The Dog Oscars

Catching up on some things I wrote and distributed to my super exclusive email list, but never got around to posting here. 

This is a recap from the first night of the Westminster dog show, which was held on February 16, 2016. Dogs rule. 

The Hound Group

More diverse than its name implies, the group includes sight hounds and scent hounds and lie around on the couch and destroy your shoe collection hounds. There are two sizes of actual Beagles plus three dogs that look like Beagles, if Beagles were the size of Labrador Retrievers. The most ancient of dog breeds are part of this group – the Afghan Hound and the Pharaoh Hound – plus more recently developed breeds for sport hunting in the US – the American Foxhound and the American English Coonhound.

Note to potential owners: Although most are highly sociable and make great companion animals, these dogs were bred to track, hunt (and some to kill) other animals. Not necessarily the dogs to own if you also enjoy the company of cats, hamsters, rabbits or other prey-type animals.

Dog in the group that is smarter than you: the Basenji. Intelligent, obstinate, sneaky – they understand what you want them to do, they’re just not sure they care. A great dog for people who are still emotionally attached to a high maintenance ex-girlfriend.

Perennial crowd favorite: the Basset Hound, because how can you not love a dog where part of the breed description is “long, velvety ears”.

Group winner: the Borzoi, Lucy. A stunningly elegant super athlete. Only the Saluki combines as much beauty and grace with speed and agility.

Criminally overlooked: the Redbone Coonhound. Didn’t even get a glance as the judge passed her when selecting the group finalists. Coonhounds generally don’t have a lot of prestige at Westminster. A fact which hurts their confidence not at all.  

The Toy Group

Group winner: a black and white Shih Tzu named Panda, sporting a $500 cut and blow out, wearing a topknot cinched by a turquoise hair barrette that matched his handler’s dress.

And that’s pretty much all you need to know about the toy group.

Oh, alright. There are 23 breeds in the toy group. Though like the Beagles and Coonhounds in the hound group, multiple versions of the same dog are considered distinct breeds, due to color combinations or type of coat (curly or flat, short or long). So the group includes two Chihuahuas, two English Toy Spaniels, the nearly identical looking Cavalier King Charles Spaniel, three Terriers, and two toy versions of regular sized dogs (the Poodle and the Manchester Terrier).

Easily mistaken for an Ewok: The Brussels Griffon.

Most awkward styling: the handler for the Chinese Crested. Do not have the same haircut as your dog. Especially when it looks better on the dog.

The Non-Sporting Group

Every contest needs a “catch all” category, and this is it at Westminster. These are all purpose dogs. The group includes some breeds which are ancient, like the Shar-Pei and Chow Chow; and others that are of more recent or of indeterminate origin, such as the Dalmation and French Bulldog. Despite some very popular breeds, the non-sporting group does not tend to produce many best in show winners. The last time dogs from the non-sporting group prevailed were in back-to-back wins in 2001 and 2002 by a Bichon Frise and a Miniature Poodle.

Group winner: Annabelle, the lumbering English Bulldog, who narrowly beat out a Disney-worthy Dalmation.

Sighs of embarrassment: for the handler who was wearing a snappy plaid suit, roughly matching the coloring of her dog, and perhaps absentmindedly tucked a white dishtowel into the waistband at the back of her skirt. Trotted energetically around the ring, looking like she had just come from the toilet.

The Herding Group

Note to potential owners: These are intelligent, focused, high energy dogs. They will herd everything from sheep to cattle to toddlers. Some were bred to do so over variable terrain and long distances. Like many of the hunting dogs in the hound group, few are adaptable to apartment living unless they get a lot of exercise.

I have to admit I fell asleep before the judging for the herding group started. The odds-on favorite to win Best in Show is in this group, and she did in fact win last night, to roars from the crowd.

Group winner: Rumor, the German Shepherd. You do not have to love dogs to love this dog. Wow. Hoping she takes Best in Show tomorrow (unless the Brittany wins the sporting group!).

Big shout out: To the handlers throughout the evening who would give their dogs a discreet smooch while taking them off the podium or after trotting around the ring. So genuine and sweet.

Beer For My Horses

It has been a rough few weeks around the globe for those who are committed or aspire to defend and uphold justice. Amidst escalating international terrorist attacks and domestic mass shootings, the US is heading into a presidential election cycle with two candidates who – if polls can be believed – are both “historically unpopular” among voters. This seems to be contributing to deepening political polarization in the country, and a bubbling up of partisanship in unfortunate places. Including, most recently, from Supreme Court justices.

