Wall Street Declining?
This is some very, very bad news. If the US continues on the path is is on, Wall Street may no longer be the dominant financial center in the world. That would be a disaster for the US. And it is all the fault of some of the "reforms" put in place after the Enron debacle. John Fund reports in the Opinion Journal.
Increasingly, Hong Kong and London are the places where companies are finding it easier and cheaper to list their shares and raise capital. Last year, of the 25 largest initial public offerings in the world, only one took place in America. This year, Hong Kong is likely to end up as the No. 1 market for stock offerings world-wide.
Perhaps the top culprit in New York's relative decline as a trading center is the Sarbanes-Oxley corporate accountability rules that were put in place in 2002 in the wake of the Enron and WorldCom scandals. Henry Tang, Hong Kong's financial secretary, couldn't be more blunt on the good fortune Sarbanes-Oxley has brought his city. "Our success is giving [Treasury Secretary] Hank Paulson a few raised eyebrows," he told a delegation from the Fraser Institute, a Canadian free-market think tank, last week. "Thank you, Mr. Sarbanes and Mr. Oxley," he said, referring to Democratic Sen. Paul Sarbanes and GOP Rep. Mike Oxley, the law's chief sponsors.
While some of Sarbox's rules make sense, its Section 404 has had unintended and damaging consequences. Section 404 requires corporate executives to certify their financial statements and internal controls personally. Audit fees for Fortune 1000 companies have more than doubled on average. Worse, the rigid and cumbersome rules are driving away business without significantly improving corporate governance. "Managers are increasingly losing their appetite for risk and innovation," says Hank Greenberg, former chairman of the insurance giant AIG.
No wonder that last week a blue-ribbon panel of 22 top U.S. financial and political figures issued a report saying that a more flexible way to police corporate behavior would be to emulate the London Stock Exchange's "watchdog" unit, which uses broad principles to ensure compliance with ethical standards. The focus should be on ensuring a company's financial soundness rather than entangling a corporate executive or its auditors in litigation, which cause its stock price to plummet overnight. Hal Scott, a Harvard law professor and member of the panel, told the New York Post that the corporate controls in Sarbox don't exist anywhere else in the world, and compliance costs "are absolutely killing the U.S. in terms of maintaining listings dominance" in world markets. "If we correct it, we have been told to expect an almost immediate turnaround in listings."
Unintended consequences. Look, nobody wants to see another Enron. But frankly, I always thought the personal certification thing was stupid on the face of it. That we are killing our ability to compete with rules like that will be a long-term disaster for the US. If the Wall Street dominance erodes, so does the long term economic growth. There has to be a better way to do this, one that does not cost the US this kind of damage. It is in the best interests of this nation as a whole to fix this before those unintended consequences yield permanent reduction in tax revenues. This should not be a partisan issue. Both parties should see the wisdom of keeping tax revenues maximized.
UPDATE: More about the report here, including a link to the report itself (huge file warning on that, though).
By George Bruce, Tuesday, 5 December , 2006 @ 11:16 am
Connect the dots for me. How does a few fewer jobs on Wall Street effect main street America?
By Gaius, Tuesday, 5 December , 2006 @ 12:07 pm
It is not a few jobs. There is much more tax revenue than that generated.