Author: Todd Tucker

Financial regulation is having a walk-on role in the raging trade debate between Obama and progressive legislators.

Sen. Elizabeth Warren (D-Mass.) is claiming that the Fast Track trade legislation could be used to undermine the Dodd-Frank Wall Street reforms. Her erstwhile partner in passing that bill – President Obama – virulently disagrees:

She is absolutely wrong… Think about the logic of that, right? The notion that I had this massive fight with Wall Street to make sure that we don’t repeat what happened in 2007, 2008 [the recession], and then I sign a [trade] provision what would unravel it? … I’d have to be pretty stupid.

The claim continues to be litigated in the secondary opinion market, with Bloomberg’s Mike Dornan backing up Warren…

Warren says she’s concerned that Republicans could include provisions in a future trade deal undercutting Dodd-Frank. They could then pass it with a simple majority in the U.S. Senate because the fast-track bill would prevent Democrats from blocking the legislation through a filibuster. Normally, it takes 60 votes to break a filibuster… On Warren’s side: One of the nation’s preeminent constitutional law scholars, Laurence Tribe of Harvard University, who counts Obama as a former student. “Any act of Congress or duly ratified treaty overrides any contrary prior federal legislation,” he said in an e-mail.

… and Matt Yglesias at Vox casting doubt on her claims…

Warren is right about this, but it’s also irrelevant. A Republican president looking to gut Dodd-Frank isn’t going to need anything as labyrinthine as a trade pact with Europe to wreck Obama’s signature financial regulation initiative.

For one thing, House Republicans keep passing bills to repeal parts of Dodd-Frank. They don’t pass because the Obama administration opposes them. But with the Cruz administration’s support, huge swaths of the bill would simply be repealed the old-fashioned way.

Beyond that, there is a lot of regulatory discretion in Dodd-Frank. The new president will appoint new personnel to run the SEC, CFTC, and CFPB and the Treasury Department. Later, the new president will appoint a new Fed chair and colleagues on the board. If these people want to go easier on the banks than Obama, that is exactly what is going to happen. Unlike in the case of environmental or civil rights regulations, there are no private causes of action that a regular citizen can take if she feels bank supervision is excessively lax.

Long story short, while it is easy to image a scenario in which a Republican president undermines bank regulation in 2017 it is difficult to imagine a scenario in which possession of Trade Promotion Authority is the linchpin of the scheme.

As someone who spent nearly a decade researching Fast Track and financial services trade issues, I am excited to see these issues break into the mainstream debate. Too often, reporters and politicians simplify the trade debate into a tariff reduction story. But tariffs are low, and most of modern trade deals are about behind-the-border regulation of the kind Warren is talking about.

But some of these interventions are conflating various issues, and confusing the debate as a result.

Continue reading “Fast Track Changes the Conversation, Not the Law” →

The debate over Fast Track is heating up, and President Obama is getting more riled up by the details of the investor-state dispute settlement mechanism, or ISDS, than I’ve ever seen a sitting president get. On a recent conference call with reporters discussed by Greg Sargent, Obama said:

This is the notion that corporate America will be able to use this provision to eliminate our financial regulations and our food safety regulations and our consumer regulations. That’s just bunk. It’s not true.

ISDS is a form of dispute resolution. It’s not new. There are over 3,000 different ISDS agreements among countries across the globe…

ISDS has come under some legitimate criticism, when they’re poorly written, because they’ve been used in particular by some tobacco countries in some countries to challenge anti-tobacco regulation. That’s why we have made sure that some of the legitimate criticisms around past ISDS provisions are tightened, are strengthened, so that there is no possibility of smaller countries or weaker countries getting clobbered by the legal departments of somebody like R.J. Reynolds so that they can’t pass anti-smoking regulations.

The president is correct about the widespread proliferation of investment treaties. Indeed, I can’t think of another category of international pact that is equally bounteous.

Notably, most of these treaties – UNCTAD estimates nearly 80 percent – include most-favored nation provisions. MFN rules have a long history, and are premised on the notion that – when King Sam extends privileges to King Jack, he should do the same for King George. Fast forward to investment treaties, and MFN means that the US must treat German investors as well as it treats Canadian investors, and Argentine investors, and so on.

