By Sam Obenhaus

NATO-Ukraine Commission session in Brussels |
U.S. Department of State on Flickr 

Money flows quickly.  It has no morals and tends to have a very short memory.  In the case of great powers, it’s tentacles also bind economies together in ways that are hard to define and even harder to untangle.

This last trait has, of course, been a tremendous benefit of expanding trade and interdependence since the latter half of the 20^th century.  Global trade, some like to say, is now “too big to fail.”  The interconnectedness it created pacified Europe, the most violent continent for the majority of recent history, and this is not about to change.  World War III, or even another Cold War, is not around the corner.

But has the deterrence of large-scale conflict come at the expense of reducing the expected costs associated with moderate acts of aggression?  This is the hypothesis Russian President Vladimir Put is testing in Crimea and maybe soon in Eastern Ukraine.

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April 04, 2014

By Sam Obenhaus

The United Kingdom wants banking regulations covered by the Transatlantic Trade and Investment Partnership (TTIP), a free trade agreement being negotiated by the United States and European Union.  The United States, however, is opposed to including the matter.  

According to Lord Ian Livingston of Parkhead, the U.K. Minister for Trade and Investment, U.S. negotiators have expressed fear that any agreement on banking regulations will have the effect of unwinding key parts of Dodd-Frank, the important but controversial financial reform bill passed in the wake of the Great Recession.  

“If you go back to Glass Steagal, America has felt that things were unwound over time and that that's problematical. They don't want the same thing to happen with Dodd Frank,” he said, while speaking before the E.U. Sub-Committee on External Affairs. 

According to the E.U. Trade Commissioner, the two sides aim to complete negotiations on the entire agreement by November. Bloomberg BNA has more on this issue and the ongoing negotiation of TTIP.

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March 27, 2014

By Sam Obenhaus

European Union lawmakers struck an agreement with member states that will establish a single resolution mechanism for winding down banks in the event of their failure.  How to structure this authority has been debated for nearly two years.  European Union lawmakers generally support the creation of a centralized rescue fund while member states, most notably Germany, resist any efforts to pool resources into a pan-European Union bailout fund.  Germans fear they will be left on the hook for bailouts of non-German banks.

The agreement reached on Friday creates a bailout fund that will be capitalized by levies on banks.  While some of the money will be put in “national compartments” and not pooled, these divisions will be slowly phased out as the fund is capitalized over an eight-year period.  This is a major victory, at least in principle, for the European Parliament.

While the agreement is a breakthrough, the rescue fund’s €55 billion size strikes many as inadequate.  Another persistent concern is the mechanism’s complexity, which may make the proscribed wind-down process too slow and unwieldy to implement in the context of a financial crisis.

The Financial Times and Wall Street Journal have more on this story.

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March 26, 2014

By Sam Obenhaus

Senators Carl Levin (D-MI) and John McCain (R-AZ) are seeking the extradition of 60 Swiss bankers and financial advisers who allegedly assisted U.S. citizens in evading taxes.  On March 18, they sent a letter to Assistant Attorney General James Cole pushing the Department to request extradition, something it has been reluctant to do.  

“Even if a request is unsuccessful,” they claim, “it will inform both Switzerland and its citizens that the United States is ready to make full use of available legal tools to stop facilitation of U.S. tax evasion and hold alleged wrongdoers accountable.”  

Levin and McCain are Chairman and Ranking Member, respectively, of the Senate’s Permanent Select Committee on Investigations. The Washington Post and Wall Street Journal have more on this story. 

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March 24, 2014

By Sam Obenhaus

The fix was in and now the Financial Stability Board (FSB), an international financial regulator created by the G20, is investigating.

At issue is alleged collusion among traders to set benchmark foreign-exchange rates.  According to initial investigations carried out by dozens of financial regulators across the globe, traders used chat rooms to share market-moving information about their impending foreign-exchange trades.   They then allegedly used this information to organize their trades during “the fix,” which is a one minute span starting at 3:59:30 London time each afternoon.  The trades executed during “the fix” are used to set the foreign exchange benchmark rates.

