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New FDIC Rules, Offshore Hedge Funds and WTO Rules

The AP reports on new FDIC rules that pose additional restrictions for hedge funds relative to bank holding companies when they acquire failed banks:

The Federal Deposit Insurance Corp.'s board voted 4-1 to reduce the cash that private equity funds must maintain in banks they acquire.

Private equity funds tend to buy distressed companies, slash costs and then resell them a few years later. They have been criticized for excessive risk-taking. But the depth of the banking crisis has softened the FDIC's resistance to them...

Under the new rules, a buyer would need to maintain the bank's capital reserves equal to 10 percent of the failed bank's assets, down from 15 percent under an earlier proposal. That compares with a 5 percent minimum requirement for banks that buy other banks. And the new policy limits the circumstances under which private investors must maintain assets that could be provided if needed to bolster banks they own.

But the FDIC sought to guard against private equity funds that might want to quickly buy and sell at a profit: It required the acquiring investors to maintain a bank's minimum capital levels for three years.

But as the WSJ reported:

Hedge-fund assets in offshore tax havens such as the Cayman Islands and Bermuda represent more than two-thirds of the roughly $1.3 trillion industry, according to Hedge Fund Research Inc.

Of those offshore assets, industry insiders estimate, between $400 billion and $500 billion belongs to U.S. investors, with tax-exempt foundations, endowments and pension funds accounting for about half of that. Investors from outside the U.S. make up the rest.

What implications might this have for our trade and investment rules? Changes in minimal capital requirements would probably not run afoul of WTO member countries' market access commitments, but they could impact their commitments on domestic regulations.

Continue reading "New FDIC Rules, Offshore Hedge Funds and WTO Rules" »

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NAFTA Case Shows Financial Rescue Measures Open to Trade Pact Attack

I'm just back from a relaxing vacation of kayaking, eagle-watching, gun-shooting and salmon-eating, and I've got a bit of a long post stored up in me. So, you've been warned.

Before there was the New Great Depression, or whatever the latest term of art is for the current economic meltdown, there was a series of financial crises that wracked developing countries in the 1990s. And there's one NAFTA case that followed from these government responses to crises that provides a unique insight into how trade and investment treaties limit policy space in response to financial crises.

Going back to 1994, we saw Mexico's Peso Crisis, which came mere months after NAFTA went into effect. As a response, the incoming Ernesto Zedillo administration launched the Programa de Capitalización y Compra de Cartera, a financial rescue plan very similar to the packet of policies launched by the U.S. government in response to our crisis: the government bought non-performing loan portfolios from troubled banks in return for interest-generating government notes redeemable 10 years later. As a condition for participation in the program, banks had to raise additional capital from outside sources.

One of the 11 banks that participated in the program was BanCrecer, a subsidiary of a bank-holding company called Grupo Financiero BanCrecer (GFB). One of the outside sugar-daddies GFB saddled up to for capitalization was the Fireman's Fund Insurance Company (FFIC) of Novato, California. FFIC is owned by Allianz of America, a Delaware corporation owned in turn by Allianz AG of Germany. Allianz of America also owns Allianz Mexico, which in the mid 1990s was trying to ramp up some insurance business in Mexico.

So, to get Allianz's foot in the door, FFIC lent (via dollar-denominated mandatorily convertible five-year subordinated debentures issued by GFB) $50 million to GFB in September 1995. But GFB continued to have financial difficulties, and by 1998-99 was working with JP Morgan and Allianz to find a foreign corporation willing to buy BanCrecer, in coordination with Mexican regulators.

Allianz throughout was looking out for its own financial position, and by summer of 1999 was looking for an emergency parachute from the crumbling BanCrecer empire. It's best possible option appeared to be a reimbursement for the debentures along the lines of what some Mexican investors had gotten for their peso-denominated debentures around the same time period. But in August 1999, the Mexican Central Bank denied one of FFIC/ Allianz's parachute plan, and over 2000-01, BanCrecer was auctioned off to another Mexican bank and GFB began to be liquidated, in coordination with Mexican regulators.

