More on financial competitiveness

The man whom some on Wall Street blame for their competitiveness woes is speaking out on financial regulation and competitiveness – Spitzer slams threat to corporate reforms:

In an interview with the Financial Times, the outgoing state attorney-general, who won fame for tackling corruption in the financial services industry, said diluting such reforms would be “counterproductive” and would fail to tackle the reasons US businesses are falling behind.
“The argument that we are failing in competitiveness because of regulations is incomplete,” Mr. Spitzer said. “We’re failing in competitiveness because of failed business models and the lack of smart investment in technology. General Motors is not failing because of regulations but because it hasn’t produced good products.
. . .
Mr. Spitzer said critics who warned that aggressive enforcement hurts competitiveness were ignoring recent history. “The sectors that bore the brunt of my cases are performing extremely well,” he said. “They are more competitive because they understand the importance of ethics.”
Many of the top investment banks and the insurance companies that settled with Mr. Spitzer over allegations of biased stock research, accounting fraud and bid-rigging are having extremely profitable years.

Spitzer’s remarks in the Financial Times come on the heels of Secretary Paulson’s remarks (see earlier posting) and a special report (and cover story) in the Economist. That report, America’s capital markets: Down on the street, gives a précis of the “roll-it-back reformers” objections:

The advocates of reform see plenty of scope for improvement. The problem is not only Sarbanes-Oxley, they argue. Aggressive investigations by Eliot Spitzer forced the financial industry into settlements that curbed innovation as well as sharp practice. Federal regulators, desperate to keep up with the New York attorney-general (and now governor-elect), ran amok. Class-action lawyers have been allowed to wield too much power, and shareholders too little. on

From the tone of the article (and the accompanying opinion piece What’s wrong with Wall Street), the Economist isn’t buying this as the sole problem:

The bad news for America is in part the result of good news elsewhere. Thanks to financial liberalisation (which America encouraged), New York faces a lot more competition than it used to. Developing countries are getting richer, and their companies and financial markets better governed. Firms that might once have rushed to American exchanges to privatise themselves are instead doing so at home, or at least nearby. London is seen as a natural home for companies from Russia. Chinese firms are turning more to Hong Kong, which is gaining a reputation for capital-raising as well as trading: witness the gargantuan offering by ICBC, a bank, last month. As Asian markets mature, more of the capital there will surely never leave the region: there is little point in Asian companies going to New York to raise cash from Asian savers. Other markets are growing up, making Wall Street less exceptional.

This echoes their earlier comments on how London became a financial center (the subject of an earlier posting). A large part of the story is flow of funds and financial innovation.
Yet, almost everyone (including Governor-elect Spitzer) that some regulatory overhaul is needed. Steps are already being taken to fine-tune Sarbanes-Oxley. As the Economist says:

With regulators soon expected to announce rule changes that will lighten the burden, the battle against Sarbanes-Oxley’s excesses looks well on the way to being won. This should mean efforts can be directed elsewhere.

They suggest two areas of reform. The first is shareholder rights:

On the one hand, they have too few rights in their dealings with company boards; they have less power than their British equivalents when it comes to electing directors, for instance. On the other, American shareholders (or rather the lawyers who purport to represent them) wield too much power in securities litigation. Lawsuits brought because of falling share prices make a mockery of both the principle of caveat emptor and the honourable New York tradition of never giving a sucker an even break.

The second is the regulatory structure:

Regulators could also do with an overhaul. Here there are two problems, both serious. First, the Securities and Exchange Commission (SEC) is good at the tough stuff, bringing plenty of “enforcement actions”. But in its zeal to keep pace with crusading state attorneys, who exploit high-profile campaigns to win votes, it has lost sight of its other supposed goal—ensuring that markets run smoothly and efficiently. One way to address this imbalance would be to replace some of the SEC’s vast army of lawyers with economists. That would also lead to better cost-benefit analysis of new regulations—an area where the SEC trails behind Britain’s Financial Services Authority.
Second, the regulatory structure is too atomised. Too many agencies monitor the markets. There are four separate banking regulators. State and federal regulators tread on each other’s toes. The SEC’s duties overlap with those of the Federal Reserve, the Commodity Futures Trading Commission (CFTC) and others. Since it no longer makes sense for the increasingly entwined cash and derivatives markets to be policed by separate regulators, a sensible first step towards streamlining would be to merge the CFTC and the SEC.

These sound to me to be good starting points. As Mayor Bloomberg and Senator Schumer have said, To Save New York, Learn From London.
Let’s see if the financial community can rally behind these lessons from London. It will be a good test of their newly merged lobbying association – Securities Industry and Financial Markets Association.

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