After independent investigations by regulators including the U.S. Federal Reserve, the Bank of England and the Reserve Bank of Australia, the FSB is launching its own probe. 

The FSB was created to “to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies” across the G20.  Its membership is made up of financial regulators from G20 states.  The United States’ Treasury Department, Federal Reserve Board, and Securities and Exchange Commission are all members.

Bloomberg has more on this story.

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February 21, 2014

By Sam Obenhaus

Does Americans’ right to privacy extend far enough to protect their hidden foreign bank accounts?  Will a law requiring foreign financial entities to disclose information on all American account holders lead those institutions stop doing business with Americans?  The Republican National Committee (RNC) says yes and voted to repeal the Foreign Account Tax Compliance Act (FATCA) at its winter meeting.

The Act was passed in 2010 but goes into effect this July.  Its principle objective is to make it harder for U.S. citizens – primarily those living within the U.S. – to evade taxes by stashing money in offshore accounts.  However, banks, libertarians, and non-resident U.S. citizens, among others, are all opposed to a law that some call “overzealous.”

The heart of the conflict, the burden on U.S. citizens living abroad, comes about because of the U.S.’s unique extraterritorial taxation system.  Unlike all other developed nations, the U.S. taxes its citizens living in foreign countries.  One legitimate concern is that these Americans will find it harder to find a local bank willing to deal with them because of the increased regulatory burdens imposed by FATCA.

Undeterred, the U.S. government is forging ahead and recently signed an intergovernmental agreement with Canada to facilitate the sharing of bank account information.  This is the 22nd such agreement.

You can see the RNC resolution here and an article about their vote over at Reuters.  Bloomberg BNA has an article on the U.S.-Canadian agreement.

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February 20, 2014

By Sam Obenhaus

European finance ministers are meeting this week in an attempt to resolve long-running differences over the establishment of the European Union’s bank bailout mechanism.  The heart of the debate revolves around the design of the Single Resolution Mechanism (SRM) for handling failing European banks and ensuring that they are efficiently wound-down with minimal taxpayer assistance.

The finance ministers will be working towards their second agreement on the subject.  The E.U. Parliament criticized the finance ministers’ previous SRM agreement as being too unwieldy to implement.  Both the national governments and the E.U. Parliament must approve the SRM’s design before it can come into effect.

The familiar north-south dynamic present in most E.U. financial debates is an additional point of intrigue.  Greece currently holds the E.U. presidency while Germany remains extremely skeptical of any plan to pool bailout resources.

For more on this story visit Bloomberg BNA.

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February 18, 2014

By Sam Obenhaus

Photo courtesy of the U.S. Mint

There is at least one policy initiative that a bipartisan majority of the House and Senate agrees on: the Trans Pacific Partnership (TPP), a 12-member free trade agreement currently being negotiated by the Administration, should address currency manipulation by member states.  This isn’t all talk.  A cadre of influential members wants it to be a binding goal for negotiations.  Putting aside the merits of clamping down on currency manipulation, Congress’ interference in the negotiating process sets a terrible precedent and undermines a power-sharing agreement that has facilitated the enactment of America’s trade policy for the past 75 years.

At the heart of the problem is that modern trade agreements, despite resembling treaties, are approved as congressional-executive agreements.  This is a delicate, frankensteinian process that exists because the Constitution fails to define the scope of two, sometimes conflicting powers: the President’s Article II power to negotiate treaties with the advice and consent of the Senate, and Congress’s Article I power to “regulate commerce with foreign nations.”

Under this process, Congress effectively limits its own power by ceding its Article I authority to the President.  Congress does so by passing legislation, currently termed Trade Promotion Authority, allowing the Executive Branch to negotiate bilateral or multilateral agreements that have the effect of “regulating” international commerce by reducing or eliminating tariffs, along with other policy changes.

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December 12, 2013

By Sam Obenhaus

Senate Finance Committee Chairman Max Baucus (D-MT) is pushing forward with tax reform.  On November 19, he released a draft bill that proposes changes to the way the IRS taxes foreign earnings of U.S. corporations.