As legal scholar Martins Paparinskis has shown, investment treaty arbitrators have had a field day with MFN provisions. Arbitrators have found that investors from Country A investing in Country B get to have access to equal treatment as Country B offers investors from Countries C, D and so on. But this “treatment” goes beyond Country B’s direct relations with the investor in question, and can include the benefit of the substantive and procedural treaty provisions that Country B negotiated with those other nations.

Pause for a moment to imagine the mischief this allows. Let’s say that we take Obama at his word that his investment agreements are better than past ones – perhaps by blocking challenges of health measures. Great. But if the past pacts continue to exist, then investors could pluck the most pro-investor provisions from a country’s entire roster of treaties. Such use of MFN sharply diminishes the utility of treaty-by-treaty reform efforts.

Continue reading “Creeping multilateralism” →

Obama’s trade push has brought unparalleled levels of attention to investor-state dispute settlement. Mark Bittman writes in the NYT about Obama’s Trans-Pacific Partnership (TPP):

The agreement would even allow countries to challenge one another’s laws… If our laws are seen as restraining trade or limiting profits, they could be challenged in special courts, per the TPP’s “investor state” clause. Philip Morris is suing Uruguay over that country’s antismoking laws under just such circumstances; there are several examples of American companies’ flouting local laws and citing trade agreements as an excuse; and Mexico has been sued repeatedly for theoretically diminishing investor profits.

Underlying this argument seems to be that investment treaties’ “special courts” are more pro-business (or less pro-public interest) than national courts. At least, that seems to be the appropriate comparator.

Yesterday’s US Supreme Court oral arguments challenge that assumption. As Adam Liptak writes:

With scorn bordering on anger, some of the Supreme Court’s more conservative members on Wednesday gave a hostile reception to a government program dating to the Great Depression meant to increase raisin prices by keeping some raisins off the market.

“Central planning was thought to work very well in 1937,” Justice Antonin Scalia said, “and Russia tried it for a long time.”…

The case, Horne v. Department of Agriculture, No. 14-275, arose from the activities of Marvin D. and Laura Horne, raisin farmers in Fresno, Calif., who in 2002 set up a business arrangement that they claimed allowed them to avoid the program.

The Agriculture Department imposed fines, and the Hornes defended themselves on the ground that aspects of the program violated the takings clause of the Fifth Amendment, which says private property may not be taken for public use without just compensation….

“It doesn’t help your case that it’s ridiculous,” Justice Scalia said…

Despite the scorn, the raisin program apparently has some merits. Justice Breyer noted that the program left the raisin farmers better off than without the program. The government defense, moreover, emphasized that farmers that didn’t like raisin regulations could move into different crops – a seemingly reasonable argument that nonetheless attracted conservative ire (“That’s a pretty audacious statement,” the chief justice said. “If you don’t like our regulations, do something else.”).

The raisin case wasn’t the only unconventional takings dispute working its way through the US court system this week. As Aaron Kessler writes, US judges have been more willing to entertain a fanciful takings claim by AIG shareholders against the US government financial bailout than most observers would have thought possible. I’ve written about this case before. At its core, as Kessler notes, is about whether a government measure that actually salvages value in a bankrupt company could nonetheless be so forceful that it counts as a taking. If the US loses (which seems a bit more possible than it did a year ago), the taxpayer could be on the hook for billions.

These cases take place against the backdrop of an evolutionary debate in US law about the balance between business and public interests. As Will Baude notes over the Volokh Conspiracy, there is an ongoing debate within US constitutional law as to what kinds of property and deprivation are covered by the “takings clause”. The frontier of these rules have moved over time, from total state discretion in the early days of the Republic (as William Treanor argues here) to gradually more categories of compensable takings today (as Matt Porterfield argues here).