By October 2001, FFIC had launched a NAFTA investor-state case against Mexico, claiming that its investment was expropriated by Mexico, among other claims. There are lot of ins and outs to the case (which you can read about on Todd Weiler's website here), but there are a few points (which I draw primarily from the July 2006 award) that are instructive for anyone thinking about how trade and investment treaties limit governments' policy space in crisis situations:

Continue reading "NAFTA Case Shows Financial Rescue Measures Open to Trade Pact Attack" »

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Steee-riking Out ! (x630)

The embassy of union murder and human rights violation capital of the world Colombia just can't seem to even score a single. After 630 at-bats, the embassy 's batting average out-pathetics even the roster of the dead-last in the majors (pun intended), the Washington Nationals.SteeeRike!

According to CQ Today:

To say the stalled U.S.-Colombia trade deal is important to the Colombian government is something of an understatement.

Colombian Ambassador Carolina Barco had no fewer than 630 meetings with U.S. lawmakers about the pact last year in an effort to get Congress to approve the deal, negotiated by the George W. Bush administration.

But it’s an uphill battle, for the moment. With public attitudes toward trade becoming increasingly negative, job losses weighing down much of the United States and a presidential administration focusing on other priorities, Congress has been in no mood to approve new trade deals.

Suddenly, its not so bad to be the Kansas City Royals (
PCT .384), the Baltimore Orioles (PCT .405), or even the Nats (PCT .357). At least their D.H. can rally the team and say,"Hey we're only 28 games back. The Colombians have thousands of murders of civic leaders to clean up, and more last year than the year before. Not to mention that the public expects them to fix the text of the FTA, to meet the President's campaign pledges... At least we don't have it that bad".

What insightful trade-wonk ballplayers!

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GAO Finds that FTAs Include “Limited Efforts to Promote Progress” on Environmental and Labor Rights

The Government Accountability Office (GAO) released a report this month examining American “free trade” agreements (FTAs) with Morocco, Singapore, Chile, and Jordan, to see if the agreements were advancing U.S. commercial interests and strengthening trading partners’ labor and environmental laws.  While the GAO analysis found positive commercial results, the report faulted U.S. agencies for uneven progress on environmental and labor goals and insufficient American involvement in promoting these goals.  The report lamented the “significant and sometimes worsening systematic deficiencies in certain partner nations” and was conducted at the behest of Senator Finance Committee Chairman Max Baucus (D-MT). 

GAO concludes that, “Notably, USTR’s lack of compliance plans and sporadic monitoring, State’s lax management of environmental projects, and U.S. agencies’ inaction to translate environmental commitments into reliable funding all limited efforts to promote progress.” 

GAO’s study confirms that even the minimal provisions promoting labor and environmental rights in FTAs are not being enforced and further illustrates that all current FTAs need to be reassessed, as proposed in the TRADE Act
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Canadian Legislators Join Growing List of Those Concerned about Panama’s Tax Policies

A “free trade” agreement (FTA) between Canada and Panama may be stalled or defeated in Canada’s Parliament due to concerns legislators have expressed about Panama’s status as a leading tax haven. Panama’s tax haven status was one of the concerns U.S. members of Congress cited when they called on Speaker Pelosi to “chart a new course on trade” and replace the NAFTA model that serves as the basis for the Panama FTA. 

Bloomberg News reports that Canadian legislators from all three opposition parties have signaled opposition to the agreement, citing Panama’s lax taxation policies. Peter Julian, spokesman for the New Democratic Party, has expressed skepticism about the agreement: “We’ll read the text and look at the impacts, but given the problems with the tax haven status of Panama, I have my doubts.” The Bloc Quebecois has expressed similar sentiments, and party spokesman Serge Cardin has said, “We at the Blog Quebecois have denounced tax havens many times…Now, we have a chance, through the free trade agreement, to tell a country, if you want to do business with us, some things must change.” 