Under current law, the U.S. operates a modified residential taxation system that stands in contrast to the territorial system used by most other countries.  Under the U.S. system, U.S. multinational firms must pay U.S. taxes on income earned abroad with a few exceptions.  Most importantly, deferral provisions in the U.S. tax code allows companies to avoid paying U.S. taxes on foreign income until they decide to repatriate that money back to the U.S.  This, of course, creates a disincentive to bring money back to the U.S.

Baucus’s draft addresses a few of these issues while maintaining the U.S.’s rather unique worldwide taxation regime.  Instead of moving to a territorial system, Baucus proposes to do away with deferral.  His plan calls for immediately imposing a tax on U.S. firms’ foreign earnings but at a lower statutory rate.  It would also limit some of the mechanisms U.S. corporations use to shift income-generating assets from the U.S. to low-tax jurisdictions abroad.

The proposal has been met with mixed a mixed reception.  Some businesses, especially those without significant international operations, came out in support of the proposal.  U.S. multinationals were less enthused.  And at least one Senate Finance Committee Republican, Sen. Rob Portman (R-OH), did not reserve judgment.  “I fear that if we have a minimum tax under a worldwide system, it will encourage more U.S. companies to incorporate overseas,” he said.

For more on this story visit the Wall Street Journal and Bloomberg BNA’s International Tax Monitor.

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November 27, 2013

By Sam Obenhaus

On Wednesday, November 20, the European Central Bank took a major step towards integrating the euro zone’s financial markets when it nominated Danièle Nouy to serve as the first “Single Supervisor” for major banks across the continent. If confirmed by the European Parliament, she will lead one of the world’s most important start-ups.  The Single Supervisor’s office is still in the process of hiring staff and it does not gain the legal authority to start regulating banks until the end of next year.

The task facing Nouy is hugely important for the future of the euro zone.  One of the chief criticisms of the zone is that oversight of its banking system remains balkanized.  The hope is that installation of a Single Supervisor, along with the first set of stress tests that subject the zone’s banks to the same set of standards, will address this persistent criticism.

The New York Times has more on this story.

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November 26, 2013

By Sam Obenhaus

As recently as this summer, top U.S. officials were telling their European counterparts that financial sector regulations would not be included in the Transatlantic Trade and Investment Partnership (T-TIP) negotiations.  Treasury Secretary Jacob Lew and other Administration officials were eager to discuss market access issues, potentially making it easier for financial institutions to operate in both jurisdictions, but thought that financial regulatory reform should be addressed in another forum, such as the G20.  A major concern, presumably one the Administration still harbors, is that negotiations with Europe will only weaken the U.S.’s comparatively more rigorous financial regulatory system.

Nonetheless, Dan Mullaney, the U.S.’s chief negotiator, recently signaled an about-face with the U.S. now prepared to hold discussions on financial regulatory issues at a special November 27 meeting with his European counterparts.  One explanation for the shift is that the U.S. now believes that it can pull Europe closer to its position and force a compromise on its own terms.  Another explanation is the Administration is coming around to the idea that the benefits of regulatory convergence will outweigh the costs of compromise.

The Wall Street Journal has more information on Treasury Secretary Lew’s prior reluctance to include financial market regulations in the T-TIP talks while Bloomberg BNA has more on U.S. negotiators’ recent reversal.

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November 25, 2013

By Sam Obenhaus

While the United States has one of the highest corporate tax rates in the developed world, it is often pointed out that the effective tax rate – what corporations actually pay – is significantly lower than the official rate.  For a number of tech companies, this is largely due to one man: Feargal O’Rourke, the head of PricewaterhouseCoopers’ tax practice in Ireland.

Ireland, of course, is at the center of many tech companies tax strategies.  O’Rorke is a chief architect of many of these plans, including those used by Google, LinkedIn, and Facebook.  Each of those companies funnels its profits through Ireland on their way to other tax havens, such as Grand Cayman and the Isle of Man.  These strategies are estimated to cost the U.S. federal government and its European counterparts an estimated $100 billion per year in lost revenue.

