Slate Money: "The Shadow Courts Edition"

Episode Date: October 8, 2016
Host: Felix Salmon
Guests: Cathy O’Neill and Hayley Sweetland Edwards

Episode Overview

This episode of Slate Money centers on Hayley Sweetland Edwards' book "Shadow Courts: The Tribunals That Rule Global Trade" and dives deep into the controversial world of Investor-State Dispute Settlement (ISDS) mechanisms. The hosts explore what ISDS is, the origins and evolution of these secretive arbitration courts, and their implications for democracy, corporate power, and international investment. After unpacking "Shadow Courts," the conversation pivots to trends in active vs. passive investment management and concludes with a spirited discussion on congestion pricing in cities, capped off by the signature "numbers round."

Key Discussion Points

1. The Secret World of Investor-State Dispute Settlement (ISDS)

[02:43–21:40]

• Introduction to ISDS:
  Hayley Sweetland Edwards explains that ISDS is “a mechanism buried in almost every trade agreement and bilateral investment treaty,” allowing corporations to sue governments in supranational tribunals outside of local courts.

  “I decided to write this book because I found out about ISDS ... I thought, that can’t possibly exist.” — Hayley (03:09)

• Notorious Cases:

  • Philip Morris vs. Australia: Tobacco giant used ISDS to challenge Australia's anti-smoking regulations, arguing their intellectual property was expropriated.

    “If you try to protect your people from us, you have to pay us the money that we would have made from hurting those people.” — Cathy (05:40)
    The panel notes Philip Morris ultimately lost but highlight its chilling effect on public health policy.

  • ExxonMobil vs. Chad: Chad fined ExxonMobil $74 billion; ISDS mechanisms provide corporations avenues to challenge such government actions in international tribunals.

• Origins and Intent of ISDS:

  • Created in the 1950-60s to protect foreign investors against unreliable legal systems, especially in countries with histories of expropriation.

    “It was also, it had this kind of world peace side to it ... an avenue in which the corporation and the sovereign nation could go up against each other in a peaceful venue … No more gunboat diplomacy.” — Hayley (07:27, 07:56)

• From Good Idea to 'Very Shitty':

  • Cathy points out design flaws: Only companies can initiate cases; no appellate system; ad hoc tribunals with corporate lawyers as arbitrators; inconsistent rulings.

    “It’s like you have this inconsistent and arbitrary system which is trying to prevent internal countries’ laws from being inconsistent and arbitrary.” — Cathy (08:13)

  • Felix clarifies that all courts have inconsistencies, but Hayley emphasizes the unique lack of transparency, judicial standards, and appellate review in ISDS.

• Evolution & Proliferation in Trade Agreements:

  • ISDS migrated from obscure bilateral investment treaties to multilateral trade deals (NAFTA, CAFTA, TPP). Use exploded in the 1990s and 2000s.

    “There were 40 cases in 40 years ... It wasn’t until NAFTA ... that you saw this incredible mechanism that allows us to challenge sovereign nations outside of their court system.” — Hayley (12:47–13:33)

• 'Legitimate Expectations' and Expanding Corporate Rights:

  • Tribunals have ruled in favor of corporations based on violated “legitimate expectations” of regulatory and investment environments, such as in Argentina's crisis.

    “If you invest ... then you get a new administration in that changes those things ... Those violate my expectations of what I thought life would be like while investing in your country.” — Hayley (15:00)

• Political Backlash Across the Spectrum:

  • Both liberals (concerned about regulatory "chilling") and conservatives/Tea Party types (concerned about U.S. sovereignty) oppose ISDS in modern mega-trade agreements.

    “It’s now embedded in the Democratic platform ... we should be concerned about ISDS ... to challenge sovereign nations’ regulations outside of that sovereign nation’s court system.” — Hayley (21:11)

2. Active vs. Passive Investment Management

[21:40–32:08]

• Janus-Henderson Merger & Active Management’s Woes:

  • The panel discusses the merger as emblematic of active fund managers’ struggles in a world where investors are moving en masse to low-cost passive investing.

    “[In 2016,] $200 billion investors yanked out of active management and put into passive management.” — Hayley (23:59)

• Passive vs. Active Investment Explained ([24:29–25:31]):

  • Felix and Cathy break down what constitutes passive management (just buy and hold the index) and active management (trying to beat the market).
  • Cathy raises social and market concerns: Does favoring indexes (like S&P 500) steer too much capital to established companies, starving innovation and smaller firms?