Sidebar 1: Recent polling which portends to analyze voter sentiment and predict outcomes on both referendums (e.g. Brexit) and candidates (e.g. the nomination of Donald Trump) has been widely criticized  by many; and defended as accurate, though subject to misinterpretation, by some. Political theory being perhaps as subject to revision as economic theory, there is now an entire meme among political scientists and professional pollsters dedicated to understanding (or explaining away) how they misjudged the rise of Donald Trump.

Sidebar 2: “Historically unpopular” might be a little overstated by the media, since history in this context begins in 1936. The first modern presidential polling was conducted by George Gallup (natch) who used a statistical random sampling of voters. Prior to Gallup, polling was often done by magazines who simply surveyed their own subscribers. Not surprisingly, their “projections” were similar to those you might expect the National Review or Slate would produce if they conducted such polls of their readers.

Ginsburg Weighs in on Presidential Campaign

In a disturbing ethical lapse, Supreme Court Justice Ruth Bader Ginsburg damaged her own reputation, and that of the independence of the Supreme Court, when she unwisely remarked on the presidential candidates in a series of three media interviews.

Excerpts from a July 8^th, 2016 article by Mark Sherman of the Associated Press, Ginsburg doesn't want to envision a Trump win, following an interview with Justice Ginsburg (emphasis added):

In an interview Thursday in her court office, the 83-year-old justice and leader of the court's liberal wing said she presumes Democrat Hillary Clinton will be the next president. Asked what if Republican Donald Trump won instead, she said, "I don't want to think about that possibility, but if it should be, then everything is up for grabs."

"It's likely that the next president, whoever she will be, will have a few appointments to make," Ginsburg said, smiling.

Excerpts from a July 10^th, 2016 article in the New York Times by Adam Liptak, Ruth Bader Ginsburg, No Fan of Donald Trump, Critiques Latest Term, following an interview with Justice Ginsburg (emphasis added):

“I can’t imagine what this place would be – I can’t imagine what the country would be – with Donald Trump as our president,” she said. “For the country, it could be four years. For the court, it could be – I don’t even want to contemplate that.”

It reminded her of something her husband, Martin D. Ginsburg, a prominent tax lawyer who died in 2010, would have said. “ ‘Now it’s time for us to move to New Zealand,’ “ Justice Ginsburg said, smiling ruefully.

Excerpts from a July 13^th, 2016 CNN interview with Joan Biskupic, recapped in article Justice Ruth Bader Ginsburg calls Trump a 'faker', he says she should resign (emphasis added):

Supreme Court Justice Ruth Bader Ginsburg's well-known candor was on display in her chambers late Monday, when she declined to retreat from her earlier criticism of Donald Trump and even elaborated on it.

"He is a faker," she said of the presumptive Republican presidential nominee, going point by point, as if presenting a legal brief. "He has no consistency about him. He says whatever comes into his head at the moment. He really has an ego. ... How has he gotten away with not turning over his tax returns? The press seems to be very gentle with him on that."

"At first I thought it was funny," she said of Trump's early candidacy. "To think that there's a possibility that he could be president ... " Her voice trailed off gloomily.

"I think he has gotten so much free publicity," she added, drawing a contrast between what she believes is tougher media treatment of Democratic candidate Hillary Clinton and returning to an overriding complaint: "Every other presidential candidate has turned over tax returns.”

While some in the media praised Ginsburg for her “characteristic candor,” legal analysts and court watchers across the ideological spectrum were less glib. The accepted reality that Supreme Court justices have ideological leanings and strongly held beliefs crashed headlong into:

1.       The separation of powers between the executive and judicial branch;

2.       The presumption that judges should not only be independent and impartial; but also,

3.       Judges should maintain the appearance of being politically impartial to defend the credibility of the Court.

By July 14^th, 2016, Ginsburg issued an apology for her remarks via a Supreme Court press release (which I cannot currently find on their website, but will link to it if I do). It is recapped in CNN article by Ariane de Vogue, Ruth Bader Ginsburg: "I regret making" Donald Trump remarks, excerpted below:

"On reflection, my recent remarks in response to press inquiries were ill-advised and I regret making them," Ginsburg said in a statement. "Judges should avoid commenting on a candidate for public office. In the future I will be more circumspect."

Hours after releasing the statement Ginsburg talked exclusively to NPR's Nina Totenberg, and expanded upon her statement. She called her comments "incautious."

"I did something I should not have done," she added. "It's over and done with and I don't want to discuss it anymore."

Ginsburg's criticism had caused controversy not only in political circles but also among legal ethicists who suggested Wednesday that if the current election were ever to come down to a Bush v. Gore-like challenge, Ginsburg would have to recuse herself.

"A federal law requires all federal judges, including the justices, to recuse themselves if their 'impartiality might reasonably be questioned'," said Stephen Gillers, a legal ethicist at New York University School of Law. "Under this test, Justice Ginsburg's remarks would prevent her from sitting in the unlikely event of a 'Clinton v. Trump' case that determines the next president."

