New York DA Gets A Pasting

by Mike Godfrey, Tax-News.com, New York

10 October 2008

Robert Morgenthau, District Attorney for Manhattan in New York City, recently penned a vitriolic attack on offshore jurisdictions and the Cayman Islands in particular for the Wall Street Journal. Dan Mitchell of The Centre for Freedom and Prosperity has taken his own hatchet to Morgenthau's piece.

Said Morgenthau: A major factor in the current financial crisis is the lack of transparency in the activities of the principal players in the financial markets.

Said Mitchell: This is a nonsensical assertion. Everyone knows the activities that have caused the problem, and it is rather obvious which institutions are in trouble. The only thing that's unclear is the real value of the bad assets, and that problem is compounded by political uncertainty and the instability associated with a bailout.

Morgenthau: This opaqueness is compounded by vast sums of money that lie outside the jurisdiction of U.S. regulators and other supervisory authorities.

Mitchell: This sentence is even more absurd. Morgenthau does not identify a single problem that can be tied to money outside the United States. If anything, investors outside the United States are victims (or fools, depending on your perspective, since they purchased many bad assets) who have suffered major losses.

Morgenthau: The $700 billion in Treasury Secretary Henry Paulson's current proposed rescue plan pales in comparison to the volume of dollars that now escape the watchful eye, not only of U.S. regulators, but from the media and the general public as well. There is $1.9 trillion, almost all of it run out of the New York metropolitan area, that sits in the Cayman Islands, a secrecy jurisdiction. Another $1.5 trillion is lodged in four other secrecy jurisdictions.

Mitchell: Yes, there is considerable money in high-quality financial centers. Places such as the Cayman Islands, Switzerland, Hong Kong, Singapore, and Delaware punch way above their weight in global markets. But Mr. Morgenthau fails to identify a single aspect of the financial turmoil that is the result of either foreign money in general or "secrecy-jurisdiction" money in specific.

Morgenthau: Most recently, two Bear Stearns hedge funds, based in the Cayman Islands, but run out of New York, collapsed without any warning to its investors. Because of the location of these financial institutions -- in a secrecy jurisdiction, outside the U.S. safety net of appropriate supervision -- their desperate financial condition went undetected until it was too late. Of course, BCCI Overseas, which was part of the then largest bankruptcy in history, was also "chartered" in the Caymans.

Mitchell: Gee, why didn't U.S. regulators and supervisors detect the problems of AIG, Lehman Brothers, Fannie Mae, Freddie Mac, Wachovia, Bear Stearns, and Washington Mutual (not to mention the other shoes that are about to drop)? Could it be that companies sometimes go bankrupt and that it makes no sense to blame the jurisdictions where they are chartered? Unfortunately, Morgenthau seems intent on demonizing the Cayman Islands, so intellectual honesty is not a constraint.

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

Mitchell: Having failed to provide a shred of evidence for his hypothesis, Morgenthau's conclusion is just a stale repeat of his overwrought rhetoric about imaginary dangers. It's worth noting that the financial institutions most associated with the Cayman Islands – hedge funds – have been one of the strongest segments of the financial industry. But unlike Morgenthau, I don't draw any foolish conclusions and thus am not recommending that the Cayman Islands blacklist America.

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