The End of America’s Financial Independence?

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 28, 2009

IN THIS ISSUE:

1. Obama Endorses Global Regulation For U.S.

2. Quotes From G-20 Communiqué

3. This Just Cannot Be True, You Conclude

4. FSB Will Be a Giant Bureaucracy - How Will They Fund It?

5. Is There Any Reason To Think It Won’t Happen?

6. Conclusions – Could This Really Happen?

Introduction

President Barack Obama recently set the wheels in motion to render the ultimate control of our large financial institutions, large insurance companies, large hedge funds and quite possibly our financial markets as well, to a foreign entity. A new international regulatory agency was created at the recent G-20 Summit in London, and all G-20 countries signed onto it. Sadly, you probably have not heard a word about it until now.

Prepare to be outraged as you read what follows. And I will tell you how to confirm it on your own. Every freedom-loving American - whether conservative, moderate or liberal – needs to be aware of the information in this week’s E-Letter. Please read it carefully and consider forwarding it on to those who would want to know.

Obama Endorses Global Regulation For U.S.

On April 2 at the recent G-20 summit in London, President Barack Obama endorsed handing over the regulation of all major US financial companies, including large insurance companies and large hedge funds, to the newly created international “Financial Stability Board” (FSB) which is headquartered in Europe. The FSB’s predecessor organization was the Financial Stability Forum which primarily included the central banks of the G-8 countries.

At the April 2 Summit, the Financial Stability Board was expanded to all of the G-20 nations, plus Spain and the European Commission, and all member countries will be subject to the FSB’s rules, regulations and enforcement.

The FSB will be allowed to regulate and enforce its will on all financial entities (and financial markets if need be) that are deemed to have “systemic risks,” meaning that they are so large that their failure could pose a threat to the world financial markets and/or global credit flows.

The Financial Stability Board’s powers can supersede those of our own regulatory agencies such as the Securities and Exchange Commission, FINRA (formerly the National Association of Securities Dealers), the Commodities Futures Trading Commission and all other US securities regulators, and even the Federal Reserve if it is successful.

Yet it gets even worse. The FSB will also have the power to set executive compensation at financial institutions and any other entities and companies deemed to have systemic risk. The FSB has the power to regulate the “corporate social responsibility of all firms.”

What – you didn’t hear about this? Other than a brief mention on FOX News, Bloomberg online and a piece by Newsmax.com, I have not seen any other mainstream media outlet touch this story. If you are suddenly feeling outraged, you should be! Why on Earth would Obama do this? One commentator noted that perhaps Obama feels so guilty for the US role in triggering the international credit crisis that he felt obliged to agree to put our financial industry under the FSB’s control.

It is not as if the agreement to form the Financial Stability Board was a tightly kept secret. It was announced publicly in the official G-20 Communiqué which summarized and concluded the London summit on April 2. But the mainstream media has, with the exception of FOX, failed to bring this issue to the attention of the American people.

What follows are verbatim excerpts from the G-20 Communiqué that pertain to the new Financial Stability Board (be sure to read the bullet points below).

QUOTE

Major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis. Confidence will not be restored until we rebuild trust in our financial system. We will take action to build a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector, which will support sustainable global growth and serve the needs of business and citizens.

We each agree to ensure our domestic regulatory systems are strong. But we also agree to establish the much greater consistency and systematic cooperation between countries, and the framework of internationally agreed high standards, that a global financial system requires. Strengthened regulation and supervision must promote propriety, integrity and transparency; guard against risk across the financial system; dampen rather than amplify the financial and economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage excessive risk-taking. Regulators and supervisors must protect consumers and investors, support market discipline, avoid adverse impacts on other countries, reduce the scope for regulatory arbitrage, support competition and dynamism, and keep pace with innovation in the marketplace.

To this end we are implementing the Action Plan agreed at our last meeting, as set out in the attached progress report. We have today also issued a Declaration, Strengthening the Financial System. In particular we agree:

to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;

that the FSB should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;

to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks;

to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds; [emphasis added]

to endorse and implement the FSF’s tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms; [emphasis added]

to take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times;

to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information;

to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and

to extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.

