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Nippon, US Steel Sue Biden & Barr Steps Down · Bloomberg Law

0:02
Speaker 1: This is Bloomberg Law with June Grosseol from Bloomberg Radio.
0:08
Speaker 2: Nippon Steele is standing firm on its plans to acquire
0:12
Speaker 2: US Steel, with both companies jointly filing a federal lawsuit
0:17
Speaker 2: against the Biden administration in a last ditch effort to
0:20
Speaker 2: preserve the nearly fifteen billion dollar merger. President Biden blocked
0:25
Speaker 2: the deal last week, citing a risk to national security,
0:29
Speaker 2: but the White House never explained how the deal with
0:32
Speaker 2: the Japanese company would threaten national security.
0:36
Speaker 3: This is about a domestically owned operated steel industry, and
0:43
Speaker 3: we're talking about for our national security, of course, but
0:47
Speaker 3: also our supply chain, a resilient supply chain, and so
0:51
Speaker 3: that's what the President wanted to focus on.
0:53
Speaker 2: The companies say that the review by Siphius, the Committee
0:56
Speaker 2: on Foreign Investment in the United States, was a sham
1:00
Speaker 2: and that Biden blocked the deal for purely political reasons,
1:04
Speaker 2: that is, to gain favor with union steel workers in
1:07
Speaker 2: Pennsylvania during his re election bid. The President had announced
1:11
Speaker 2: his opposition to the deal in March, before the Scifius
1:15
Speaker 2: review even began, and in April at the US steel Workers'
1:20
Speaker 2: headquarters in Pittsburgh. Biden made this promise to the union workers.
1:25
Speaker 4: US still has been an iconic American company for more
1:28
Speaker 4: than a century, and it should remain a totally American company,
1:35
Speaker 4: American owned, American operated by American union steer workers, the
1:39
Speaker 4: best of the world, and that's going to happen, I
1:42
Speaker 4: promise you.
1:44
Speaker 2: Joining me is John Kabilo, a Washington, DC attorney who
1:48
Speaker 2: specializes in cross border transactions. John. Since nineteen ninety, only
1:54
Speaker 2: eight other foreign transactions have been blocked by presidents, according
1:59
Speaker 2: to the Congressional rect Service, and here President Biden reportedly
2:04
Speaker 2: went against his top national security aids in blocking the
2:08
Speaker 2: sale to a Japanese company, even though Japan is a
2:12
Speaker 2: longstanding ally of our country.
2:15
Speaker 1: Right, it is extraordinarily rare for a president to formally
2:20
Speaker 1: block any investment via sytheist I think it's unprecedented that
2:24
Speaker 1: a president would block a transaction like this, an investment
2:28
Speaker 1: coming from an allied nation, a critical allied nation, and
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Speaker 1: in particular where there's no clear national security threat posed
2:36
Speaker 1: by the investment.
2:38
Speaker 2: I'm confused about what Biden says is a national security threat.
2:42
Speaker 2: Is it a national security threat as you know the
2:45
Speaker 2: average person might see it? Or is it a threat
2:48
Speaker 2: to the domestic steel industry.
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Speaker 1: That's a great question, and part of that gets at
2:53
Speaker 1: the evolution of pytheists over the years. You know, ten, fifteen,
2:57
Speaker 1: twenty years ago, things that were thought of as as
3:00
Speaker 1: quote unquote national security issues that really was a limited
3:05
Speaker 1: set of things, and it related to weapons, systems, and
3:10
Speaker 1: telecommunications networks in big pretty clearly strategic assets in the
3:15
Speaker 1: United States. It is true that the notion of national
3:19
Speaker 1: security has expanded some over time, and now it includes
3:23
Speaker 1: things like the personal data of US citizens. Certainly software
3:28
Speaker 1: and things like that have been lumped into this concept
3:31
Speaker 1: of things that can cause national security concerns. Steel itself
3:35
Speaker 1: obviously is useful to the military, but there's no evidence
3:41
Speaker 1: that in this transaction, Knepon Steel was going to do
3:44
Speaker 1: anything other than expand production in the United States and
3:48
Speaker 1: bring more investment and frankly better steelmaking technology into the
3:52
Speaker 1: United States. So it's hard to say that there's any
3:56
Speaker 1: sort of threat to steelmaking in the United States because
4:00
Speaker 1: of the transaction, And ultimately it looks like it boils
4:04
Speaker 1: down to just kind of a US centric notion that
4:09
Speaker 1: this company that's an iconic company in the United States,
4:12
Speaker 1: it should be owned by US persons and not owned
4:16
Speaker 1: by a foreign company. And that's really not at all
4:20
Speaker 1: what Syphius was set up to do. And so what
4:22
Speaker 1: we're looking at is the President is sort of abusing
4:25
Speaker 1: his authorities under Scythius to achieve a political outcome that.
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Speaker 2: Sort of echoes some of the claims the steel companies
4:32
Speaker 2: are making in their lawsuit that argues that Biden violated
4:36
Speaker 2: the Constitution in blocking the merger. Tell us more about
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Speaker 2: their arguments.
