Happy Friday everyone~ here is the second half of the chapter that sets up the SRC in the Star Wars Universe. Being so integrated with the Republic Economy, the fall of the Hutt Cartel will have obvious effects on the financial system as a whole. Let us see what it is!
I do go into detail about this on my stream, which ... there's a string in my profile which points to my subreddit, which then has a link to the YouTube channel... good job in sticking to decade old protection mechanisms!
"Peace is bad for interest rates."
Chapter 1.1.2 - The Implosion of the Hutt Cartel - The Effect on the Republic
During the Hutt's slow implosion, the Republic itself was not in a state of frozen prosperity. The destruction of the Hutt Cartel had left its own mark even on the prosperous core worlds. Once a major holder and financier of the various legitimate (or not) Hutt business interests, the big Institutional Investors, Hedge Funds and Investments Banks, including those belonging to the InterGalactic Banking Clans (IBC) suffered their own extreme knock-on effects, sending the Republic as a whole into a period of financial chaos, ending only when the Republic committed a special Twenty Quadrillion (20x10sup15/sup) bailout raised via an emergency levy. This was ultimately a source of much discontent, especially in the Outer Rim Territories, where the various Trading companies resented having to bail out their rivals within the IBC.
The involvement of the IBC in Hutt Space was not an accident. Given the persistency of the Republic, but also the stagnation within Galactic technological development, returns were hard to find on core worlds, with Coruscant itself sitting at a carefully balanced net zero. Therefore, the various banks, financial institutions, and private family offices were forced to look elsewhere for yield. The more adventurous of which sought their luck even outside of Republic space, venturing out of the Inner Rim, as far as the Outer Rim and even into Wild Space.
One area that seemed to offer the greatest returns was Hutt space. When they were active, the Cartel's laser focus on profit was irresistible to the yield-starved organizations within the more civilized Republic. And so, as the braver and more adventurous family offices, who were not bound by a multitude of rules (or ethics) of the Republic moved cautiously into Cartel space, the tendrils of the IBC followed suit. The biggest, and most penetrating tendril were the myriad clan Hedge Funds.
Nominally a part of the various banking dynasties that made up the IBC, the Hedge Funds were operated as fully independent business units, with no formal ties to their parent organizations. Even though they were set up with seed capital derived from the family coffers, they were completely separate legal entities. Instead of owning shares, the families often entered as tier-A senior, secured bondholders. While this carried more risk, since the parent organization essentially gave up control of the Hedge Fund, the contribution was very well defined, thus in the event of failure, important family assets would not be dragged down by these high-risk ventures.
In fact, the distant ownership allowed IBC Hedge Funds to be nimble vehicles for ambitious sons and daughters of the clans, giving them a place to test their own mettle in the cutthroat world of finance without affecting the core family business. More than one heir, upon inheriting a higher title, reintegrated the Hedge Fund run in their youth, bringing in a fresh perspective and new blood to shake up the more staid bureaucracies. In certain cases, descendants with no hope of inheriting became so successful that their entire fund was ripped away from the parent clan, forming their own powerblocks within the IBC.
Thus because many of the funds were run by the young and hot-blooded, the risk appetite within the Hedge Funds were the greatest. As a result, even within Republic space there was consistent cooperation between the more adventurous Family Offices, regular and IBC-funded Hedge Funds. The latter often being a career goal for the many money managers because of the chance it affords to enter into the resplendent halls of the IBC. And this cross-pollination, coincidentally, brought them into perfect alignment with the lords of the Hutt Cartel.
The many Hedge Funds within the IBC actively sought out the Hutts, seeing in them something of a kindred spirit. Initial contact was made by the various Venture arms, the groups that tolerated even higher risk within organizations already famous for their risky bets. This was the usual *modus operandi* of the IBC Hedge Funds, who were generally two-to-five times leveraged *on top* of their initial debt funding round. As was characteristic when dealing with something as important as money, the Venture Funds were extremely careful in their due diligence, with seventy-five percent of their staff dedicated towards accounting and legal analysis.
