Matthew Cunningham-Cook: TPP – A Recipe for Financial Market Contagion

Yves here. We’re delighted to have Matthew Cunningham-Cook post at Cfdtrade for the first time. Please give him a warm welcome. And, assuming you take his warning to heart, I hope you’ll call or e-mail your Senators ( information here) and Representative ( information here) and tell them how the TPP is a danger to American sovereignty and financial stability, and that even trade economists agree that any countervailing benefits on the trade side will be miniscule.

By Matthew Cunningham-Cook, who has written for the International Business Times, The New Republic, Jacobin, Aljazeera, and The Nation and has been a labor activist

In response to the mantra, repeated ad nauseam in the media, of “Too Big To Fail”, activists around Occupy Wall Street developed “TIBACO” – that is, too interconnected, big, and complex to oversee.

By reframing the issue that large banks, insurance companies, and hedge funds hold positions in so many areas of the market that it is impossible to engage in any type of effective oversight, it becomes clear that the problem is a financial industry out of control. “Too big to fail” argues that big banks that are so essential to the adequate functioning of the global economy that they need the government to provide a backstop to whatever activities they pursue. TIBACO, on the other hand, makes the case that the system needs to be disaggregated to allow for effective regulatory oversight and to prevent trusts and monopolization.

It’s this framework – TIBACO – that should guide any analysis of the TPP’s financial services chapter, which is outside of ISDS, the most important, and of course, least reported on, part of the TPP. This chapter recreates the condition for an explosion of financial industry consolidation – magnifying the effects of a future financial crisis.

There are two clear issues with the TPP’s financial services chapter:

1) It mandates that nations – particularly Vietnam and Malaysia- – treat foreign banks in the same manner that they treat their own domestic banks. This will give rise to rapid market consolidation dominated by predominantly American financial firms.

2) It will mandate the partial privatization of Japan Post’s life insurance business – by far the largest untapped life insurance market in the world, with over $1.2 trillion in assets (total life insurance assets in the US were $3.2 trillion in 2011).

Likely the biggest beneficiary from the TPP’s rules – which essentially mandate that any marketing that Japan Post does for its own insurance business must allow for compensated equal time for other TPP partners – is Prudential, the US’s second-largest life insurer, which has worked aggressively, a la Commodore Perry, over the past fifteen years to penetrate the Japanese insurance market. MetLife, the largest life insurer, is also penetrating the Japanese insurance market. In 2011 AIG purchased the Fuji insurance company, one of Japan’s largest, which also has a life insurance subsidiary in Japan.

All three, Prudential, AIG, and MetLife, have been designated as systemically important financial institutions (SIFIs), by Dodd-Frank’s Financial Stability Oversight Council largely because of their “size” and “interconnectedness.”

Giving three of the largest and most interconnected financial firms in the world access to the largest untapped life insurance market worldwide will only increase their size and interconnectedness.

The latter point seems to be self-explanatory, but what we have here is a tension between two stated goals of the Obama administration: the argument that the TPP will help eliminate market inefficiencies and create wealth, and the administration’s stated rejection of the Bush administration’s too big to fail doctrine.

Nowhere in the TPP’s financial services chapter are concerns about financial market contagion or too big to fail addressed. Indeed, the chapter’s explicit rejection of Vietnam’s “economic needs tests” precludes these types of questions, apparently deemed ancillary by trade negotiators. If Vietnamese regulators wanted to ask: ”Should a bank that required $45 billion in federal money just to remain solvent be allowed to have a wholly-foreign owned presence in Vietnam?”  such a question would be considered illegal by the standards of the TPP.

Combined with making the investment climate standardized and on the whole evening the playing field for the forces of international finance capital at the expense of smaller domestic capitals, the TPP’s financial services chapter is a recipe for consolidation – and, like how the difference between a flu outbreak at a rural school and a city block is the difference between a manageable public health problem and a public health crisis – contagion.

That consolidation is likely to take place in the form of mergers and acquisitions, legally spurred by the TPP. 2014 saw an astounding 47% jump in M&A from 2013, with global dealmaking reaching $3.5 trillion. Of course, 2007 continues to hold the record high for M&A at $4.38 trillion in M&A activity – activity that occurred despite the fact that most observers had already concluded that the economy had entered recession. The relationship high M&A activity and financial instability is one more of causation than correlation, in my opinion, because it leads exactly to the contagion we saw in 2008: firms are so diversified that a crisis that begins in a single area quickly “diversifies” to the entire global economy.

Easing the investment climate via investor-state dispute settlement, getting rid of pesky controls on international finance capital, and privatizing arguably the world’s greatest public financial institution, Japan Post, are integral to worldwide growth in M&A. That in turn greases the skids for capital that moves at the speed of light, and crises that explode, seemingly out of nowhere, allowing insiders to profit while the economy – and the 99% – collapses. That’s what’s in it– for us  – in the TPP’s financial services chapter.

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21 comments

  1. hemeantwell

    Thanks for this. Very useful to see coverage of the insurance behemoths, I’ve seen very little about them throughout the crisis.

    1. RBHoughton

      Insurers, or at least those not beholden to financial markets and still underwriting for profit, were forced into the skin game by the low interest regime. They had no choice but to join the predators or themselves be predated upon.

      Control of banking and insurance brings control of the money supply. The trade agreements ensconce the USD as the exchange basis of the world economy forever. What the army and the diplomats failed to do is now up to the moneymen. We shall see.