This domestic evolution has seemed to play out in reverse in the investment arbitration world. After years of worry that international arbitrators would stretch anti-expropriation rules in investment treaties beyond that allowed in the analogous domestic takings rules, they have rarely found against states under these provisions. For example, in Merrill Ring v. Canada (a NAFTA case from 2010) entertained a logging investor’s claim against Canada’s decades-old policy of regulating the logging industry. Despite some lengthy pro-business musing in the text of the award (the lead arbitrator was none other than one of Augusto Pinochet’s diplomats), the arbitral tribunal decided that nothing in international law allowed the forestry regulations to be considered takings (or even violations of the considerably looser “fair and equitable treatment” standard). In Biwater Gauff v. Tanzania, a government was found to owe nothing after its forced invasion of a water concessionaire before its contract was up. The reason? The government action was mostly reasonable in an emergency situation, and actually salvaged some of the value in a worthless company.

These parallel developments are a bit of a puzzle. I would predict that national judges would be more restrained to follow state interests than arbitrators in ad hoc international arbitration (where investors bring the case load and the pay days). These cases – then – are somewhat confounding. Why would US judges be more willing to scrutinize decades-old agricultural policies and emergency bailouts than arbitrators whose fees come from business? Coming up with adequate answers would require more understanding into the effective opportunity and constraint structure facing US judges in a time of US political gridlock, as compared with investment arbitrators in a time where even food columnists write scathing attacks on them.

As @jonathanweisman reports, Wikileaks has leaked the investment chapter of the Trans-Pacific Partnership. In response, critics and proponents of the Obama trade deal have trotted out their favored arguments against and for the deal’s investor state provision, which allows foreign investors to directly sue states. Some of the arguments on the pro side, such as the fact that the US has never lost a case, that 3,200 of these treaties already exist without the world imploding, and that the US is already sued a lot in domestic courts, are difficult to counter.

However, one argument raised in the piece seems less compelling. From the NYT,

[In 1999] California banned the chemical MTBE from the state’s gasoline, citing the damage it was doing to its water supply. The Canadian company Methanex Corporation sued for $970 million under Nafta, claiming damages on future profits. The case stretched to 2005, when the tribunal finally dismissed all claims. To supporters of the TPP, the Methanex case was proof that regulation for the “public good” would win out […] as long as a government treats foreign and domestic companies in the same way, defenders say, it should not run afoul of the trade provisions. “A government that conducts itself in an unbiased and nondiscriminatory fashion has nothing to worry about,” said Scott Miller, an international business expert at the Center for Strategic and International Studies, who has studied past cases. “That’s the record.”

This narrative about Methanex may pass muster in the court of the public opinion, but it has not fared as well in the courts of investment treaties.

The quirk about investment treaties is, there is no binding precedent. So it’s a fairly unpredictable legal system where different ad hoc tribunals come to different conclusions on similar matters and legal provisions. So the pro-regulatory reading of Methanex (which is not the only reading of the award, BTW, as I show below) has not been consistently followed in subsequent cases. Not even, as it turns out, by its creators (who are, as an additional quirk, also not bound by their previous decisions either). The rub? Citing any one case as support for a favored proposition is a pretty merit-less exercise.

To examine Methanex’s legacy, I pulled together the 32 finalized arbitration awards since that time that cite the decision. Although not binding, past cases do influence later ones, as evidenced through citation. Although not a random sample of the 137 cases in my dataset (which features all public and finalized merits cases from the first award in 1990 to the end of 2013), it is a nice cross-section of a good chunk of awards.

The Methanex decision was rendered by an ad hoc tribunal led by UK arbitrator VV Veeder, who was joined by Michael Reisman of Yale Law School (selected by the US) and Canadian lawyer J. William Rowley (selected by the investor). I will first highlight its conclusions on expropriation, which are the ostensible basis for some of the claims by Miller above. (Later on, I will address a few other aspects of the case.)

Continue reading “No Methanext Time” →

New York federal courts have rattled nerves around the globe with recent decisions that impact far beyond US borders. Last month, an Eastern District jury verdict found a Jordanian bank responsible for terrorist financing. Meanwhile, over in the Southern District, Judge Griesa is working to force Argentina into a settlement with so-called “vulture funds” that have rejected that country’s debt restructuring offers. These laws have never been successfully adjudicated before, but the judges in each case dismissed arguments of the Obama administration that caution should prevail. In particular, the administration claimed that the way the judges interpreted the law risked damaging US foreign policy interests and economic stability. Both cases raise questions about how the judges catapulted themselves into these diplomatic roles and if there is any way to contain them.