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Speaker 1: So Syphius is an authority. It's under the Defense Production
4:44
Speaker 1: Act of nineteen fifty and its authorities were just expanded
4:47
Speaker 1: recently in twenty eighteen. But really what the law says
4:51
Speaker 1: is that first and foremost, the US is intended to
4:55
Speaker 1: have an open investment environment that allows foreign re investment
5:00
Speaker 1: into the United States. And what Syphius is empowered to
5:03
Speaker 1: do is review investments from foreign parties. Syphius has the
5:08
Speaker 1: ability to approve those transactions, but if a transaction may
5:14
Speaker 1: pose a threat to the US national security, then Syphius
5:18
Speaker 1: can negotiate conditions and require an investor to comply with
5:22
Speaker 1: whatever conditions it needs before it approves the transaction. Only
5:26
Speaker 1: in the rarest of circumstances. If there's a threat that
5:30
Speaker 1: is so great and CIFIUS can't find a way to
5:33
Speaker 1: solve the threat, then it goes to the president, and
5:35
Speaker 1: the president has the authority to block the transaction. And
5:38
Speaker 1: so with that is background, what the lawsuit essentially is
5:42
Speaker 1: saying is that the process and the requirements necessary for
5:46
Speaker 1: a president to block the transaction were never followed. Before
5:50
Speaker 1: Sophius even began to review the transaction, President Biden, vice
5:55
Speaker 1: President Harris, and Secretary Yellen had already gone public saying
6:00
Speaker 1: that the transaction should not go through, that US Steel
6:04
Speaker 1: needed to remain domestically owned, and I believe Biden even
6:08
Speaker 1: told the steel workers that he guaranteed that the transaction
6:11
Speaker 1: was not going to go through. And again, this is
6:13
Speaker 1: before the SCIFIAT process had started. And it's important to
6:16
Speaker 1: know that what the SIFIAS process does is it brings
6:20
Speaker 1: thirteen federal agencies together. They look at extensive information that's
6:25
Speaker 1: provided about the transaction by the parties. Every member agency
6:29
Speaker 1: on the committee has the ability to ask questions over
6:33
Speaker 1: a lengthy review process. So it's a detailed fact finding mission.
6:38
Speaker 1: And as they're doing fact finding, they're also sort of
6:40
Speaker 1: assessing what the national security issues might be first of all,
6:45
Speaker 1: and then second of all, if they do have national
6:47
Speaker 1: security concerns, how might they go about solving those concerns.
6:51
Speaker 1: And it really is a burdens and process for the parties.
6:54
Speaker 1: It's a detail oriented process, and kind of counterintuitively, it's
6:58
Speaker 1: also a constructive process. You know, Syphius is trying to
7:02
Speaker 1: find facts that are meaningful to it, but at the
7:05
Speaker 1: same time it's trying to figure out a path forward
7:09
Speaker 1: and then negotiate with the parties if it does have concerns.
7:12
Speaker 1: So again, understanding how that process works, and then knowing
7:16
Speaker 1: that before any of that had kicked off, the administration
7:19
Speaker 1: was sort of going around publicly saying that the transaction
7:22
Speaker 1: shouldn't go forward, I think fundamentally shows that they had
7:25
Speaker 1: no intention of sort of looking at the facts or
7:28
Speaker 1: following the requirements of the law. They had essentially looked
7:33
Speaker 1: at the transaction and knew that it was a political
7:36
Speaker 1: hot potato and recurrying favor with voters in a swing
7:40
Speaker 1: state by saying, you know, we're never going to let
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Speaker 1: this go forward, but that's not what the law allows
7:45
Speaker 1: the president to do.
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Speaker 2: The steel companies say that the Scythias panel sent a
7:51
Speaker 2: seventeen page letter of security concerns riddle with inaccuracies over
7:56
Speaker 2: the Labor Day weekend and only gave them one business
7:59
Speaker 2: day to response, And they claim that the Siphious staff
8:04
Speaker 2: were told not to offer counterproposals or engage in discussions that,
8:10
Speaker 2: on its face, if true, seems to support the steel
8:14
Speaker 2: company's arguments.
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Speaker 1: I think that's right, and I think it's important to
8:19
Speaker 1: draw out that distinction, which is that the president did
8:22
Speaker 1: this to Knipon Steel and US Steel, and the President
8:25
Speaker 1: also did this Tocifius itself. You know, I think the
8:28
Speaker 1: career staff at Syphius, they are quite good at running
8:31
Speaker 1: their process. And so when you see things like a
8:36
Speaker 1: seventeen page letter that again allegedly was riddled with factual inaccuracies,
8:41
Speaker 1: that's not the type of thing that you would ordinarily
8:43
Speaker 1: see out of Pythias. And I think it would show
8:45
Speaker 1: you that Siphius was being ordered to do something that
8:48
Speaker 1: it really didn't have evidence or justification to do, and
8:53
Speaker 1: so they were sort of put in a position where
8:54
Speaker 1: they had to stretch to meet the directive from above.
