Bloomberg LawJohn Kabealo, a Washington DC attorney who specializes in cross-border transactions, discusses Nippon Steel and United States Steel suing the Biden administration over President Biden’s blocking of their nearly $15 billion deal. Kathryn Judge, a professor at Columbia Law School and an expert on banking and financial regulation, discusses Michael Barr stepping down from his role as Fed Vice Chair for Supervision. June Grasso hosts.
This is Bloomberg Law with June Grosseol from Bloomberg Radio.
Nippon Steele is standing firm on its plans to acquire US Steel, with both companies jointly filing a federal lawsuit against the Biden administration in a last ditch effort to preserve the nearly fifteen billion dollar merger. President Biden blocked the deal last week, citing a risk to national security, but the White House never explained how the deal with the Japanese company would threaten national security.
This is about a domestically owned operated steel industry, and we're talking about for our national security, of course, but also our supply chain, a resilient supply chain, and so that's what the President wanted to focus on.
The companies say that the review by Siphius, the Committee on Foreign Investment in the United States, was a sham and that Biden blocked the deal for purely political reasons, that is, to gain favor with union steel workers in Pennsylvania during his re election bid. The President had announced his opposition to the deal in March, before the Scifius review even began, and in April at the US steel Workers' headquarters in Pittsburgh. Biden made this promise to the union workers.
US still has been an iconic American company for more than a century, and it should remain a totally American company, American owned, American operated by American union steer workers, the best of the world, and that's going to happen, I promise you.
Joining me is John Kabilo, a Washington, DC attorney who specializes in cross border transactions. John. Since nineteen ninety, only eight other foreign transactions have been blocked by presidents, according to the Congressional rect Service, and here President Biden reportedly went against his top national security aids in blocking the sale to a Japanese company, even though Japan is a longstanding ally of our country.
Right, it is extraordinarily rare for a president to formally block any investment via sytheist I think it's unprecedented that a president would block a transaction like this, an investment coming from an allied nation, a critical allied nation, and in particular where there's no clear national security threat posed by the investment.
I'm confused about what Biden says is a national security threat. Is it a national security threat as you know the average person might see it? Or is it a threat to the domestic steel industry.
That's a great question, and part of that gets at the evolution of pytheists over the years. You know, ten, fifteen, twenty years ago, things that were thought of as as quote unquote national security issues that really was a limited set of things, and it related to weapons, systems, and telecommunications networks in big pretty clearly strategic assets in the United States. It is true that the notion of national security has expanded some over time, and now it includes things like the personal data of US citizens. Certainly software and things like that have been lumped into this concept of things that can cause national security concerns. Steel itself obviously is useful to the military, but there's no evidence that in this transaction, Knepon Steel was going to do anything other than expand production in the United States and bring more investment and frankly better steelmaking technology into the United States. So it's hard to say that there's any sort of threat to steelmaking in the United States because of the transaction, And ultimately it looks like it boils down to just kind of a US centric notion that this company that's an iconic company in the United States, it should be owned by US persons and not owned by a foreign company. And that's really not at all what Syphius was set up to do. And so what we're looking at is the President is sort of abusing his authorities under Scythius to achieve a political outcome that.
Sort of echoes some of the claims the steel companies are making in their lawsuit that argues that Biden violated the Constitution in blocking the merger. Tell us more about their arguments.