We instruct our Finance Ministers to complete the implementation of these decisions in line with the timetable set out in the Action Plan. We have asked the FSB and the IMF to monitor progress, working with the Financial Action Taskforce and other relevant bodies, and to provide a report to the next meeting of our Finance Ministers in Scotland in November.

END QUOTE

You noticed that I highlighted the key word “all” in the bullet points above from the G-20 Communiqué. If the FSB, in its international wisdom, considers a financial institution or company or a hedge fund “systemically important,” it may regulate and oversee it. This provision extends and internationalizes the recent proposals by Treasury Secretary Geithner and the Obama administration to regulate all firms that are deemed to be “too big to fail,” in whatever sectors of the economy they so choose.

You no doubt noticed the fifth bullet point above where the FSB says is will create and enforce “tough new principles on pay and compensation.” This means that the FSB will regulate how much executives are to be paid at financial firms – including US firms - that are deemed to have “systemic” risk.

The chairman of the new Financial Stability Board is Mario Draghi, Italy’s central bank president. In a speech on Feb. 21, 2009, Draghi noted:

“The progress we have made in revising the global regulatory framework... would have been unthinkable just months ago… Every financial institution capable of creating systemic risk will be subject to supervision.”

“It is envisaged that, at international level, the governance of financial institutions, executive compensation, and the special duties of intermediaries to protect retail investors will be subject to explicit supervision.”

It is painfully obvious that these people lust for oversight and control of major US financial institutions and markets, and it appears that President Obama is willing to give it to them, sadly. Here is how Bloomberg described the FSB on April 3:

“Global leaders took their biggest steps yet toward a new world order that’s less U.S.-centric with a more heavily regulated financial industry and a greater role for international institutions and emerging markets.

At the end of a summit in London, policy makers from the Group of 20 yesterday delivered a regulatory blueprint that French President Nicholas Sarkozy said turned the page on the Anglo-Saxon model of free markets by placing stricter limits on hedge funds and other financiers. The leaders also pledged to triple the resources of the International Monetary Fund and to hand China and other developing economies a greater say in the management of the world economy.”

This Just Cannot Be True, You Conclude

I’m quite sure many of you are thinking that this just cannot be true. Well, it is. Just Google the words “Financial Stability Board” and you’ll find dozens and dozens of articles on this issue. Or you can go directly to the Financial Stability Forum’s website at www.fsforum.org and find the information there, including the recent G-20 Communiqué, straight from the source.

Unfortunately, some of the articles you’ll read online simply reprint the “talking points” that the G-20 put out there for public consumption, which all sound lofty and necessary, of course.

I’m sure many of you are also thinking that the President of the United States would never sign on to such a plan granting sovereignty over US financial firms and large hedge funds to a global regulatory agency dominated by European members – not even Barack Obama. But he did.

Some of you may be thinking that there’s no way Congress would authorize such a dramatic shift in power that would subordinate our financial system and markets to a foreign body. I don’t profess to know all the legalities that will be involved, but some analysts believe that President Obama may not have to gain congressional approval for this giant action; rather, that he will simply order our US financial regulators (SEC, FINRA, CFTC and others) to adopt the rules and regulations promulgated by the Financial Stability Board. This is really scary!

Finally, some of you may be thinking – in light of this terrible housing meltdown and credit crisis – that it’s high time for some type of international agreement and standards for financial regulations. And I might agree. However, international rules and regulations could be agreed upon by the G20 members and put in place by each country’s own regulators, not some foreign body dominated by Europeans. The same goes for regulating executive pay.

FSB Will Be a Giant Bureaucracy - How Will They Fund It?

If the G-20 Financial Stability Board is going to regulate financial institutions (and markets if need be) pretty much around the world, it will have to be a massive organization. Let’s take our own Securities and Exchange Commission as an example for comparison. The SEC reportedly has over 3,500 employees, and it is only responsible for overseeing the various US securities markets.