8:58
Speaker 2: Where does it sit in that after this year long review,
9:02
Speaker 2: the Committee divided on the risks and failed to reach
9:06
Speaker 2: a decision about whether the deal should go forward.
9:09
Speaker 1: So the process kicks off by the parties filing a
9:12
Speaker 1: detailed notice to the Committee, and then over the course
9:15
Speaker 1: of the review period, which is typically up to ninety days,
9:18
Speaker 1: but it can be extended in tough cases voluntarily by
9:21
Speaker 1: the parties and with Sethius's consent. The point of that
9:25
Speaker 1: whole process is to provide the Committee with all the
9:28
Speaker 1: information that it needs to fully render a decision, and
9:32
Speaker 1: then if it does have concerns, there's time in the
9:35
Speaker 1: process for the Committee and the parties to engage in
9:38
Speaker 1: the negotiation around what conditions the Committee needs and what
9:43
Speaker 1: conditions the parties can comply with, so that then the
9:46
Speaker 1: Committee is in a position to approve a transaction. So
9:49
Speaker 1: at the end of ninety days, what the Committee ordinarily
9:51
Speaker 1: is looking to do is avoid referring anything to the
9:55
Speaker 1: President's desk, and the way that that's achieved is there's
9:59
Speaker 1: thirteen member ages season fifius. Nine of them are voting agencies.
10:02
Speaker 1: The agencies have to be in unanimity that the transaction
10:06
Speaker 1: should be approved, and so sometimes the agencies don't have
10:08
Speaker 1: any national security concerns, or other times there is a
10:12
Speaker 1: national security concern, but it's been solved with whatever conditions
10:16
Speaker 1: were negotiated with the parties. So it's only when they
10:20
Speaker 1: can't get comfortable with something and reach a unanimous conclusion
10:24
Speaker 1: to approve a transaction then they refer something to the President.
10:27
Speaker 1: And here the reports are that every agency was in
10:31
Speaker 1: favor of approval except for the US Trade Representative, So
10:35
Speaker 1: there was this sort of one holdout agency that was
10:38
Speaker 1: saying that they didn't want to approve the transaction. So
10:40
Speaker 1: in that case, when the committee is divided, that's when
10:43
Speaker 1: it goes to the President for final adjudication.
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Speaker 2: That's interesting because the companies are also suing rival US
10:50
Speaker 2: steelmaker Cleveland Cliffs, It's CEO and the United steel Workers
10:56
Speaker 2: president alleging coordinated anti competitive and recketeering activities. And the
11:02
Speaker 2: lawsuit claims that the US Trade Representative got a private
11:08
Speaker 2: tour and fireside chat with the CEO and United steel
11:13
Speaker 2: Workers leadership at a Cliff's facility, and they alleged that
11:17
Speaker 2: the defendants improperly bought her loyalty. So that suits on
11:21
Speaker 2: a separate track. We'll see where that suit goes. Coming
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Speaker 2: up next, President elect Donald Trump has said on truth
11:29
Speaker 2: Social I will block this deal from happening. Buyer beware.
11:34
Speaker 2: But could that change. I'm June Grosso and you're listening
11:38
Speaker 2: to Bloomberg. Nippon Steele, and US Steel jointly filed a
11:42
Speaker 2: pair of lawsuits in a last ditch effort to preserve
11:46
Speaker 2: their planned nearly fifteen billion dollar merger. The companies are
11:51
Speaker 2: arguing that SCIPHIUS, the Committee on Foreign Investment in the US,
11:55
Speaker 2: failed to consider the deal on national security grounds, and
11:59
Speaker 2: that Biden's or to block it was made for purely
12:02
Speaker 2: political reasons. I've been talking to John Kabilo, a Washington,
12:06
Speaker 2: DC attorney who specializes in cross border transactions. So, John,
12:12
Speaker 2: are the companies basically making a due process argument?
12:16
Speaker 1: Ultimately, they're making a due process argument, but I think
12:18
Speaker 1: there's also, at least in my view, there's also a
12:21
Speaker 1: substantive claim as well. But the due process argument is
12:24
Speaker 1: pretty straightforward and I think extremely compelling, which is the
12:27
Speaker 1: law sets forth this very detailed and robust process that
12:31
Speaker 1: has the involvement of, like I said, thirteen federal agencies.
12:35
Speaker 1: That process is there for a reason, and it's not
12:37
Speaker 1: so that you know before they've done any work at all,
12:40
Speaker 1: the president and other senior political officials can sort of
12:44
Speaker 1: go all over the United States and publicly say that
12:48
Speaker 1: that deal should never go forward. The fact that they
12:50
Speaker 1: were doing that for considering any of the evidence, considering
12:54
Speaker 1: any of the recommendations of the committee, that shows that
12:56
Speaker 1: they were engaged in political thinking. And so at the
13:00
Speaker 1: end of the day, you know, they took their sort
13:03
Speaker 1: of political motivations and they grafted it on to national
13:06
Speaker 1: security authorities. It can't be justified under a national security
13:11
Speaker 1: regime to take up political action.
