Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (35 page)

The OSS Harvard Plan documents detailing Thomas McKittrick’s role in negotiating deals with German industrialists confirm Pol’s assertion that the BIS was a contact point for negotiations about Germany’s plans to dominate postwar Europe. Pol’s predictions of how postwar German leaders would rapidly abandon the outward trappings of Nazism still make unsettling reading:

           
To obtain a peace, which would leave them in power, they will suddenly flaunt “European spirit” and offer worldwide “co-operation.” They will chatter about liberty, equality, and fraternity. They will, all of a sudden, make up to the Jews. They will swear to live up to the demands of the Atlantic Charter and any other charter. They will share power with everybody and they will even let others rule for a while. They will do all this and more, if only they are allowed to keep some positions of power and control, that is, the only positions that count: in the army—were it even reduced to a few thousand men; in the key economic organizations; in the courts; in the universities; in the schools.
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Which is precisely what happened, when, after 1945 former Nazis took many of the key positions of “power and control” in the new Germany. Their legacy
has proved extremely profitable. Germany now has the largest economy in the European Union and the fourth largest in the world. Greece faces collapse, and Spain is mired in recession, but Germany is booming, with growth rates of 3.7 percent in 2010 and 3 percent in 2011. Much of this success is based, as Funk predicted, on the high quality of German exports. Germany’s total share of world trade is about 9 percent. The country is especially strong in the biotechnology, genetic engineering, and pharmaceutical sectors.

BASF and Bayer, two of IG Farben’s successor companies, are dominant in their fields. BASF is the world’s largest chemicals company with annual sales of 73.5 billion euros. Bayer, which makes aspirin, employs 112,000 people. Bayer felt no shame about its roots in IG Farben. In 1964 Bayer set up a foundation to honor Fritz ter Meer on his eightieth birthday with a donation of 2 million deutschmarks. Ter Meer had handled IG Farben’s negotiations with Standard Oil and oversaw the building of IG Auschwitz. Found guilty of war crimes, ter Meer was sentenced to seven years imprisonment in 1948. He was freed in 1950 and later joined the supervisory board of Bayer. Bayer’s foundation honoring him was renamed in 2005 and existed until 2007.

By the early 1990s, Funk’s “European Large-Unit Economy,” perhaps better known as the Eurozone, was clearly in sight. The technical preparations had been going on for decades—at least since 1964, when the Governors’ Committee of European central banks had first met at the BIS to coordinate monetary policy, if not 1947, when the Paris accord on multilateral payments was signed. The positive reception for the 1989 Delors Report, which had been drafted at the BIS and which laid out the plan for EMU, meant that the political momentum was unstoppable.

In December 1993 Alexandre Lamfalussy stepped down as general manager of the BIS to start work as the director of the European Monetary Institute (EMI), the precursor of the European Central Bank. He would be much missed. “Lamfalussy put the BIS on the map. He was superb, very bright,” said Geoffrey Bell, the founder of the G30 advisory group, an international think tank. “Lamfalussy was a thinker, especially when the bank started to move into intellectual issues such as bank regulation and the general state of the world.”
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The EMI opened its doors the following month. Lamfalussy did not have far to go: the institute was based at the BIS. The president was charged with a mammoth task: the construction of the first trans-European monetary institution, in preparation for the introduction of the single currency. Nobody was better qualified for the job. Lamfalussy had been at the center of the drive to European monetary unity almost since its inception. The Hungarian economist had once boasted that it was his subordinates who “held the fountain pen” and “prepared the meetings in Basel of a project that was primarily European.”