So Syphius is an authority. It's under the Defense Production Act of nineteen fifty and its authorities were just expanded recently in twenty eighteen. But really what the law says is that first and foremost, the US is intended to have an open investment environment that allows foreign re investment into the United States. And what Syphius is empowered to do is review investments from foreign parties. Syphius has the ability to approve those transactions, but if a transaction may pose a threat to the US national security, then Syphius can negotiate conditions and require an investor to comply with whatever conditions it needs before it approves the transaction. Only in the rarest of circumstances. If there's a threat that is so great and CIFIUS can't find a way to solve the threat, then it goes to the president, and the president has the authority to block the transaction. And so with that is background, what the lawsuit essentially is saying is that the process and the requirements necessary for a president to block the transaction were never followed. Before Sophius even began to review the transaction, President Biden, vice President Harris, and Secretary Yellen had already gone public saying that the transaction should not go through, that US Steel needed to remain domestically owned, and I believe Biden even told the steel workers that he guaranteed that the transaction was not going to go through. And again, this is before the SCIFIAT process had started. And it's important to know that what the SIFIAS process does is it brings thirteen federal agencies together. They look at extensive information that's provided about the transaction by the parties. Every member agency on the committee has the ability to ask questions over a lengthy review process. So it's a detailed fact finding mission. And as they're doing fact finding, they're also sort of assessing what the national security issues might be first of all, and then second of all, if they do have national security concerns, how might they go about solving those concerns. And it really is a burdens and process for the parties. It's a detail oriented process, and kind of counterintuitively, it's also a constructive process. You know, Syphius is trying to find facts that are meaningful to it, but at the same time it's trying to figure out a path forward and then negotiate with the parties if it does have concerns. So again, understanding how that process works, and then knowing that before any of that had kicked off, the administration was sort of going around publicly saying that the transaction shouldn't go forward, I think fundamentally shows that they had no intention of sort of looking at the facts or following the requirements of the law. They had essentially looked at the transaction and knew that it was a political hot potato and recurrying favor with voters in a swing state by saying, you know, we're never going to let this go forward, but that's not what the law allows the president to do.
The steel companies say that the Scythias panel sent a seventeen page letter of security concerns riddle with inaccuracies over the Labor Day weekend and only gave them one business day to response, And they claim that the Siphious staff were told not to offer counterproposals or engage in discussions that, on its face, if true, seems to support the steel company's arguments.
I think that's right, and I think it's important to draw out that distinction, which is that the president did this to Knipon Steel and US Steel, and the President also did this Tocifius itself. You know, I think the career staff at Syphius, they are quite good at running their process. And so when you see things like a seventeen page letter that again allegedly was riddled with factual inaccuracies, that's not the type of thing that you would ordinarily see out of Pythias. And I think it would show you that Siphius was being ordered to do something that it really didn't have evidence or justification to do, and so they were sort of put in a position where they had to stretch to meet the directive from above.
Where does it sit in that after this year long review, the Committee divided on the risks and failed to reach a decision about whether the deal should go forward.
So the process kicks off by the parties filing a detailed notice to the Committee, and then over the course of the review period, which is typically up to ninety days, but it can be extended in tough cases voluntarily by the parties and with Sethius's consent. The point of that whole process is to provide the Committee with all the information that it needs to fully render a decision, and then if it does have concerns, there's time in the process for the Committee and the parties to engage in the negotiation around what conditions the Committee needs and what conditions the parties can comply with, so that then the Committee is in a position to approve a transaction. So at the end of ninety days, what the Committee ordinarily is looking to do is avoid referring anything to the President's desk, and the way that that's achieved is there's thirteen member ages season fifius. Nine of them are voting agencies. The agencies have to be in unanimity that the transaction should be approved, and so sometimes the agencies don't have any national security concerns, or other times there is a national security concern, but it's been solved with whatever conditions were negotiated with the parties. So it's only when they can't get comfortable with something and reach a unanimous conclusion to approve a transaction then they refer something to the President. And here the reports are that every agency was in favor of approval except for the US Trade Representative, So there was this sort of one holdout agency that was saying that they didn't want to approve the transaction. So in that case, when the committee is divided, that's when it goes to the President for final adjudication.