“You’re Splitting Ideological Hairs”

No. Ruth Marcus in the Washington Post makes the case more persuasively than I can.  In an excellent, and at points ironic and hilariously partisan column,  Justice Ginsburg's damage to the Supreme Court, Marcus distinguishes between ideology and partisan politics (excerpted, edited for brevity):

It is naive to imagine that justices don’t have political views, or strong political preferences. Of course they do. It is the rare justice who ends up on the court without having ties to politics and politicians.

But there is a difference — a big one — between having a preexisting political relationship or predilection that the public might reasonably presume (no one would mistake Ginsburg for a potential Trump voter) and one that is so strongly held that the justice feels impelled to make it public.

That approach is not mere window-dressing. Judicial silence is the tribute that the imperative to appear impartial pays to reality.

Some people will read this and snort: The justices are political animals like all the others; they decide based on their political views, not on the law.

This dismissiveness ignores and obscures the distinction between ideology and partisanship. Broadly speaking, Republicans and Democrats have differing conceptions of the role of the judiciary, the meaning of the Constitution and the proper approach to its interpretation. It is no surprise, and no tragedy, that judges appointed by Republican presidents tend toward one set of reasonably predictable conclusions and those named by Democratic presidents another.

Ginsburg’s remarks — like Scalia’s duck-hunting — present a problem, and not just for her. They drag the court down to the level of other political actors, into the partisan muck. They reinforce the public’s perception that this game, too, is rigged — more than it actually is. 

Definitions, provided by Google, for my own reference - because I wanted to make sure I understood and agreed with the distinction Marcus and other legal analysts have made.

ideology – a system of ideas and ideals, especially one that forms the basis of economic or political theory and policy.

partisan – an adherent or supporter of a person, group, party or cause, especially a person who shows a biased, emotional allegiance. In politics, a partisan is a person who strongly supports their party’s policies and are reluctant to compromise with their political opponents.

partisanship – prejudice in favor of a particular cause; bias. “An act of blatant political partisanship.”

Thou (Federal Judges) Shalt Not Campaign for Politicians

The  Code of Conduct for United States Judges spells out the ethical standards for federal judges. The Code was initially adopted by the Judicial Conference in 1973. Canon 5 of the Code reads as follows (emphasis added):

Canon 5: A Judge Should Refrain from Political Activity

(A) General Prohibitions. A judge should not:

(1) act as a leader or hold any office in a political organization;

(2) make speeches for a political organization or candidate, or publicly endorse or oppose a candidate for public office; or

(3) solicit funds for, pay an assessment to, or make a contribution to a political organization or candidate, or attend or purchase a ticket for a dinner or other event sponsored by a political organization or candidate.

(B) Resignation upon Candidacy. A judge should resign the judicial office if the judge becomes a candidate in a primary or general election for any office.

(C) Other Political Activity. A judge should not engage in any other political activity. This provision does not prevent a judge from engaging in activities described in Canon 4.

The Code of Conduct applies to all lower court federal judges. The Supreme Court justices voluntarily follow the principles outlined in the Code of Conduct, but are not obligated to obey them. There are occasionally calls for the justices to adopt a formal code of ethics. Such controversies typically arise when a group or members of Congress want a Supreme Court justice to recuse him or herself from a particular case, though Ginsburg’s remarks have raised the issue in this different context.

“What did you think of Sotomayor’s ‘black lives matter’ dissent in Utah v Strieff?”

If you haven’t yet read about this case and the court’s opinion, please do. There are many excellent articles covering the case – read at least one on each side. I also highly recommend reading on The Federalist Society website the article Utah v Strieff: Fourth Amendment Rights Without Remedies and the Problem of Arbitrary Police Power, by Evan Bernick.

I’m not enough of a legal scholar to truly parse the constitutional merits of the case. I’m still in the phase of reading the law community’s response to the majority’s decision and the dissents (as opposed to the media’s response) so I can adequately understand the historical context of Fourth Amendment rulings, the current legal context, and the potential ramifications.

All that being said, I did read the majority opinion (5-3) written by Clarence Thomas and Sotomayor’s dissent. (I have not yet read Elena Kagan’s dissent.) I am deeply uncomfortable with the decision - which continues to erode the rights of citizens subjected to search and seizure without reasonable suspicion of unlawful conduct – and the majority’s rationale. I found myself in agreement with the initial sections of Sotomayor’s dissent, and at points cheering her on – while at the same time feeling like she later badly and needlessly overstepped the legal arguments (which were clearly strong) in favor of cultural and political partisanship. Which brings me back to concerns about justice, and the difference between having a well-structured and informed ideology versus a blatant partisan bias. It undermines the legal argument and impairs both actual and perceived impartiality.