After eleven months, in November 1994, the EMI had outgrown the BIS and moved to Frankfurt. Its new home was a skyscraper at Willy-Brandt-Platz, known as the “Eurotower.” The small number of staff that Lamfalussy brought from the BIS was not sufficient. The EMI president had to recruit 150 people in six months, and the network of contacts he had built up over seventeen years at the BIS was invaluable. “I knew everyone, and when I saw that there was a hole in the organization, or that we needed someone . . . I knew exactly who to ask, and I could ask them for everything. It was a phenomenal advantage.” Lamfalussy’s network was also an advantage for the EMI’s governors, he recalled, “because they also knew each other and the staff too.”
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The Eurotower was forty stories tall, more than double the BIS’s eighteen floors. The size of the Frankfurt skyscraper symbolized its role as the home of an idea that had been nurtured at the BIS but which had now far outgrown its birthplace. Nonetheless, the small, clubbable world of the Tower of Basel was soon replicated there. Back in the 1960s Charles Coombs, of the New York Federal Reserve, recalled that the central bankers at the BIS governors’ meetings frequently did not even need to finish their sentences “because everyone instinctively knew the rest and in an almost uncanny way, a simultaneous realization of the appropriate technical solution.” The EMI president enjoyed the same kind of telepathy with Hans Tietmeyer, the president of the Bundesbank, and Jacques Delors, the president of the European Commission.

When Europe’s most powerful bankers and politicians came to Frankfurt to discuss the single currency project, Lamfalussy sat at the head of the table.
“When Tietmeyer or Delors . . . would put up his hand to ask a question, I would know exactly what he would ask, and he also knew that I would know exactly what he wanted to ask. It was enough just to look at them and I knew what they wanted to talk about because I knew what they thought.”
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THE DEPARTURE OF
the EMI for Frankfurt left a void at the BIS. The long, looping corridors were quieter, the air of excitement that the bank was at the center of the most ambitious monetary project in European history had dissipated, and the chatter in the staff restaurant was more subdued. Even the Governors’ Committee, which had met at the BIS since 1964, was gone. The committee’s members—the governors of the European Central Banks—now formed the council of the EMI.

Once again, the BIS faced an existential crisis: Did it still need to exist? The bank was certainly still profitable. The accounts for the year ending March 1995 showed a net profit of 162.4 million gold francs. But if the BIS had no international role, it would be increasingly difficult to justify its existence and the extensive legal privileges that helped guarantee those profits. The bank had a new manager, Andrew Crockett, a British economist who had worked for the IMF from 1972 to 1989. Crocket came to the BIS in 1994 from the Bank of England, where he had spent four years as an executive director. There he could observe firsthand the after-effects of the “Big Bang,” the 1986 deregulation of the City of the London.

Until the Big Bang, the Square Mile had been still a clubby, comfortable place of old school tie connections and long lunches, where Montagu Norman would have felt at home. That world vanished almost overnight. Wall Street investment banks poured into the Square Mile, bringing aggressive new tactics. The 1933 Glass-Steagall Act, which separated investment banking and deposit taking, was still in force in the United States. London, newly unburdened from cumbersome regulations, offered fabulous opportunities, heightened by the rapid growth of computer technology, which accelerated trading. The BIS gave the Big Bang a cautious welcome. “It was feared that if nothing was done, the
Stock Exchange would be unable to compete with foreign institutions and business would move abroad,” the BIS noted in its 1987 Annual Report.
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The changes had brought a “major inflow” of capital to British and foreign banks, the BIS noted, but had highlighted the importance of Chinese walls within firms to avoid conflicts of interest. The Chinese walls however, soon crumbled under the tsunami of money. The city firms’ new American partners often had few qualms about conflicts of interest. They advised a company on a merger, and then sold the new shares.

Some said that the BIS job was Crockett’s consolation prize for his failure to get the top job at the IMF. Either way, he had not joined the BIS to see it fade away. Crockett’s international background brought valuable perspective to what could still be a cozy and parochial institution. Crockett understood that the establishment of the EMI marked the end of an era for the BIS. The bank was sixty-four years old, of pensionable age. Its original mission, of managing German reparations payments from the First World War, had long faded away, the details of the arcane disputes preserved in dusty files in the bank’s archives.

