"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

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- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Sunday, January 22, 2012

Sovereign Default Immunity Under US Law

A couple weeks back we posted an Excel spreadsheet of Eligible Collateral for Repurchase Agreements at the Swiss National Bank.  Since then there have been bits and pieces of information dribbling out that paint a picture of desperation that we all know Central Bankers have been displaying but is now visible in real terms.  CC broke down the information and realized the Euro was by far the largest currency overall being pledged at the SNB in an effort to maintain their liquidity lines and make sure the Ponzi has the full support of other fiat currencies.  Zero Hedge released the information on the Euro Short levels and  it's no surprise that the next big worry will be the legal immunity that Central Banks have to defaults of their sovereign nations.  The Europeans have tapped the FRBNY at the highest levels in 12 months and is should be more than evident that the full on blitz to "hide the debt" is becoming drastically worse each day.  One key aspect for 2012 that isn't being talked about is what the secret central bank cabal is doing to make sure they are capitalizing on the litigation arbitrage, should the house of cards collapse sooner than expected and financial equillibrium achieved, what are the rights central banks have in legal judgements should a sovereign nation default?

Think of this:  The Federal Reserve was establish through the Federal Reserve Act of 1913.  The US law gave birth to the Federal Reserve system.  Is this entity its own private entity or is it the "alter ego" of the sovereign nation?  We'll have to review a little history to lay some context for what we're theorizing about Central Bank behavior today.  The National Bank Act enacted through Congress allowed for "National Banks" to represent the US Treasury through guidelines established by the United States government.  The actual legal right of these Banks was blurry then and still is today.  Are these private entities that operate and exist under US government law immune to legal judgement if their parent (sovereign nation) defaults?  The answer is in the US code. 

28 U.S.C. § 1611 (b) - (b)(1) states:
(b) Notwithstanding the provisions of section 1610 of this
chapter, the property of a foreign state shall be immune from
attachment and from execution, if -
(1) the property is that of a foreign central bank or monetary
authority held for its own account, unless such bank or
authority, or its parent foreign government, has explicitly
waived its immunity from attachment in aid of execution, or from
execution, notwithstanding any withdrawal of the waiver which the
bank, authority or government may purport to effect except in
accordance with the terms of the waiver;
So Central Banks are immune provided the money is for financial market stability purposes and that the foreign government hasn't waived its immunity, that seems simple enough.  The challenge for the courts is addressing the central bank's assets that are "held for its own account".  Since central banks only exist because of laws made by their sovereign nation, we will for now assume these entities are merely an alter ego of their respective governments.  Addressing whether central bank holdings are "held for its own account" we turn to the Foreign Sovereign Immunities Act of 1976 and analysis written up by the Fordham International Law Journal in 1991, which states on the beginning of page 1063:
Congress passed the FSIA to resolve the problems inherent in the previous system for determining the scope of foreign sovereign immunity in U.S. law.  In the early nineteenth century, U.S. federal courts applied federal common law, recognizing an absolute view of sovereign immunity which exempted foreign states from all suits in U.S. courts.  This absolute theory of sovereign immunity produced hardship for U.S. citizens involved in contracts with foreign entities or suffering torts committed by foreign entities, because the U.S. citizens simply had no opportunity for legal redress in U.S. courts.  By the mid-1940s, the U.S. judiciary adopted a less restrictive approach to the issue, deferring to the practices and policies of the U.S. Department of State concerning the propriety of granting sovereign immunity in suits involving foreign sovereigns.  In Ex Parte Peru, the U.S. Supreme Court explained  that deference to the executive was mandated by the nature of foreign sovereign immunity24 and separation of powers principlepse.  In 1952, the U.S. Department of State announced its modification of this practice in the landmark letter from Jack B. Tate, Acting Legal Adviser, Department of State, to Acting Attorney General Philip B. Perlman ("Tate Letter").  In the Tate Letter, the Department of State adopted a legal standard known as the restrictive theory of sovereign immunity, by which it advised courts to grant foreign states immunity only for their public acts and not for actions arising out of their strictly commercial or private acts.
Jake B. Tate authored the letter that gave foreign sovereigns immunity when they were sued in the United States.  That means should you or your hedge fund buy debt offered from a Sovereign Nation through a central bank auction and should that Sovereign Nation default before you are repaid, tough shit, you have no recourse under US law.  In Europe it's different.  And the the legal bullshit gets even worse as we go further into the US Code surrounding Sovereign Immunity. 

Central banks perform critical functions in the global economy by attempting to maintain stable currency markets and by offering emergency funding during financial crisis times.  These auctions become ever hazier because the same activities that central undertake for market regulation and intervention are also undertaken by private parties acting out of profit motive.  Does this understanding translate into viewing central banks as subject to immunity or has their actions called for an interpretation that central banks are merely an extension of their sovereign nation?

Harvard Law provides a case in which sovereign immunity was disputed by two US hedge funds:
In December 2001, in the midst of a severe financial crisis, Argentina defaulted on certain of its sovereign debt obligations. The plaintiffs in the case, NML Capital, Ltd. and EM Ltd., are hedge funds that acquired bonds during the period surrounding the default. Suing in the United States District Court for the Southern District of New York, the bondholders obtained judgments against Argentina based on the Republic’s waiver of its sovereign immunity in the instruments underlying the bonds. The bondholders then sought to enforce the judgments by moving to attach the central bank’s reserves held at the FRBNY.
The United States Court of Appeals for the Second Circuit determined the FRBNY funds belonging to Argentina bank were used in accordance with central banking functions given the history of cash movement through the FRBNY and NML Capital and EM ltd. were out of luck.  This is a  case where the law is vague enough that government A can help government B.  For a counter view on how this all works in Europe, read this.

When a central bank issues debt for its sovereign nation and the immunity protection offered in the US has been waived by the sovereign nation to make the debt more valuable, that obligation has precedent in the US for being vacated resulting in the debt certificate owners loss.  More specifically, this is the case should the central bank for a sovereign nation use the FRBNY as a source of funding operations.  The Argentina case used by Harvard Law led to the Court noting:
"...in addition to the peso-regulating and reserve-holding functions of the actual dollars attached, BCRA’s account at the FRBNY had been used in the period leading up to the attachment for: currency settlement services for domestic Argentine banks, transfers on behalf of the Republic to international organizations such as the IMF and to Argentine missions abroad, transfers to certain foreign business service providers for expenses incurred by the Republic, and payments BCRA made on its own behalf for U.S. dollar denominated operating expenses such as purchasing currency paper".
What we're interested in is central bank litigation arbitrage that is being structured with input from the government treasuries and government branches.

Are central banks and their governments positioning their books in the event of a Sovereign Nation default?  This has the making of being the stage for WW3, where the longevity of government isn't based on its ability to defend a physical invasion but its ability to stave off an engineered devaluation. Will governments act through their central banks to undermine enemies on a scale we've never seen before through the use of complex and sophisticated financial engineering and rationalize it through a set of arbitrary agreements called laws?  If that is the plan of central planners, they'll fail miserably and the entire system will fail as it resets itself to financial equilibrium.