That's interesting because the companies are also suing rival US steelmaker Cleveland Cliffs, It's CEO and the United steel Workers president alleging coordinated anti competitive and recketeering activities. And the lawsuit claims that the US Trade Representative got a private tour and fireside chat with the CEO and United steel Workers leadership at a Cliff's facility, and they alleged that the defendants improperly bought her loyalty. So that suits on a separate track. We'll see where that suit goes. Coming up next, President elect Donald Trump has said on truth Social I will block this deal from happening. Buyer beware. But could that change. I'm June Grosso and you're listening to Bloomberg. Nippon Steele, and US Steel jointly filed a pair of lawsuits in a last ditch effort to preserve their planned nearly fifteen billion dollar merger. The companies are arguing that SCIPHIUS, the Committee on Foreign Investment in the US, failed to consider the deal on national security grounds, and that Biden's or to block it was made for purely political reasons. I've been talking to John Kabilo, a Washington, DC attorney who specializes in cross border transactions. So, John, are the companies basically making a due process argument?
Ultimately, they're making a due process argument, but I think there's also, at least in my view, there's also a substantive claim as well. But the due process argument is pretty straightforward and I think extremely compelling, which is the law sets forth this very detailed and robust process that has the involvement of, like I said, thirteen federal agencies. That process is there for a reason, and it's not so that you know before they've done any work at all, the president and other senior political officials can sort of go all over the United States and publicly say that that deal should never go forward. The fact that they were doing that for considering any of the evidence, considering any of the recommendations of the committee, that shows that they were engaged in political thinking. And so at the end of the day, you know, they took their sort of political motivations and they grafted it on to national security authorities. It can't be justified under a national security regime to take up political action.
Presidents have brought authority to determine what constitutes a national security threat. Can the president's authority here be challenged successfully in court?
This is the novel issue here, which is, you know, courts historically for centuries have deferred to the president on questions of national security, you know, the substantive decision making regarding what counts as a national security threat and what does not. So in that regard, the president does have broad authorities and it's hard to challenge them. But here, I think what the parties are saying is that the process itself was so flawed. They were denied their rights from the beginning and ultimately what the president was doing was not making a national security determination. What the president was doing was making a political determination. And so I I think that's the really interesting issue, at least in my mind, that the courts are going to have to consider, is, you know, when a president pretty clearly is engaged in political behavior but just claiming that it's national security decision making, what degree of difference does a court have to give the president in those situations? And I think that's a nuanced and a novel question in one where I think the parties may have more traction than if it were, you know, pretty clearly a standard national security type decision that maybe the parties didn't like or maybe they thought that the president was going too far. But I don't even think there was really much of an attempt to call this, you know, national security. This was economic nationalism, This was election year politics, This was all sorts of things, but it was not national security.
Nearly a decade ago, there was a court challenge to the Scifius review process and the president's authority over foreign business deals that concerned a Chinese owned company, and a federal appeals court ruled that the company's due process rights were violated. By the Sifius review, but still the court didn't overturn President Barack Obama's order that the Chinese company had to sell. Does that case have relevance here?
Right?
That was a little different. I think that case is instructive in that, first of all, due process challenges can be successful when the Syfius process itself is corrupted. And so in that case, Fyfius pursued an action against a Chinese acquirer of wind farms that were next to military airspace that was used to train unman burial vehicles, and CFIUS issued an interim order very early in the process, and they ordered the deconstruction of windmills, They ordered that the acquirer not access the property. They ordered all sorts of extremely onerous things. And what the parties argued there was that essentially the order from Syphius was so onerous that it was equivalent of blocking the transaction. And really only the President of the United States has the authority to block a transaction. And so I think there they got a lot of traction on that angle, which was that there are limitations to what Syphias as a committee can do. And then additionally they got some traction on the notion that Syphius does have to provide some information about its decision making process when it's going to take an adverse action against the party. And then again when that process was rerun and when the decision was in Obama's hands, there was not a substantive way to challenge a president's decision on national security grounds. But the parties did make a lot of progress on the procedural violations.
So do you think it's possible that a court would order another review by Syphius here?