With austerity gripping much of Europe and sequestration in the United States, Ireland has found itself in the middle of a controversy.  Governments need more revenue, and some U.S. lawmakers have started calling Ireland a tax haven.  But O’Rourke – perhaps Ireland’s biggest defender – is undeterred. 

He points out that Ireland’s tax strategies have led many multinational corporations to set up offices in Ireland.  These operations are estimated to employee approximately 100,000 people.  Further, he notes that the United States and other countries could tip the balance overnight by simply changing their own tax laws.  What O’Rourke may be less willing to discuss is his role in shaping Ireland’s tax policies. 

Bloomberg has more on O’Rourke, while Reuters reports on Ireland’s recent moves to shed its image as a tax haven.

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October 29, 2013

By Sam Obenhaus

Sometimes the Supreme Court wants a little outside help.  Earlier this week, the high court requested a brief from the Office of the Solicitor General on the legal issues at play in Arab Bank v. Linde.  The case involves a Jordanian bank accused of financing terrorist organizations responsible for crimes committed in Israel and Palestine.  U.S. citizens and foreign nationals brought the case under the Anti-Terrorism Act and the Alien Tort Claims Act.  When a judge sitting in the Eastern District of New York ordered the bank to turn over certain financial records, the bank refused on the grounds that the disclosure would be a violation of Jordanian banking secrecy laws.  The Second Circuit upheld the document production order and the Supreme Court is now weighing whether to hear the case.  Hopefully, the Administration can add some clarity to the Supreme Court’s thinking.  

Bloomberg BNA and Reuters have more on the story.

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October 25, 2013

By Sam Obenhaus

One of the European Unions’ lingering problems is widespread uncertainty regarding the health of its largest banks.  The European Central Bank is trying to address these persistent concerns by conducting a rigorous round of stress tests early next year ahead of the date when it assumes supervisory responsibility for the zone’s largest banks.  This will be the first time that these banks are held to the same set of standards.

Unfortunately, these stress tests also look likely to cause a new set of problems for the E.U.’s financial integration project.  In order to be credible and have their intended confidence-boosting result, they must be significantly tougher than the prior two rounds of stress tests.  But the prospect that a few banks are likely to fail the tests is causing problems.  Someone, simply put, will be on the hook to recapitalize these under-performing banks.

Fears have arisen because of a new rule that requires the conversion of subordinated debt into equity ahead of any taxpayer-funded bank bailout.  The rule, strongly backed by a handful of E.U. countries, concerns ECB President Mario Draghi, according to a recently surfaced letter.  As opposed to reducing uncertainty, he fears that the interplay between the rule and the stress tests could add to uncertainty by making it hard for banks that fail the stress test but remain solvent to raise capital on the private markets.

Investors still can’t conduct a side-by-side comparison of E.U. banks because of differing capital standards, and many banks are still undercapitalized.  By contrast, the U.S. recapitalized its banks in the immediate aftermath of the financial crisis. This is just further proof that financial integration is easier said than done in the context of a multi-state system.  

For more on this story, read MNI and Bloomberg BNA.  Additionally, this article in the Financial Times provides a superb background on the new rule requiring banks to convert subordinated debt into equity before receiving a taxpayer-funded bailout.

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October 23, 2013

By Sam Obenhaus

The European Union’s plan to implement a harmonized financial transaction tax (FTT) likely violates customary international law, according to an E.U. Council legal service memorandum obtained by the Financial Times.  The non-binding opinion finds FTT “exceeds member states’ jurisdiction” by taxing covered transactions made by E.U.-headquartered companies and their counterparties regardless of where the trades were executed.  As a result, trades made outside E.U. jurisdiction, including New York, would be subject to the tax.  The proposal, which is designed to reduce tax avoidance, is still supported by the E.U. Tax Commissioner, Algirdas Semeta, who continues to defend FTT’s legality.

Read more on this story at the Financial Times.

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September 14, 2013