       OTC interest rate derivatives turnover, April 2013

8.5       UK financial account net annual flows, 1987-2014

8.6       Net external position of UK MFIs by location

List of Charts

5.1       The global pecking order, 2013-2014

6.1       Leverage ratios of major international banks, 2007–2011

6.2       Leverage ratios of major UK banks, 1960-2010

6.3       US corporate rate of profit, 1948-2013

6.4       US Federal Reserve financial support stays in place

8.1       Key components of the UK current account, 1987-2014

8.2       UK net foreign investment stock position, 1989-2014

8.3       Returns on UK foreign investment assets and liabilities, 1990-2014

Tony Norfield, 25 January 2016

* note of the FT review was added on 8 May 2016

Cameron's Sharia Bond and British Parasitism

To be the political leader of an imperialist power that has attacked a number of Muslim countries in the past decade, it takes a certain, how can one put it, chutzpah, to say:

"I don't just want London to be a great capital of Islamic finance in the Western world, I want London to stand alongside Dubai as one of the great capitals of Islamic finance anywhere in the world."

Yet that was British Prime Minister Cameron, talking to the World Islamic Economic Forum in London on Tuesday. Part of the plan is for the UK Treasury to launch an 'Islamic bond' worth £200m next year, presented as the first Islamic bond issued outside the Muslim world.

One UK financial lobby group report suggests that 'global Islamic finance assets' - namely those which are 'Sharia compliant' - already amount to some $1.5 trillion and are growing fast. Hence the UK wants some of the action. There are 22 Islamic banks in the UK, more than in all other western countries combined. The UK government has even established an Islamic Finance Task Force, but this one is not weaponised.

The contradiction between Britain's foreign policy and its financial policy is only apparent. Despite the invasions of Afghanistan and Iraq, and the bombing of Libya, not to mention other covert interventions, Britain is not anti-Islam or anti-Muslim. It just wants to see its interests protected. It has no problem backing jihadist rebels if they will serve that policy, as in Syria, just as it supported the Moslem Brotherhood against the nationalist threat from Nasser in Egypt from the late 1950s. Today British imperialism steadfastly supports Sunni elites throughout the Middle East, and most of the families were put in place by British policy. Further afield, in Brunei, 1000 British army Gurkhas are also paid for by the Sultan to back his 'security' - and the interests of Royal Dutch Shell plc. Brunei is not a big place, so if you had some doubts about the wisdom of the autocracy you would think twice about expressing it with these guys coming at you.

However, to return to the financial issues. Cameron's Sharia bond is planned as a sign that the City is 'open for business', to use Bank of England governor Carney's phrase (see below). The size of the planned bond issue is minuscule in terms of state finance, but it will show that the City is willing to do whatever is necessary to attract business from this previously untapped area. It will encourage other financial activity and it will give enterprising specialists in Islam a profitable role as arbiters of what is Sharia-compliant. From the City's perspective, dealing spreads can be important, not just interest rate returns. In any case, it will not be difficult to transform interest remuneration into something that does not look like interest and so be Sharia-compliant. Best of all, Britain's lack of capital controls will make it easy for rich foreign investors to put money in, and take it out, while there will be little fear of political moves against them. Well, perhaps less confidence these days, since Assad's wife no longer shops at Harrods and the Gaddafi family no longer have a residence in Hampstead.

Details of Cameron's bond are to be finalised, but early reports suggest that coupon payments will be based on rentals from government property. Will the rentals come from chemical weapons plants, MoD buildings, GCHQ, MI5/6, US bases in Britain or the leased bases around the world? That can be sorted out later, and the result will no doubt be deemed 'ethical' and compliant.

Two other issues are worthy of note related to imperial finance, but not to Islamic finance. The connection is that these two and the previous discussion all relate to a desperate attempt by the British state to boost the scale of financial dealing, with all the opportunities this offers for skimming off more surplus value from the rest of the world. My previous note (see this blog, 22 October 2013), showed that the balance of payments flows are worsening for the UK so, as one might expect, the focus of British policy now is on how to leverage what the Brits are best at in order to get more revenues in the future. No, not by marketing self-deprecating humour in BBC video exports, but by increasing financial deals to make money from other people's money.

The first is Britain's attempt to build on its already prominent role in the offshore trading of China's currency, the renminbi. It took a while before the People's Bank of China gave the Bank of England the currency swap line it wanted. It was delayed until June this year and was CNY 200bn, embarrassingly less than the CNY 350bn agreed with the European Central Bank in October. This may have been aimed to cast a deliberate shadow over the status of the City of London, although the swap is for sterling versus CNY not for the much larger euro currency. As if to ward off any further problems, the UK Treasury went out of its way to make it easier for Chinese banks to set up in London in October, lifting regulatory hurdles and risking annoyance from the Americans, together with embracing a pan-European visa deal - for Chinese tourists only.

Outside China and Hong Kong, the City already manages some 60% of offshore trading in China's currency, with the US at just 15% and France at 10%. In October, the UK Treasury announced the opening up of direct trading of China's currency with sterling and that it had gained a (small) quota for accessing Chinese equities and bonds. These factors will increase the potential for City dealing, at least until China changes its mind.

The second is the latest policy change from the new Bank of England governor, Mark Carney. The theme of a keynote speech to a Financial Times anniversary event last Friday was that London was 'open for business'. So he introduced policies to boost the volume of financial dealing. He envisaged bank assets in the UK growing from some 4 times GDP at present to more like 9 (!) times by 2050. Then, in a squaring of the circle that was a wonder to behold, he argued this could be done with lower costs for private banks getting central bank aid while at the same time making the overall system more secure.

I am not one to make ad hominem comments, for example noting that he, like Mario Draghi of the European Central Bank, is an alumnus of Goldman Sachs. This is because, despite him being Canadian, and despite him being in the job only since July, last week he showed that he had the best interests of British imperialism at heart. This, together with the Sharia bond and China policies already discussed, is the clearest sign that the British ruling class knows how to adopt and to bring on board whomever and whatever policies look like having some upside in these difficult times.

Tony Norfield, 30 October 2013