New York-based funds are abus­ing ‘secre­cy juris­dic­tions.’

by Robert M. Mor­gen­thau
Wall Street Jour­nal

A major fac­tor in the cur­rent finan­cial cri­sis is the lack of trans­paren­cy in the activ­i­ties of the prin­ci­pal play­ers in the finan­cial mar­kets. This opaque­ness is com­pound­ed by vast sums of mon­ey that lie out­side the juris­dic­tion of U.S. reg­u­la­tors and oth­er super­vi­so­ry author­i­ties.

The $700 bil­lion in Trea­sury Sec­re­tary Hen­ry Paulson’s cur­rent pro­posed res­cue plan pales in com­par­i­son to the vol­ume of dol­lars that now escape the watch­ful eye, not only of U.S. reg­u­la­tors, but from the media and the gen­er­al pub­lic as well.

There is $1.9 tril­lion, almost all of it run out of the New York met­ro­pol­i­tan area, that sits in the Cay­man Islands, a secre­cy juris­dic­tion. Anoth­er $1.5 tril­lion is lodged in four oth­er secre­cy juris­dic­tions.

Fol­low­ing the Great Depres­sion, we bragged about a new­ly installed safe­ty net that was sup­pose to save us from such a hard eco­nom­ic fall in the future. How­ev­er, the Secu­ri­ties and Exchange Com­mis­sion, the Fed­er­al Reserve Sys­tem, the Comp­trol­ler of the Cur­ren­cy and oth­ers have ignored tril­lions of dol­lars that have migrat­ed to off­shore juris­dic­tions that are secre­tive in nature and out­side the safe­ty net — beyond the reach of U.S. reg­u­la­tors.

We should have learned a long time ago that total­ly unsu­per­vised mar­kets, whether trad­ing in tulips or sub­prime mort­gages, will soon­er rather than lat­er get into trou­ble. We don’t have to look back very far in his­to­ry to under­stand this.

Long Term Cap­i­tal Man­age­ment, a hedge fund “based” in Green­wich, Conn., but com­posed of eight part­ner­ships char­tered in the Cay­mans, was sup­posed to be the wun­derkind of the finan­cial world. At its peak in the late 1990s, its gross hold­ings were val­ued at $1.8 tril­lion. But, regret­tably, its lia­bil­i­ties exceed­ed its assets and the Fed­er­al Reserve Bank of New York had to step in and res­cue it when the val­ue of its assets plum­met­ed.

Most recent­ly, two Bear Stearns hedge funds, based in the Cay­man Islands, but run out of New York, col­lapsed with­out any warn­ing to its investors. Because of the loca­tion of these finan­cial insti­tu­tions — in a secre­cy juris­dic­tion, out­side the U.S. safe­ty net of appro­pri­ate super­vi­sion — their des­per­ate finan­cial con­di­tion went unde­tect­ed until it was too late.

Of course, BCCI Over­seas, which was part of the then largest bank­rupt­cy in his­to­ry, was also “char­tered” in the Cay­mans.

We have to learn from our mis­takes. Any sig­nif­i­cant infu­sion to the finan­cial sys­tem must car­ry assur­ances that it will not add to the pool of mon­ey beyond the safe­ty net and super­vi­so­ry author­i­ty of the Unit­ed States. More­over, the tril­lions of dol­lars cur­rent­ly off­shore and invest­ed in funds that could impact the Amer­i­can econ­o­my must be brought under appro­pri­ate super­vi­sion.

If Con­gress and Trea­sury fail to bring under U.S. super­vi­so­ry author­i­ty the finan­cial insti­tu­tions and trans­ac­tions in secre­cy juris­dic­tions, there will be no trans­paren­cy with the inevitable con­se­quences of the lack of trans­paren­cy — name­ly, a repeat of the unbri­dled greed and reck­less­ness that we now face. Because of the mono­lith­ic char­ac­ter of world finan­cial mar­kets, a default cri­sis any­where becomes a default cri­sis every­where.