But those are only my opinions, and they are admittedly not yet well-developed.

The Irony and the Rednecks

Please look past the association of country music with southern rednecks (North Carolina, represent!) or at least appreciate the irony of what I am about to quote:

You know justice is the one thing you should always find

You got to saddle up your boys, you got to draw a hard line

When the gun smoke settles we'll sing a victory tune

And we'll all meet back at the local saloon

And we'll raise up our glasses against evil forces singing

Whiskey for my men, beer for my horses.

Excerpted lyrics from Beer for My Horses, by Toby Keith

An Abbreviated and Biased Timeline of the European Union

This is the first post in a series of how Britain leaving the EU might impact the financial services industry generally, and the fixed income and foreign currency markets in particular. To put the UK vote in context – we consider the rather laborious and at times contentious development of the EU, which evolved from a loosely defined trading area to a single market with a (mostly) common currency. Over the decades, the majority in several countries chose not to join the EU or EEA for reasons similar to why Britain has now chosen to leave it. In that respect, although the outcome of the vote may have been unexpected by the pollsters, it was hardly unprecedented.

Editorial aside: As an observer and citizen of a former British colony (hat tip to both King George and George Washington), it has at times been difficult to understand what all the elbow-throwing is about between the countries in the Europe. However, we fought a war to gain our sovereignty and lower our taxes (oh, the irony) so it’s understandable that significant net benefits should accrue from willingly ceding such power to a supra-sovereign organization. Let’s hope the new government – once elected - quickly puts a plan in place for ongoing relations with the EU and moves forward. There are two obvious options (e.g. the Norway model or Switzerland model) which we briefly touch on in this post, and have been discussed ad nauseum in the press. (Pardon for adding to the nausea.)

An Abbreviated and Biased Timeline of the European Union

1957: The European Economic Community (EEC) was created by the Treaty of Rome in order to facilitate an economic integration of its member states. This economic integration included a customs union and a common market. The six founding members of the EEC, often referred to as the “inner six”, were: Belgium, France, Italy, the Netherlands, Luxembourg and West Germany.

·         A customs union is a type of trading bloc with free trade between the members and a common external tariff. Customs unions alone generally only cover free trade of goods, and do not include free movement or trade of services, capital or labor (people) between members.

·         A common market is one where members have relatively free movement of capital and services, though significant non-tariff trade barriers may remain, e.g.  there may be differences in members safety, packaging and marketing standards. A common market can be considered a first step towards a single market.

As part of the common market, the Treaty of Rome also outlined objectives for a Common Agricultural Policy (CAP) and a Common Fisheries Policy (CFP). These policies would be drafted, adopted, come into force, be criticized, debated and reformed (many times) over the following years as the EEC, and later the EU, developed.

1960: Britain responded to the formation of the EEC in part by instigating the formation of a competitive organization, the European Free Trade Association (EFTA). The EFTA was established as a free trade area for European states who were either unable or unwilling to join the EEC. The seven founding members of the EFTA, often referred to as the “outer seven”, were: Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the United Kingdom.

·         The EFTA does not have a customs union – so there is not a common external customs tariff - but it does coordinate trade policy among its members.

·         Members were also allowed to negotiate individual trade agreements with non-member countries.

1961: Denmark, Ireland, Norway and the United Kingdom apply for membership in the EEC. Their membership was rebuffed (vetoed, actually) by then-President of France Charles de Gualle, who feared that inclusion of the UK would function as a back door to US influence.

1962: Common Agricultural Policy The CAP, formally adopted in 1962, is a system of agricultural subsidies, price supports and farming programs.

·         CAP has been a primary source of conflict, both within and outside the EEC (now EU), since its inception. The cost of the CAP program represented 71% of the EU budget in 1984, The cost has declined, but still totals 39% of the EU budget as of 2013.

·         Currently only 5.4% of the EU’s population works on farms, and the farming sector contributes only 1.6% of EU GDP (as of 2005).

·         Among the many criticisms of CAP is that it allows outdated farming and production methods; contributed to artificially high food prices in the EU; encourages overproduction of some crops and products; results in quotas and waste; provides overly generous welfare to inefficient and unprofitable rural farms; is environmentally unfriendly, and increases poverty in developing economies.

·         Waves of CAP reforms have been proposed – and some adopted – over the years. The EU farming lobby is still powerful.

·         The CAP subsidies particularly irk more urban countries, such as the UK and Norway, who are net payers into the EU, and those like Sweden who believe all farm subsidies should be abolished.

1967: The four countries resubmit their applications for membership; in 1969 Georges Pompidou succeeds Charles de Gaulle as President of France and the veto is lifted.

