"Someone tell the Vatican: Monarchy and banks don’t mix; Why Europe’s last kinglike ruler has a serious problem on his hands—and we might, too" by Jacob Soll | June 09, 2013
As Pope Francis sets the course for his young papacy, one of his first challenges has nothing to do with theology or the behavior of the far-flung priests and bishops he supervises: It is to reform the troubled Vatican Bank. A private and highly secretive institution estimated to control more than $7 billion in capital and more than 33,000 secret accounts, the Institute for the Works of Religion (its official name) has long been dogged by scandals and questions.
Founded in 1942 to “safeguard and administer” the funds of church members, it has become a modern symbol of the hazards of secrecy in finance. It was accused of holding Croatian Nazi funds during World War II and more recently has faced continued suspicions of money laundering for the mafia.
Publicly, at least, the bank is making efforts to push back against this reputation. Ernst von Freyberg, who became the bank’s chief in February, has characterized it as “very, very safe,” and pledged to clean up the scandal-racked institution. He has retained an American law firm to help the bank meet international anti-money-laundering and terrorism finance standards.
But if history is any guide, Francis and von Freyberg face a difficult task. Effectively, the pope is the last absolute monarch in Europe, a single individual with total authority over the city-state’s government—and this extends to its banking arm, which he personally oversees with the help of two boards of advisers. The Vatican is essentially trying to run a modern bank within a monarchy. No matter how sincere reformers of the Vatican Bank are, they are up against an age-old problem: The long history of European banking suggests that secretive, absolute government and long-term successful banking do not coexist well.
From the 1300s to the modern era, absolute monarchs—unaccountable to boards, investors, and even their own people—have had a poor track record of managing money, paying debts, and managing banks within their borders. Some of Europe’s most powerful banks foundered and even collapsed when confronted by the unpaid debts of the monarchs they lent to; others failed simply because they had trouble gaining trust from financiers and merchants within a system that didn’t require openness.
The incompatibility of banking and monarchial secrecy is more than just a problem for the Vatican. As banks themselves rise in financial and governmental power—and as secrecy, opacity, and impunity come to define modern finance—it is tempting to wonder whether banks themselves are starting to embody many of the same risks of the monarchies that once endangered them, and thus jeopardizing our financial stability in ways that Europeans of previous times would have found entirely too familiar.
***
The Vatican’s entwinement with banking goes deep into history; in fact, modern banking as we know it actually has its origins in the Medieval papacy. In the Middle Ages and Renaissance, the Apostolic See (as papal government is called) was among the wealthiest entities in Europe, with complex financial needs. The church transferred funds to and collected taxes from every corner of Europe. The money was used to hold multiyear council meetings; to build palaces, churches, charitable organizations, schools, shrines, and libraries; to bankroll its imperial courts and diplomatic corps; and to raise large armies to defend its territories.
Beginning in the 1300s, however, instead of operating its own bank, the papacy relied on the outside banking houses that had arisen in Italy, the Medici house foremost among them. These family-run banks flourished by following some basic rules. Unlike the popes and kings of his day, banker Cosimo de’ Medici maintained strict training, professional rules of financial management, and internal and external accountability, keeping clear double-entry books that balanced income and expenditure. He performed audits on his branches and was forced to submit his own books (albeit a set specially prepared to be appropriately modest) for the Florentine tax assessors.
Underreporting income. Nothing old there.
Modern finance and accounting was one of the great societal leaps of the Renaissance, and as banks spread through Europe, they helped fuel trade, industry, and art across the continent.
Yeah, banks have been the saviors of the world since... sigh.
They also amassed great pools of capital. Like popes, kings and other great nobles did not do their own banking, and they began turning to the heavily capitalized Italian and German banks to provide funds. To banks, the royals were tempting clients, often deep in debt from wars and maintaining their sumptuous courts. Loans to monarchs were enormous and potentially very profitable, and they brought banks prestige and an entrée into national markets....
Sound familiar, America?
The wealthiest bankers of the 16th century were the Fugger family of the Bavarian city of Augsburg, who had built their unparalleled fortune on international trade, a pan-European mining operation, and a banking network almost three times the size of the Medicis’. To maintain this financial and industrial empire, they were obliged to lend money to the Hapsburg Holy Roman Emperor, Charles V, and his son Philip II, king of Spain. On the face of it, being bankers to the Spanish Empire offered vast rewards from the tons of gold and silver that were arriving from South America. But the overextended Philip struggled to manage his finances, and indeed refused to even look at his ledgers, deeming it beneath him. With its imperial debts outstanding, the giant Fugger bank began to falter, and the family retreated from finance. (A counterexample would eventually emerge in the Rothschild dynasty, which succeeded in banking to kings—in part by building an international asset network whose secrecy and inscrutability rivaled any monarch’s.)
How interesting that a parenthetical statement is used for a House that is still standing -- and is then quickly forgotten again.
