From the Treasure Islands blog:
I will introduce this blog with a comment from Michael Greenberger, a former top U.S. regulator, in a paper that looks at the Dodd-Frank bill and its (welcome and appropriate) willingness to reach U.S. financial regulation out into other jurisdictions if U.S. taxpayers are on the hook.
“Barclays has repeatedly threatened to relocate to the United States if the British government requires British banks to separate their high street retail operations from their investment banking work. As Congressman Barney Frank has observed, the threats made by U.S. banks to migrate to the United Kingdom and the simultaneous threats by U.K. banks to migrate to the United States are reminiscent of “the 13-year-old son of divorced parents who tries to play Mommy off against Daddy.” The threats made by banks are both empty and divisive. They are intended to weaken financial regulation on both sides of the Atlantic.
But this quote is merely context for a related issue, which is the thrust of Greenberger’s paper: ‘extraterritoriality’, a hugely important topic that few in the media seem to have paid any serious attention to. The idea is introduced with the stark words of Gary Gensler, chair of the Commodity Futures Trading Commission (CFTC:)
transactions booked in London or anywhere around the globe can wreak havoc on the American public.
Indeed. (I very briefly touch on this issue in my latest Vanity Fair article, for which a brief summary is available here; I’m hoping the full online edition will become available soon enough). In essence, British bankers and U.K. real estate agents have been taking the cream from wild west financial risk-taking, then foisting those risks and the ensuing fallout onto U.S. taxpayers and others. “Extraterritorial” reach is clearly a necessary aspect of financial regulation, worldwide; one might have thought it was a no-brainer that U.S. regulation should be able to reach across borders, if U.S. taxpayers are on the hook.
In the real world, though, this is not so. Interviewees recently told me that the British government and the City of London have been lobbying furiously behind the scenes in Washington to water down Dodd-Frank’s “extraterritorial” reach. Hardly surprising, given the size of the international derivatives markets, with some $600 trillion in notional amounts outstanding, with the UK in a dominant position.
There is plenty of pressure to gut Dodd-Frank from inside the United States too, of course: witness this bill, known as HR 3283, whose culinary equivalent would perhaps be a soup made of radioactive poison, mixed with ground glass, sewage and medical waste.
On a cursory search yesterday, it seemed from public documents that the bill had died. I checked its status, though, and my D.C. contact tells me “It’s back and kicking, my friend”.
This is terrible news. If passed, this would gut Dodd-Frank’s ability to stem wholesale foreign evasion. One particularly distressing thing I notice about this piece of legislation is that (based on a simple Google search, so I may have missed something important) almost nobody in the media ever wrote anything significant about it: the best I could find was this.)
If this bill makes it through, then Wall Street could simply escape the derivatives regulation of Dodd-Frank and conduct it in London instead. As Greenberger noted at the time:
“They could easily route their swaps trades through their foreign subsidiaries in order to avoid U.S. financial regulation. Such a large-scale migration would cause the vast majority of swaps trades not to be cleared, exchange-traded or otherwise publicly reported, and, subsequently, would significantly reduce transparency and stability in the global derivatives market. Such a migration would also send financial jobs overseas, while continuing to expose U.S. tax payers, consumers, and businesses to the demonstrated risks associated with foreign swaps transactions—risks that Congress sought to eliminate when it passed Dodd-Frank.”
See also this important letter from Americans for Financial Reform last year (or a more layperson-friendly version here), which made similar points, and describes in detail how such evasion might happen. As they note:
“Foreign affiliates could be exempted from U.S. prudential protections such as capital requirements for their swaps business. This would create an overwhelming temptation to move swaps business overseas, indeed to the foreign jurisdictions where regulation was most lax compared to the U.S. In addition to seriously undermining the basic transparency and accountability requirements in the US, such a ‘race to the bottom’ would be a serious blow to the entire international effort to make derivatives markets safer.”
If this were to happen, we’d have seen yet another reason to label London (where a big chunk of this business would flow) as the great Wall Street regulatory escape route. (The Germans and many others are in on the act – but London is undoubtedly the big one.)
There are other threats to Dodd-Frank, notably from within the CFTC through the principle of ‘comity’ (essentially, this is about pussy-footing about ‘interfering in other countries’ sovereign interests) which you can read about in this Greenberger testimony, here.
“Congress did not authorize the CFTC to place the interests of foreign countries over the interests of the U.S. taxpayer. . . . if another financial crisis ensues because the CFTC failed to assert its full statutory authority to protect American taxpayers from the risks posed by the swap market, . . . the American taxpayer will never forgive the CFTC if it bows to the shrine of “comity” and “the sovereign interests of other nations” over protecting the U.S. taxpayer.”
This ‘extraterritorial’ principle is a fundamental one, which does not only concern financial regulation: it is a core issue in fields such as money laundering (where it is known as ‘group compliance’ and is pertinent in the field of tax too.
Update: this blog will be stored permanently on TJN’s “Economic Crisis and Offshore” page.