Why Warren Is Right and Obama Is Wrong on Fast Track’s Threat to Wall Street Reform
President Obama seems unaware that his controversial trade agenda could undermine the Wall Street reform agenda of his first administration.
Fortunately, Senator Elizabeth Warren has been reminding him of this contradiction and the threat it poses to financial stability. Last week, in a speech about the president's trade agenda, she stated, “Anyone who supports Dodd-Frank [the post-crisis Wall Street reform law] and who believes we need strong rules to prevent the next financial crisis should be very worried.”
Unfortunately, Obama responded over the weekend by dismissing Senator Warren’s concerns and defending his controversial push to Fast Track through Congress the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Free Trade Agreement (TAFTA).
In an interview, Obama seemed unnerved by the notion that this agenda could “unravel” Wall Street reform. Indeed, it is unnerving – because it’s true.
Just four days after Obama brushed away Sen. Warren’s concerns as “pure speculation,” Canada's Finance Minister Joe Oliver has declared that the Volcker Rule – a centerpiece of the Dodd Frank Wall Street reform law – violates the North American Free Trade Agreement (NAFTA). Not only would the TPP replicate many of NAFTA’s pre-crisis, deregulatory rules that threaten financial regulations – it would expand them further.
“I believe, with strong legal basis, that this [Volcker] rule violates the terms of the NAFTA agreement,” states Oliver. If our trading partners are already invoking existing U.S. trade pacts to issue clear threats against Wall Street reform, why would we undertake an unprecedented expansion of this trade model’s threat to financial stability via the TPP and TAFTA?
For the first time, the TPP and TAFTA would empower the world's largest banks, including 19 of the 30 biggest non-U.S. banks, to “sue” the U.S. government before extrajudicial tribunals over U.S. financial regulations. And unlike any past U.S. trade pacts, the TPP would empower foreign banks to challenge new U.S. financial protections on the mere basis that they frustrated the banks' "expectations."
The deals are also slated to include deregulatory provisions that literally were written under the advisement of Wall Street banks before the financial crisis – provisions that would conflict with bans on risky derivatives or policies to prevent banks from becoming “too big to fail.” Sen. Warren and other Senators warned the administration about these pre-crisis provisions in a letter last December, concluding that the TPP “could make it harder for Congress and regulatory agencies to prevent future financial crises.”
And Senator Warren isn’t the only canary in this mine. Leading members of the House of Representatives, including House Financial Services Committee ranking member Rep. Maxine Waters, have issued similar warnings about TAFTA’s threats to U.S. financial stability measures. The Americans for Financial Reform – a coalition of more than 200 groups leading the push for Wall Street reform – has repeatedly detailed how TPP and TAFTA provisions conflict with commonsense financial protections.
Prominent economists like Simon Johnson, former chief economist for the International Monetary Fund, have explicitly backed Warren’s concerns. And in a speech last year, Federal Reserve governor Daniel Tarullo plainly stated that proposals “to include limitations on prudential requirements in trade agreements would lead us farther away from the aforementioned goal of emphasizing shared financial stability interests, in favor of an approach to prudential matters informed principally by considerations of commercial advantage.”
But, you may be thinking, surely President Obama would not want to roll back Wall Street reform, right? Fast Track’s threat, unfortunately, is larger than Obama, because Fast Track would outlast Obama. Fast Track would also give blank-check powers to whoever is president after Obama to pursue additional binding agreements to which U.S. domestic laws, including financial regulations, would have to conform. Senator Warren spotlighted this threat in her response to Obama this week, stating, “If that [next] president wants to negotiate a trade deal that undercuts Dodd Frank, it will be very hard to stop it.” While an attempt to undermine Dodd Frank via normal legislation would require 60 votes in the Senate, a Fast-Tracked trade deal that undermines Dodd Frank could be implemented with a simple majority.
But even if no future trade agreements would be shoved through Fast Track’s back door, the existing trade pacts – TPP and TAFTA – present plenty of cause for concern. Indeed, the two deals pose greater threats to U.S. financial regulations than any past U.S. trade or investment deals. That’s largely because, for the first time, they would allow the world’s most powerful banks to use the notorious “investor-state dispute settlement” (ISDS) system – a parallel legal system for multinational firms – to challenge U.S. financial regulations.
Under current U.S. pacts, none of the world’s 30 largest non-U.S. banks may bypass domestic courts, go before extrajudicial tribunals of three private lawyers, and demand taxpayer compensation for U.S. financial policies. Were the TPP and TAFTA to be enacted, 19 of the world’s 30 largest non-U.S. banks would be so empowered - from the UK’s HSBC (notorious for enabling money laundering by drug cartels) to France’s BNP Paribas (notorious for evading U.S. sanctions). These global banks have many subsidiaries in the United States, any one of which could serve as the basis for an ISDS challenge against U.S. financial regulations if the TPP and TAFTA were to take effect.
One of the largest banks that that would be newly empowered to challenge U.S financial protections is Deutsche Bank, a German megabank that received hundreds of billions of dollars from the U.S. Federal Reserve in exchange for mortgage-backed securities in the aftermath of the financial crisis. The Association of German Banks, led by Deutsche Bank’s CEO, has already made clear that it has “quite a number of…concerns regarding the on-going implementation of the Dodd-Frank Act (DFA) by relevant US authorities.”
The ISDS threat is not hypothetical – foreign firms have already used ISDS to attack financial measures, such as when a Netherlands investment company demanded hundreds of millions of dollars from the Czech Republic for choosing not to bail out a bank during the country’s banking crisis. The foreign firm was irked that the bank in which it had a minority share did not receive a government bailout while other banks did. An ISDS tribunal of three private lawyers ordered the government to pay the firm $236 million.
Fast Track’s threat to U.S. financial regulations is also unprecedented because the TPP, according to U.S. TPP negotiators, would be the first U.S. trade pact to empower foreign banks to launch ISDS cases against U.S. financial regulations on the basis that those regulations violated a special guarantee of a “minimum standard of treatment” for foreign investors. ISDS tribunals have interpreted this ambiguous obligation as requiring governments to maintain a “stable and predictable regulatory environment” that does not frustrate foreign firms’ “expectations.” That is, regulations should not significantly change once a foreign investor has invested – even if the government is trying to prevent or mitigate a financial crisis.
Due to such sweeping interpretations, this vague government obligation has become the basis for three out of every four ISDS cases brought under U.S. pacts in which the government has lost. Unlike past U.S. trade pacts, the TPP would newly subject U.S. financial regulations to this broad and oft-used obligation.
President Obama did not address these realities when dismissing Senator Warren’s warnings about the threat Fast Track poses to Wall Street reform. Indeed, he seemed eager to simply call Sen. Warren “absolutely wrong” and move on. The U.S. public deserves an honest debate, not defensive one-liners, when something as sensitive as financial stability is on the line. Let’s hope Senator Warren keeps stoking that debate.