Just imagine how many employees the FSB will need to oversee, regulate and enforce its rules in the securities markets in 20+ countries. It would likely require offices, staff and enforcement personnel in each of the regulated member countries. The FSB could easily grow to an organization of 10,000-15,000 employees over the course of just a few years.

Likewise, we can only imagine how intricate and convoluted its regulations and enforcement proceedings would be to encompass so many different financial institutions and securities markets, especially since the FSB will be largely dominated by Europeans who have a socialist view of the markets and capital.

Then, of course, is the question of who will pay for it? The G-20 Communiqué was oddly (perhaps purposely) vague on the details of how this massive international regulatory agency will be funded. However, as best I can tell, it will be funded largely by the International Monetary Fund (IMF).

At the G-20 Summit in early April, the members agreed to increase the IMF’s capital base by apprx. US$1 trillion in a combination of US$750 billion in new contributions from the G-20 members, and another US$250 billion in new Special Drawing Rights (SDRs), all of which will have to be printed out of thin air. You can bet that the US will be the largest contributor by far.

This new Financial Stability Board is so alarming in so many ways, and there may be no way to stop it now that Obama has signed onto it. And the worst part is that virtually no Americans have any idea about it. This is unbelievable!

Bad News For Hedge Funds

If you ask large hedge fund managers what is their secret to success, most would respond with one word – privacy. They go to great lengths to keep their various positions in the markets secret and unavailable to their competitors, and even their own investors in most cases. They don’t want to give anyone information that can be used to trade against them.

Yet if the FSB deems a large hedge fund to have “systemic risk,” they could force the fund manager to disclose all of its positions, which could be very detrimental to its performance. The FSB will have this authority over any large hedge funds domiciled in any of the G-20 countries.

It remains to be seen what the FSB can do with the thousands of offshore hedge funds that are domiciled in places like Bermuda, Turks and Caicos, the Caymans, etc. that are not G-20 members. However, it is clear in the G-20 Communiqué that the Financial Stability Board intends to crack down hard on these so-called “tax haven” countries.

As discussed above, the other big hammer the FSB will wield is the ability to regulate and limit executive pay in financial institutions and large hedge funds that are deemed to have systemic risk. Large hedge fund managers typically receive an annual management fee, usually 1% of assets, with most of their compensation coming in the form of “incentive fees.”

Incentive fee compensation is a percentage of any profits that the manager generates. Often, incentive fees run 15%-20%-25% of net profits. Thus, a really successful fund manager of a very large hedge fund can make hundreds of millions of dollars a year. Yet the FSB will have the authority to put an arbitrary ceiling on what large fund managers can make if they are deemed to have systemic risks.

My prediction is that if the Financial Stability Board grows into the powerful entity that is clearly envisioned, we will see many very successful hedge fund managers close their doors and send the money back to their investors. The really successful managers have made tons of money over the years, and would likely not stand for such potentially onerous regulation.

Is There Any Reason To Think It Won’t Happen?

President Obama promised a new era of “transparency” in governance during the presidential campaign. Whether you are a liberal or a conservative, I think you must conclude that the transparency promise was just an empty campaign slogan, when in fact just the opposite has been true, especially in the case of the FSB.

That point aside, are there any reasons to think that the international Financial Stability Board won’t come to fruition, or that it will fail? Well maybe. The first point may sound way too elementary to be made, but it is probably valid. Do we think an international body made up of more than 20 countries will really be able to agree on anything substantial?

Compounding the problem is the nature of the new members. Whereas the FSB predecessor, the Financial Stability Forum, was a smaller, mostly-Western club in years past, the new membership will include China, Argentina, Russia, India, and Mexico, among others. If the US and Germany have been unable to agree on stimulus for the sagging economy, chances are that the inclusion of these new members will only make it more difficult for the G-20 to agree on its over-arching global regulatory mandates.

