SarbOx Under Assault
Lee Drutman
December 14, 2006
Lee Drutman is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
Last week, an official-sounding group called the Committee on Capital Markets Regulation released an equally official-sounding document called the “Interim Report of the Committee on Capital Markets Regulation." In this report, a star-studded group of financial industry cheerleaders from academia and business (but with no official capacity) argued that the competitiveness of U.S. financial markets is at stake, and restoring competitiveness depends not only on rolling back reforms enacted in the wake of Enron, but on creating an even looser regulatory environment than existed before.
The main target is the Sarbanes-Oxley Act of 2002 (SarbOx, for short), the accounting and securities reform legislation inspired by Enron, WorldCom and all the rest. Financial industry leaders never liked the law, and now, four and a half years later, they are hoping that memories of the scandals have finally faded enough to go back to the happy-go-lucky style of accounting that made Wall Street much more fun and profitable for those few in the know.
Don’t be fooled. The committee’s arguments are based on a number of dubious claims and a misguided set of priorities. But, then again, given that the committee comprises representatives of many of the same accounting and Wall Street firms that were behind the recent wave of corporate scandals, perhaps we shouldn’t be surprised to observe yet another questionable sleight of hand.
According to the report, a growing number of companies are looking to overseas markets to raise capital, rather than deal with the allegedly burdensome regulatory environment of U.S. financial markets. According to the report, in 2000, half of the money raised in global IPOs came from U.S. exchanges, whereas in 2005 only 5 percent came from U.S. exchanges.
But to blame this on the regulatory environment is misleading. For one, 2000 was the height of the technology IPO boom in the U.S., hardly a representative year for comparison. And in retrospect, there were many, many companies that really shouldn’t have been taken public, and a lot of investors would have actually been much better off had Wall Street not engaged in a reckless bout of IPO cheerleading. If tighter had rules stemmed the IPO flow, this actually would have been a good thing.
Moreover, as The New Republic’s Clay Risen recently noted, a likely reason that start-ups may be seeking out overseas markets may not be the regulations, but rather the greed of U.S. investment banks, which charge 6.5 to 7 percent in underwriting fees—as opposed to London firms who charge 3 to 4 percent. London markets have raised $40 billion through late October this year, as opposed to $30 billion in New York.
The Committee on Capital Markets Regulation report also notes that while in 1995 only 2.2 percent of public takeovers involved taking a company private, by 2004, 26 percent involved taking companies private. But is this all because of overregulation? Perhaps the pressure on Wall Street for constant steady quarterly earnings growth has become too intense and unmanageable, making it nearly impossible for firms to do anything resembling long-term planning anymore and making private ownership much more appealing. And maybe more companies going private is not such a bad thing, considering the often destructive short-termism that many public companies are forced to engage in to meet Wall Street expectations.
Of course, it is certainly possible and that the heightened regulatory climate has pushed some IPOs overseas and pushed at least some companies to seek private as opposed to public funding. But even if this is the case, should we really be worried about these trends? Certainly, there is no shortage of capital to grow the economy among private and overseas investors.
But Wall Street firms are certainly worried. Companies choosing to raise capital privately or overseas means less lucrative underwriting business for the big Wall Street firms. Undoubtedly, a more anything-goes approach to securities regulation would be a boon to these major investment banks, as it was in the late 1990s.
But the whole reason that we have the Sarbanes-Oxley Act is because we already tried the anything-goes approach to securities regulation. It didn’t work. Made-up corporate profits, cheered on by conflicted Wall Street analysts, duped small investors out of trillions of dollars in retirement savings. The whole point of Sarbanes-Oxley was to restore faith in markets at a time when investors had good reason to doubt. How easily we forget the very real possibility that investors could take their money and put it in treasury bonds if they lost confidence that corporate financial reports represented a realistic picture and not some elaborate trompe l’oeil . Certainly, big Wall Street firms don’t want that to happen.
It may even turn out that in the long run, having a tightly-regulated securities market is a comparative advantage. Investors tend to be risk averse, and many would prefer to invest in markets where they know what they are getting, especially when it is their retirement security at stake (even if that means a slightly diminished potential for returns). If other financial markets suffer a series of scandals (the chance of which are increased by lax regulations), a listing on an American stock market will start to look awfully good by comparison.
Still, the politics of this all promise to be interesting. This report was timed to come out right after the election, and incoming House Speaker Nancy Pelosi, D-Calif., has reportedly promised that revising Sarbanes-Oxley is a top priority. (Pelosi receives a lot of money from Silicon Valley investors, who are eager to see financial regulations loosened.) Then again, the financial industry has complained about Sarbanes-Oxley for years to a Republican Congress, with no effect. But they do not appear about to give up, either.