The Organization for Economic Cooperation and Development (OECD) recently criticized Panama for failing to substantially implement reforms aimed at improving tax information sharing, despite having promised to do so back in 2002. Panama is one of only 13 countries – and the only current or prospective U.S. FTA partner – that is listed on all of the major tax-haven watchdog lists that also does not have U.S. tax transparency treaties. Canadian legislators should be commended for doing their homework on Panama’s taxation policies.  We can only hope that members of U.S. Congress will be as vigilant and conscientious. 

For more information on how the U.S.-Panama FTA grants corporations expansive new rights to challenge U.S. government anti-tax haven initiatives – and claim U.S. taxpayer-funded damages as compensation – see GTW’s report, entitled “Panama FTA Would Undermine U.S. Efforts to Stop Offshore Tax-Haven Abuse and Regulate Risky Financial Conduct.”
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In Memory of Nick Skala, Former GTW Intern

The following comes from former GTW policy analyst Mary Bottari, the member of our team who worked most closely with Nick.

Dear Friends,

I wanted to share with you how shocked and incredibly saddened I was to learn that former GTW intern and Northwestern law student Nick Skala died in his sleep over the weekend at the home of his good friend and mentor Dr. Quentin Young. In his 27 years, Nick made quite an impact, especially publicizing and organizing around the issue of single payer health care. As the Research Director for Physicians for a National Health Program (PNHP), he contributed to many of their research projects including the groudbreaking study demonstrating that the vast majority of American bankruptcies are due to health care costs.

When he applied to GTW, Daphne and I interviewed him and decided to hire him immediately. He started last summer, then had to leave DC to return to Chicago because the Illinois Speaker decided to put the single payer bill he had been working on to a vote. He continued to work with me while working the bill. He knew a boatload about the insurance industry and quite a bit about banking too. Over the summer, he educated me about how the insurance industry and the reinsurance industry were regulated by states and did some quick letters and memos that helped us stall a vote on a bill that would have allowed the Department of the Treasury to preempt prudential state insurance regulations, due solely to trade concerns.

He quickly grasped the rules of the WTO General Agreement on Trade in Services (GATS) and even the GATS financial services agreement and wrote a series of memos on related topics, including the WTO legality of the Obama health plan. When he returned to law school, he decided to pursue the complex WTO issues by taking a business law class and critiquing the economic reform proposals put forward by progressive economist Nouriel Roubinis from a GATS perspective. He got an A from his law professor, and a hedge fund manager who reviewed the paper later called him up to grill him on the WTO and how the rules might be useful to their firm...! I was fortunate enough to see him a few weeks ago and hear about his exciting summer internship with the House Judiciary Committee. He had the plum assignment of reading and cataloging Karl Rove's emails. In his free time, he helped the single payer advocates organize their effective protests and strategies on the hill.

He was brilliant, inventive, inexhaustible and the world is a better place for his efforts. I hope folks will consider making a donation to PNHP in his honor.

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Senators Request Climate Change Legislation that Builds the American Economy

A group of forward-thinking senators have come together to ensure that climate change legislation doesn’t disadvantage existing U.S. manufacturers.  Last week ten senators, including Sherrod Brown (D-OH), Russell Feingold (D-WI), and Arlen Specter (D-PA) wrote a letter to the president expressing support for a border adjustment program and other initiatives that would maintain a level playing field for American manufacturing in any climate change legislation. 

The senators wrote, “It is essential that any clean energy legislation not only address the crisis of climate change, but include strong provisions to ensure the strength and viability of domestic manufacturing…Any climate change legislation must prevent the export of jobs and related greenhouse gas emissions to countries that fail to take action to combat the threat of global warming comparable to those taken by the United States.” 

Obama should heed the senators’ call to support responsible climate change legislation because it would not only increase manufacturing opportunities in the United States, but would pressure other countries to do their part to fight global warming.  For more on this, see our fact sheet entitled Trade Agreement Threats to State Climate Change Policy.

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Three Amigos Summit Ends

Yesterday marked the conclusion of the North American Leaders Summit in Guadalajara, Mexico. President Obama, Canadian Prime Minister Stephen Harper, and Mexican President Felipe Calderon held a joint press conference to answer questions from reporters and discuss outcomes of the conference. Importantly, NAFTA expansion was not addressed at all during the press conference, and the agreement was not referenced in the joint statement released by the three leaders. 

