The Obama Administration’s Invisible War • Bumbling From Basel, Again

It’s time for the administration to come clean on drones

Federal Judge Colleen McMahon has issued an important but puzzling decision regarding the Obama administration’s drone campaign against Islamic terrorists. After declaring that the White House need not respond to Freedom of Information Act requests to turn over its legal doctrine for the drone program, she raised the possibility that the president is a murderer.

The plaintiffs — the American Civil Liberties Union and the New York Times — asked the administration to turn over a 2010 Department of Justice memo that provided the legal justification for the 2011 targeted killing of U.S. citizen Anwar al-Awlaki. Their argument: Officials, including Attorney General Eric Holder, had divulged much of the legal rationale in public and could no longer claim classified privilege. McMahon sided with the government.

Then the judge climbed on her soapbox. “I can find no way around the thicket of laws and precedents that effectively allow the executive branch of our government to proclaim as perfectly lawful certain actions that seem on their face incompatible with our Constitution and laws while keeping the reasons for their conclusion a secret,” she wrote. She implied that, as a citizen, Awlaki should have faced treason charges in a U.S. court rather than death in a Yemeni desert, and that his death constituted a breach of the U.S. criminal code, which forbids the killing of U.S. nationals abroad.

The problem here is that the treason-clause argument was deemed irrelevant by the Supreme Court in 2004’s Hamdi v. Rumsfeld. As terrorism expert Robert Chesney of the University of Texas School of Law puts it, “It simply is not clear why the possibility that a person could be tried for treason must foreclose resort to otherwise lawful alternative measures.”

McMahon’s reasoning aside, the government’s argument that the drone memo should stay in a locked drawer is not convincing. Between Holder’s speech and a front-page account in the New York Times after Awlaki’s death, the rules the administration has set for itself are extant.

Still, there’s legitimate concern about the precedent set by succumbing to FOIA requests for information on covert action. The way out of the puzzle is clear: The administration should voluntarily release the memo. If there are national security secrets involved, they can be redacted. Alternatively, the White House can issue a document to Congress that clearly delineates its legal thinking, just as the George W. Bush administration did with its warrantless wiretapping operation in 2005. The current administration has been far too quiet on its drone war for far too long.

Imperiling the financial system, one retreat at a time

Not for the first time, the Basel Committee on Banking Supervision has retreated from its mission to build a safer global financial system. Its final liquidity rule is far less rigorous than the committee had said it wanted and financial markets had been expecting. This is a shame, though it’s not the biggest mistake the committee has made. The failure to set effective capital-adequacy ratios is a greater cause for concern. The liquidity rule announced on Jan. 6 merely confirms the main point: The Basel project is failing.

The committee issued its draft liquidity rules in 2010. The idea was to lay down the quantity and quality of liquid assets (in theory, assets that can be sold quickly without driving down prices) that banks must hold to cover a run on deposits or some other interruption in short-term funding. Under pressure from banks, especially those in the U.S., most aspects of the draft proposal have been weakened in the final document.

The new rule says liquidity must be enough to cover the withdrawal of 3 percent of insured retail deposits over 30 days, vs. 5 percent under the proposed rule. It also expands the range of corporate debt securities that qualify as liquid to BBB- (the lower boundary of investment grade); previously, the committee said nothing less than AA- should be eligible. High-quality mortgage-backed securities will also count. This broadening of qualifying assets means almost all banks already satisfy the rule.

As guttings go, this is pretty thorough. Bear in mind, too, that designing rules for liquidity is harder — and less important — than designing rules for capital. In practice, a bank’s need for liquidity can’t be measured in isolation: It depends on its central bank’s willingness to lend in an emergency. Indeed, a liquid asset could be defined as anything a central bank will accept as collateral in a panic.

Here’s another complication. If a bank is told to hold cash, central bank reserves, and high-grade liquid securities in case of a run, it has less money to devote to ordinary lending. Many banks, especially in the U.S., hold enormous quantities of cash and excess central bank reserves (the purest forms of liquidity), and face criticism for hoarding these assets instead of lending to finance investment or refinance mortgages. The Basel supervisors have taken care, in effect, to deflect blame for the lending drought away from themselves.

Banks, too, have made this argument against tighter rules on capital — namely, that more capital means less lending. In contrast with the liquidity case, however, this argument is false. Capital is a source of funds for banks, not (like liquidity) a use of funds.

Requiring banks to finance themselves with more equity and less debt doesn’t restrict their lending. True, it will reduce return on equity, but that’s the counterpart of less risk, which is the whole idea.

Capital is the ultimate safety cushion in a banking crisis. Basel’s failure to ensure banks have enough is a serious concern.

To read William D. Cohan on why the Volcker Rule won’t work and Jonathan Weil on China’s Zoomlion, go to


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