13:15
Speaker 2: Presidents have brought authority to determine what constitutes a national
13:19
Speaker 2: security threat. Can the president's authority here be challenged successfully
13:25
Speaker 2: in court?
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Speaker 1: This is the novel issue here, which is, you know,
13:28
Speaker 1: courts historically for centuries have deferred to the president on
13:34
Speaker 1: questions of national security, you know, the substantive decision making
13:37
Speaker 1: regarding what counts as a national security threat and what
13:40
Speaker 1: does not. So in that regard, the president does have
13:43
Speaker 1: broad authorities and it's hard to challenge them. But here,
13:46
Speaker 1: I think what the parties are saying is that the
13:48
Speaker 1: process itself was so flawed. They were denied their rights
13:50
Speaker 1: from the beginning and ultimately what the president was doing
13:53
Speaker 1: was not making a national security determination. What the president
13:57
Speaker 1: was doing was making a political determination. And so I
14:00
Speaker 1: I think that's the really interesting issue, at least in
14:03
Speaker 1: my mind, that the courts are going to have to consider, is,
14:06
Speaker 1: you know, when a president pretty clearly is engaged in
14:11
Speaker 1: political behavior but just claiming that it's national security decision making,
14:16
Speaker 1: what degree of difference does a court have to give
14:18
Speaker 1: the president in those situations? And I think that's a
14:21
Speaker 1: nuanced and a novel question in one where I think
14:24
Speaker 1: the parties may have more traction than if it were,
14:27
Speaker 1: you know, pretty clearly a standard national security type decision
14:32
Speaker 1: that maybe the parties didn't like or maybe they thought
14:34
Speaker 1: that the president was going too far. But I don't
14:37
Speaker 1: even think there was really much of an attempt to
14:39
Speaker 1: call this, you know, national security. This was economic nationalism,
14:43
Speaker 1: This was election year politics, This was all sorts of things,
14:46
Speaker 1: but it was not national security.
14:49
Speaker 2: Nearly a decade ago, there was a court challenge to
14:53
Speaker 2: the Scifius review process and the president's authority over foreign
14:57
Speaker 2: business deals that concerned a Chinese owned company, and a
15:01
Speaker 2: federal appeals court ruled that the company's due process rights
15:05
Speaker 2: were violated. By the Sifius review, but still the court
15:09
Speaker 2: didn't overturn President Barack Obama's order that the Chinese company
15:13
Speaker 2: had to sell. Does that case have relevance here?
15:17
Speaker 3: Right?
15:17
Speaker 1: That was a little different. I think that case is
15:20
Speaker 1: instructive in that, first of all, due process challenges can
15:24
Speaker 1: be successful when the Syfius process itself is corrupted. And
15:28
Speaker 1: so in that case, Fyfius pursued an action against a
15:32
Speaker 1: Chinese acquirer of wind farms that were next to military
15:36
Speaker 1: airspace that was used to train unman burial vehicles, and
15:40
Speaker 1: CFIUS issued an interim order very early in the process,
15:43
Speaker 1: and they ordered the deconstruction of windmills, They ordered that
15:48
Speaker 1: the acquirer not access the property. They ordered all sorts
15:51
Speaker 1: of extremely onerous things. And what the parties argued there
15:55
Speaker 1: was that essentially the order from Syphius was so onerous
15:58
Speaker 1: that it was equivalent of blocking the transaction. And really
16:02
Speaker 1: only the President of the United States has the authority
16:04
Speaker 1: to block a transaction. And so I think there they
16:07
Speaker 1: got a lot of traction on that angle, which was
16:10
Speaker 1: that there are limitations to what Syphias as a committee
16:13
Speaker 1: can do. And then additionally they got some traction on
16:16
Speaker 1: the notion that Syphius does have to provide some information
16:20
Speaker 1: about its decision making process when it's going to take
16:23
Speaker 1: an adverse action against the party. And then again when
16:26
Speaker 1: that process was rerun and when the decision was in
16:29
Speaker 1: Obama's hands, there was not a substantive way to challenge
16:34
Speaker 1: a president's decision on national security grounds. But the parties
16:39
Speaker 1: did make a lot of progress on the procedural violations.
16:43
Speaker 2: So do you think it's possible that a court would
16:47
Speaker 2: order another review by Syphius here?
16:49
Speaker 1: Yeah, I think it's possible that a court would order
16:51
Speaker 1: another review. It's clear that the process was corrupted from
16:56
Speaker 1: even before day one, and so in that regard, whatever
16:59
Speaker 1: sort of the maximal remedy for due process violations is,
17:03
Speaker 1: any court should provide that remedy, you know. And then
17:06
Speaker 1: I think the next question, which is, Okay, there's going
17:09
Speaker 1: to be a new administration in town. The next president
17:12
Speaker 1: has come out against this transaction. What happens there? And
17:16
Speaker 1: this is just sort of crystal ball talk here, but
17:19
Speaker 1: I do think that the parties are presented with an
17:21
Speaker 1: opportunity to actually reach some kind of a deal with
17:25
Speaker 1: the new administration. When you look at all of the
17:27
Speaker 1: commitments that Nipon Steel was willing to make to get
17:32
Speaker 1: the deal done. I think ultimately that transaction was really
17:35
Speaker 1: really good for the steel workers and for US deal,
17:39
Speaker 1: and for our domestic steel industry and for our supply
17:44
Speaker 1: chain security. I think that, you know, the parties may
17:48
Speaker 1: well be able to make a compelling pitch to the
17:50
Speaker 1: next administration and find a way to get a deal done.
