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The Financial Meltdown and Its International Implications Author(s): Detlev F. Vagts Reviewed work(s): Source: The American Journal of International Law, Vol. 103, No. 4 (Oct., 2009), pp. 684-690 Published by: American Society of International Law Stable URL: http://www.jstor.org/stable/20617038 . Accessed: 28/05/2012 01:26
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EDITORIAL COMMENT THE FINANCIAL MELTDOWNAND ITS INTERNATIONAL IMPLICATIONS
ByDetlevF. Vagts meltdownof financial assetsin the off The worldwideeconomicdownturntouched by the in of and alike. United Stateshas been thecenter attention 2009 forindividuals governments media, the pub preoccupythe What caused the breakdown what shouldbe done about it and crisisisan international by about That this matter isshown headlines lic, and the government. issues, government oftenconcerntransnational such as unhappinessthat the meltdown that American International banks that had been Group were passed on to foreign paymentsto contracts AIG. Foreigninvestors with to turned among the up counterparties creditinsurance schemes. Meetings of the Group Madoff's and R. Allen Stanford's many victims Bernard of were expressed U.S. moves tostimulate Concerns that of20 havefocused meltdown issues.1 on as firms suppliers. results excludingforeign economic activity by might have protectionist mess. United Statesforthe have tendedtoblame the Moreover, foreigners acts that the 930swith unilateral The United Statesconfronted GreatDepression of the 1 Nixon took abroad.2In 1971 theadministration action-the so-called alsohad repercussions
Shock-without consultation with other states even though itarguably violated commitments

General of Articles Agreement theInternational of MonetaryFund (IMF) and the under the will have Reactions on and Agreement Tariffs Trade (GATT).3That cannothappen thistime. elbow room will findthatits and the United States tobe carefully coordinated amongnations,
available FinancialMarkets of 20, Declaration 15,2008), andtheWorldEconomy(Nov. of theSummiton in John R. Crook, Contempo excerpted http://www.un.org/ga/president/63/commission/declarationG20.pdf, States, 103 AJIL 149 (2009). The Group of 20 consists of the nineteen major national rary Practice of theUnited and the European Union. The G-20 has established a Financial economies Stability Board. 2 action in 1933 to go off the gold standard and abrogate contractual gold clauses was upheld U.S. emergency a in the "Gold Clause Cases." Perry v. United States, 294 U.S. 330 (1935). The dissent by divided Supreme Court " erswarned the impending legal that [l]oss of reputation for honorable dealing will bring us unending humiliation; van Devanter, and moral chaos is appalling." Id. at 381 (McReynolds, Sutherland, & Butler, JJ.,dissenting). Later there was a futile monetary and trade conference in London. Detlev F. Vagts, International Economic Law and the 3 The 1 Group

at

States tomaintain the dollar at a fixed rate in relation to the United IMF Agreement committed original see note 2, at 779-80, theAgreement was this commitment, States abandoned after the United Vagts, supra gold; of the International Monetary in 1978. Compare Articles of Agreement amended Fund, opened for signature of Apr. 30,1976, w/VA Amendment Stat. 1401,2 UNTS 39 (entered into force Dec. 27,1945), Dec. 27,1945,60 tariff surcharge was 29 UST 2203 (entered into force Apr. 1, 1978). It is questionable whether the accompanying action in case of balance-of-payment problems. See Report of provisions authorizing compatible with the GATT at 212-23 For one thing, the emergency balance-of B.I.S.D. GATT (1971). (18th Supp.) Party, Working is a quota rather than a tariff surcharge. See JOHN H. JACKSON, WILLIAM J. payments action authorized by GATT ed. 2008).

American Journal International of Law, 100AJIL 769, 775 (2006).

OF INTERNATIONAL ECONOMIC RELATIONS 1100-03 (5th LEGALPROBLEMS DAVEY,& ALANO. SYKESJR., 684

2009]

