Debunking the myths of Brexit ‘disaster capitalism’

The proliferation of daft conspiracy theories has been one of the more depressing features of the painful process of leaving the EU. You might expect this nonsense from notoriously sloppy journalists, ‘fake news’ websites, or desperate politicians. But even some otherwise fairly sensible people have claimed that government policy is being driven by a cabal of hedge funds, dodgy corporations and tax avoiders who stand to benefit from a ‘hard Brexit’.

One of the worst recent examples can be blamed on Byline Media, which ‘revealed’ that some donors to Boris Johnson’s leadership campaign and/or to Vote Leave have links (in some cases, very tenuous links) to hedge funds with short positions in UK equities. Fortunately, this story has now been thoroughly debunked by every serious financial commentator who has looked at it, including Frances Coppola, Chris Dillow, Juliet Samuel, and the team at the FT.

In brief, Byline has provided no substantial evidence that these donors would benefit personally from any particular form of Brexit. The claim that this has created a potential conflict of interest for Johnson, or for government policy-making, therefore falls at the first hurdle.

For a start, Byline got its figures wrong (as explained here by Full Fact and subsequently admitted by Byline itself). More importantly, it is pure financial illiteracy to assume that short positions in UK equities are anything to do with Brexit. They are far more likely to be a bet against particular companies with weak fundamentals, and very often a hedge against a bigger long position. Or they could simply be a reflection of a bearish view on the valuation of equities generally, both in the UK and elsewhere.

Why also the obsession about ‘short’ positions? A long position in a different company, or a different asset class, might be just as likely to create an interest in a particular outcome. For example, if you expected a no-deal Brexit to hit the pound, you could go overweight in a selection of UK companies which earn most of their money overseas, or an international asset such as gold whose sterling price would presumably rise. And if you were really confident – perhaps because you had some special insight into government policy – you would buy options that allowed you to benefit from big market moves.

Other news outlets have made similar mistakes. The Sunday Times has bizarrely suggested that short positions held by a fund managed by Crispin Odey in companies such as the Royal Mail and Intu, a shopping centre owner, are somehow a play on ‘no deal’. (There is a more serious forensic analysis of the positions held by Odey Asset Management here.) Similar nonsense has appeared in Private Eye and been lazily parroted by other Remain-supporting publications, such as the i.

What’s more, hedge funds are rarely controlled by one person. Indeed, the principals of some of the funds cited included prominent supporters of both Leave and Remain. Funnily enough, only the former are name-checked. It is also ridiculous to suggest that every director of a hedge fund, let alone every shareholder, has knowledge of every position. And they are often people with many other interests and investments. Even if you could show that some of their positions in one fund might benefit from a particular form of Brexit, this would not necessarily mean that they would gain overall.

Other conspiracy theorists have focused on the fact that many speculators have been running short positions on sterling. I’m not actually aware of any evidence (even to the Byline standard) that Brexit-backers are betting against the pound. Unlike equities, short positions in currencies do not have to be reported. But anyone with a view on the market impact of no deal will position their portfolios accordingly. That’s their job – and it’s a bit odd for a former Chancellor or top Treasury official to criticise them for doing it.

And yet still the conspiracy theories pile up. Another dodgy claim is that Brexit is being driven by the desire to escape EU tax avoidance measures due to come into force in 2020. This trope was recently reheated by the economist Simon Wren-Lewis in a strange blog which also claimed that ‘Brexiters have controlled the narrative around Brexit’ (if only!), and that ‘the number of people passionate about Brexit is limited to a few thousand people…’

As it happens, I suspect that the number of Leave supporters who are even aware of the EU tax avoidance measures is vanishingly small. But this would be a feeble reason to back Brexit anyway. To take this position, you’d have to be confident that the UK government would not keep these measures after Brexit, despite having shown every intention of planning to do so.