1970: Common Fisheries Policy The CFP was created to manage fish stock for the EU as a whole, and maintains a system of quotas, regulates production and grading, sets minimum prices and buys up unsold fish, and sets trading rules for non-EU countries. The CFP almost immediately became a sticking point for the countries of northern Europe. Excerpted from Wikipedia, Common Fisheries Policy:

The first rules were created in 1970. The original six Common Market members realized that four countries applying to join the Common Market at that time (Britain, Ireland, Denmark including Greenland, and Norway) would control the richest fishing grounds in the world. The original six therefore drew up Council Regulation 2141/70 giving all Members equal access to all fishing waters, even though the Treaty of Rome gave no authority to do this. This was adopted on the morning of 30 June 1970, a few hours before the applications to join were officially received. This ensured that the regulations became part of the acquis communautaire before the new members joined, obliging them to accept the regulation. At first the UK refused to accept the rules but by the end of 1971 the UK gave way and signed the Accession Treaty on 22 January 1972, thereby handing over an estimated four fifths of all the fish off Western Europe. Norway decided not to join. Greenland left the EC in 1985, after having gained partial independence in 1979.

When the fisheries policy was originally set up the intention was to create a free trade area in fish and fish products with common rules. It was agreed that fishermen from any state should have access to all waters. An exception was made for the coastal strip, which was reserved for local fishermen who had traditionally fished those areas. A policy was created to assist modernisation of fishing vessels and on-shore installations.

·         Unlike the heavy subsidies and relative cost of the CAP, the CFP currently represents 0.75% of the EU budget. The fishing industry is a small component of EU GDP, contributing less than 1.0%.

·         Criticism of CFP by conservationists and those in the commercial fishing industry has been intense over the years, with blame for the decline in fishing stocks pointing in many directions.

·         Reforms and amendments to the CFP have occurred routinely over the years, but ultimately little satisfactory progress has been made, and many in Britain still cited the intrusion of CFP as another reason to leave the EU.

1972: The people of Norway vote in a referendum, rejecting membership in the EEC by a majority of 53.5%. This is partially due to Norway wanting to maintain control over its fishing grounds and fishing industry, which is the second largest contributor to GDP in Norway after oil. Norway remains in the EFTA.

1973: Denmark, Ireland and the UK complete negotiations, sign the accession treaties and join the EEC, leaving the EFTA.

1981: Greece joins the EEC.

1986: Spain and Portugal join the EEC.

1987: The ongoing enlargement of the EEC leads to a desire to further integrate the foreign policy and economies of the members. The Single European Act (SEA) was the first major revision of the Treaty of Rome. It was developed and signed in 1986, and came into force in 1987. The Act extended powers, made some reforms and set an objective for the European Community of establishing a single market by December 31, 1992. The import of the Act was to pave the road for the establishment of the European Union (EU).

·         A single market is an area where there are no restrictions to the free movement of goods, services, capital and people.

1988: Throughout the build-up of the EEC and eventually the EU, many members and nations expressed varying degrees of concern about the supranational nature of the European Community (EC) and the loss of sovereign powers – or delegation of sovereign authority – to the EC. In her famous Bruges speech in September 1988, then Prime Minister of Britain Margaret Thatcher, summed up the “eurosceptic” view:

“To try to suppress nationhood and concentrate power at the centre of a European conglomerate would be highly damaging (...) We certainly do not need new regulations which raise the cost of employment and make Europe's labour market less flexible and less competitive with overseas suppliers  (...) And certainly we in Britain would fight attempts to introduce collectivism and corporatism at the European level - although what people wish to do in their own countries is a matter for them".

-excerpted from The Single European Act and the road toward the Treaty of the European Union.

Editor’s note: Ok, here is where my already abysmal grasp of European politics and culture clashes fails completely. But an absurdly condensed timeline of events: ramifications from the cold war between the USSR and the US, civil protests and revolutions in eastern Europe against Communist rule, eventually led to the collapse of the Soviet Union and later re-unification of Germany from 1989-1992. This dramatically changed the perceived balance of power and economic landscape in Europe and globally. There is ongoing pressure from many countries to expand the EC, and resistance from some EC leaders and members to do so.

1992: The European Economic Area (EEA) is proposed in 1989 by then-EC president Jacques Delors, as an alternative to expanding the EEC. The EEA agreement is signed in 1992 by the then seven states of the EFTA and the then 12 member states of the EC, and becomes effective in 1994.

·         The EEA allows members of the EFTA access to the internal market within the EU.

·         EEA members are required to adopt most EU legislation concerning the single market, with notable exceptions for the laws governing agriculture and fisheries.

·         The EEA provides for the free movement of persons, goods, services and capital within the internal market of the EU.