EDITORIAL COMMENT

685

isrestricted the by development international andnetworks, by theleverage for of rules of and eigngovernments. This Comment attempts sketch the to out bravenew ways thatthis world of international U.S. freedom act. It isgenerally to lawand finance hem in will must be agreedthattwotasks One is to restart economicsystem; undertaken. the and thelike bailouts,stimulus packages, are thetools one looksto. The otherisrevising regulation financial the of markets. Regulatory failure of alongsidethe recklessness privateactorsbears some responsibility thedisaster. for Many experts would also say- but notwithoutdissenting voices,particularly abroad-that getting world economy and running the more urgent thetwotasks. up again is the of Re-reg more extendedcareand analysis. ulatingis lessurgent and requires The following with an analysis theregulatory discussion begins of issues sincethey easier are tofit intostandard Part in financial marketregulation general legalframeworks. I considers and thentakes accounting up and financial The secondpartanalyzes con reporting questions. the straints in United States, thatforeign investments the bothportfolio direct, and will impose onU.S. financial The final examines relationship these the of to policy. part developments fears in already expressed aboutU.S. losses freedom choice (orof sovereignty) otherareas. of of I. THE NEW FINANCIAL REGULATION Formany yearsthe as United States was regarded setting gold standard securities in the reg as of ulation,justasNew Yorkwas regarded thecapital thefinancial world. Inherstudy the of international networks, Anne-MarieSlaughter wroteonlyfive years of "regulatory ago export" todenote thetendency foreign of to governments emulate U.S. supervision thesecurities of market.4 quoted a former commissioner saying, She as SEC "The trick be toencourage will the securities of regulators theother major trading nations todevelop systems providepro that tections investors to similarto thoseprovided in thiscountry."5 substantially Practitioners U.S. documentation securities abroad imitated for transactions, including issuing by prospec tuses thatlooked American. U.S. lawyers theleadincreating forms invest They let take new of ment vehicles, derivatives. particularly Foreignenterprises subjectedthemselves thejuris to diction the of Securities Exchange and Commission (SEC). In sodoing,they believedthat they were not onlygainingaccess to the U.S. capital marketsbut also assuringinvestors other in countries thattheir integrity transparency U.S. standards. and met The United States may now be ina state "regulatory of import." The lossof Americanpri Enron andTyco corporate macy began with the scandalsand theconsequentenactmentin 2002 of the Sarbanes-Oxley statute improving on corporate governance undersecurities law.6 Quite a few foreign corporations, some in conspicuously Germany, decidedthatthe additional burdens complying of with that exceededtheadvantages Act derivedfrom havinga presence
4 Anne-Marie Slaughter, A New World Order 172-77 (2004). 5 Id. at 172 (quotingBevis Longstreth, The SEC After FiftyYears:An Assessment Its Past and Future, of 83 COLUM. L. REV. 1593, 1610 (1983)). 6 Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002) (principally codified in 15& Sarbanes-Oxley

18 U.S.C.). see Detlev F. For theAct's international implications, Vagts, Extraterritoriality and theCorporate Gov ernance Law, 97 AJIL 289 (2003). On the extent towhich the relative decline of U.S. securities markets is due to theAct or to other factors such as the see Howell E. Jackson & Eric increasing efficiency of foreign markets, J. Pan, in International Securities Markets: Evidence II, 3 VA. L. & BUS. REV. Regulatory Competition from Europe?Part

207 (2008).

686

OF INTERNATIONALLAW THE AMERICAN JOURNAL

[Vol. 103:684

and their soughtto terminate U.S. registration lobbied they U.S. market. Accordingly, in the withdrawals.7 to ease therulesforsuch negativejudgment. marketcrisis beginningin2007 put a new edgeon this The financial of dishonesty schemessuch as thatcap were shockedat theoutright Americans themselves whistleblowers. them despite warningsfrom SEC's failure prevent to by tained Madoff and the was supposed tobe to was More pervasive a sensethattheSEC was too sympathetic thoseit fueled of that new types securities had first staff notkeptupwith the had regulating thatits and of The creation packaging realestate and the generated collapse. the exuberant boom and then had of Although theFederalReserveSystem escaped all forms regulation. mortgageslargely doing so.State refrained from practices, had deliberately it these beengiven power to regulate by were bypassed mortgageorig oversight willing toexercise regulators mighthavebeen who default swaps such types derivatives ascredit of inators werenotbanks. Meanwhile, certain that TradingCommission. of CommodityFutures were exemptedfromthejurisdiction the the was sharp, that Criticismfrom particularly ofPeerSteinbriick, Germanminister abroad more ofan urgetoregulate less and will nowadays have of finance.8 SinceEuropeanpoliticians thattheend result market,itseemslikely Americansto trust wisdom of the the ingness than may be unable to the thananticipated.In particular, United States will bemore regulation compulsory disclosure full which emphasizes of SEC style regulation, maintain thetraditional thansubstantive controlsinvolving bureaucratic to investors regulated companiesrather by bodies-the How that would be allocatedamong thepresentregulatory power judgments. Reserve- or somenew Federal CommoditiesFutures TradingCommission,and the SEC, the to agencyremains be seen. does not seemprobable. However, of watchdogagency The establishment an international Commissions (IOSCO) can be expectedtoplaya theInternational Organisationof Securities which nationalbodies coordinatetheir role. 1OSCO is in essencea networkthrough larger make law. and not organization hasno basis intreaty Itcannot work. It is an intergovernmental United Statesunless do decisionsbindingon its members; itsstances not become law in the U.S. administrative adopts them. Nonetheless,IOSCO has the law, SEC, actingaccordingto reactions of membersand exposedthemto thecollective the affected activities its significantly share.Itwill be a conduit for and attitudes whose experiences fellowregulators they of their for pressures changeon theSEC. exerting foreign overaccount consists control of A specialand highlytechnical of securities part regulation for This isunfamiliar standards. territory international lawyers. reporting ingand financial as was regarded thesource the of most advancedand admi the Until recently, United States AccountingPrac These areembodied in the Accepted Generally rableaccounting practices. statements presented, are and theStandard financial which governthe tices(GAAP), way mustmake before auditors the which prescribe investigations giving AuditingPractices(SAP), looks truth the that worldno longer has their opinion. That, too, changed;itisan inconvenient standard. to the U.S. GAAP as theglobalgold U.S. bodiesof the the has In recent authority been passingfrom SEC and therelevant years such as theFinancial AccountingStandards Board, to international accounting profession,
7 Their 8 efforts resulted