Suddenly the BIS looked like an anachronism, a hangover of the era of credit controls and currency restrictions in a global economy that was ever more interlinked, dynamic, and faster moving. Small, unimportant countries such as Belgium and the Netherlands sat on the board, but where were the central banks of China, Brazil, Saudi Arabia, and Russia? True, Japan, Canada, and Turkey had joined, but many, especially in the United States, regarded the bank as a thoroughly Eurocentric institution. William White, from the Bank of Canada, joined the BIS in May 1995 as head of the Monetary and Economic Department, the bank’s research arm. “When I arrived, people were asking what is the BIS going to do after the euro? It was a legitimate question. It was a very heavily European organization. Once the EMI was set up, all the Euro stuff was going to get done somewhere else.”
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The BIS had to find a new purpose. To Crockett it was clear, White recalled. “Crockett said, we are going to go global.” But for that to happen, the United States needed to be on board. More than sixty years after the BIS was
founded, the Federal Reserve still kept its distance and had not taken up its tranche of shares, despite the BIS’s deep American roots. The United States had always followed what was happening at the bank and the discussions taking place there. But the American Federal Reserve officials who traveled to Basel were there as observers, not as representatives of a member bank. Crockett wanted to end this anomaly. All the countries that took part in the G10 Sunday evening governors’ meeting at the BIS should be members of the bank and be represented on the board of the bank, he believed. The Federal Reserve needed first to join the bank, then the board.
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During the 1970s and ’80s, Washington had not been especially interested in the BIS. The focus then had been primarily on trade, rather than finance, said Karen Johnson, a former Federal Reserve director for International Finance. “Trade behaves in a rather predictable way. It’s hard to change, but it’s also hard to surprise you. That began to alter in the 1980s and changed hugely in the 1990s.” Rapidly increasing globalization, the growing power of international markets and money’s ability to flow ever faster around the world highlighted how the United States economy was inextricably linked to the global financial system. “Financial linkages had become vastly more important. The actions occurring in the financial markets were much faster. Crises or unanticipated events were far more likely to occur on the financial side,” said Johnson.

Crockett’s lobbying worked. In 1994 the Federal Reserve finally took up its shares in the BIS, joined the bank and appointed two directors to the board: the chairman of the Federal Reserve and the president of the New York Federal Reserve. The decision to join the board was made, noted Charles J. Siegman, a senior official in the Federal Reserve’s International Finance Division, “in recognition of the increasingly important role of the BIS as the principal forum for consultation, cooperation and information exchange among central bankers and in anticipation of a broadening of that role.”
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The American decision sent a powerful signal to the world suggesting that the BIS was still relevant, necessary and could contribute to international financial stability.
Two years later, in 1996, the central banks or monetary authorities of China, India, Russia, Brazil, Hong Kong, Singapore, and Saudi Arabia joined. The BIS’s future was assured.

As director of the Division of International Finance, Karen Johnson attended the governors’ meetings for nine years, from 1998 until her retirement in 2007, accompanying either Alan Greenspan, the chairman of the Federal Reserve or his successor, Ben Bernanke, or their deputies. Johnson successfully pushed for the Federal Reserve to pay attention to the BIS. “The American attitude to the BIS changed because the world changed. The BIS was expanding its membership because countries in the rest of the world now mattered in ways they hadn’t mattered before. The BIS went from being a Eurocentric thing to which the United States paid little attention, to something global and international. Once we took up our shares the degree to which senior members of the Fed became involved changed completely.”
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The Federal Reserve and the New York Federal Reserve, like all visiting central banks, opened up a micro-branch in the BIS headquarters during the Basel weekends. Both had their own offices, as well as a shared extra room for staffers or other governors who might also be attending. Johnson enjoyed her trips to Basel. From Stanford University, she had joined the Federal Reserve in 1979—a rare woman in the male-dominated world of central banking. “Going to these international meetings, I was again the only woman in the room, but because I had the Fed on my nametag, that opened every door I wanted.”
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