In fact, these measures are designed to support OECD-wide initiatives that the UK itself has helped to lead. The EU’s own track record here is actually pretty poor. Most importantly, the essentials of the EU measures are already part of UK tax law and will remain so, come what may.

Needless to say, Jeremy Corbyn has also tapped into the ‘disaster capitalism’ narrative with a pledge to do everything he can to stop a ‘bankers Brexit’. This phrase is presumably designed to appeal to the hard left and the #FBPE echo chamber. Nonetheless, as lazy slogans go, it still takes some beating.

Let’s not forget that Goldman Sachs, JP Morgan, Citigroup and Morgan Stanley all donated substantial six-figure sums to the Remain campaign ahead of the 2016 referendum. Other major Remain supporters included the financier Mark Coombs and the hedge fund owner David Harding, both counted among the dreaded ‘billionaires’. And that’s even without mentioning George Soros.

So, what was Mr Corbyn driving at? Of course, he’s partly recycling the familiar claptrap that we are controlled by shadowy bankers and their ‘dark money’. Apparently, Leave supporters are particularly susceptible to these evil influences.

But this narrative doesn’t make any more sense if you look at the substance of what he then said. The Labour leader goes on: ‘there were reports over the long weekend that the Tories are going out with their begging bowl to billionaire hedge funders to raise cash for an autumn general election. Let no one be in any doubt what these super-rich donors will be paying for: the chaos and uncertainty caused by a no-deal Brexit is a potential goldmine for speculators betting against the pound.’

This is daft at so many levels, but let’s just turn the logic around. Does this mean that the financiers who backed Remain, or who now oppose a no-deal Brexit, are only doing so because they hope to gain personally from a rebound in sterling? Of course not. What’s more, if the UK does leave the EU with a deal (which by the way is stated government policy), will Johnson’s financial backers expect a refund?

Mr Corbyn warmed further to his theme: “But the payout for those elements of the super-rich that support no deal won’t just stop there. If we leave without a deal on 31 October, they will use the crisis to push through policies that benefit them and hurt everyone else – as they have since 2010.”

This is guff. My Corbyn does not – and cannot – explain how the ‘super-rich’ will be able to push anything through parliament (particularly this one). We can debate the pros and cons of bolder measures to liberalise the economy, lighten the burdens of tax and regulations, and increase consumer choice, including in the NHS. But there is simply no majority for the more sweeping changes that Mr Corbyn would have us fear, nor is there likely to be one any time soon. It’s yet another ‘disaster capitalism’ myth to claim that Brexit will give any UK government a free hand to do whatever it likes.

We’re just left with vague accusations and mudslinging in the hope that some might stick. Byline has doubled down by suggesting that ‘Boris Johnson’s decision-making could be swayed by his reliance on financial institutions and hedge funds for donations.’ Oddly though, they then deny that they are suggesting that the donors themselves are motivated by the prospect of personal financial gain. This is obviously inconsistent.

What’s more, you could make the same insinuations of bad faith against almost anybody. Remain-supporting politicians have also been backed by financiers. Why does this not create a ‘conflict of interest’ too? Labour is dependent on money from trade unions. The CBI gets most of its money from big business. Recent Brexit work by the National Institute of Economic and Social Research (NIESR) has been funded by the Peoples Vote campaign. I could go on.

In reality, most people – even politicians – take a particular view because they genuinely believe in it. That’s true on all sides of the Brexit debate too. Others might then support them, including financially, because they agree with that view, but it’s crucial to get the direction of causation the right way around. Would you argue, for example, that Molly Scott Cato only backs Green causes because it earns her an MEP’s salary? Again, of course not.

In summary, the ‘disaster capitalism’ narrative is based on at least three ridiculous assumptions. First, that only the EU can ever be trusted to do the right thing, and we’d therefore be lost without them. Second, that the Johnson administration is beholden to a cabal of special interests motivated solely by money. And third, that Brexit would give any UK government a free hand to do whatever it likes. Serious commentators should be able to do a lot better than peddling such drivel.

 

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