?240.12h-6 (2009).

in the promulgation

in 2007

of Securities TIMES

Exchange

Act

Rule

12h-6,

17 C.F.R. available in

Eric Pfanner, Germans Receive Bush Speech Coldly, N.Y. File. LEXIS, News Library, Individual Publications

ON THE WEB,

Sept. 26, 2008,

2009]

EDITORIAL COMMENT

687

has Federation Accountants, of which has entities.9 driving The force been theInternational amembership more thana hundrednationalaccounting of groups.It speaksauthoritatively now theInternational Account through International the Standards Accounting Committee, ingStandards whichU.S. parties have a significant, bynomeans con but Board, a body in out trolling, That body has been turning International role. FinancialReporting Standards (IFRS),which havegarnered increasing acceptanceinEurope and othercountries, more and in United States.10 from recently the different U.S. rules, gaps can be but They arenotvastly expectedtoopen up as theyearspass. Some accountingrules so technical are receive attention thatthey little outside theprofes For sion,but others have stimulated to politicalreactions. example, Congresshas threatened intervene both inthereporting executive of stock optionsand in the maintenance the of mark write down assets to-market whichmakes companies whose value has fallen requirement, SEC has acceptedfilings foreign below their issuers price.Since 2007 the couched in IFRS by thatthey reconciled be with the AmericanGAAP.1 International without insisting lawyers attention SEC announced in2007 thatit when the was considering paid little U.S. allowing 12 to issuers securities use IFRS rather of thanthegood oldGAAP in their filings. This would representsubstantial a international incursion intothe way thatthe Americanaccounting pro fession conductsits business.Ithasbeen termed most revolutionary "the in development secu rities regulation since the New Deal."'3 THE ECONOMY II. REVIVING As the newU.S. administration its turns attention revivingstaggering to a economy,itfinds its moves beingcarefully scrutinized commented and upon by the governments other of coun tries. in interest taxrules, Changes rates, new government expenditures, otherfiscal and policy moves all have international The implications. foreign commentsinvolve detailedquestions, suchas whether government on money shouldbe spent buyingtainted assets from threatened financial or institutions shares stockinthem. some of At point the United States will encounter elements that further inhibit foreign go and actionsthenation would liketo take. This isnot amatterof international The United States law. will not, for example,resort theresources to of theInternational Monetary Fund. The IMF simply does not operateon a scale tobe very
9

see DAVID R. HERWITZ & MATTHEW ON ACCOUNTING FOR J. BARRETT, MATERIALS background, see Detlev F. For a comparative overview of 174 (4th ed. 2006). Law and accounting practices, Vagts, in Business Associations, in 13 INTERNATIONAL OF COMPARATIVE ENCYCLOPEDIA LAW, BUSINESS Accounting For LAWYERS

AND PRIVATE Conard & Detlev Vagts eds., 1998). ORGANIZATIONS,eh. 12A (Alfred
10 Work

Reporting Standards, Concept Release, 72 Fed. Reg. 45,600 (Aug. 14, 2007). The SEC has recently indicated that itmay use of IFRS for the Potential Use of Financial in Accordance Statements Prepared require by 2014. Roadmap with International Financial Standards by U.S. Issuers; Proposed Rule, 73 Fed. Reg. 70,816 (Nov. 21, Reporting

to increase international is also & being done uniformity in auditing practice. See HERWITZ supra note 9, at 239. 11 Id. at8(Supp. 2008). 12 Issuers to Prepare Financial Statements inAccordance with International Financial Allowing U.S.

