Wall Street leaders have established a series of self-empowered commissions — among them the Commission on Capital Markets Regulation (the “Paulson Commission”), the U.S. Chamber of Commerce’s Commission on the Regulation of the U.S. Capital Markets — to peddle a fantasy story to the public and policymakers. This is their fantasy: U.S. competitiveness in financial services is now in grave doubt. Regulation, litigation and prosecution are driving companies to float their IPOs (Initial Public Offerings) on foreign markets. If something isn’t done soon, U.S. economic performance is in jeopardy. Give me a break.
In the real world, things look quite different.
First, a disinterested observer might comment that securities regulations exist to protect investors, not to enhance the interests of Wall Street. Wall Street is supposed to serve business and investors, not the other way around.
Second, the much-touted decline in U.S. IPOs is deeply misleading. The regulatory and litigation climate is a small and insignificant factor in the rising percentage of IPOs undertaken outside the United States. The real issue is that other countries’ stock markets are strengthening, and most recent IPOs were done by companies outside the
Indeed, a devastating January 2007 White Paper from Ernst & Young looking at every IPO in the first half of 2006 found that 90 percent were conducted in the launching company’s home country. Of the remaining 10 percent, only a few were “in play” — most went to regional markets, or were small-caps that went to the London Alternative Investment Market. Of the IPOs in play — a grand total of 17 for the first six months of 2006 — about two-thirds were listed on U.S. exchanges.
Most fundamentally, though, the IPO statistic is a chimera. What matters to the U.S. economy is whether businesses are investing in the United States, not where they undertake IPOs. That’s a narrow Wall Street consideration.
Third, although the doom-and-gloom rhetoric of the capital markets commissions might suggest otherwise, Wall Street is in fact doing fabulously well. Goldman Sachs CEO Lloyd Blankfein grabbed a $53.4 million bonus, the largest single annual executive bonus in Wall Street history. Blankfein’s bonanza is a sign of the times. Wall Street bonuses totaled $23.9 billion in 2006, according to the New York State comptroller, up 17 percent over 2005. And it is the NYSE and Nasdaq that are buying foreign exchanges, not vice versa.
Sam Pizzigati, editor of the on-line newsletter “Too Much,” notes that
“Top Wall Street traders, assuming a 60-hour work week, averaged from $17,000 to $33,000 an hour. The typical American household, by contrast, only took home $46,326 in 2005 for the entire year.”
Finally, the real problem on the Street is too little action from the cops on the beat, not too much. Although the Paulson commission treats the Enron/WorldCom and related scandals as something from a bygone era, they are not even a decade old. And financial wrongdoing is pervasive and ongoing. There is now a new set of financial scandals of even greater breadth than Enron/Worldcom. Researchers estimate that hundreds of corporate executives engaged in back-dating of stock options. And there is strong statistical evidence that insider-trading is rampant — the basis for a just-launched SEC investigation. When companies do get caught cheating, they typically get off with a slap on the wrist — literally a promise not to break the law in the future.
With financial wrongdoing so prevalent, in many cases the best defense for investors is private litigation. So it comes as no surprise that the Wall Street apologists recommend gutting investors’ right to sue. In fact, securities lawsuits have declined in recent years, and the overall amounts recovered for investors, despite rampant fraud, are tiny as corporate profits.
A far-sighted Wall Street elite would not seek to reduce regulation, but recognize that the complex, esoteric market innovations are rapidly outdistancing existing systems of control, creating bubbles and huge systemic risk. What is needed is a new theory of comprehensive public regulation and public and private enforcement that responds to present-day realities. These must address the overall risks to financial system well-being, as well as to investor interests, from both innovations in private equity and the long-standing problems and abuses in the traditional publicly traded markets. Otherwise, Uncle Bailout will be asked to pay — if he can foot the bill.
In the meantime, it is vital that the minimal protections against financial crime and wrongdoing now available — regulation, civil litigation and prosecution — be maintained against the encroachments of those who proffer a grotesquely fanciful U.S. financial services competitiveness crisis, when they should be competing with other nations over stability and integrity.
RALPH NADER is the author of The Seventeen Traditions