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.
According to the 2001 GATS Scheduling Guidelines,
It should be noted that the quantitative restrictions specified in sub paragraphs (a) to (d) refer to maximum limitations. Minimum requirements such as those common to licensing criteria (e.g. minimum capital requirements for the establishment of a corporate entity) do not fall within the scope of Article XVI. If such a measure is discriminatory within the meaning of Article XVII and, if it cannot be justified as an exception, it should be scheduled as a limitation on national treatment. If such a measure is non discriminatory, it is subject to the disciplines of Article VI:5. Where such a measure does not conform to these disciplines, and if it cannot be justified as an exception, it must be brought into conformity with Article VI:5 and cannot be scheduled.
Here's GATS Article VI:4-5:
4. With a view to ensuring that measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services, the Council for Trade in Services shall, through appropriate bodies it may establish, develop any necessary disciplines. Such disciplines shall aim to ensure that such requirements are, inter alia:
5. (a) In sectors in which a Member has undertaken specific commitments, pending the entry into force of disciplines developed in these sectors pursuant to paragraph 4, the Member shall not apply licensing and qualification requirements and technical standards that nullify or impair such specific commitments in a manner which:
(b) In determining whether a Member is in conformity with the obligation under paragraph 5(a), account shall be taken of international standards of relevant international organizations(3) applied by that Member.
Just offhand, it would seem that the requirement for higher minimum capital requirements for hedge funds might run afoul of GATS Article VI(4)b-c, and thus Article VI(5)a. And while it would not really matter whether most hedge funds were foreign-owned (since the GATS restriction is on all domestic regulations, discriminatory or not), the fact that so many are might lead a country, in particular a typical offshore island economy with little else going for it, to launch a WTO case.
In this regard, it's worth noting that most of these islands are WTO members, and some even scheduled their financial services commitments in accordance with the Understanding on Commitments in Financial Services - a deeply anti-regulatory scheduling protocol. The 33 countries whose current schedules referenced the Understanding include: Australia, Austria, Bulgaria, Canada, Czech Republic, Finland, Hungary, Iceland, Japan, Liechtenstein, New Zealand, Norway, Slovak Republic, Sweden, Switzerland, and the United States, as well as the European Communities members as of 1994 (Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain and the United Kingdom.) The only developing nations that utilized the Understanding were Aruba, Netherland Antilles, Nigeria, Sri Lanka (for banking not insurance), and Turkey. Additionally, eight countries - Cyprus, Estonia, Latvia, Lithuania, Malta, Poland, Slovenia and Romania - are in the process of revising their commitments to match the EC schedule.
You don't have to look too hard to find the tax and regulatory havens in the bunch.
Moreover, 40 countries have signed U.S. bilateral investment treaties, and 17 countries have signed U.S. FTAs, most of which are covered by provisions on investment and financial services. And the Bush administration negotiated an FTA with Panama, one of the world's top tax havens. Under most of these pacts, therefore, hedge funds domiciled in the BIT or FTA country could bring an investor-state case against the U.S. government for the FDIC's policy, perhaps basing it on an indirect expropriation or transfer limitation complaint.
As I wrote yesterday, most of these pacts contain some sort of so-called "prudential carve out." But, the only time this was referenced by a tribunal was in a recent NAFTA case, and even though the prudential carve out in NAFTA is sometimes argued to be the most protective of prudential concerns, the tribunal seemed to read it as fairly restrictive in terms of what it would allow countries to get away with.