BARRETT,

2008).

13 Lawrence

A.

87N.C.L.

REV.

Cunningham, 1,3(2008).

The SEC's

Global

Accounting

Vision: A Realistic Appraisal

of

a Quixotic

Quest,

688

THE AMERICAN JOURNAL OF INTERNATIONALLAW

[Vol. 103:684

restraints U.S. pol on cannot impose conditionality helpfulto the United Statesand therefore pay cutting, bureaucracy limita and iciesliketherequirements budgetbalancing,subsidy of lies upon smaller leverage in the tionsithas forced economies.14 The chiefsourceof foreign when dollarat a time the plain factthat each steptaken the by United Statesaffects valueof the tobe concerned Americanshave about the thenation isalready heavilyindebtedto aliens.15 not treasuries enterprises and might withdraw dollar investments, possibility only thatforeign An to but thatthey for responsible Chinese mightbe unwilling makemore investments. official thatlendyou investments abroadhas reminded United States to "beniceto thecountries the
money."16

is One area in whichU.S. action to Exon-Florio Act17 to may be constrained in resort the national security. Two recentnegative preventforeigninvestments might threaten that such amongobservers the in United Statesthat responses underthese rules havecausedconcern in United States. One was the investment the rejections might deterotherscontemplating Unocal Cor Chinese oil company CNOOC tobuy oppositionto thebid by thestate-owned of that The second was thefuror about the proposed takeover P&O, a Britishfirm poration. by UnitedArab Emirates.18 operatedfacilities six at U.S. seaports, a companybased in the been complicated theemergence foreign of situation recently has sovereign The current by
wealth funds,19 agencies thatmanage the direct investments of foreign nations. As yet,we do not know a great deal about how theyoperate; for example, whether they will mix political con

tactics. the with their siderations investment-value-maximizing How effectively United States con if would need access to files can regulate themisnot clear,inparticular U.S. regulators haveadopteda code termed SantiagoPrin the The trolled theforeign government. agencies by and inany casenot binding.20 which arevery general ciples, invest on to are Of somewhatlonger foreign standing restrictions U.S. freedom regulate NorthAmericanFreeTrade Agreement(NAFTA)and other international ments under the Mexico might inflict Americanshad assumed that investors, damageon foreign agreements. and of its as it had done in thedecadesafter 1910 revolution, would be thetarget proceedings. fraction theclaims filed foreign of were therefore when a substantial startled by Americans The case that this NAFTAwereaimedat the United States. brought pointhome investors under that was initiated Methanex, a Canadian firm manufactured methyl tertiary butylether by the a chemicalthat when added togasolinelessened pollutionemitted the by exhaust (MTBE), it that MTBE leakedfrom It motorvehicles. turned however, when of storage tanks, could out, restric the of of impair quality groundwater. the Accordingly, state Californiaimposedsevere denialof fair equitable and United Statesalleged on use. tions its Methanex's claimagainstthe
TIONS inTheir Legal Setting 565-69 (2d ed. 1993).
15 The 14 For a brief description general impact of IMF conditionality, see FREDERIC now L. KlRGIS JR., INTERNATIONAL ORGANIZA inNlALL

on U.S.

Ferguson, Colossus:
16 James Fallows,

The Price of American empire 279 (2004).
to the Countries That Lend You Money,

of the nation's foreign policy

being

a "debtor empire" Jan. 2009,

is explored at 62, 65.

17 U.S.C. 50 app. ?2170 (2006). 18 Detlev F.Vagts, William S.dodge, & Harold lems 489-93 (4thed. 2008). 20
19 Paul Rose, Sovereigns as Shareholders, 87 N.C.

Be Nice

ATLANTIC,

Hongju Koh, Transnational
83 (2008).

Business Prob

L. REV.

International Working Group of Sovereign Wealth Generally Accepted Principles and Practices ("Santiago
http://www.iwg-swf.org/pubs/eng/santiagoprinciples.pdf.

