Monday, September 22, 2008

WWWTOD? - What would the World Trade Organization Do? U.S. Bailout Edition

What is the Issue?

Does the massive bailout of the U.S. financial services sector by the U.S. government violate international law?

We already know that the last series of bailouts has been viewed with skepticism by the rest of the world. The bailouts have been seen as either an example of U.S. hypocrisy when insisting on deregulated markets in treaties or an admission of the failure of the U.S. guiding financial policies.

But is the bailout illegal under an international law regime?

What is the controlling international law?

The World Trade Organization governs many obligations - including domestic regulation - relating to trade and business.

The United States is a member of the WTO - voluntarily assuming obligations imposed by the Marrakesh Agreement, signed in 1994 and entering force in the U.S. in 1995.

The section of the Marrakesh Agreement that applies to financial services - like banking - is the General Agreement on Trade in Services (GATS).

Annex 1B of GATS contains the following provision in Article XXIX; Annex on Financial Services; Paragraph 2(a):

"Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member's commitments or obligations under the Agreement."


The seems to clearly indicate that actions taken to prop up failing domestic financial service suppliers are exempt from the WTO limits.

This includes throwing unprecedented sums of money at financial institutions in the hope that investment banks land softly and they can then proceed to swim about like Scrooge McDuck.

All perfectly legal under international law.

How does this affect the readers?

Readers can expect that many countries around the world will not contest the U.S. bailout in WTO tribunals. Get ready for your cash to help pay for executive golden parachutes.

Instead, foreign banks - like UBS - will be lining up to receive U.S. taxpayer cash. We're already seeing it happen.

The next question is, are we obligated to pay money to foreign banks as well as domestic ones?