Did you know the latest from Transnational Corporations?

The financial assault on Europe and the Euro, conventionally and conveniently (for somebody) dubbed as a crisis, has spectacularly deepened and widened since last October. In just a quarter of year we are at point where the rating agency Standard & Poor’s is threatening the downgrading of all Eurozone countries if the situation does not improve in the next quarter.
Despite some reassuring noises from Brussels, Berlin, Paris and Rome, panic is steadily gripping not just top level operators, but also common people as soon the horrible news about Greek poverty flow through the net, despite mainstream media soft censorship.

Right now it is time to have a closer look at the global market in order to understand the Truman Show in which we lived for three decades: we have a huge global market of at least 30 million economic actors (Orbis 2007 database), but only a very closely knit core controls most of the TNC (TransNational Companies) revenue.

The oligarchy within economic pluralism. From Switzerland we have a very interesting article that gives us a much clearer understanding of the de facto oligopoly in a supposedly free market.

The authors have performed the following tasks “We start from a list of 43060 TNCs identified according to the OECD definition, taken from a sample of about 30 million economic actors contained in the Orbis 2007 database (see …). We then apply a recursive search (Figure …) which singles out, for the first time to our knowledge, the network of all the ownership pathways originating from and pointing to TNCs (Figure …). The resulting TNC network includes 600508 nodes and 1006987 ownership ties.”

One million of ownership ties seems a lot, but even assuming that every ownership tie involves e.g. seven persons, we have just 7 million people on a total world population of 7 billion, which means that 1 on 1.000 persons is in a position of profiting from the world economy set up by the machine of financial capitalism.

The next step sees the use of network analysis tools and here it discovers that this TNC net has a bow-tie shape and that:
1. Its largest connected component contains all the top TNC by economic value accounting for 94,2% of the total TNC operating revenue;
2. The centre of the bow-tie is made by a strongly connected component where all companies are connected among themselves, with the result that ¾ of the ownership never goes outside this node.

The interesting feature of the article is that it measures corporate control not by voting events, but by “how much economic value of companies a shareholder is able to influence” looking at the control each shareholder has over its whole portfolio of directly and indirectly owned firms, so that shareholders with a high level of control are those potentially able to impose their decision on many high-value firms.

As you remember, in the past essay we gave short shrift to the notion of the “markets”, observing that this is just a misleading shorthand expression that obscures a simple fact. The OECD has observed that, after decades of M&A, during this year 10 major economic actors control beyond 90% of the derivatives market (i.e. CDS, CDO, exchange rate swaps). They still are:

• J.P Morgan, Bank of America-Merrill Lynch, Citibank, Goldman Sachs, HSBC USA;
• Deutsche Bank, UBS, Credit Suisse, BNP-Paribas, Société Générale (SG).

Now we shall cross reference the table of the world top 50 controlling companies provided by Stefania Vitali, James B. Glattfelder and Stefano Battiston with our top 10 derivatives actors.

And we will also fusion a sample illustrative cloud of cross-shareholding structures by Vitali et al. with the OECD references to the usual top 10.

The picture that emerges is frankly startling. All the major actors that control 90% of the derivatives market belong to that core of strongly connected components where ¾ of the ownership never goes outside. It is a cloud of inter-owned and -controlled companies that is practically inaccessible from the outside. Even if not all companies are at the top eight are among the top 25 with an impressive amount of control.

If we look at these data with geoeconomic eyes, we see that in the first 10 positions there is a US-Swiss grouping, enlarged in the first 15 ones to the other Swiss conglomerate and the Deutsche Bank. The famous Goldman Sachs 18th in the top 20. Both French financial conglomerates and Bank of America are in a more marginal position.

This does not mean that France is totally cut out from the great transnational companies game, because Axa is top insurance and financial company and because Natixis is the financial arm of the Groupe BPCE (Banques Populaires et Caisses d'Epargne), but it makes bells ring a propos its first shaky and now lost AAA status.

