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Jewish World Review
Dec. 4, 2006
/ 13 Kislev, 5767
How Congress put Hong Kong and London in a position to surpass New York as a financial capital
John H. Fund
HONG KONG If you want to look for reasons why New York's status as the world's financial center is in serious jeopardy, you need only come here to gaze at this booming city and tour its markets.
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."
Other stock markets are doing all they can to avoid emulating U.S.-style regulation. Ed Balls, Britain's economic secretary, says that his government will continue "to safeguard the light touch and proportionate regulatory regime that has made London a magnet for international business." He recently traveled to Hong Kong to call for a "strengthened partnership" between the "two leading global financial centers."
Last week Stephen Ross, one of New York's premiere developers, warned of a ripple effect: By pushing companies abroad, Sarbox could weaken New York's real estate market. That's why Rep. Gregory Meeks, a Democrat from Queens, is sponsoring legislation to ease Sarbox's audit burden for small companies.
But there are those who don't appear to be heeding the warnings. Britain's Financial Times reported last week that New York's Gov.-elect Eliot Spitzer "pronounced himself suspicious of the push to revamp" the Sarbanes-Oxley rules. Mr. Spitzer is in danger of presiding over Wall Street's slow decline into a satellite financial center for London and Hong Kong. "Having innovative companies use foreign sources of capital slows America's entrepreneurial spirit and economic growth," says Mallory Factor, head of the Free Enterprise Fund, which is challenging the constitutionality of portions of Sarbanes-Oxley in court.
Our foreign competitors couldn't agree more. That's why they are taking advantage of our curious refusal to reform our financial markets, which could make the U.S. a global also-ran. As one leading Hong Kong businessman told me, "Your current policies amount to unilateral disarmament in the contest for IPO's. The next year or so will be a test for whether you can wake up in time."
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JWR contributor John H. Fund is author, most recently, of "Stealing Elections: How Voter Fraud Threatens Our Democracy". (Click HERE to purchase. Sales help fund JWR.)
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© 2006, John H. Fund