17:53
Speaker 1: The next administration. You know, I think they pride themselves
17:56
Speaker 1: in finding ways to get deals done, and I think
17:58
Speaker 1: when they look at what's being off or they may
18:00
Speaker 1: find something very compelling in that.
18:03
Speaker 2: How long would it take for this lawsuit to go
18:07
Speaker 2: through the DC circuit and perhaps a request for Supreme
18:11
Speaker 2: Court review? Are we talking years or months?
18:15
Speaker 5: Yeah?
18:16
Speaker 1: Unfortunately, it could take quite some time. I wonder if
18:20
Speaker 1: a court may use sort of exodited authorities to order
18:23
Speaker 1: a new review or at least halt the block of
18:27
Speaker 1: the transaction to provide the parties with more time and
18:31
Speaker 1: more ability to negotiate with the new administration.
18:35
Speaker 2: And is there a chance that this might be accepted
18:38
Speaker 2: for review by the Supreme Court.
18:41
Speaker 1: There are some novel legal questions here that I would
18:44
Speaker 1: love to see in the hands of the Supreme Court,
18:47
Speaker 1: because I think it's really critical, really really critical, not
18:52
Speaker 1: just for the scipious process and not just for transaction parties,
18:57
Speaker 1: but I really think for everyone it's important that we
19:00
Speaker 1: come up with some idea that no president can just
19:04
Speaker 1: wave a wand and call something national security and then
19:07
Speaker 1: be exempt from all scrutiny. I think the traditional deference
19:11
Speaker 1: to the president on anything understood to be national security
19:15
Speaker 1: related is proper, but I think it also invites, and
19:20
Speaker 1: we've seen this incithius, that more and more things are
19:23
Speaker 1: being called national security, and at some point there's no
19:27
Speaker 1: check on a president that wants to call anything that's
19:30
Speaker 1: politically expedient national security. And I think it's really important
19:35
Speaker 1: that a court step in and say we have to
19:37
Speaker 1: have some guardrails, and Congress may need to act, but
19:40
Speaker 1: somewhere there needs to be an intervention that says that
19:43
Speaker 1: it's not a get out of jail free card, so
19:45
Speaker 1: to speak, that if you call it national security, you
19:47
Speaker 1: can do whatever you want.
19:48
Speaker 2: I've read this prediction that if this suit is successful,
19:53
Speaker 2: it would mean sweeping changes to the authority of the
19:56
Speaker 2: US government to vet foreign transaction. Do you agree with that?
20:01
Speaker 1: I don't see this suit as fundamentally rewriting the rules
20:06
Speaker 1: of Syphius. I think the actions of the President and
20:09
Speaker 1: the administration were so aberrant and so clearly objectionable that
20:15
Speaker 1: you can create a ruling in this case that applies
20:18
Speaker 1: to this case that doesn't rewrite the entire scipious process.
20:22
Speaker 1: It's possible to just say, hey, this process and its
20:25
Speaker 1: results need to have greater fidelity to the notion of
20:28
Speaker 1: national security and can't just be clearly a political tool
20:33
Speaker 1: or a tool used in clearly political context. And so
20:36
Speaker 1: I don't think it has to be a very broad ruling.
20:40
Speaker 2: And do you see any effects of this decision outside
20:46
Speaker 2: of this deal the big picture.
20:49
Speaker 1: Something that's personally troubling to me is that over the
20:52
Speaker 1: last five or six years, the US has gone to Europe,
20:56
Speaker 1: we've gone to Asia, and we've strongly incur in most
21:00
Speaker 1: cases successfully encourage other nations to stand up processes that
21:06
Speaker 1: are similar to Scythius. The animating factor there was that
21:10
Speaker 1: we wanted other countries to get tougher on investments from China.
21:13
Speaker 1: You know, it's always been in the back of my mind.
21:16
Speaker 1: US investment firms are the number one overseas investors and
21:19
Speaker 1: so we're sort of going around to other countries and
21:22
Speaker 1: asking them to implement these processes. They're going to burden
21:25
Speaker 1: US investors, but I think the policy thinking was that,
21:28
Speaker 1: you know, that was worth it. But now having encouraged,
21:31
Speaker 1: you know, all these other countries to set up Sithius
21:33
Speaker 1: like processes and then to have made the single worst
21:36
Speaker 1: decision in Sifia's history, and to make the single most
21:41
Speaker 1: transparently political decision in fifious history, I think just paints
21:45
Speaker 1: the entire exercise and undermines confidence in those countries that
21:51
Speaker 1: the US is sort of a reliable partner and certainly
21:55
Speaker 1: encourages similar behavior by those other countries. It's not a
21:59
Speaker 1: stretch all to imagine, you know, especially if we implement
22:03
Speaker 1: tariffs and you know, start potentially pulling back from NATO.