Yeah, I think it's possible that a court would order another review. It's clear that the process was corrupted from even before day one, and so in that regard, whatever sort of the maximal remedy for due process violations is, any court should provide that remedy, you know. And then I think the next question, which is, Okay, there's going to be a new administration in town. The next president has come out against this transaction. What happens there? And this is just sort of crystal ball talk here, but I do think that the parties are presented with an opportunity to actually reach some kind of a deal with the new administration. When you look at all of the commitments that Nipon Steel was willing to make to get the deal done. I think ultimately that transaction was really really good for the steel workers and for US deal, and for our domestic steel industry and for our supply chain security. I think that, you know, the parties may well be able to make a compelling pitch to the next administration and find a way to get a deal done. The next administration. You know, I think they pride themselves in finding ways to get deals done, and I think when they look at what's being off or they may find something very compelling in that.
How long would it take for this lawsuit to go through the DC circuit and perhaps a request for Supreme Court review? Are we talking years or months?
Yeah?
Unfortunately, it could take quite some time. I wonder if a court may use sort of exodited authorities to order a new review or at least halt the block of the transaction to provide the parties with more time and more ability to negotiate with the new administration.
And is there a chance that this might be accepted for review by the Supreme Court.
There are some novel legal questions here that I would love to see in the hands of the Supreme Court, because I think it's really critical, really really critical, not just for the scipious process and not just for transaction parties, but I really think for everyone it's important that we come up with some idea that no president can just wave a wand and call something national security and then be exempt from all scrutiny. I think the traditional deference to the president on anything understood to be national security related is proper, but I think it also invites, and we've seen this incithius, that more and more things are being called national security, and at some point there's no check on a president that wants to call anything that's politically expedient national security. And I think it's really important that a court step in and say we have to have some guardrails, and Congress may need to act, but somewhere there needs to be an intervention that says that it's not a get out of jail free card, so to speak, that if you call it national security, you can do whatever you want.
I've read this prediction that if this suit is successful, it would mean sweeping changes to the authority of the US government to vet foreign transaction. Do you agree with that?
I don't see this suit as fundamentally rewriting the rules of Syphius. I think the actions of the President and the administration were so aberrant and so clearly objectionable that you can create a ruling in this case that applies to this case that doesn't rewrite the entire scipious process. It's possible to just say, hey, this process and its results need to have greater fidelity to the notion of national security and can't just be clearly a political tool or a tool used in clearly political context. And so I don't think it has to be a very broad ruling.
And do you see any effects of this decision outside of this deal the big picture.
Something that's personally troubling to me is that over the last five or six years, the US has gone to Europe, we've gone to Asia, and we've strongly incur in most cases successfully encourage other nations to stand up processes that are similar to Scythius. The animating factor there was that we wanted other countries to get tougher on investments from China. You know, it's always been in the back of my mind. US investment firms are the number one overseas investors and so we're sort of going around to other countries and asking them to implement these processes. They're going to burden US investors, but I think the policy thinking was that, you know, that was worth it. But now having encouraged, you know, all these other countries to set up Sithius like processes and then to have made the single worst decision in Sifia's history, and to make the single most transparently political decision in fifious history, I think just paints the entire exercise and undermines confidence in those countries that the US is sort of a reliable partner and certainly encourages similar behavior by those other countries. It's not a stretch all to imagine, you know, especially if we implement tariffs and you know, start potentially pulling back from NATO. It's really easy to foresee a situation where anti American sentiment rises, and you know, investments from American firms in other countries all of a sudden are nearly impossible because we've established as precedent that these regimes can be politicized. So, you know, I do worry significantly about the second order effects of this single decision. That is an awful decision.
Well, see if the courts remedy it. Thanks so much John for being on the show. That's Washington, DC attorney John Kabilo, who specializes in cross border transactions. As far as the reaction in Japan, Japanese Prime Minister Shageru Ishiba was blunted, warning that spoiling the deal might hurt Japanese investment in the US. Ishiba was emphatic quote as for why when national security was cited as an issue, it must be clearly explained, otherwise future discussions on the matter will come to naught, and that it's an unfortunate fact that Japanese industry has voiced concerns about future investments between the US and Japan. We have to take this very seriously. Coming up next on the Bloomberg Law Show, the exit of the fed's top bank cup puts capital rules in jeopardy. I'm June Grosso and you're listening to Bloomberg. Federal Reserve Vice Chair for Supervision Michael Barr plans to step down from the role, avoiding a potential battle with President elect Donald Trump over his position and raising questions about the future of a landmark bank capital proposal. Joining me is an expert on the FED and financial regulation. Catherine Judge, a professor Columbia Law School, bar said it was a very tough decision, but he was concerned that staying would be a distraction for the institute. Do you think he made the right decision.
