Last May, when Henry Paulson was nominated by President Bush to be treasury secretary, the Goldman Sachs chairman declared, "We must take steps to maintain our competitive edge in the world." Five months later, Paulson warmly embraced a private-sector Committee on Capital Markets Regulation, ostensibly to preserve America's role as the world's largest international capital market. In November, the 22-member committee -- self-described as independent, bipartisan, and consisting of America's corporate and financial leaders -- issued its first interim report.
Co-chaired by another Goldman Sachs alum (under Paulson), John Thornton, the committee warned that U.S. regulations were scaring away capital. New stock issues were increasingly being listed on European or Asian exchanges. Foreign companies were raising capital via private offerings instead of public exchanges, to avoid the disclosure requirements of the Sarbanes-Oxley Act of 2002 and the liability provisions of the 1933 and '34 Securities Exchange Acts. The risk of class-action lawsuits and high director insurance rates were frightening away foreign capital, too. The solution? Dismantle much of what's left of New Deal financial regulations and some of Sarbanes-Oxley.
But, despite the natural growth of Europe and Asia as competing financial centers, the U.S. share of global stock-market activity is 50 percent, 3 percent higher than it was a decade ago. One reason: Regulation reassures investors.
In mid-March, Paulson co-hosted -- along with yet another Goldman Sachs veteran (also under Paulson), Undersecretary of the Treasury of Domestic Finance Bob Steel -- a "Conference on U.S. Capital Market Competitiveness" to discuss the regulatory issues raised by a parallel panel sponsored by the U.S. Chamber of Commerce. Ironically, the conference was announced on February 27, the day before one of the fastest-growing capital markets, China, saw its stock market plummet more than 9 percent, its largest drop in a decade, prompting a bloodbath of global selling and causing a 3.3 percent plunge in the Dow.
China, despite heavy state involvement in the economy, has lighter stock-market regulations than the United States, and much smaller trading markets. That's why the magnitude of China's drop was so intense. The more-mature and better-regulated U.S. markets managed to claw back a quarter of their losses the next trading day.
Uncertainty isn't good for markets. Smart regulation provides companies and investors a safer haven in which to both raise and park money. Stock prices relative to profits are also higher for companies trading on U.S. exchanges than for similar companies trading outside the United States. That's not because those firms are burdened by Sarbanes-Oxley; it's because regulation certifies the safety of markets and attracts capital.
The self-serving argument that too much regulation hurts the U.S. financial markets was used by another former Goldman co-CEO and U.S. treasury secretary, Robert Rubin, to help kill Glass-Steagall, the 1933 act that prevented conflict-of-interest behavior within the walls of financial institutions. But when Glass-Steagall was repealed, in 1999, it was (at least) done amid multiple congressional debates. Now, these private-sector committees seek to have recommendations approved by a docile Securities and Exchange Commission without any review by Congress.
The report on regulation warns "a regulatory race to the bottom will serve no useful competitive purpose." Yet loosening disclosure is exactly that bottom-bound race, as we know from having witnessed the Savings and Loan crisis, and the collapse of Long-Term Capital Management, Enron, WorldCom, and so many other casualties of past deregulation.
The U.S. share of growth in all global capital-raising activities has indeed declined comparatively in recent years, but the reason is not regulation designed to protect investors; it's a weak dollar and exorbitant debt. Since George W. Bush took office, the U.S. treasury debt leaped from $5.6 trillion to $8.78 trillion, and the dollar fell sharply relative to all other major currencies. Economic mismanagement is a far stronger deterrent of foreign capital than disclosure.
The treasury secretary should defend the integrity of the U.S. markets, not lead the charge to increase their short-term profits by lowering the regulatory bar, even if that helps Wall Street firms increase fee income and the New York Stock Exchange increase market share. The exchange happens to be run by John Thain, yet another former Goldman Sachs co-president (under Paulson).
Nomi Prins is a senior fellow at Demos and the author of Jacked: How "Conservatives" Are Picking Your Pocket (Whether You Voted for Them or Not).
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