This is the beginning of a post of mine on Huffington Post. For the rest, go to the link.

The AIG lawsuit by Maurice Greenberg attracts some scathing attention from Andrew Ross Sorkin in today’s Times. He’s right on the politics, but is he right on the law?

Sorkin has little sympathy for Greenberg, who is suing the government over its handling of the AIG takeover, writing that the insurance giant “stupidly insured big banks on large swaths of bad mortgage deals via credit-default swaps.”

As Sorkin recounts,

Mr. Greenberg, who sued on behalf of fellow shareholders and seeks more than $40 billion from the government, does not dispute that A.I.G. needed $192 billion to survive the financial crisis. It instead challenges the onerous nature of the rescue.

On Monday, his lawyer, David Boies, hammered Henry M. Paulson Jr., the former Treasury secretary, about why A.I.G.’s shareholders were nearly wiped out when the government took what eventually became a 92 percent stake in the firm and put the interest rate on the loans at a high 14 percent. The onerous terms were unlike the deals made for so many other institutions receiving bailouts in 2008, including Morgan Stanley, Citigroup and Bank of America.

In his complaint, Mr. Greenberg asserts that the terms amounted to a violation of the Fifth Amendment. “This is the only time in history when the government has taken without just compensation and/or illegally exacted the assets and equity of a company and its shareholders in connection with a loan, let alone a fully secured loan bearing an extortionate interest rate,” the suit says.

To Sorkin, this is a ridiculous argument. The AIG takeover was “punitive” and “confiscatory”, and “it was supposed to be”. Or, as Sorkin quotes,

On questioning, Mr. Paulson didn’t beat around the bush. ““It was important that the terms be harsh because I take moral hazard seriously,” he said, confirming that the deal was structured so as to be punitive to A.I.G. shareholders. “When companies fail, shareholders bear the losses,” he said, “It’s just the way our system is supposed to work.”…

So why was the government so tough on A.I.G. and so easy on the banks that bought the soured mortgage bundles in the first place?

In truth, because the government thought that such a deal wouldn’t destabilize A.I.G. — and a tougher deal for banks might undermine confidence in the financial system in the markets.

That’s the same reason the government didn’t push harder for A.I.G.’s counterparties — i.e. the banks — to take “haircuts,” or less than the money they were owed on the insured payouts. The government worried it would only make people more nervous about the strength of the banking system, undermining the confidence it was trying to sow.

Sorkin is right on the political optics of the case. If the Court of Federal Claims were to award any money to shareholders, it would be politically toxic for the legal system and at least two administrations.

But, as his reporting reveals, the government actually did seek to confiscate and use its force with AIG, and made it bear a burden not imposed on other financial players. This starts to sound like a regulatory taking, even if it were a politically justified one.

Now, even though this is a colorable taking case, I would be surprised if US courts sided with Greenberg. But this is because of the politics, not the law.

Indeed, as I wrote earlier in Greenberg’s lawsuit, he may have a better chance bringing his claim under the US’ investment treaty with Panama – which is where Greenberg’s holding company is domiciled.

I can see at least four reasons why a treaty based claim could yield more fruit than a domestic case.

My colleague Matt Porterfield has compared the domestic regulatory takings doctrine to the analogous international indirect expropriation doctrine. While the former is relatively pro-government, the latter is more deferential to investors. And in this case, the principals are on the record as saying they intended to punish and take shareholders’ property.

Second, if a US court failed to side with Greenberg despite the legal merits, he could claim additionally that the US judiciary contributed to the taking or to denial of justice.

Third, to my knowledge of the case law, Paulson’s moral hazard defense would not carry water – investment tribunals have been loath to give much weight to economics-rooted defenses. The government’s speculations that banks would be more able to bear the brunt of the burden would be just that. Greenberg could bring in many experts that will just say that the banks could have / should have failed. In treaty cases, experts tend to cancel each other out.

Finally, international arbitral tribunals do not face the same type of political pressures as US courts to side with the US government on a case that is “too big to lose”.