22:07
Speaker 1: It's really easy to foresee a situation where anti American
22:10
Speaker 1: sentiment rises, and you know, investments from American firms in
22:16
Speaker 1: other countries all of a sudden are nearly impossible because
22:20
Speaker 1: we've established as precedent that these regimes can be politicized. So,
22:25
Speaker 1: you know, I do worry significantly about the second order
22:28
Speaker 1: effects of this single decision. That is an awful decision.
22:33
Speaker 2: Well, see if the courts remedy it. Thanks so much
22:36
Speaker 2: John for being on the show. That's Washington, DC attorney
22:40
Speaker 2: John Kabilo, who specializes in cross border transactions. As far
22:45
Speaker 2: as the reaction in Japan, Japanese Prime Minister Shageru Ishiba
22:51
Speaker 2: was blunted, warning that spoiling the deal might hurt Japanese
22:54
Speaker 2: investment in the US. Ishiba was emphatic quote as for
22:59
Speaker 2: why when national security was cited as an issue, it
23:02
Speaker 2: must be clearly explained, otherwise future discussions on the matter
23:06
Speaker 2: will come to naught, and that it's an unfortunate fact
23:10
Speaker 2: that Japanese industry has voiced concerns about future investments between
23:14
Speaker 2: the US and Japan. We have to take this very seriously.
23:19
Speaker 2: Coming up next on the Bloomberg Law Show, the exit
23:22
Speaker 2: of the fed's top bank cup puts capital rules in jeopardy.
23:26
Speaker 2: I'm June Grosso and you're listening to Bloomberg. Federal Reserve
23:32
Speaker 2: Vice Chair for Supervision Michael Barr plans to step down
23:36
Speaker 2: from the role, avoiding a potential battle with President elect
23:39
Speaker 2: Donald Trump over his position and raising questions about the
23:43
Speaker 2: future of a landmark bank capital proposal. Joining me is
23:47
Speaker 2: an expert on the FED and financial regulation. Catherine Judge,
23:51
Speaker 2: a professor Columbia Law School, bar said it was a
23:54
Speaker 2: very tough decision, but he was concerned that staying would
23:58
Speaker 2: be a distraction for the institute. Do you think he
24:01
Speaker 2: made the right decision.
24:02
Speaker 5: I don't think he made the right decision. The concerns
24:06
Speaker 5: animating the decision are understandable. There was a lot of discussion,
24:12
Speaker 5: quite credible discussion, suggesting that the incoming Trump administration might
24:18
Speaker 5: have sought to remove him from his post as vice chair,
24:22
Speaker 5: And there is a difficult legal question about whether or
24:25
Speaker 5: not the Trump administration would have the facility to remove
24:28
Speaker 5: him by stepping down the short circuits that legal debate,
24:34
Speaker 5: which would also have implications for the capacity of the
24:37
Speaker 5: Trump administration or any presidential administration. True of the chair
24:41
Speaker 5: of the sed that being said, he freely announced that
24:46
Speaker 5: he believed he was in the right to be able
24:49
Speaker 5: to stay in that position, and given that the Senate
24:52
Speaker 5: confirmed him to that position, and there was a lot
24:55
Speaker 5: that's still on that agenda, I would have preferred to
24:58
Speaker 5: see him take on that fight and serve out his terms.
25:02
Speaker 2: Who has the better side in that legal battle?
25:05
Speaker 5: It is a really difficult legal question. I do think
25:08
Speaker 5: that the stronger argument is that both the Vice Chair
25:12
Speaker 5: and the Chair have the ability to serve out their
25:16
Speaker 5: terms and cannot be removed by the President except for cause.
25:21
Speaker 5: That being said, the judiciary has been much more hostile
25:26
Speaker 5: to the independence of any agency, and those concerns could
25:34
Speaker 5: very well result in a judicial decision holding that the
25:38
Speaker 5: Vice Chair or the Chair is removable by the President
25:43
Speaker 5: at their discretion.
25:44
Speaker 2: Explain how his departure may impact or will impact the
25:49
Speaker 2: future of this landmark bank capital proposal.
25:53
Speaker 5: So one of his signature efforts as Vice Chair was
25:59
Speaker 5: an effort meant was known as boslea free endgame, and
26:03
Speaker 5: the aims were twofold one. It was trying to bring
26:06
Speaker 5: the United States in line with international agreements that they
26:12
Speaker 5: had already agreed to try to abide by embodied in
26:16
Speaker 5: Boggle Free and to the specific proposal that came out
26:21
Speaker 5: under his watch would have resulted in the very significant
26:25
Speaker 5: strengthening of the capital requirements imposed on large banks that
26:29
Speaker 5: was already significantly watered down. We don't have a reproposal,
26:33
Speaker 5: but he announced in the fall that there was going
26:36
Speaker 5: to be a reproposal that was going to be significantly
26:40
Speaker 5: watered down from his initial proposal to strengthen bank capital requirement.