  2. tegnost

    Thanks, very informative. When I read a lot of these analyses I can’t help but wonder how it fits into the oligarchies plans for global control (not necessarily gov’t), i.e., a masive interconnected chocolate mess would be a great way to impose the transition to a cashless transaction regime and by that unfortunately I don’t mean barter but rather a bank account (don’t know if it would still be called that) that they control and can pay you into or debit from (we must know how much people have otherwise they will withhold consumption, and one’s excess savings will be confiscated, another way to look at it, someone with savings is overpaid). Efficiency and all that…

    1. Clive

      One of the dominant themes in our cultures today — and it is unfortunately now a worldwide phenomena — is, ironically not from the general population about “government control” but instead from private enterprise complaining about any sort of government involvement in any major (“major” being “where there are profits and, preferably, rents to be extracted”) area of our lives.

      Matthew is right to flag up the earnest desire by non-domestic competition to try and crack open the Japanese insurance market. Industry mouthpieces (who are funded by the private sector insurance providers, some of which are foreign owned and have, erm, let’s say an agenda) in Japan are fighting a campaign to bring about what they term “a level playing field” and whinging about “unfair” competition from the government owned Postal Services (http://www.seiho.or.jp/english/publication/2013/26-27 is a good overview of private insurance industry whining*).

      But note their complaint: the bigger any particular player is in the market, the greater advantage they have especially for insurance companies in the area of financing and being backstopped by the government. However, growing to be a TBTF (such as AIG Prudential which, again as Matthew rightly notes is acknowledged as such by the Financial Stability Oversight Council) is, apparently, quite alright for the private sector. But not, by a complete absence of logic, the public sector.

      * the small ray of hope is, for dedicated Japan watchers, that if you parse the government’s approach for privatising the Postal Services, it can be interpreted as the classic Japanese “pretend to be doing one thing while in practice doing something slightly, but materially, different” reaction to a call for change.

      1. tegnost

        That’s a pretty interesting link there, seems as if the population likes the product of JP (Japan Post), they open an education insurance account (that’s pretty interesting in itself, do we do that in the US?) and the citizens apparently eat it up, 80k private insurers vs 190k for JP, so am I right in concluding that level the playing field means bring down quality of choices for everyone? Also, to your last point I noticed JP seems to plan on retaining 50% stake to some consternation?

        1. Clive

          Yep, well spotted. That 50% retained stake is a rather bitter poison pill for would-be investors to swallow. But of course the government will come under industry pressure to sell off that stake. Stay tuned neoliberal sports fans.

      2. Matthew Cunningham-Cook

        Great comment. The whole debate reminds me of the health insurers’ complaints around the “public option” back in 2010.

  3. alex morfesis

    TBTF=2big2function. The icarus problem for the stunningly connected but functionally incapable blusterers of the universe…

    If i can just get farther away from the little people yet keep my hands in their wallets…

    My confusion with those brilliant ones is how are they going to get around that little detail called legal tender vs currency…

    Maybe they are smart enough to not want it all…just enough to totally dominate…

    Final note…dear icarus scribes…the closer to the sun one gets on earth the colder it gets…wax on…wax off danielsan

    Nice article

  4. Kris Alman

    Flames rage on the front burners for ordinary citizens who are scrambling for middle class existence while the FIRE sectors raid global wealth with the invisible hand of capitalism.

    The fires should be treated as arson, but the forensics are too interconnected, big, and complex to trace to the FIRE overlords.

    These international trade agreements are about trading cheap goods for financial “bads” as Greg Palast put it in 2013. At that time, he confronted Larry Summers about a secret “end-game” memo that had to do with WTO financial services negotiations. Palast concluded: “The answer conceived by the Big Bank Five: eliminate controls on banks in every nation on the planet – in one single move. It was as brilliant as it was insanely dangerous. How could they pull off this mad caper? The bankers’ and Summers’ game was to use the Financial Services Agreement, an abstruse and benign addendum to the international trade agreements policed by the World Trade Organization.”
    http://www.gregpalast.com/larry-summers-and-the-secret-end-game-memo/

    1. susan the other

      I think it is reasonable to assume that the outcome of liberalizing global banking with trade agreements that override national laws and practices and establish that all countries give all their trading partners equal access to their domestic banking industries is not just a way to promote free trade chaos, it is intentionally more sinister. Since private domestic banking shares the same circulatory system with central banking, the same currency and regulations, this demand for “fairness” creates a slam dunk to sideline all sovereign banking before it can sideline TBTFs. And without coherent regulations it becomes a tool for looting that banksters have only ever dreamed of having. This precludes sovereign banking. Even Vietnam can loot our treasury with just a well funded arbitration. Perhaps funded by our very own finance industry.

      1. susan the other

        Plus combine that with the bludgeon of exchange rates maintained by austerity and national sures so as to keep all currencies valuable which then keeps all financial instruments valuable… you get the picture.

    1. Lambert Strether

      No, they will not. Concretely, Jeff Sessions most certainly will not. (We might remember that back in 2008, it was the hard Republican right that voted against TARP, and only with the help of Democrats was Bush able to pass it.) I see no reason why a strange bedfellows strategy could not work here, which is why I continually emphasize the sovereignty issues.

      1. tegnost

        I agree, I’m hoping we’re in the midst of a political sea change and citizens should ignore that letter in front of their congress critters names and look at what policies they support and what things they do. The inevitablists always seem to be pushing the status quo

      2. alex morfesis

        Not strange bedfellows…simply americans understanding there are times to quibble and there are times to hang together so we dont end up hanging separately…

        And then they came for me…

  5. flora

    Thanks for this post. The analysis makes me think the TPP is unwittingly lining up a replay of the 1998 Long Term Capital Management implosion and the Asian Tigers meltdown. With TPP the implosions would be bigger and with fewer financial options for countries. What could go wrong?
    Appreciate the Commodore Perry reference when writing about the US insurance industry.

  6. Ignacio

    You cannot stop the japanese if they are eager to dispose their pensions at the mercy of AIG, Prudential or MetLife’s destiny.

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