Could a jury decision on terror financing trigger #WTO liability for the US?

Earlier this week, a New York jury found a Jordanian bank liable for damages under the 1990 US Anti-Terrorism Act (ATA). According to the Times, it was “the first time a bank has ever been held liable in a civil suit under a broad antiterrorism statute.” The Bank plans to appeal the case, which could produce a damage award in the billions of dollars.

Allegedly, the Arab Bank (Jordan’s largest bank and a major conduit of US and Israeli foreign aid money) ran a life insurance program for suicide bombers. US victims of suicide bombing attacks in Israel invoked the ATA to claim civil damages. According to Fortune, the US courts have jurisdiction over the case because some of the transfers were conducted through Arab Bank’s New York affiliate – although the New York link is pretty tenuous from the available records.

The Arab Bank claims innocence, but has also refused to hand over documents proving this – saying it would violate financial secrecy laws of several countries where it conducts business. Here is Fortune again:

The Arab Bank’s prospects of successfully defending itself have been hobbled, if not foreclosed, by U.S. District Judge Nina Gershon’s July 2010 order imposing stiff sanctions on the bank for its failure to turn over records, an act that would have—according to both the bank and the Kingdom of Jordan, which filed papers on the bank’s behalf—violated the country’s bank secrecy laws…

Judge Gershon’s controversial sanctions order relates to document requests the plaintiff made in 2005, seeking bank records of certain named individuals and organizations. Most of the records were located in Jordan, Lebanon, or Palestinian territories, where they were protected by bank secrecy laws, meaning that the bank would have risked criminal prosecution in those countries for complying with Judge Gershon’s order.

The general U.S. rule is that, even under such circumstances, U.S. judges do have the power to order records to be turned over, but they must first perform a balancing test, examining all the equities of the situation and taking into account considerations of international “comity”—i.e., respect for foreign countries’ laws. Given the interests that both the U.S. and Jordan had expressed in fighting terrorism, Judge Gershon ordered the records turned over and, when they weren’t, imposed a crushing and, potentially, case-dispositive sanction order.

Under that order the jury would be instructed that it may (though it need not) infer solely from the bank’s failure to turn over those records that the bank did, indeed, “knowingly and purposefully” aid the financing of terrorists. Equally devastating, the order forbids the bank from introducing any evidence of its allegedly innocent state of mind if that evidence might have been contradicted by the records that were never turned over.

In other words, the judge made a decision that US interests trump foreign laws and that a jury was to be instructed to disregard much of Arab Bank’s argument. This does not put the Arab Bank in a strong position.

Continue reading “Hamas’ Bank: Meet US trial lawyers” →

Canada and the EU’s draft trade agreement was recently leaked, and it appears to give more space to nations to regulate the financial services sector than past trade deals. (h/t @snlester) But CETA may actually introduce new problems for financial regulators.

A quick refresher: the Uruguay Round of trade talks produced the world’s first major “trade” deal that also included rules restricting what types of financial regulations countries could apply on their home turf. This obviously concerned financial regulators, who were worried that WTO adjudicators would give more weight to “trade” concerns than regulatory ones. The compromise was a “prudential measures defense” or “prudential carve-out” that a country could invoke in WTO proceedings if its financial regulations were ever challenged. The problem is that the defense is not clearly written, and may cause more problems than it solves, as I have written here and here.

The CETA drafters appear to be sensitive to this criticism, and have a lot more language emphasizing the importance of regulation. (I’ve posted the full thing below). But even the permissive language (e.g. “Each Party may determine its own appropriate level of prudential regulation”) does not mean that investors or states could not challenge that regulation once the state established it.

A few quick points.

