Drug Money Saved Banks in Global Crisis?

Wow, so it wasn’t Turbo Timmy, the AIG rescue, the alphabet soup of Fed currency facilities or the currency swaps that saved the global banking system. The marginal suppliers of capital, according to the UN, were drug lords. That means that the UN is saying that the banks went into the money-laundering business on a much greater scale than before as a matter of survival. I would presume if this is accurate, it would also mean terrorist groups were able to more more money through the banking system.

From the Guardian:

Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were “the only liquid investment capital” available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result….

Costa said evidence that illegal money was being absorbed into the financial system was first drawn to his attention by intelligence agencies and prosecutors around 18 months ago. “In many instances, the money from drugs was the only liquid investment capital. In the second half of 2008, liquidity was the banking system’s main problem and hence liquid capital became an important factor,” he said.

Some of the evidence put before his office indicated that gang money was used to save some banks from collapse when lending seized up, he said.

“Inter-bank loans were funded by money that originated from the drugs trade and other illegal activities… There were signs that some banks were rescued that way.” Costa declined to identify countries or banks that may have received any drugs money, saying that would be inappropriate because his office is supposed to address the problem, not apportion blame. But he said the money is now a part of the official system and had been effectively laundered.

“That was the moment [last year] when the system was basically paralysed because of the unwillingness of banks to lend money to one another. The progressive liquidisation to the system and the progressive improvement by some banks of their share values [has meant that] the problem [of illegal money] has become much less serious than it was,” he said…

Gangs are now believed to make most of their profits from the drugs trade and are estimated to be worth £352bn, the UN says. They have traditionally kept proceeds in cash or moved it offshore to hide it from the authorities. It is understood that evidence that drug money has flowed into banks came from officials in Britain, Switzerland, Italy and the US.

The British Bankers Association, not surprisingly, took huffy exception to the report and said it was the central banks that saved the industry. Even if the UN claims are true, central banks no doubt did provide more firepower in aggregate. However, as any economist or investor will tell you, what happens at the margin makes a big difference, and it may pan out that laundered funds were a significant factor.