Banking ran into a different kind of obstacle in France. The French monarchy became the biggest and most powerful in Europe, but was plagued by financial mismanagement and massive debt. In 1720, with the monarchy effectively bankrupt, the ruling regent tried to create a modern bank and currency system with the help of the Scottish financial innovator and gambler John Law. The results were quick and dire: With no accountability, and no venue for political debate about France’s monetary policies, the French Royal Bank became tangled in Law’s secretive pyramid scheme, known as the Mississippi Bubble. When both the bubble and the bank crashed in 1720, the monarchy and the public lost all confidence in banking; the regent shut down the Royal Bank and the French stock exchange. France would not succeed in creating a true national bank until 1800.
1790s revolution only to be enslaved again.
Where European banking flourished, it tended to be in the freer air of nations like Holland and England. Holland was a republic with an open political system, famous for its freedom of information and religion. England, by 1688, had a constitutional monarchy in which state financial matters were negotiated and debated publicly in Parliament and in the nascent press. Even more, these nations had relatively open financial institutions. The Bank of England was established in 1694 and is still healthy, despite scandals from very early in its history. When the English South Sea Bubble burst in 1720, in which the Bank of England was partially implicated, there was a public inquiry that led to reforms—and, unlike in France, the survival of the British central bank and stock exchange. The Bank of England ultimately allowed the British government to manage its enormous debt and outpace France in military and colonial spending.
Notice nothing about the Rothschild role in the Bank of England?
***
In the last year, the Vatican Bank has made some moves in the right direction—last year its board stepped in and fired chief Ettore Gotti Tedeschi, accused of money-laundering by the Italian authorities. But with no voters or regulators to answer to, the bank and its patron state still share more characteristics with the closed monarchies of the past than with the open systems that survived them. And it is unlikely that its nominal head, Francis I, will want to put his nose deeply in the books.
Though the Vatican’s model of finance would seem long obsolete, there are ways that modern banking is now moving closer to that old value system. China’s most powerful banks are largely black boxes, beholden to a regime rather than to empowered shareholders.
They are state banks, but even they are not in good shape.
The West’s top banks have grown into some of the world’s wealthiest international entities, capable of hiding debts and obligations in much the same way monarchial governments did.
Translation: we truly are back in the days of serfdom, and the wealth inequality proves it.
And bankers have acquired, like absolute monarchs, an aura of unaccountability, with the ability to tamp down regulation and avoid culpability. So far, for instance, not a single American banker has gone to jail for the 2008 financial debacle.
Don't think we haven't noticed.
This princely power might seem desirable to those that hold it, but history suggests it’s at odds with the trust we require from our bankers.
Where have you been the last 5 years? The trust is gone forever, and their behavior since hasn't helped!
As a society we—and, in the end, the banks themselves—are better off the less they look and act like kings.
--more--"
Meanwhile, over at the Vatican window:
"3 arrested in Vatican bank inquiry" by Alessandra Migliaccio, Chiara Vasarri and Flavia Rotondi | Bloomberg News, June 29, 2013
ROME — A senior Vatican prelate, an agent of Italy’s secret service, and a financial broker were arrested Friday in a corruption investigation that is part of a wider inquiry into Vatican bank transactions....
The arrests came two days after Pope Francis named a commission to oversee operations of the bank. Moneyval, the Council of Europe’s watchdog for money laundering and terrorism financing, is calling for independent supervision of the bank, which is known as the Institute for the Works of Religion, or IOR....
--more--"
"2 Vatican bank officials resign amid scandal" by Nicole Winfield | Associated Press, July 02, 2013
ROME — The director of the embattled Vatican bank and his deputy resigned Monday, the latest heads to roll in a broadening finance scandal that has landed one Vatican monsignor in prison and added urgency to Pope Francis’s reform efforts....
The bank, known as the Institute for Religious Works, has remained in the news amid fresh concerns it has been used as an offshore tax haven. The bank has long been a source of scandal for the Holy See....
Word is it's all tied up with Wall Street, too.
The resignations Monday and nominations of interim administrators represented a final overthrow of the bank’s old guard management and coincided with its efforts to comply with international norms to fight money-laundering and terror financing.
The resignations came days after the pope announced a commission of inquiry and followed the arrest of a Vatican accountant. Monsignor Nunzio Scarano is accused of corruption and slander in connection with a plot to smuggle $26 million into Italy from Switzerland without reporting it to customs officials.
Scarano, dubbed ‘‘Don 500’’ by the Italian media because of his purported favorite euro banknote, acknowledged Monday that his behavior was wrong but said he was only trying to help friends, his attorney, Silverio Sica, told the Associated Press.
Scarano is also under investigation in Salerno for alleged money-laundering....
Related: Sunday Globe Special: Papal Politics
The Vatican bank was founded in 1942 by Pope Pius XII to manage assets destined for religious or charitable works.
Interesting.
Considering the Catholic Church's history of collaboration with the Nazis and the time frame there (until fall of 1942 the Axis powers were winning the war. Hitler had moved into the Caucasus and the Japanese had taken over South Asia. That was when the war began to turn against them) it is obvious the Church thought international finance was on the verge of change.
How odd we now have a fascist banking system (unfair to what are described as fascists in schools and the media, really, since they were nothing more than severe nationalists who upended the private central banking cartels of Europe) ruling this planet?
--more--"