I don't think he made the right decision. The concerns animating the decision are understandable. There was a lot of discussion, quite credible discussion, suggesting that the incoming Trump administration might have sought to remove him from his post as vice chair, And there is a difficult legal question about whether or not the Trump administration would have the facility to remove him by stepping down the short circuits that legal debate, which would also have implications for the capacity of the Trump administration or any presidential administration. True of the chair of the sed that being said, he freely announced that he believed he was in the right to be able to stay in that position, and given that the Senate confirmed him to that position, and there was a lot that's still on that agenda, I would have preferred to see him take on that fight and serve out his terms.
Who has the better side in that legal battle?
It is a really difficult legal question. I do think that the stronger argument is that both the Vice Chair and the Chair have the ability to serve out their terms and cannot be removed by the President except for cause. That being said, the judiciary has been much more hostile to the independence of any agency, and those concerns could very well result in a judicial decision holding that the Vice Chair or the Chair is removable by the President at their discretion.
Explain how his departure may impact or will impact the future of this landmark bank capital proposal.
So one of his signature efforts as Vice Chair was an effort meant was known as boslea free endgame, and the aims were twofold one. It was trying to bring the United States in line with international agreements that they had already agreed to try to abide by embodied in Boggle Free and to the specific proposal that came out under his watch would have resulted in the very significant strengthening of the capital requirements imposed on large banks that was already significantly watered down. We don't have a reproposal, but he announced in the fall that there was going to be a reproposal that was going to be significantly watered down from his initial proposal to strengthen bank capital requirement. Now the prospects remained quite uncertain. We saw that the FED announced in connection with Bar's resignation that it would not pursue any significant rulemaking until somebody else has been nominated confirmed to that role. So it really just creates a period of uncertainty over what the future is going to look like. But it's probably going to result in something that's even weaker than the water downstandards are already suggested. We're worth coming and even he at.
A difficult time getting broad based support for his policies. So if he's not there and a Trump appointee is there, I mean, how likely that anything will happen?
I mean, so that's an interesting question. One possibility, of course, is nothing at all happens. Another possibility is the said does still take seriously the desire to maintain the international rule of the Boggle standards, and that they implement them, that they implement them in a way that doesn't result in significant increases and the capital requirements imposed on banks. There's flexibility in how they are implemented. Are there ways to implement them that would abide by at least much of the spirit, if not all, of the details of BUNCLE three, while not imposing the magnitude of the capital requirement increases that would have been involved in Bar's initial proposal.
Do you think it's important that something like that happen.
It is important that something along those lines happen. Ever since it was initially created, the Fossil Accords have played a really important role acknowledging the fact that if there's a banking crisis in one country, its impact stills over in other countries as well, And so one of the role of the Bossle Committee is to say, look, there can be variation in different countries. There ought to be some variation, but let's make sure that there's at least the base level of agreement, and by all trying to live up to this base level, we're going to minimize or reduce at least the likelihood that there's going to be significant failures in a major jurisdiction in ways that really harm the broader banking system that's serving the global economy. So there's a lot of reasons to want that overall international infrastructure to live on, even in somewhat weaken form.
At his press conference today, Trump said he'll be announcing a replacement for bar as Vice chair someday soon. He's limited to picking one of two Republican Fed governors to fill that position, Michelle Bowman or Christopher Waller.
That seems likely to be the case. So one of the interesting things for this resignation is he chose to resign from this position as vice chair, he did not resign from his position as governor. There's very clear or protection in place. So it's clear that Trump does not have the ability to remove governors of the Shutter Reserve except for cause. So it really does look like because otherwise is a full slate that is either going to be both in a wall or each of whom have different important qualifications for the job.