For more, see Global Trade Watch's press release.

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OK, We Get It.

President Obama is meeting as we speak with Mexican President Calderon and Canadian Prime Minister Harper, us trade wonks aren't in denial that there's some pretty big issues on the front burner ahead of NAFTA. Drugs cartels and violence. Immigration. Economic meltdown. Anyone? Anyone?

Here's our full statement:

Ok, We Get NAFTA Renegotiation Isn't Obama's Top Priority (Amidst Economic Armageddon) but Americans Expect Him to Deliver on His Commitments to Fix Our Job-Killing Trade Policies...
President Obama's Guadalajara, Mexico, "Three Amigos" meeting Sunday with Mexican President Felipe Calderon and Canadian Prime Minster Stephen Harper can't but remind Americans of Obama's oft-repeated campaign commitment:  "One of the first things I'll do as president will be to call the Prime Minister of Canada and the President of Mexico and work with them to fix NAFTA."
The North American Free Trade Agreement (NAFTA) is not slated to be a major topic of conversation at the summit. But with U.S. unemployment nearing 10 percent, polls showing Americans' anger about NAFTA-style trade policies and Obama spending this week campaigning in battleground states on the impact of his economic policies, the president cannot forget, "It's the global economy, stupid."
Millions of Americans are still waiting for Obama to deliver on his campaign commitment: "NAFTA's shortcomings were evident when signed and we must now amend the agreement to fix them." Since the election, President Obama has reaffirmed his plan to renegotiate NAFTA - including in the face of Canadian Prime Minister Stephen Harper's pressure not to do so during Obama's February Canada trip.
That NAFTA - its expansion, not renegotiation - is not the main topic of this summit is noteworthy. The Three Amigos process was created for "deepening" NAFTA among its first three nations and pushing NAFTA expansion to 34 nations in the hemisphere through a now-dead Free Trade Area of the Americas (FTAA). Now instead of more NAFTA being discussed, the main trade talk will be about problems caused by NAFTA, among other trade irritants to be aired in bilateral sessions. (Mexico and Canada have trade challenged U.S. truck safety, dolphin protection, food labeling laws and more.)
Americans expect relief from the NAFTA trade model that has led to the loss of five million manufacturing jobs - one out of every three- since NAFTA. Last year, Obama committed to fix the core provisions of NAFTA that push down wages, cost U.S. jobs and lead to unsafe food imports. Instead of discussing tweaking the edges of NAFTA, he targeted: 
  • NAFTA's EXTREME FOREIGN INVESTOR PRIVILEGES THAT PROMOTE OFFSHORING  Obama answered "yes" to the question: "Will you commit to renegotiate NAFTA to eliminate its investor rules that allow private enforcement by foreign investors of these investor privileges in foreign tribunals and that give foreign investors greater rights than are provided by the U.S. Constitution as interpreted by our Supreme Court thus promoting offshoring?"  He also said: "While NAFTA gave broad rights to investors, it paid only lip service to the rights of labor and the importance of environmental protection. We should amend NAFTA to make clear that fair laws and regulations written to protect citizens in any of the three countries cannot be overridden simply at the request of foreign investors."
  • NAFTA's MISSING LABOR RIGHTS  "We'll add binding obligations to protect the right to collective bargaining and other core labor standards recognized by the International Labor Organization. And I will add enforceable measures to NAFTA, the World Trade Organization (WTO), CAFTA [Central America Free Trade Agreement] and other Free Trade Agreements (FTAs) currently in effect." "The rights of working people should be equal to those of commercial interests and their protections in trade agreements should be the same. Again, this was a fundamental failing in the NAFTA and CAFTA agreements." 
  • NAFTA'S PROCUREMENT POLICY MEDDLING   Obama answered "yes" to the question: "Do you support renegotiating trade agreements so they will allow us to use "Buy America" and "Buy Local" procurement policies?"