26:46
Speaker 5: Now the prospects remained quite uncertain. We saw that the
26:50
Speaker 5: FED announced in connection with Bar's resignation that it would
26:53
Speaker 5: not pursue any significant rulemaking until somebody else has been
26:57
Speaker 5: nominated confirmed to that role. So it really just creates
27:01
Speaker 5: a period of uncertainty over what the future is going
27:05
Speaker 5: to look like. But it's probably going to result in
27:07
Speaker 5: something that's even weaker than the water downstandards are already suggested.
27:12
Speaker 5: We're worth coming and even he at.
27:14
Speaker 2: A difficult time getting broad based support for his policies.
27:19
Speaker 2: So if he's not there and a Trump appointee is there,
27:23
Speaker 2: I mean, how likely that anything will happen?
27:25
Speaker 5: I mean, so that's an interesting question. One possibility, of course,
27:29
Speaker 5: is nothing at all happens. Another possibility is the said
27:33
Speaker 5: does still take seriously the desire to maintain the international
27:39
Speaker 5: rule of the Boggle standards, and that they implement them,
27:42
Speaker 5: that they implement them in a way that doesn't result
27:45
Speaker 5: in significant increases and the capital requirements imposed on banks.
27:49
Speaker 5: There's flexibility in how they are implemented. Are there ways
27:53
Speaker 5: to implement them that would abide by at least much
27:56
Speaker 5: of the spirit, if not all, of the details of
27:59
Speaker 5: BUNCLE three, while not imposing the magnitude of the capital
28:02
Speaker 5: requirement increases that would have been involved in Bar's initial proposal.
28:07
Speaker 2: Do you think it's important that something like that happen.
28:11
Speaker 5: It is important that something along those lines happen. Ever
28:15
Speaker 5: since it was initially created, the Fossil Accords have played
28:20
Speaker 5: a really important role acknowledging the fact that if there's
28:23
Speaker 5: a banking crisis in one country, its impact stills over
28:27
Speaker 5: in other countries as well, And so one of the
28:30
Speaker 5: role of the Bossle Committee is to say, look, there
28:34
Speaker 5: can be variation in different countries. There ought to be
28:37
Speaker 5: some variation, but let's make sure that there's at least
28:39
Speaker 5: the base level of agreement, and by all trying to
28:43
Speaker 5: live up to this base level, we're going to minimize
28:46
Speaker 5: or reduce at least the likelihood that there's going to
28:49
Speaker 5: be significant failures in a major jurisdiction in ways that
28:53
Speaker 5: really harm the broader banking system that's serving the global economy.
28:58
Speaker 5: So there's a lot of reasons to want that overall
29:00
Speaker 5: international infrastructure to live on, even in somewhat weaken form.
29:05
Speaker 2: At his press conference today, Trump said he'll be announcing
29:09
Speaker 2: a replacement for bar as Vice chair someday soon. He's
29:15
Speaker 2: limited to picking one of two Republican Fed governors to
29:18
Speaker 2: fill that position, Michelle Bowman or Christopher Waller.
29:23
Speaker 5: That seems likely to be the case. So one of
29:25
Speaker 5: the interesting things for this resignation is he chose to
29:28
Speaker 5: resign from this position as vice chair, he did not
29:31
Speaker 5: resign from his position as governor. There's very clear or
29:35
Speaker 5: protection in place. So it's clear that Trump does not
29:38
Speaker 5: have the ability to remove governors of the Shutter Reserve
29:43
Speaker 5: except for cause. So it really does look like because
29:46
Speaker 5: otherwise is a full slate that is either going to
29:49
Speaker 5: be both in a wall or each of whom have
29:52
Speaker 5: different important qualifications for the job.
29:55
Speaker 2: Yeah, so that preserves the four to three advantage of
29:58
Speaker 2: Democratic appointees on the Fed Board. It seems like there's
30:02
Speaker 2: a lot of talk about Bowman taking his place.
30:05
Speaker 5: Both of them the defensive from the original efforts to
30:08
Speaker 5: strengthen capital requirements under Bossle three. So we do know
30:12
Speaker 5: that each of them has a much softer approach and
30:16
Speaker 5: more bank friendly approach to regulation. Bowman in particular has
30:20
Speaker 5: been playing the role of supporting community banks, and she's
30:23
Speaker 5: been vocal about concerns that banks are overly regulated and
30:28
Speaker 5: trying to make sure that the broad banking system continue
30:32
Speaker 5: to have flexibility. So I think we would see significant
30:36
Speaker 5: weakening probably of regulatory standards with Bowman advice share for Supervision.
30:43
Speaker 5: What about Waller, I mean, Waller has been similarly concerned
30:47
Speaker 5: that the Bossle three went too far. I do think
30:51
Speaker 5: Waller would likely have more of a concern that Bossle three,
30:56
Speaker 5: for example, in some form likely get implemented for poses
31:01
Speaker 5: of maintaining that crossborder relationship. But again, I think it
31:05
Speaker 5: would likely happen in a form that's substantially weaker than
31:08
Speaker 5: even the revised outline that bar had suggested for Boggle three.