Yeah, so that preserves the four to three advantage of Democratic appointees on the Fed Board. It seems like there's a lot of talk about Bowman taking his place.
Both of them the defensive from the original efforts to strengthen capital requirements under Bossle three. So we do know that each of them has a much softer approach and more bank friendly approach to regulation. Bowman in particular has been playing the role of supporting community banks, and she's been vocal about concerns that banks are overly regulated and trying to make sure that the broad banking system continue to have flexibility. So I think we would see significant weakening probably of regulatory standards with Bowman advice share for Supervision. What about Waller, I mean, Waller has been similarly concerned that the Bossle three went too far. I do think Waller would likely have more of a concern that Bossle three, for example, in some form likely get implemented for poses of maintaining that crossborder relationship. But again, I think it would likely happen in a form that's substantially weaker than even the revised outline that bar had suggested for Boggle three. So I think that either one would involve deregulation, but Waller might be a little bit more of an institutionalness.
It's generally expected that Trump, as in his first term, there's going to be a d emphasis on regulation, that regulatory agencies are going to step back.
That is true. I mean that being said, it's easy to overstate the extent of the impact. Randy Corrals was the vice chair for Supervision during Trump's first administration. And we certainly saw that all of the modifications and red before reforms that he implemented tended to be in the direction of reducing capital and other requirements as imposed on banks. That being said, it wasn't a wholesale overhaul, and much of the did Frank regime as it had been implemented really remained in place, and banks remained significantly better capitalized than they were prior to two thousand and eight. So there was a weakening of softening, but there wasn't a wholesale revision.
Trump has yet to name nominees for the FDIC, the Office of the Controller of the Currency, and the CFPB. How important are those nominees going to be?
They're all quite important and for different reasons. So, first of all, when it comes to much as bank regulation, a lot of it is not the product of FED regulational loans, but it's instead joint rulemaking with the FDAC and the OCC. Interestingly, those traditionally been independent agencies who've often had leadership that transcends changes in the administration. But for a variety of reasons, both of those positions are going to be imediately open. So it really is going to be free for the Trump administration to make significant changes across the bank regulatory regime.
Tell me what you think Bar contributed in his time as vice chair.
So one of his most important contributions was really shining a spotlight on the deficiencies and the bank supervisory processes leading up to the failure of SDB. And while it's not transparent to the public, one of his significant initiatives was to try to strengthen bank supervision. And so part of what we aren't going to ever be able to fully understand, or at least loan in the short runt be able to fully understand, is how much of an impact he has had trying to strengthen the banking sector by strengthen thinning the supervisory processes and the rigor of supervision.
Any other regulatory issues. Connected with Barr's departure.
There was an announcement by the federals are just in December twenty twenty four that they were going to undertake significant changes and how they can extress this thing, and that that too is going to go to a significant rulemaking process. And so that's another process that now looks like it's going to be on hold. It's how we have a new advice share for supervision. And that's also a process that could result in very significant changes in the regulatory environment facing banks.
Thanks so much for being on the show, Kate. That's Professor Catherine Judge of Columbia Law School. In other legal news today, Trump is still set to be sentenced for his hush money conviction on Friday, at least for now, after a New York Appeals Court judge swiftly rejected his second attempt to get it called off. Judge Ellen Gasber denied Trump's request for an order that would have indefinitely postponed sent and sing and halted the case while he appeals a decision last week upholding the verdict. The judges one sentenced decision didn't give reasons for her denial. That means that Trump's sentencing is on schedule for Friday, although he can still ask other courts to intervene. And that's it for this edition of the Bloomberg Law Show. Remember you can always get the latest legal news on our Bloomberg Law podcasts. You can find them on Apple Podcasts, Spotify, and at www dot Bloomberg dot com, Slash podcast Slash Law, and remember to tune into The Bloomberg Law Show, every weeknight at ten pm Wall Street Time. I'm June Grosso and you're listening to Bloomberg