1992: Switzerland rejects ratification of the EEA Agreement. Switzerland remains a member of the EFTA and over time negotiates a series of bilateral trade agreements with the EU.

Sidebar: There has been an enormous amount of ink, political speculation and media commentary devoted to Britain modeling either the “Norway model” or the “Swiss model” for its future relationship with the EU. Functionally the two options boil down to EFTA membership with the EEA agreement (Norway) or EFTA membership with bilateral trade agreements (Switzerland). We will delve into this in detail in a later post. Below are excerpts from a recent article  by Espen Eide, a former foreign minister of Norway and current resident of Switzerland (edited for brevity).

Could Britain mimic the ”Norway model” or the “Swiss model” when it exits the EU?

As an EEA member, Norway does not participate in decision-making in Brussels, but we loyally abide by Brussels’ decisions. We have incorporated approximately three-quarters of all EU legislative acts into Norwegian legislation – and counting. We have legally secured access to the single market, and we practise the free movement of people, goods, services and capital. Norway is more closely integrated into many aspects of the EU than even some of the EU’s members. Our subscription to freedom of movement and our membership of the Schengen area means that Norway has even higher per capita immigration than Britain.

Those campaigning for Britain to leave the EU and chose the Norwegian way can hence correctly claim that a country can retain access to the single market from outside the EU. What is normally not said, however, is that this also means retaining all the EU’s product standards, financial regulations, employment regulations, and substantial contributions to the EU budget. A Britain choosing this track would, in other words, keep paying, it would be “run by Brussels”, and it would remain committed to the four freedoms, including free movement.

British voters might also hear about the virtues of the “Swiss model”. It so happens that I currently live in Switzerland. My new alpine homeland is in most respects in a similar position to Norway, but instead of the EEA, it has chosen an array of bilateral agreements with the EU on most aspects of integration.

Compared to the EEA arrangement it can be seen as an even more cumbersome way of integrating into a EU-led market. Where the EEA is dynamic – which means it trails the developments of EU policy in all relevant areas – the Swiss arrangements are static. Crucially, too, they don’t cover services, which are so central to Britain’s economy.

To make the point louder: services = financial services. If Britain wants its banking and financial services industry to retain single market access to the EU, it will likely need to pursue EEA and EFTA membership (the “Norway model”). Unfortunately this would not allow Britain to regain control of its borders and immigration – which was a crucial motivation for many who voted to exit the EU.

1993: Passage of the SEA immediately led to drafting of the Maastricht Treaty (also known as the Treaty on European Union or TEU), whose goals were to strengthen supranational powers creating the European Union (EU), increase economic integration, establish some fiscal and monetary policy objectives and eventually lead to a monetary union (e.g. the introduction of the euro as a common currency). The Maastricht Treaty was drafted in 1991 and came into force in 1993. The EC was officially absorbed by the EU.

1994: Norway has a second referendum on EU membership, which is rejected by a 52.2% of voters. Norway remains in the EFTA.

Why did the majority of Norwegians not want Norway to become a member of the EU?

A recent response to this exact question, from the Minister Counsellor for Culture and Communication of at the Royal Norwegian Embassy in Paris, Rune Bjastad (edited for brevity):

“The arguments for saying ‘no’ were that membership was a threat to the sovereignty of Norway, the fishing industries and agriculture would suffer, that membership would result in increased centralisation, and there would be less favourable conditions for equality and the welfare state. Fishing is extremely important to the Norwegian economy, especially for coastal areas. It is the second largest industry in our country, after oil.

“But we must immediately say that economically, Norway is already part of the EU Internal Market. The question may be a bit misleading: in fact, we are strongly integrated in the European Union, even if we are not members.

“Economically, we are equal with other member states, through the Agreement on the European Economic Area, the so-called EEA. Since 1994, Norway has participated fully in the Internal Market.

“The Norwegian economy is strong, unemployment is low. Norwegians therefore see no economic argument in favour of EU membership.”

1994: The second stage of the Economic and Monetary Union of the EU is launched with the establishment of the European Monetary Institute. Austria, Sweden and Finland also join the EU.

Sidebar: The UK chose not to join the European Monetary Union (EMU). Its currency remains the pound sterling, which has taken a heck of a beating – hitting a 30+ year low against the US dollar – since the Brexit vote on June 23^rd.

1999: The euro becomes the official currency of the European Monetary Union (EMU), and the European Central Bank (ECB) begins operations.

2002: Euro notes and coins are put into circulation and the euro replaces old EMU member currencies entirely. There is heady talk that the euro could soon equal or supplant the dollar as the preeminent global reserve currency.