I would venture, however, that the newly admitted G-20 nations will have little to no serious input on the Financial Stability Board’s rules and regulations. In fact, a broad set of mandates and guidelines have already been drafted, including those highlighted above in the G-20 Communiqué excerpts. The drafters of the rules were reportedly instructed to have them in near-final form by the next meeting of the G-20 finance ministers in Scotland in November. This thing is moving fast.

Next, some analysts have concluded that while the FSB may prove to be a lively debating forum for central bankers, it is unlikely to move beyond that unless member states can somehow be legally bound to follow its mandates. It remains to be seen if the FSB can come up with such legally binding international authority, even if Obama has given it his blessing.

And lastly, at some point the Financial Stability Board’s onerous, cross border powers will have to come into the public view. It remains to be seen what the public backlash will be, not only in America, but in each country that may be asked to surrender its financial sovereignty to a multi-national regulatory body. Maybe that’s the point when the public gets outraged. I hope so!

Conclusions – Could This Really Happen?

The current weakened state of the global economy and the ongoing credit crisis unfortunately make the chances better for the FSB to become a reality, and for US financial markets to come under its control. President Obama went to the G-20 meeting knowing that they expected some concessions on his part to “make up” for the perceived unilateral actions by the Bush administration over the years. I’d say he more than lived up to their expectations. No, I’d say he gave away the farm!

Say what you will about former President George W. Bush (I’ve certainly criticized him often in these pages), but I don’t think the new Financial Stability Board would have had a snowball’s chance of becoming a reality when he was in office, at least not with the US signing on.

Enter President Obama. Armed with blame for the financial crisis, stories of bank failures and collapsing economies, the G-20 members were able to browbeat Obama into making concessions that would open up our financial institutions and markets to international regulation.

While I could support well thought out guidelines for financial institutions that are agreed upon by an international body like the G-20, such rules and regulations should be implemented by our own regulatory agencies like the SEC and others. President Obama should have never relinquished control of our regulatory agencies to a foreign entity.

There are those who believe that Obama wants to set the US on a course of submission to a new global government and a move toward socialism. But many Obama supporters insist these claims are absolutely false. Yet with Obama signing onto the Financial Stability Board, which will put our financial institutions (and possibly our financial markets as well) under foreign control, what can these Obama supporters say now?

However the FSB issue plays out, I believe that it bears watching closely by all Americans – liberals, moderates and conservatives – this is not a purely political issue. We are talking about nothing less than the national sovereignty of our financial institutions and financial markets and possibly a whole lot more if this move toward socialism is allowed to happen.

Unfortunately, it is not entirely clear if we can stop it. Hopefully, it is not true that Obama can commit the US to the Financial Stability Board without congressional approval. To me, the FSB is in fact a binding international treaty that should at least require ratification by a two-thirds vote in the Senate. The debate over whether the FSB is a treaty, or not, is where the fight will take place.

Freedom loving Americans need to get in this fight now! First, if you have any questions about the credibility of the information I have provided this week, get on the Internet and confirm it yourself. Type in Financial Stability Board and you will find plenty of information. Second, let your representatives in Washington know: 1) surrendering our financial sovereignty to the FSB is outrageous; 2) that it IS a treaty that must be ratified by the Senate; and 3) they had better not vote for it.

Let’s not give up control of our financial institutions and markets to a new international regulatory body dominated by European socialists! We should all be able to agree on that, even though I’m sure I’ll get some nasty responses to this week’s letter. So be it.

Lastly, feel free to forward this E-Letter widely.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Moving Towards Europe – but Do Americans Want to Go?
http://www.realclearpolitics.com/articles/2009/04/28/moving_towards_europe_--_but_do_americans_want_to_go_96208.html

How to Spend $6.5 Trillion in 100 Days
http://aei.org/publications/filter.all,pubID.29769/pub_detail.asp

Obama: The Global Apologist In-Chief
http://www.latimes.com/news/opinion/la-oe-kirchick28-2009apr28,0,4218519.story