• Counterarguments:

  • Felix rebuts: Buying indexed stock on the secondary market doesn’t funnel new capital to firms but can affect cost of capital through price signals; no evidence of privileged access or valuation distortion so far.

• System Stability:

  • Felix: “You would need passive investment to be somewhere north of 95% of the stock market before the capital allocation started getting screwed up. … We’re a very, very long way away from this.” (29:18)

3. Congestion Pricing in Global Cities

[32:08–43:04]

• Congestion in London Despite Pricing:

  • Firsthand cab ride anecdote leads to explanation of how London's congestion pricing (fees for driving in central zones) succeeded at first but hasn’t solved gridlock.

    “On the face of it, [congestion pricing] has utterly, utterly failed ... There is more congestion than ever.” — Felix (35:54–36:38)

• Why?

  • Felix: Drastic reduction in private cars, but congestion persists due to commercial vehicles, taxis, and delivery trucks.
  • NIMBYism (residents closing streets to through-traffic) results in fewer routes for vehicles, pushing more traffic onto main roads.

• Policy Ideas and Global Comparisons:

  • European cities often ban trucks during peak hours—unlike New York—and enforce traffic investments that serve public rather than private mobility.
  • Cathy: “I think we should charge 20 bucks for congestion and also close half the streets because it’s actually a better city.” (39:43)

• Economic Impacts of Congestion:

  • U.S. drivers lose 38 hours a year to gridlock, with major economic and environmental costs ([42:24–42:49]).

4. Numbers Round

[43:12–48:00]

• Cathy’s Number: 6%

  • The British pound fell 6% in a flash crash overnight—a historic drop attributed to possible algorithmic trading.

    “Did you know that the pound dropped 6% in overnight trading… some kind of mini flash crash?” — Cathy (43:12)

  • Felix explains the mechanics and incentives behind such rapid FX moves, including derivatives like knock-in options.

• Hayley's Number: 8.7 Billion

  • The number of internet-connected devices globally—projected to almost triple to 21 billion in four years.

    “A little glitch in code… can lead to 6% drop in the pound sterling, or it can lead to everyone’s coffee machine … beginning percolating at 2 AM.” — Hayley (46:18–46:31)

• Felix’s Number: 25 Billion

  • The anticipated value (in dollars) for Snapchat upon its IPO, despite little revenue and no profits—a provocative example of modern tech valuations.

    “They have revenue right now of a few hundred million dollars a year … but this is still a crazy multiple of their revenue, let alone their profits.” — Felix (47:41)

Notable Quotes & Memorable Moments

• On ISDS’s Evolution:

  “This is the great narrative that I’ve been trying to harp on … there were 40 cases in 40 years. … It wasn’t until [ISDS] was inserted into NAFTA and then began being inserted into these multinational trade agreements that you saw ... ‘holy shit! We have this incredible mechanism that allows us to challenge sovereign nations outside of their court system.’”
  — Hayley (12:47–13:33)

• On Regulatory Chilling Effects:

  “If you try to protect your people from us, you have to pay us the money that we would have made from hurting those people.”
  — Cathy (05:40)

• On Passive Investment’s Systemic Impact:

  “If everybody did it, then we would be in some bad place. ... What degree of investment would you need in order to get to that bad place? ... You would need passive investment to be somewhere north of 95% of the stock market.”
  — Felix (29:18)

• On Urban Congestion:

  “The answer is never building more roads. No, but this has been proven empirically time and time again, which is that traffic expands to fill the number of lanes available. … It never, ever works.”
  — Felix (42:05)

Timestamps for Major Segments

• [02:43–21:40] — Shadow Courts and the ISDS system
• [21:40–32:08] — Active vs. Passive investment management
• [32:08–43:04] — Congestion pricing and city transport policy
• [43:12–48:00] — Numbers round: Pound flash crash, internet of things explosion, Snapchat’s IPO value

Tone & Style

Conversational, sharp-witted, and occasionally irreverent, the panel combines deep financial and policy insight with a humorous, skeptical edge.

In Summary

This Slate Money episode unpacks the shadowy mechanisms of ISDS, explores the tension between active and passive investing, and muses on how cities do—and don’t—solve congestion, offering fresh insights and laughs throughout. Hayley Sweetland Edwards' "Shadow Courts" emerges as a must-read for anyone curious about the hidden rules governing global trade and the expanding power of international arbitration tribunals.