Continue reading "OK, We Get It." »

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Business Leaders Lobby Obama to Push Through Harmful FTAs

Reuters reported on Wednesday that the leaders of six major U.S. business groups have called for President Barack Obama to back speedy passage of NAFTA-style “free trade” agreements (FTAs) with Colombia, Panama and South Korea. Wisely, the president has yet to send Congress any of the bilateral trade deals negotiated by former president George W. Bush with the three nations.  In addition to pressing for passage of the three pending trade agreements, the groups urged Obama to pursue “major market-opening agreements with the Asia-Pacific and beyond,” essentially advocating for even more NAFTA-style FTAs. 

In a letter to the president, the associations acknowledged that trade agreements can ship jobs overseas, and stated that "[T]rade agreements can have adverse effects on specific industries, workers and communities…”. Actually, this is true, and Obama knows it. On the campaign trail, President Obama repeatedly expressed opposition to NAFTA and promised to usher in an era of U.S. trade policy that would require respect for labor rights, environmental standards, and human rights. The Colombia FTA is especially controversial due to the repressive regime of President Álvaro Uribe. Colombia has a longstanding and egregious record of violations of labor and human rights, especially with regard to those of its indigenous and Afro-descendant peoples. 

In addition to gaining a reputation as a notorious corporate tax haven, Panama has some of the most secretive, least transparent banking and financial laws in the world. This is exactly the wrong approach to the current global financial crisis. This problem would be made worse by the FTA.

It is up to Americans as taxpayers and voters to ensure that the new administration does not bend to the will of agents of corporate globalization, and instead works to fulfill its campaign promises. 

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The most awesome WTO agreement that no one can remember

After years of celebrating the WTO Financial Services Agreement, many analysts and institutions appear eager to pretend it doesn't even exist.

Take a new report by Gary Hufbauer of the Peterson Institute and his colleagues Luca Rubini and Yee Wong. They assert that:

By far the largest bailouts were extended to the financial sector, both in the United States and Europe. This is not surprising, since reckless behavior by major banks and insurance firms created the epicenter for the Great Crisis and threatened to drag the entire world into the Second Great Depression. By our reckoning, shown in Tables 1 and 2, the United States has extended $1.7 trillion to financial institutions, and European member states have extended $854 billion. These figures exclude mortgage market support and the Fed’s dealings in commercial paper (which exceeded $6 trillion), though of course those measures were entwined with rescuing the financial system. The threat of a Second Great Depression furnished the justification for financial sector bailouts on an unprecedented scale.

The Agreement on Subsidies and Countervailing Measures (ASCM) was not extended to discipline subsidies in the service sector. Moreover, the General Agreement on Services (GATS) does not provide meaningful regulation of service subsidies. Accordingly, WTO members have no grounds for complaining in the WTO Dispute Settlement Mechanism when another member provides massive assistance to a bank or insurer, even when the assistance enables the recipient firm to survive and compete vigorously in the global marketplace.

As support, they cite an opinion piece by Arvind Subramanian and Aaditya Mattoo, the latter a GATS expert who should know better. In their joint piece, they write:

We have witnessed protection imposed through traditional instruments, such as tariff increases, restrictive import licensing, state aid (especially in the automobile and financial sectors), anti-dumping actions, and discriminatory government procurement, which has assumed greater importance in industrial countries because of the increased role of the state and higher government expenditures. There have also been newer forms of protection, including undervalued exchange rates, environmentally motivated trade restrictions, resource nationalism (such as when countries restricted the export of food during last year’s commodity crisis), and now financial nationalism, whereby financial resources are directed to national firms.

These differing forms of protection share two common features – they are consistent with current WTO rules and, for the most part, are not being addressed in the Doha Round.