Funds: Funds, Sovereign Wealth Principles") (Oct. 2008), available at

2009]

EDITORIAL COMMENT

689

The Methanex lost itscasebeforethearbitral treatment de facto and expropriation. factthat anxieties on U.S. freedom regulate.21 to about restraints the panel onlypartially relieved is The possible standard magnified the effect ofthefair-and-equitable-treatment by presence of similar-and even broader-investor-protecting clauses in bilateralinvestment treaties is now recognized, in (BITs) with other countriesthat, it might have investments the with statesthatonly receiveforeign United States. While most U.S. BITs were concluded that investment, there somany of these are agreements chancesaregood thatsome investor on Because of these may rely one topursuea grievance United States.22 againstthe concerns,
was modified and the negotiations on amultilateral theU.S. model bilateral investment treaty

investment agreement failed.23
III. DEMOCRATIC SOVEREIGNTY AND THE MELTDOWN

in At first constraints United Statesisexperiencing dealing the with the glancethe meltdown inotherareasaboutwhich theso-called seem to resemble constraints the new sovereigntists havebeen complaining some time.24 for thattheauthority elected They fear of U.S. political institutions be undermined, will undercutting American democraticsovereignty. the On new sovereigntists focused areasin on whole, the have which international might interfere law in Americanpolitical withU.S. practices with profoundresonance the arena,suchas resort to thedeathpenalty and thelegalization gay of are marriage. Noting thatsuch issues "tied to a and Kenneth Andersonexplainsthat stress "I particular culture, society, history," valuesasdis economicissues."25 from new sovereigntists tendedtoaccept tinguished purely have Thus, the such international agreements the as GATT despitetheir imposition important of restrictions on U.S. freedom action in the tradefield, of since thedispute resolution especially process involves high level legalism.26 a of In fact, constraints with herediffer the in dealt substantially character from thosethat con cern thesovereigntists. latter arise The restraints fromtheacceptance international of rules, either treaty by customary or by international They can be countered legalreactions law. by like reservations treaties, to attaching federalism restraints thescopeof treaties, on finding and on strict insisting standards beforea ruleof customary international can be established. law
v. United States, Final Award on Jurisdiction and Merits (NAFTA Ch. 11Arb. Trib. Aug. 3, Corp. v. United in Sanford E. Gaines, Case States, in 100 AJIL 683 (2006). Report: Methanex Corp. see the For a current of State Web site at Department listing of BITs, http://www.state.gOv/e/eeb/ifd/bit/ index.htm. 23 On the 2004 revised model bilateral investment treaty, see Sean D. Practice of the Murphy, Contemporary discussed ET AL., treaty on investment, see LORIF. DAMROSCH (4th ed. 2001). For an overall survey of the expropri in Institutional Context: Beyond theFear ofFragmented Inter 21 Methanex

2005), 22

United States,98AJIL 836 (2004), and John Crook, Contemporary R. Practiceof the United States, AJIL 259 99
for amultilateral (2005). On the ending of the negotiations LAW: CASES AND MATERIALS INTERNATIONAL 1626-27 issue, see Steven R. Ratner, Regulatory Takings label originated Nov.-Dec. Anderson, ation

national Law, 102AJIL 475 (2008).
24 The FOREIGN

63 Ohio

?FF.,

Government HARV. L. REV. 1266,1286 - 87& n.52 (2005) (reviewing ANNE-MARIESLAUGHTER, Networks,118 A New World Order (2004)). 26 For an exception,see JEREMY RABKIN, A. THE CASE FOR SOVEREIGNTY: WHY THEWORLD SHOULD Welcome American Independence, ch. 5 (2004).

25 Kenneth

State L.J. 649 (2002).
Squaring

in Peter J. Spiro, The New and Its False Prophets, Sovereigntists: American Exceptionalism and the 2000, at 9; see also Peter J. Spiro, Globalization (Foreign Affairs) Constitution, the Circle? Reconciling Sovereignty and Global Governance Through Global

690

THE AMERICAN JOURNAL OF INTERNATIONALLAW

[Vol. 103:684

are Although there somepossibleexceptions this to generalization,27 limitations U.S. the on crisis arise fromthebasic economics,thatis,theshift the actionsin thefinancial in primarily financial balanceof power.The United Statesgovernment cannotundo them. An Americannationalist, particularly who came to one maturityina periodofU.S. hege the loss of mony,will regret relative of power regardless itssource. the Perhapsreducing level will someof that in ofU.S. indebtedness restore power.Similarly, improvements thefinancial institutions the of United Statesand their regulation might rebuild someof itsinfluence and
prestige.
Some U.S. stimulus actions might be thought to violate commitments under the GATT, specifically those Investment treaties may keep the United States from concerning government procurement. regulating foreign investments in this country theway the government might otherwise wish. In the future the United States may be crisis such as an drawn into treaty-based solutions for some aspects of the economic financial intergovernmental to bear To some extent, restraints are of international net brought through themedium regulatory organization. works or regimes. IOSCO, having once been a forum inwhich U.S. positions received widespread acknowledgment a source of pressure on the United to international States to adapt its positions by other countries, has become norms. 27

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