(Un?)Intended Regulatory Consequences of the Financial Crisis: Multinational Corporations and Sovereign Wealth Funds

Anyone who does not want to see what is lofty in a man looks that much more keenly for what is low in him and mere foreground--and thus betrays himself.

Friedrich Nietzsche, Beyond Good and Evil: A Prelude to a Philosophy of the Future (Walter Kaufmann, trans., New York: Vintage Books, 1966) Section 275 (What is Noble).

It was with this passage of Nietzsche in mind that I considered the possible shape of the principal regulatory consequences of the financial crisis. Attention is certainly focused on the foreground--the failures of the financial sector to remain robust even with the collapse of the debt markets for real estate in the United States, the culpability of certain actors and entities in bringing the crisis about, and the search for appropriate people to sacrifice to appease an electorate now made appropriately nervous by just the right kind and amount of media coverage to force the hand of Congress and the President in a certain direction. The search for political, economic and social advantage proceeds apace while the masses are maneuvered to play their part by the great actors seeking in the loftiest terms the basest goals. In the process of focusing so intently on the low, we betray ourselves in a perverse way.

There is a certain dejà vu operating today. The mini financial scandals of nearly a decade ago produced the Sarbanes-Oxley Act of 2002 and a set of regulatory consequences--(1) a shift in regulatory power from the states to the federal government, (2) privatization of enforcement, (3) an increasing reliance on surveillance as a technique of governance (control of social and economic behavior), (4) , and (5) . See Larry Catá Backer, The Sarbanes-Oxley Act: Federalizing Norms for Officer, Lawyer and Accountant Behavior, St. Johns Law Review, Vol. 76, pp. 897-952, 2002; Larry Catá Backer, Surveillance and Control: Privatizing and Nationalizing Corporate Monitoring After Sarbanes-Oxley, Law Review of Michigan State University 2004(2):327-440.

In like manner, the current crisis has already produced its governmental intervention framework in the United States--in the form of the Emergency Stabilization Act of 2008-- and will also produce its own great shifts of regulatory consequences far beyond its apparent scope. I highlight two here:

1. Regulation of Multinational Corporations: Underlying the great global finger pointing in the context of the financial crisis has been the idea of state intervention. Though there are great differences between political camps--all agree that the state--that is the collective holders of political power, have a duty to intervene directly, and in a coercive manner, in the markets. That intervention is necessary because the effects of market collapse are no longer merely social and economic but political as well. Financial sector collapse would result in political instability. In that context intervention is necessary for the state to protect itself--even if it had no interest in protecting economic and social actors. For those who have always been suspicious of market independence, or who held to an ideology of the subordination of economic and social to political power, the financial collapse offered the perfect pretext for righting the course of current globalization by seeking to assert the dominance of political collectives over global economic and social sectors. In either case, the political intervention represented by the Emergency Stabilization Act of 2008 may provide the necessary template to attempt what had seemed impossible even three years ago--the regulation of multinational enterprises. As late as earlier this year, even the United Nations and its apologist, John Ruggie, had been happy to make the best of the deal that seemed firmly in place--a regime of voluntary standards applicable to multinational enterprises. See John Ruggie, Protect, Respect and Remedy: A Framework for Business and Human Rights, A/HRC/8/5 (April 7, 2008). There was a sense that the political had to defer to the economic and social sectors on the basis of a markets ideology that appeared to restrict political power to its territorial limits and insist on global regimes of lightly fettered free movement of capital. See Larry Catá Backer, Multinational Corporations, Transnational Law: The United Nation's Norms on the Responsibilities of Transnational Corporations as Harbinger of Corporate Responsibility in International Law, Columbia Human Rights Law Review, Vol. 37:287-389 (2005). But the crisis itself may provide either a cover for, or the excuse necessary, to revisit the issue. It seems likely that the "market failure" analogy will be resurrected and the ideology of political control will become much more palatable even to those states, like the United States, that had served as the principle obstacles to direct regulation based on those notions. I expect to see the transformation of the U.N. Global Compact into a basis for the global regulation of multinational enterprises. The possible excuse would be the near term efforts by national governments to regulate more closely the world wide operations of multinationals within each territorial unit producing a matrix of inconsistent regulatory obligations.

2. Regulation of Sovereign Wealth Funds: The opposite may be true with respect to the regulation of sovereign wealth funds. While political power can be now more efficiently deployed against economic actors, it will be harder to deploy against state actors--even those acting within the markets rather than as regulators. Moreover, such activities are both vital to the integrity of the markets to which current regulation is focused and potentially recharacterized as sovereign. It is likely that the forces that drive the charge to assert political authority over markets will also drive the retreat from the regulation of sovereign wealth investment activities as a quasi-private activity. Instead, what may be expected will be both a greater effort to develop a set of voluntary guidelines for sovereign wealth activity, coupled with state to state and multilateral conventions describing the nature and limits of such activities. More importantly, sch legislation will focus both on the protection of the territorially based markets from overt manipulation by funds, and a set of guarantees to funds for the protection of their investments. The contours of those regulatory devices are still unclear, but their direction have likely already been set. principally through the work of the International Working Group of Sovereign Wealth Funds. See Generally Accepted Principles and Practices for Sovereign Wealth Funds (GAPP) (IMF, Press Release No. 08/97 2008). Already "The IWG members also decided to explore the establishment of a standing group of sovereign wealth funds (SWFs). This is in recognition of the need to carry forward the work relating to the GAPP, as necessary, and to facilitate dialogue with official institutions and recipient countries on developments that impact SWF operations. The IWG members also decided to explore the establishment of a standing group of sovereign wealth funds (SWFs). This is in recognition of the need to carry forward the work relating to the GAPP, as necessary, and to facilitate dialogue with official institutions and recipient countries on developments that impact SWF operations." International Working Group of Sovereign Wealth Funds, International Working Group of Sovereign Wealth Funds Reaches a Preliminary Agreement on Draft Set Generally Accepted Principles and Practices-"Santiago Principles," Press Release No. 08/04, September 2, 2008.

The framework is clear enough: it will seek to merge the public and the private in a new way--sovereign wealth funds will create a regulatory superstructure modeled on an intergovernmental governance (state to state) basis for the rules by which they can each participate in the economic markets of each other as participants rather than as sovereigns. The consequence will be both a privileging of public (political) over private (economic) actors within markets in an emerging sphere of public-private governance.

The question remains, though--where is the foreground? And what about ourselves might we have betrayed?

Almost everywhere in Europe today we find a pathological sensitivity and receptivity to pain; also to repulsive incontinence in lamentation, an increase in tenderness that would use religion and philosophical bric-a-brac to deck itself out as something higher--there is a veritable cult of suffering.

Friedrich Nietzsche, Beyond Good and Evil: A Prelude to a Philosophy of the Future (Walter Kaufmann, trans., New York: Vintage Books, 1966) Section 293 (What is Noble). Our cults will produce something interesting indeed.