The authors seem not to have read the Guidelines for Scheduling GATS Commitments, adopted by WTO Members in 2001, which state:

“Article XVII [National Treatment] applies to subsidies in the same way that it applies to all other measures. ... any subsidy which is a discriminatory measure within the meaning of Article XVII would have to be either scheduled as a limitation on National Treatment or brought into conformity with that Article. Subsidies are also not excluded from the scope of Article II (MFN). In line with the paragraph above, a binding under Article XVII with respect to the granting of a subsidy does not require a Member to offer such a subsidy to a services supplier located in the territory of another Member.”

So, for scheduled sectors, subsidies that favor domestic financial industries can certainly conflict with the GATS. The United States committed essentially the entirety of its financial services sector to GATS coverage, thanks in large part to negotiations led alternately by Timothy Geithner and Larry Summers in the 1990s. And, as pages 12-13 of this document show, subsidies are not excluded from the national treatment obligations for services suppliers operating in the United States (i.e. Mode 3, or establishment).

As the Wall Street Journal recently noted, banks like Goldman Sachs that benefited from government largesse and thus weathered the storm, certainly have a leg up on the competition. Meanwhile, no foreign bank got TARP money, or had access to many of the other bailout programs. Banks that did not have access to these bailout funds and found themselves eliminated from competition are likely to feel very differently than Mattoo and Hufbauer.

Despite disagreeing with these authors on the empirics, I do agree with their prescription to negotiate more policy space on crisis-related measures, especially prudential financial regulations and capital controls.

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USTR Refuses Public Disclosure of US-Russia Trade Agreement

[Editorial note: This post is written by guest blogger Steve Charnovitz of George Washington University Law School.  The views expressed herein are solely those of the individual contributor and do not necessarily reflect those of Public Citizen.]

This is a follow-up to my blog post of July 20, 2009 about my efforts to use the Freedom of Information Act (FOIA) to get the Office of the U.S. Trade Representative (USTR) to release the text of the US-Russia Bilateral Market Access agreements signed on November 19, 2006.  After several unsuccessful efforts by email and phone to get the text, I had written to the USTR FOIA officer, Carmen Suro-Bredie, on November 19, 2008.  The US-Russia agreement was negotiated as part of Russia’s longtime efforts to join the World Trade Organization and I was interested to see the precise terms of this legal arrangement.

Ms. Suro-Bredie denied my request in a letter dated July 28, 2009 which I received on August 3.  She said that the completed trade agreements are considered “foreign government information” that are exempt from disclosure under Exemption 1 of the FOIA.  In addition, she described her turndown letter as a “complete response to your request,” and advised that “I am closing your file in this office.”

Although I was surprised about how long it takes to get a response from USTR (251 days elapsed between November 19 and July 28), I was not surprised by USTR’s position that it will disclose only what it is required to by law. As a veteran USTR watcher, I have observed that USTR is hardwired to keep trade treaties and negotiations as secret as possible from the American public. Bureaucracies are highly resistant to change, even when a new Administration comes to office promising “Change We Can Believe In” and specifically pledging that it wanted a presumption for FOIA disclosure and greater transparency and accountability in government. So I was not surprised by the turndown of my request for transparency.

Continue reading "USTR Refuses Public Disclosure of US-Russia Trade Agreement" »

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Another Race to the Bottom

As the United States and other countries around the world embark on properly regulating the financial services sector in hopes of preventing future financial collapse, House Financial Services Chairman Barney Frank warns that an international "race to the bottom" could undermine these efforts.

Congress Daily reported last week:

Frank said that there is wide agreement among the European Union, Canada, France and others that there must not be an "escape hatch" as countries revamp their systems to make their rules sufficiently similar to others.

"Everyone understands that it would be fatal," Frank said. "There is just overwhelming agreement that this is going to be done in a multinational, coordinated way and that a great conglomeration is going to come down hard on anybody that tries to play games with it."

While Frank deserves praise for pledging to prevent the woefully low regulatory floor that would be created should some countries fail to implement stricter regulations on financial services, policymakers also need to be careful about the regulatory ceiling that could be imposed by the World Trade Organization (WTO) and other international trade agreements.   

Americans for Financial Reform lays out a set of guiding principles for re-regulating financial services in the global arena which will help ensure that policymakers and regulators have the policy space to get it right.

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