First, the CETA text puts states back in the drivers’ seat. Other trade agreements outsource power to international courts and adjudicators, who are seen as trustees and independent interpreters of a system of rules that hold states to account. Some scholars have questioned the wisdom of this. As Eric Posner and John Yoo write,

Tribunals are likely to be ineffective when they neglect the interests of state parties and, instead, make decisions based on moral ideals, the interests of groups or individuals within a state, or the interests of states that are not parties to the dispute. The difference between our view and the conventional wisdom centers on the role of tribunal independence. A tribunal is independent when its members are institutionally separated from the state parties-when they have fixed terms and salary protection, and the tribunal itself has, by agreement, compulsory rather than consensual jurisdiction. Conventional wisdom holds that independence at the international level, like independence at the domestic level, is the key to the rule of law as well as the success of formalized international dispute resolution. We argue, by contrast, that independent tribunals pose a danger to international cooperation because they can render decisions that conflict with the interests of state parties. Indeed, states will be reluctant to use international tribunals unless they have control over the judges. On our view, independence prevents international tribunals from being effective.

Continue reading “Ejusdem regs” →

Simon Lester asks what part of Judge Griesa’s anti-Argentina injunctions would be actionable under WTO rules. This was a possibility I raised here. On Twitter, he asks “have other courts interpreted similar clauses differently than Griesa did?” and “Isn’t this US court enforcing a private contract, rather than interpreting statute/regulation?”

It’s a good question. My take is that the measures at issue would not be the underlying contractual term, but Griesa’s interpretation of it plus any judicial or executive branch efforts to enforce the holding.

First, on the question of the weight of precedent. There has not been much interpretation by courts of the so-called pari passu clauses which are at issue here. As SCOTUS Blog notes, 

One promise [by Argentina] was that any dispute would have to be settled under New York law.  And another was a so-called “equal treatment” guarantee.  That second promise goes by a Latin phrase, pari passu.  Loosely translated, it means that everybody gets treated the same when it comes to investors’ rights.  It is a standard part of almost all international borrowings by governments. …

Ultimately, a federal judge in New York City, Thomas P. Griesa (in time, fully supported by a higher court, the U.S. Court of Appeals for the Second Circuit), ruled that if Argentina made any more payments to the swap participants, it had to pay what it owed to the holdouts — that is $1.33 billion.  That, Judge Griesa said, is what pari passu means.

Argentina thinks pari passu means something else: only that it would treat the investors in a single borrowing the same, not that it would treat everyone in the world to whom it owed money the same.  The holdouts had a chance to make a swap, and they chose not to. 

The rival interpretations could be recast as to whether pari passu clauses guarantee equality of outcome (payment) or equality of opportunity (everyone given same procedural rights to make a deal).

The US argued for the latter interpretation in its amicus brief. The Obama administration lawyers said that the correct legal result (as a matter of New York contract law) is that which is consistent with settled expectations of the meaning of contractual terms at the time of original contract. Citing a long string of academic and historical publications, the US argued that the settled understanding was limited to procedural equality.

Continue reading “What is at Fault in #GrieFault?” →

Could the US face WTO sanctions for the recent Argentina bonds debacle?

A quick recap of where we are. US Judge Griesa recently ruled that Argentina cannot pay off its restructured bondholders without first paying a group of “vulture fund” holdouts. Those restructured bondholders were due their payments last night, but US banks were enjoined from making the payments on Argentina’s behalf (despite having Argentina’s money to do so). This prompted Standard & Poors to declare Argentina in technical default. Financial reporter Felix Salmon is referring to the mess using the hashtag #GrieFault on Twitter, distinguishing a judicially determined default from one where a government doesn’t have the economic resources to meet its payment obligations.

Argentina prefers a different nomenclature, noting that the US is “internationally responsible” for its judiciary, which it accuses of “transfer restrictions“.

In the world of international law, thems are fighting words. Back in 2011, the WTO ruled that the US court rulings are “a priori capable of constituting a measure attributable to the United States, which may be challenged in dispute settlement proceedings under” the WTO. And a decade earlier, a WTO panel noted that – if US prosecutors or courts moved to block payments and transfers to offshore gambling sites – it risked violating its WTO obligations.(Indeed, Argentina just announced that it might pursue action at the International Court of Justice, although it is not clear on what basis.)

It would be ironic if the Obama administration, which supported Argentina’s positions in US court filings, now finds itself on the hook for judicial actions it disagrees with. But them’s the rubs when it comes to international law (as I write in this piece for UNCTAD).

Here’s a bit more detail on how I see such a claim playing out:

Continue reading “GrieFault Backfire?” →