This dedication to the rule of law and ethics was not because the funds themselves cared much about the source of the Hutt profits, or the toll it took on non-Republic citizens. Rather, it was important that business partners were properly vetted, and their future cash flows analysed from first principles. And it was here that the later rule-bending practices were born. The pleasant co-operation between the IBC Hedge Funds and the Hutt Cartel, meant that soon, the other financial institutions were squeezed to the periphery. Within a decade, the IBC had become the main channel of funds between the Galaxy and the Hutt Cartel, participating in almost eighty percent of total trade.
To the Cartel itself, the existence of a direct link to the money within the Republic was too delicious to ignore. Not only would it provide even further legitimacy to the various shell corporations, the contacts made could even be expanded into actual underground trade routes which only further extended opportunities. Thus, even though it was out of character, many of the big players within the Cartel piled into legitimate business opportunities with the new players. The value of the contact was such, that they were even willing to tolerate equal deals where both sides made money.
So as the first tranches of investment entered into Hutt Space, both the Hedge Funds and the Cartel began to benefit almost right away. The former suddenly had access to vetted, legitimate high-growth opportunities. Money that had been sitting almost idle within the Republic was put to work, and more than one offspring upended the succession because of the the business savvy demonstrated within Hutt Space.
However, it was the Hutt Cartel that benefit the most. Not only did the big players find an almost unlimited source of cheap credit, the investments of the venture funds brought along a myriad secondary benefits including, crucially, the various ratings agencies. Paying a nominal fee for having the Hutt shell corporations rated opened up the sector to other financial entities within the Republic.
And immediately following in the wake of the Hedge Funds were the various Investment Banks that formed the core *value* of the IBC. Even though the mandate of the IBC was to provide banking services to the Republic, Retail Banking, serving the citizens of the republic in financing personal loans, mortgages and the like, was never going to be lucrative. Instead, since the IBC held the savings of much of the Republic, and by definition savings were not often moved, this money was originally channelled into further development of the Republic itself.
Thus the Investment Banks within the IBC took depositors money that they accumulate in the Commercial (Retail) side of the business, and channelled it into funding corporate and Republican causes. By investing depositors money in this manner, the IBC helped to provide an incentive for the average worker to save, inherent in the interest paid to retail savings, but also provided working capital to those companies that wanted to expand out of the core worlds themselves. However, returns within these narrowly defined areas remained comfortable, but never spectacular.
When the wild success of the various IBC Hedge Funds in Hutt Space became common knowledge, the Investment Bankers back in the Core worlds became progressively more envious. Almost immediately intense lobbying efforts started to appear in all aspects of the Republican Senate, often from the highest levels within the IBC itself. The Investment Bankers argued that allowing the Corporate side of the IBC banks to extend their operations past Republican space would benefit the Republic the most. Not only would this mean that value generated in the Outer Rim, Wild and Unknown Regions would be directly channelled back into the Republic, it would also serve as long-term ambassadorship, and demonstration of the values of the Republic.
Out of everything, it was the last argument that convinced the Senators. The expansion of the Republic had slowed after a long period of colonization, and while nobody would admit that it was because of the fragmented, weakly confederate nature of the Republic itself, everyone agreed that the Republic should continue to "civilize" the rest of the Galaxy. Thus the value proposed by the the IBC was material; not only would the Republic gain extra wealth, the IBC would also take responsibility for civilizing the more savage portions of the Galaxy.
Thus the remit for the IBC was broadened to include areas outside of Republic space. While lawmakers and Republic Civil Service were not acutely aware of the situation *rimward*, they were aware of the risks posed by an unconditional transfer of the question of sovereignty. Thus only the major IBC shareholding clans were given charters to form "Trading Companies" which were fully backed by the parent organization.
