When it came time for Switzerland to decide between an angry US Internal Revenue Service and its own constitution, the good people in Bern made the only decision they could: they forgot the details of the bank secrecy provision of their constitution and decided to turn over four thousand names of American UBS clients.
Tax cheats are hardly a sympathetic bunch. The rule the Americans are accused of breaking – earning income offshore and not declaring it to the IRS – is a bit silly; the US is the only OECD country that even presumes the right to tax worldwide income, and it is a bit of a tortured argument that money flows outside the US should be any concern of the US government in the first place. But those are the rules, and there are plenty of silly tax rules that citizens are nevertheless expected to follow. Good for the IRS to step up.
Why is it limited to some petty-ante tax case?
Switzerland was brought to heel not by logic or morals but by simple power. UBS and Credit Suisse dominate the Swiss economy. If one or both were to fail, the country might literally not have the resources to save it. This is the circumstance Willem Buiter described where a solvency crisis becomes a sovereignty crisis: small country, independent currency, huge financial firm. It blew up Iceland, and for a little while it looked like it could take Switzerland or even the UK.
UBS’ search for growth has led it over the years to do a great deal of perfectly legitimate domestic business in the US; it runs a large, full-service investment bank with extensive capital markets activities. The US government was prepared to bring criminal charges against the bank. If you check out Arthur Andersen’s history, you will note that whatever the ultimate outcome of the appeal system, one criminal conviction kills a company. Even if a penalty were somehow suspended, how could you do business with such a firm? And with a case about to go to trial, how could UBS divest itself of such a division, even if there were a market for the asset and even if the remaining company (ex-US) could carry on – both improbable assumptions over the past year.
The US could make UBS crumble. The Swiss government could not afford a UBS failure. The Swiss had to cave. Curious behavior from a people who hollowed out their mountains and mined their bridges should World War II force them to abandon their cities and fight from the Alps, but the practical choice. The disclosure process will be long and unsatisfying – the names first go to a Swiss special court, which will likely not be in any great rush – but it is a signal.
So why not turn this level of power on a more interesting target? The Organization of Petroleum Exporting Countries, for example, regularly meets in Vienna to discuss cartel action to fix the price of oil. They are not a stealthy band; they have an online calendar and a very visible hideout:
Nice touch with the logo.
When a global conspiracy to fix bulk vitamin prices was discovered, the US government prosecuted all parties, even though the principal actors (Hoffmann LaRoche of Switzerland, BASF of Germany, and Rhone Poulenc of France) are foreign, all meetings to discuss the subject were overseas, and several of the conspirators did not do any sort of business in the US. Our perspective was that if you mess with a market that includes the US, we are going to mess with you. And it turns out to be very hard to run from the US when the US puts its mind to catching you and you are a businessman. Much easier when you are Osama bin Laden or Roman Polanski.
Why not declare OPEC illegal? Even simply saying so would force a few changes. To begin with, anyone taking on the job of oil minister of an OPEC nation would be on notice that we considered him a fugitive. And there is really no point making all that oil money if you can’t use it to spray Cristal at Voile Rouge without wondering if you are due for extradition. The Oppenheimers got sick and tired of avoiding the US, and they at least had nice houses in South Africa. Freedom of movement is particularly valuable if there is a decent possibility that you might outlive your country; what are the odds Angola goes forty years without a violent overthrow of power?
Beyond the direct ability to tweak the individuals conspiring in Vienna, it is worth considering that the oil importing nations bring much more to the table than the oil producing nations. Think of the currency we send in exchange for the oil. That currency is only worth something when recirculated through the system of petroleum importers: it is our banking system that processes claims for goods from our factories and claims against property in our countries. Every one of those areas provides a break point for us. If we seize every Saudi asset we can lay our hands on and they seize every American asset they can lay their hands on, it is no contest who comes off the better…and, as I mentioned here, that’s assuming we play nice and do include “their oil” on the list of assets to seize.
Cut off from OPEC oil, we are a nation of disgruntled drivers facing expensive gasoline, and perhaps some amount of rationing as we adjust. Cut off from the west, OPEC nations are flat broke. Famine-level flat broke. Revolution flat broke.
How about we put the screws to them?
Taunter — I read you pretty regularly, and I am a little surprised by the thrust of this piece. Apparently you are suggesting (I presume seriously) that we Americans should unilaterally enforce our laws wherever it suits us, even though we refuse to accept international jurisdiction over any of our actions. Further, you are suggesting we prosecute an entity (OPEC) which is modeled on the Texas Railroad Commission which controlled US oil output in the (glorious) days when America was the largest exporter of oil — a little one sided don’t you think? Or doesn’t that matter?
I don’t think the Texas Railroad Commission was exactly the apogee of free market principles.
If we are going to have laws against cartel action in global markets, they do need to be international in scope, which is another way of saying that they need to be a tool of foreign as well as domestic policy. We regularly interpose ourselves in the behavior of our trading partners in their domestic markets: we sue the EU over state aid to Airbus (even though our military funnels billions to Boeing), we sue the Chinese over their domestic media market, and we have allowed our court system to process a variety of civil cases against facilitators of genocide in other countries. By these standards, I would think it straightforward to decide that oil prices are our business.
Everything you say is true. It is also true that not suing OPEC would be inconsistent with many of our previous actions you cite. But then consistency has not been the hallmark of our foreign policy — ever.
I guess we would probably both agree that our pleading for legal relief from quota fixing cartels has little basis in equity, morality, evenhandedness or international law. If that is indeed what you are recommending, I can only argue against you on the basis of realpolitik — does the action bring a greater national good, or not. That case I think is very difficult to make on one side or the other, and I am not prepared to take the time to pick either side.
Thanks for your posts — I really enjoy them
There was a really interesting movie from the 70′s titled “The Formula” starring Geo. C. Scott and Marlon Brando. Brando played an oil co. executive, and he had one of the great lines in moviedom. Another character, (don’t remember if it was Scott) was complaining about the Arabs and OPEC, and Brando’s character states: “Forget the Arabs. We’re the Arabs!”
Getting back to the point, we’ll never move against OPEC because it would hurt Exxon, Shell, BP and the others. It’s one thing to pursue a single financial giant like UBS. It’s completely different to take on the entire oil industry.