Certainly, some small technical fixes to Sarbanes-Oxley, particularly to the dreaded and demonized Section 404, may be in order. But a large-scale regulatory rollback of the type recommended in the “Interim Report of the Committee on Capital Markets Regulation” would be foolish. There is little direct evidence that tighter regulations are the main reason that companies are going private or IPOs are going overseas. Nor should these trends necessarily be troublesome to anybody except the big Wall Street firms that lose out on a lucrative underwriting business.
http://www.tompaine.com/articles/2006/12/14/sarbox_under_assault.php
Saturday, December 16, 2006
Wednesday, December 13, 2006
Democrats and lobbying - The Providence Journal
Democrats and lobbying
01:00 AM EST on Monday, December 11, 2006
BERKELEY, Calif. As the ascendant Democratic majority takes center stage in the Washington political drama, one of the emerging (and poll-tested!) motifs is a promise to end the “culture of corruption.”
Nancy Pelosi, the new speaker of the House, is busy practicing her lines: “The Democratic ethics package will break the link between lobbyists and legislation.…The American people want greater integrity in Washington, and Democrats pledge to make this the most honest, ethical, and open Congress in history.” Democratic leaders are declaring that reforms will be a legislative priority: No more gifts, no more travel, no more of those ugly appurtenances of legal bribery.
But, wait, what’s that scurrying noise, stage left? Why, it sounds like the steady march of former Democratic staffers heading off to Washington lobby firms, lured by the appeal of quadrupling their salaries now that their political connections are suddenly valuable. Why, even Nancy Pelosi’s own former chief of staff, George Crawford, has reportedly been hired to lobby on behalf of biotech company Amgen. It adds up to a clever bit of dramatic irony that makes all those histrionics about “The People’s House will not be an auction House” (Pelosi, again) seem at best quixotic (and at worst, insincere).
To understand why the proposed reforms are bound to be ineffectual, let’s ask a purposely naïve question: Why are lobbying firms so eager to hire Democrats? If private interests achieve so much influence through nefarious perks like gifts, meals, and plane rides (the banning of which will supposedly end the culture of corruption), why should lobbying firms care about the partisan pedigree of their hires? After all, a Republican can presumably trade away a steak dinner for a surreptitious tax write-off just as well as a Democrat.
The answer, of course, is that personal connections matter (surprise!). Washington, D.C., is a city of dense interpersonal networks, and it turns out that if you want to get a friendly audience before a member of Congress, it sure helps to hire a trusted former colleague to make your case.
One problem is that these kinds of connections come at a very high price. A former Democratic staffer with solid ties on Capitol Hill is going to cost you a few hundred grand. Which means that generally only those organizations with bulging political budgets (mostly the large corporations and wealthy trade groups that dominate the lobbying landscape) can purchase that kind of access. A related problem is that congressional staffers increasingly rely on transitioning to lobbying careers post-Hill to pay off their mortgages and send their kids to college. And as they do, they become more likely to lend sympathetic support to today’s lobbyists, who might have a job for them tomorrow. Connections, connections, connections.
Sure, we could slow the “revolving door” — increase the amount of time that former members have to wait before they can lobby their colleagues from one, to say, two years, as Democrats have proposed. But even if you take away all the former members and all the former staffers, you would still have a cadre of lobbyists who are specialists at the personal charm game, who are experts at establishing rich friendships and relationships just by hanging around. And who often win trust by providing a wide range of legislative support services beyond the capacity of harried and overworked congressional staffs.
But there is one way to at least weaken the link between lobbyists and legislation: take the private money out of campaigns. These days, winning campaigns cost on the order of millions of dollars, especially close ones. And fundraising is always much easier when lawmakers take the time to meet with a potential donor’s lobbyists than when they don’t. Problem is, as with lobbying, the vast majority of campaign money comes through a limited number of wealthy organizations. Which means that as long as candidates rely on private money to get re-elected, they are going to keep prioritizing the concerns of major campaign donors over other potential issues? Unfortunately, public funding of elections remains entirely off-stage in the current discussions of lobbying reform.
So then, let the Democrats speak boldly of ending the “culture of corruption.” There is certainly no great harm in banning private gifts and meals and travel, in increasing disclosure on earmarks and slowing the revolving door. But the trail of former Democratic staffers ascending to six-figure lobbying jobs suggests getting to the heart of unequal influence in Washington will require a kind of ugly introspection that is rare in politics.
