What Can Banks Do With $30 Billion in Libya Funds?

The news that the Libyan government had $30 billion worth of cash and securities in US financial institutions has set off a scramble on Wall Street to comply with President Obama’s executive order freezing the funds.

Libyan leader Muammar Gaddafi
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Libyan leader Muammar Gaddafi

But how do you freeze $30 billion?

That’s the question Treasury worked frantically to answer over the weekend after Obama announced the freeze on Friday night.

In a hastily arranged conference call on Sunday, Treasury officials explained to the nation’s large money-center banks and their lawyers what the rules are on Libyan assets.

This is familiar territory for US financial institutions, because the United States has a long history of freezing Libyan assets, and sanctions were in place as recently as 2004.

That’s why many in the financial world were stunned that the Libyans had so much money invested in a country that had a history of blocking their funds.

For now, American banks holding Libyan assets are directed to place those funds into accounts that pay interest at market rates, according to a senior Treasury official. Bankers are not allowed to trade or manage that money, but they can let assets such as bonds mature, and they can continue to hold stocks. Securities that expire must be converted to cash. The US Treasury must grant specific approval for any transactions, and any transactions already in process are allowed to be completed, so long as they don’t benefit specific Libyan individuals.

That means banks will lose the fees they generate from managing the Libyan assets, but many bankers have told Treasury that they aren’t adversely affected, because they can still keep the assets as liquidity on the books.

As for real estate and other tangible assets, the rules can get complicated. In the past, Treasury found a strip mall in Florida that was owned by a banned drug cartel. But rather than put the innocent tenants out onto the street, Treasury allowed the mall to continue to operate, but steered profits into secure, blocked, bank accounts. That’s the model that will operate with any Libyan assets that are discovered, but the Treasury official said the government has not found any real estate owned by the Libyans in the United States yet.

Unwinding all this will be complicated. The Executive Order underlying the asset freeze stays in place until the president terminates the national emergency—which is an important tool of foreign policy. The US now has $30 billion dollars of leverage over any new Libyan government —because the president can decide not to release the assets to any government the US does not approve of.

Once Obama—or his successor—lifts the executive order, Libyan government assets—which make up the bulk of the $30 billion—will revert to control of the new Libyan government. But as for the Gaddafi personal assets, that’s much more unclear. Depending on what Gaddafi decides to do—step down or continue to fight for power— the US can unblock his assets, or continue to hold them. That’s one more chip the Obama administration has to hold over Gaddafi’s head, and one more decision Gaddafi will have to make in the days to come.

The law that undergirds the US authority in all this is the International Emergency Economic Powers Act, which can be found here: http://www.treasury.gov/resource-center/sanctions/Documents/ieepa.pdf.