Culprits or Bystanders?

Abstract

Abstract Questions have been raised regarding the role of low tax offshore jurisdictions in the global financial crisis, based largely on evidence that many problematic asset-backed securities were issued from or listed in the Cayman Islands, Jersey, Ireland, and other offshore sites. However, there has not been a systematic investigation of the offshore geography of crisis-implicated securitization. This chapter fills this gap by constructing the first comprehensive jurisdictional map of the largest pre-crisis asset-backed commercial paper (ABCP) programs, and examining the rationale for and impacts of this geography in detail. It shows that offshore jurisdictions were disproportionately involved in producing the most unstable ABCP classes. However, this is difficult to explain in terms of the traditional role of offshore banking centers as sites for direct avoidance of onshore regulation and transparency. Rather, the chapter proposes a Minskian model of pre-crisis offshore ABCP production, wherein these jurisdictions specialized in alleviating incidental institutional frictions (e.g. double taxation) hindering onshore financial innovation. In this context, they could sometimes be legitimately described as improving the institutional “efficiency” of financial markets. However, by facilitating the endogenous evolutionary instability of these markets, this apparently innocuous service had profoundly negative effects. This normative disconnect poses a conundrum for offshore reform, and indeed highlights the intrinsic limitations of financial regulation more broadly.