For the record, to date the euro has never even come close to matching the ubiquity, trading volume, perceived safety and global currency status of the US dollar. In our next post we will touch on this when we discuss the more recent developments in the EU. 

What Puerto Rico’s New Bankruptcy Law Means for Debt Holders

On June 29^th, 2016 Congress passed the “Puerto Rico Oversight, Management and Economic Stability Act,” otherwise known as PROMESA. PROMESA was signed by the President June 30^th, 2016. Mere hours later, in a surprise to absolutely no one, Puerto Rico’s Governor Padilla (made good on his threat / promise) defaulted on $1.9 billion of debt (of the $72 billion outstanding) that was due July 1, 2016.

The $1.9 billion included $800 million owed on general obligation bonds, which – prior to the passage of PROMESA – were contractually required by the Constitution of Puerto Rico to be paid first, ahead of all other debts, salaries, pensions or services of Puerto Rico.

Not at all coincidentally, PROMESA included a provision effective upon enactment that provides an automatic stay against legal action from creditors, where the stay may not be treated as a default under existing contracts or laws. The stay lasts until at least February 15, 2017, though can be extended under multiple conditions and circumstances. The automatic stay of legal action by creditors is part of the normal federal Bankruptcy Code, effective once the petition for bankruptcy is filed.

The territorial government and municipal issuers of Puerto Rico did not previously have the ability to declare bankruptcy or restructure their debts under federal bankruptcy law. Nor did the bond contracts for the general obligation bonds provide a mechanism such as collective action clauses (CACs) to allow for binding negotiation given a super-majority of creditors in the event of default. Among the provisions in PROMESA are Titles that provide for a municipal-like bankruptcy scheme (similar to chapter 9) and debt restructuring under business reorganization (similar to chapter 11) for the territory, effectively overriding the protections in the bond indentures under which the debt was issued.

Kind of stinks for bondholders, huh?

Not a banner day for contract law, but savvy bondholders knew it was coming. Several groups of investors – including most politician’s and financial commentator’s favorite villain, the “hedge funds” – have been lobbying against PROMESA for a couple of years now. They may not like the outcome, but this is how our legislative system works. Don’t like existing legal recourse or remedy? Pass new law that supersedes it. And Congress did, by a relatively wide margin in a truly bipartisan vote.

PROMESA (H.R. 5278, and S. 2328)

·       Passed in the House on June 9, 2016, by a vote of 297-127.

·       Passed in the Senate on June 29, 2016 by a vote of 68-30.

Is there any contagion risk?

None that appears evident right now. The Commonwealth of Puerto Rico, as a territory of the U.S., makes the resolution and depth of its fiscal crisis somewhat unique. PROMESA is written so that its scope and provisions would apply to other U.S. territorial governments, and instrumentalities of those territorial governments, that find themselves in dire financial circumstances. However, other territories of the U.S. such as Guam and the U.S. Virgin Islands, for instance, are certainly troubled but nowhere near experiencing the fiscal and economic distress that has been decades in the making in Puerto Rico. Therefore the broader applicability of PROMESA is quite limited, and perhaps unlikely. Your muni bond trader and analyst can provide up to date commentary, analysis and trading volumes for similarly situated debt.

A Punctuated Overview

PROMESA establishes a seven-member Financial Management and Oversight Board which will have broad (some might say vast) powers of oversight and enforcement to:

·       Adopt and approve fiscal plans;

·       Balance and manage the budget;

·       Negotiate voluntary agreements with bondholders; and

·       Execute debt restructuring plans.

Wow. How are the seven Oversight Board members chosen and how long do they serve?

·       The President is allowed to appoint one Board member entirely at his own discretion.

·       Congressional leaders will submit lists for the other six, some of whom are required to either be residents of, or do business in, Puerto Rico. The President can either choose candidates off the lists, or appoint others; though anyone not on one of the Congressional lists would be subject to Senate confirmation.

·       If all appointments are not made by September 1^st, the President will be mandated to choose nominees for the remaining vacancies from the lists by September 15^th, 2016.

·       The governor of Puerto Rico, or a designee, will serve on the Board as an ex-officio, non-voting eighth member.

·       The Board members are to serve concurrent three-year terms, and can continue to serve another three-year period until a successor has been appointed.

·       The Board members are unpaid, though normal expenses will be reimbursed.

What conditions have to be met for the Oversight Board to be disbanded?

The Oversight Board will terminate when the territorial government has:

1.       Access to short-term and long-term credit markets at reasonable rates of interest; and

2.       Achieved balanced budgets for four consecutive years.

So it’s like, indefinite? Possibly so. Access to the credit markets can likely be achieved once the debt restructuring process is successfully completed (see: Argentina). Balancing the budget for four consecutive years is going to complicate the debt restructuring, and is likely to cause further political upheaval and economic distress, at least in the short term.