Systemic and geopolitical implications

At a systemic level we have now clear indications that this web of relationship is a pluralistic, but not a free market. It is a networked oligarchy that is essentially self-serving a small group of big shareholders and financial managers, but not the small shareholders whose interests should be served by institutional investors (who are managed by the same financial wizards).

This market, as shown by increasingly devastating crises and bubbles since 30 years, is not a self-regulating machine and has not a natural inbuilt balance. It is instead a system that produces chaos and that is fully equipped with computerised tools (e.g. derivatives, algorithmic trading, the mechanisation of risk models, etc.) that guarantee the automated production of chaos.

If we have been worried about the too-big-to-fail problem with Lehman Brothers, this was just an appetiser for the problems to come. It is useful to recall what the mentioned Vitali et al. article concludes

This remarkable finding raises at least two questions that are fundamental to the understanding of the functioning of the global economy. Firstly, what are the implication for global financial stability? It is known that financial institutions establish financial contracts, such as lending or credit derivatives, with several other institutions. This allows them to diversify risk, but, at the same time, it also exposes them to contagion. Unfortunately, information on these contracts is usually not disclosed due to strategic reasons. However, in various countries, the existence of such financial ties is correlated with the existence of ownership relations. Thus, in the hypothesis that the structure of the ownership network is a good proxy for that of the financial network, this implies that the global financial network is also very intricate. Recent works have shown that when a financial network is very densely connected it is prone to systemic risk. Indeed, while in good times the network is seemingly robust, in bad times firms go into distress simultaneously. This knife-edge property was witnessed during the recent financial turmoil.

Secondly, what are the implications for market competition? Since many TNCs in the core have overlapping domains of activity, the fact that they are connected by ownership relations could facilitate the formation of blocs, which would hamper market competition. Remarkably, the existence of such a core in the global market was never documented before and thus, so far, no scientific study demonstrates or excludes that this international “super-entity” has ever acted as a bloc. However, some examples suggest that this is not an unlikely scenario. For instance, previous studies have shown how even small cross-shareholding structures, at a national level, can affect market competition in sectors such as airline, automobile and steel, as well as the financial one. At the same time, antitrust institutions around the world (e.g., the UK Office of Fair Trade) closely monitor complex ownership structures within their national borders. The fact that international data sets as well as methods to handle large networks became available only very recently, may explain how this finding could go unnoticed for so long”.

Going back to a geopolitical and geoeconomic interpretation, data above represented cloud of cross-shareholding structures (also called cycles) shows the following:
1. Merrill Lynch is at the centre of a web of shareholding cycles which control Axa and Goldman Sachs;
2. Germany has set up a closer cycle between Deutsche Bank, Commerzbank and Credit Suisse, but Deutsche Bank is participated by Barclays, the most powerful TNC in the world, that participates also Axa. So much for the French-German axis, entente cordiale or any Rhine-based formula. The fact that Deutsche Bank does have a stake in Barclays does not diminish the power gap in the relationship;
3. Such a web of cycles can easily baffle any existing anti-trust legislation or regulation, precisely through its networked structure;
4. Moreover the three Western rating agencies (Moody’s, Standard & Poor’s, Fitch) are practically captive within this cloud of interconnected interests. They control 85% of the rating market, but these strongly connected companies are regularly their biggest customers. One can hesitate between a captivity and an active collusion, but it is really difficult to believe in their independence (and credibility);
5. The only state-owned TNC in the top 50 is a Chinese oil conglomerate (by the way the only country with a national rating agency, Dagong).

This leads us to deduce that the BRICS, while being in majority international creditors, are out both of the top TNC and the financial capitalism games. Does this draw a possible confrontation line between BRICS still strongly engaged in real economy and the group of heavily indebted countries engaged in financial capitalism (sometimes called casino capitalism)? It is highly probable as it is reasonably certain that these power relationships are the real feathers that move the financial warfare assault against Europe (misleadingly called Euro crisis).

In the next part we will see how the global financial war has begun and how Europe is for the moment its most visible front. Stay radar tuned.

Pubblicato il 31/1/2012 alle 15.11 nella rubrica diario.

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