A good test will be to watch closely what happens with the Democrats’ campaign promises to go tough on the pharmaceutical industry and negotiate bulk discounts for Medicare. Will the Democrats stick to their populist guns? Or will a small army of jovial pharmaceutical lobbyists, armed to the hilt with scientific studies, campaign cash, and connections, send those of us who care about the integrity of the political process reaching for more Prozac?
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
http://www.projo.com/opinion/columnists/content/CT_Drut11_12-11-06_3F37QCM.11e1fc9.html#
01:00 AM EST on Monday, December 11, 2006
BERKELEY, Calif. As the ascendant Democratic majority takes center stage in the Washington political drama, one of the emerging (and poll-tested!) motifs is a promise to end the “culture of corruption.”
Nancy Pelosi, the new speaker of the House, is busy practicing her lines: “The Democratic ethics package will break the link between lobbyists and legislation.…The American people want greater integrity in Washington, and Democrats pledge to make this the most honest, ethical, and open Congress in history.” Democratic leaders are declaring that reforms will be a legislative priority: No more gifts, no more travel, no more of those ugly appurtenances of legal bribery.
But, wait, what’s that scurrying noise, stage left? Why, it sounds like the steady march of former Democratic staffers heading off to Washington lobby firms, lured by the appeal of quadrupling their salaries now that their political connections are suddenly valuable. Why, even Nancy Pelosi’s own former chief of staff, George Crawford, has reportedly been hired to lobby on behalf of biotech company Amgen. It adds up to a clever bit of dramatic irony that makes all those histrionics about “The People’s House will not be an auction House” (Pelosi, again) seem at best quixotic (and at worst, insincere).
To understand why the proposed reforms are bound to be ineffectual, let’s ask a purposely naïve question: Why are lobbying firms so eager to hire Democrats? If private interests achieve so much influence through nefarious perks like gifts, meals, and plane rides (the banning of which will supposedly end the culture of corruption), why should lobbying firms care about the partisan pedigree of their hires? After all, a Republican can presumably trade away a steak dinner for a surreptitious tax write-off just as well as a Democrat.
The answer, of course, is that personal connections matter (surprise!). Washington, D.C., is a city of dense interpersonal networks, and it turns out that if you want to get a friendly audience before a member of Congress, it sure helps to hire a trusted former colleague to make your case.
One problem is that these kinds of connections come at a very high price. A former Democratic staffer with solid ties on Capitol Hill is going to cost you a few hundred grand. Which means that generally only those organizations with bulging political budgets (mostly the large corporations and wealthy trade groups that dominate the lobbying landscape) can purchase that kind of access. A related problem is that congressional staffers increasingly rely on transitioning to lobbying careers post-Hill to pay off their mortgages and send their kids to college. And as they do, they become more likely to lend sympathetic support to today’s lobbyists, who might have a job for them tomorrow. Connections, connections, connections.
Sure, we could slow the “revolving door” — increase the amount of time that former members have to wait before they can lobby their colleagues from one, to say, two years, as Democrats have proposed. But even if you take away all the former members and all the former staffers, you would still have a cadre of lobbyists who are specialists at the personal charm game, who are experts at establishing rich friendships and relationships just by hanging around. And who often win trust by providing a wide range of legislative support services beyond the capacity of harried and overworked congressional staffs.
But there is one way to at least weaken the link between lobbyists and legislation: take the private money out of campaigns. These days, winning campaigns cost on the order of millions of dollars, especially close ones. And fundraising is always much easier when lawmakers take the time to meet with a potential donor’s lobbyists than when they don’t. Problem is, as with lobbying, the vast majority of campaign money comes through a limited number of wealthy organizations. Which means that as long as candidates rely on private money to get re-elected, they are going to keep prioritizing the concerns of major campaign donors over other potential issues? Unfortunately, public funding of elections remains entirely off-stage in the current discussions of lobbying reform.
So then, let the Democrats speak boldly of ending the “culture of corruption.” There is certainly no great harm in banning private gifts and meals and travel, in increasing disclosure on earmarks and slowing the revolving door. But the trail of former Democratic staffers ascending to six-figure lobbying jobs suggests getting to the heart of unequal influence in Washington will require a kind of ugly introspection that is rare in politics.
A good test will be to watch closely what happens with the Democrats’ campaign promises to go tough on the pharmaceutical industry and negotiate bulk discounts for Medicare. Will the Democrats stick to their populist guns? Or will a small army of jovial pharmaceutical lobbyists, armed to the hilt with scientific studies, campaign cash, and connections, send those of us who care about the integrity of the political process reaching for more Prozac?
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
http://www.projo.com/opinion/columnists/content/CT_Drut11_12-11-06_3F37QCM.11e1fc9.html#
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