How would the debt restructuring work?

The following are excerpts, with some paraphrasing, from an excellent June 27^th, 2016 overview of PROMESA by Andrew Austin of the Congressional Research Service (formatting and emphasis added, minor edits).

Title III of PROMESA sets up a process for the adjustment of debts of a territorial government or an instrumentality of a territorial government. The following are a few salient features of such a process:

·       Eligibility for a debt restructuring requires agreement of at least five of the seven members of the Oversight Board.

·       Unlike in municipal bankruptcy (chapter 9) or business reorganization (chapter 11) of the federal Bankruptcy Code, the role of filing the petition with the district court and proposing a debt restructuring plan is taken on by the Oversight Board, not by the debtor.

·       Otherwise, many of the provisions in Title III are similar to chapters 9 and 11 of the Bankruptcy Code.

·       The debt restructuring process is set up to ensure fair and equitable treatment of creditors.

Title VI would create a process for creditor collective actions, which resemble collective actions clauses (CACs) that are a common feature of sovereign debt contracts.

·       CACs typically allow some subset of creditors holding a supermajority of the face value of a given debt category to enter into an agreement that would bind remaining creditors within that category.

·       Title VI would require the Oversight Board, in consultation with the Puerto Rico government and its subunits that have outstanding debts, to set up voting pools for the CAC process. Separate pools, in general, would correspond to the relative priority or security arrangements of bondholders.

·       Triggering the Title VI CAC provision for a voting pool would require a two-thirds vote (by value of eligible debt), in which holders of at least half of the eligible debt participated.

·       Creditors in those voting pools not assenting to a modification agreement would retain certain rights, which might be affected by a subsequent Title III debt restructuring.

·       Creditors agreeing to a Title VI CAC provision, in general, would then avoid Title III debt restructuring.

The bill would allow the Oversight Board to obtain information on the nature and aggregate amount of claims held by each creditor or organized group of creditors from those creditors seeking to participate in voluntary negotiations regarding debt restructuring.

Most importantly, the bill would grant an Oversight Board, at its sole discretion, the power to certify voluntary debt restructuring agreements entered into between the territory or territorial instrumentality and holders of its debt instruments. Upon review of such an agreement, the Oversight Board must certify that the agreement provides for a sustainable level of debt and is in conformance with the territory or territorial instrumentality’s certified Fiscal Plan. The act would grandfather in voluntary agreements executed before its enactment.

What are the options in a debt restructuring?

The debtor typically proposes options that include some or all of the following:

·       A decrease in the coupon of outstanding debt, effectively lowering the interest payments;

·       An increase in the time to maturity;

·       A lowering of the principal amount owed (often referred to as “cram down” of the debt holders);

The recovery rate is then the ratio of the net present value of the new debt that is exchanged for the net present value of the existing debt. The last time I checked, some of the general obligation debt was trading at about 66 cents on the dollar, implying an expected recovery rate of 66% of the value of the existing bonds. That’s not awful. Unless you bought it at par.

Did anyone see this coming?

Hell, yes. Just to give a shout out to one asset manager (and I don’t invest with this company, know any of these people, or otherwise shill for anyone), go read the article  Puerto Rico and Beyond - An Analysis of the Municipal Debt of US Territories by David Ashley of Thornburg Asset Management in April 2014.

The entire article is exceptionally informative and well-researched. What follows is a single brief excerpt (emphasis added). I urge you to read the entire piece.

Territory Debt: Its Role in Thornburg Municipal Portfolios

Investing in U.S. territory debt can have its place in a well-diversified portfolio, especially one that is robustly structured to withstand the volatility and price performance of these bonds. Thornburg has not been a buyer of Puerto Rican debt for approximately 15 years. This includes all debt issued by the commonwealth or any of its many debt-issuing entities such as the Puerto Rico Electric Power Authority (PREPA) and COFINA. In our view, the pricing of the securities has not accurately reflected the risks associated with ownership. Such risks include pervasive budget deficits, pension underfunding, growing debt levels and an increasing reliance on market access to roll over previously issued debt.

With the brutal sell-off of Puerto Rican debt in June 2013, these risks have been more accurately reflected in market prices, but even at these levels, prices still remain outside our comfort level. Should prices continue to decline, we may revisit our investment thesis on Puerto Rican bonds.

Because of the enhanced yield they offer and because of our careful attentiveness to the risk/reward trade-off, we do have exposure to both Guam and Virgin Islands credits in our municipal funds. 

Later we discuss some of the high profile legal issues involved in Brexit- e.g. how to think about the options for Britain staying part of the EU single market via trade agreements and treaties – which roughly boils down to adopting the Norway model or the Switzerland model. From the stratosphere.