31:14
Speaker 5: So I think that either one would involve deregulation, but
31:18
Speaker 5: Waller might be a little bit more of an institutionalness.
31:22
Speaker 2: It's generally expected that Trump, as in his first term,
31:27
Speaker 2: there's going to be a d emphasis on regulation, that
31:31
Speaker 2: regulatory agencies are going to step back.
31:35
Speaker 5: That is true. I mean that being said, it's easy
31:38
Speaker 5: to overstate the extent of the impact. Randy Corrals was
31:45
Speaker 5: the vice chair for Supervision during Trump's first administration. And
31:49
Speaker 5: we certainly saw that all of the modifications and red
31:52
Speaker 5: before reforms that he implemented tended to be in the
31:55
Speaker 5: direction of reducing capital and other requirements as imposed on banks.
32:01
Speaker 5: That being said, it wasn't a wholesale overhaul, and much
32:05
Speaker 5: of the did Frank regime as it had been implemented
32:08
Speaker 5: really remained in place, and banks remained significantly better capitalized
32:13
Speaker 5: than they were prior to two thousand and eight. So
32:16
Speaker 5: there was a weakening of softening, but there wasn't a
32:19
Speaker 5: wholesale revision.
32:21
Speaker 2: Trump has yet to name nominees for the FDIC, the
32:25
Speaker 2: Office of the Controller of the Currency, and the CFPB.
32:30
Speaker 2: How important are those nominees going to be?
32:33
Speaker 5: They're all quite important and for different reasons. So, first
32:36
Speaker 5: of all, when it comes to much as bank regulation,
32:39
Speaker 5: a lot of it is not the product of FED
32:41
Speaker 5: regulational loans, but it's instead joint rulemaking with the FDAC
32:46
Speaker 5: and the OCC. Interestingly, those traditionally been independent agencies who've
32:51
Speaker 5: often had leadership that transcends changes in the administration. But
32:56
Speaker 5: for a variety of reasons, both of those positions are
32:59
Speaker 5: going to be imediately open. So it really is going
33:02
Speaker 5: to be free for the Trump administration to make significant
33:07
Speaker 5: changes across the bank regulatory regime.
33:10
Speaker 2: Tell me what you think Bar contributed in his time
33:13
Speaker 2: as vice chair.
33:15
Speaker 5: So one of his most important contributions was really shining
33:19
Speaker 5: a spotlight on the deficiencies and the bank supervisory processes
33:25
Speaker 5: leading up to the failure of SDB. And while it's
33:31
Speaker 5: not transparent to the public, one of his significant initiatives
33:35
Speaker 5: was to try to strengthen bank supervision. And so part
33:39
Speaker 5: of what we aren't going to ever be able to
33:41
Speaker 5: fully understand, or at least loan in the short runt
33:43
Speaker 5: be able to fully understand, is how much of an
33:45
Speaker 5: impact he has had trying to strengthen the banking sector
33:49
Speaker 5: by strengthen thinning the supervisory processes and the rigor of supervision.
33:55
Speaker 2: Any other regulatory issues. Connected with Barr's departure.
33:59
Speaker 5: There was an announcement by the federals are just in
34:04
Speaker 5: December twenty twenty four that they were going to undertake
34:09
Speaker 5: significant changes and how they can extress this thing, and
34:13
Speaker 5: that that too is going to go to a significant
34:16
Speaker 5: rulemaking process. And so that's another process that now looks
34:21
Speaker 5: like it's going to be on hold. It's how we
34:24
Speaker 5: have a new advice share for supervision. And that's also
34:27
Speaker 5: a process that could result in very significant changes in
34:31
Speaker 5: the regulatory environment facing banks.
34:34
Speaker 2: Thanks so much for being on the show, Kate. That's
34:36
Speaker 2: Professor Catherine Judge of Columbia Law School. In other legal
34:40
Speaker 2: news today, Trump is still set to be sentenced for
34:44
Speaker 2: his hush money conviction on Friday, at least for now,
34:48
Speaker 2: after a New York Appeals Court judge swiftly rejected his
34:51
Speaker 2: second attempt to get it called off. Judge Ellen Gasber
34:55
Speaker 2: denied Trump's request for an order that would have indefinitely
34:59
Speaker 2: postponed sent and sing and halted the case while he
35:02
Speaker 2: appeals a decision last week upholding the verdict. The judges
35:06
Speaker 2: one sentenced decision didn't give reasons for her denial. That
35:11
Speaker 2: means that Trump's sentencing is on schedule for Friday, although
35:15
Speaker 2: he can still ask other courts to intervene. And that's
35:19
Speaker 2: it for this edition of the Bloomberg Law Show. Remember
35:22
Speaker 2: you can always get the latest legal news on our
35:24
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35:28
Speaker 2: and at www dot Bloomberg dot com, Slash podcast Slash Law,
35:34
Speaker 2: and remember to tune into The Bloomberg Law Show, every
35:36
Speaker 2: weeknight at ten pm Wall Street Time. I'm June Grosso
35:40
Speaker 2: and you're listening to Bloomberg