It was the hope of the regulators that the direct arms-length attachment, and the formal political recognition would prevent these systemically important banks from taking risks that would affect the Galactic Banking System as a whole. In addition, by forcing the Hutt corporations to be subjected to the Republican Ratings Agencies, the Senate was setting up extra careful layers of accountability, ensuring that multiple sets of eyes kept a watch over the long-term savings of the Republic itself.
As the Galaxy remained stagnant, and generally good, the savings of the Galaxy was safe. In fact, as the working relationships become more entwined between the IBC Hedge Funds and the Cartel, joint ventures (JVs) became more common. Formed between the IBC Trading Companies and the Hutts, the ventures themselves not only expanded in scope operationally, but often took on territorial ambitions as well. While they remained just barely on the legal side of the line, the source of their income was blurred by many layers of shell corporations, and Hutt interests that extended into the Wild regions themselves. However, this lack of governance was not obvious to politicians sitting in the core, especially since it allowed IBC Investment Banks to provide market-beating returns on the money deposited in the retail portion of the bank.
The sprit of the law were definitely challenged when the various joint ventures started selling aggregated funds containing junk-rated Wild-Space assets. That this was a way to fireproof IBC investments that were challenging the Trade-Company charter, and of dubious legal nature, went tactfully unsaid. The argument by the JVs, and their parent IBC organizations, was that even though the underlying assets were rated officially as junk, there was no correlation between them.
That is to say, even if one asset failed, the rest of the assets remained safe. Therefore, in aggregate, the bundle itself should be considered safe. In addition, with IBC Ratings, a subsidiary of the big IBC clans, moving first to rate these aggregate funds, the other two major ratings agencies (Alderaan Financial, and Corellia Galactic) soon followed suit. For a decade, the argument of the JVs proved to be true. Even as some junk-rated assets within the funds failed, others remained in good health, thus providing a rather healthy return for those Institutional Investors who bought into them.
Problems only arose in the funds when prolonged unrest in Hutt Space suddenly rendered much of the funds assets worthless. Within less than 100 hours, the value of the AA+-rated funds dropped fifty percent, rendering them essentially worthless. This had an immediate effect on the valuation of the various IBC subsidiaries with exposure to Hutt space. And while the Republic could have carefully absorb and spread out the damage to one systematically important Bank (i.e. the IBC), the latter had created the condition for the subsequent investments by other big Institutional Investors, many of whom were also systematically important.
Thus even the Twenty Quadrillion (20x10sup15/sup) credit bailout was merely a a stopgap measure to prevent further contagion in the financial system. Even so, the dramatic loss of sizeable assets within the financial system pushed the entire galactic economy into a recession. The problem was the reach of many systematically important financial institutions. Because the expansion of civilized space was mostly funded by deposits within these same institutions, a period of retrenchment meant that credit for expansionary efforts were essentially non-existent.
In addition, because the Galactic Republic effectively did not have full control over its own monetary policy, having outsourced it to the IBC, there was little the Senate could do to induce further expansion. Instead, the various senators were loudly and frequently seen holding inquiries, and berating the banking community, even while no action was taken on the part of those systematically important banks.
It was at this time, due to the retrenching of both the IBC and the Republic, that many of the surviving Joint Ventures, and rogue IBC Hedge Funds essentially declared their organizational independence from their parent institutions, or planets. These companies survived in the Outer Rim, or even further in Wild Space, by rejecting, or dramatically curtailing their dependency on the Republic Credit system. Often simply issuing their own currency backed by the massive territorial gains that had been carefully shielded from public view up until then.
This evoked natural anger within the Republic, as the Trading Company charter explicitly stated that territorial gains would come under the administration of the Republic. Out of this fundamental differences arose untold lawsuits and vicious arguments. In the end, the Republic had little choice but to accept the de facto annexation of what it perceived to be its territory, especially because the dramatic recession in the deep core was taking a toll on funding. While many options were considered by the bureaucrats on Coruscant, most were wildly complicated, and the stalemate between government and Corporations continued. The issue was finally considered settled with the establishment of the Corporate Sector in 490 BBY.