Sarbanes-Oxley Act may kill Wall Street's golden goose

It was the moment they'd all been waiting for. Way up in a New York skyscraper, inside the Times Square headquarters of Morgan Stanley, bankers and brokers were about to learn how their boss, John Mack, would divvy up millions of dollars in bonuses for 2006, the richest year in Wall Street history.

Only Mack wasn't there.

Instead, he was an ocean away on that December day, congratulating his stars in London. In an office overlooking the River Thames, Chief Executive Officer Mack was anointing more than 70 new managing directors in Europe, where revenue has been growing by about 40 percent a year lately, more than double the rate in the US.

In this era of superlatives on Wall Street - record profit, record pay, record mergers "" a chorus of alarm is rising over a tectonic shift within the global securities industry.

President George W Bush and Treasury Secretary Henry Paulson have warned that the US risks losing its edge in the financial world as markets in Europe and Asia grow.

Two studies "" one conducted by McKinsey & Co. for New York Mayor Michael Bloomberg and New York Senator Charles Schumer, and another done by a group of executives and academics - have concluded that excessive regulation is making the US an unattractive place to sell new stocks. (Bloomberg is the founder and majority owner of Bloomberg LP, the parent of Bloomberg News.)

In particular, the reports single out the Sarbanes-Oxley Act of 2002, the antifraud law passed after the debacle at Enron Corp.

IPO Flight
Both studies point to figures that show initial public offerings are migrating to Hong Kong and London, where underwriters charge half of what they do in the US. If IPOs flee, the thinking goes, trading, investment and jobs will follow.

Unless the US takes action "" including relaxing the way Sarbanes-Oxley regulations are followed "" New York will lose its spot as the world's financial capital, according to McKinsey. The resulting upheaval would jeopardize 30,000-60,000 US. jobs, the 134-page report says.

A third study, this one from the U.S. Chamber of Commerce, is due out in March. Paulson, former chief executive officer of Goldman Sachs Group Inc., will convene a conference in Washington in March to take up the issue.

"America's capital markets are the deepest, the broadest and most efficient in the world,'' Bush said in his January 31 State of the Economy report, which he delivered at Federal Hall, across the street from the New York Stock Exchange.

"Yet excessive litigation and overregulation threaten to make our financial markets less attractive to investors, especially in the face of rising competition from capital markets abroad.''

Gold Standard
His warning echoed one that Paulson had issued to former Wall Street colleagues in November.

"Historically, the U.S. markets have represented the gold standard,'' Paulson said in a speech at the Economic Club of New York. ''Yet recently, in the wake of new, heightened regulatory and listing requirements for all public companies in the US, we have witnessed changes in IPO activity.''

With all of the hand-wringing, you'd think Wall Street was going down the tubes. On the contrary, U.S. financial firms have never been more profitable.

Citigroup Inc., Goldman Sachs, Morgan Stanley, JPMorgan Chase & Co. and Merrill Lynch & Co. ""all based in New York "" collected more fees from underwriting securities and advising on mergers and acquisitions in 2006 than any other firms, according to data compiled by Bloomberg. These five firms made more than $60 billion in net income last year.

Their employees around the globe pocketed an estimated $60 billion in bonuses. In all, investment banks worldwide collected $71 billion in fees from M&A and underwriting, the most since Bloomberg began keeping records.

Easing Rules
Amid such riches, calls to roll back rules designed to prevent another Enron ring hollow, says Amy Borrus, deputy director of the Washington-based Council of Institutional Investors. Strong regulation helps the U.S. by fostering confidence in its markets, she says.

"It is ironic that, in a year when Wall Street raked in mountains of profits and paid record bonuses, they would be complaining about competitiveness,'' says Borrus, whose organization represents 140 public, union and corporate pension funds with combined assets of more than $3 trillion.

The McKinsey report says the US can't afford to wait. To help American markets compete, the US government should ease immigration restrictions, so banks can attract more talent from overseas, and take steps to curb costly litigation, the study says.

Accounting costs
The New York-based consulting firm also recommends that the Securities and Exchange Commission and the Public Company Accounting Oversight Board, which oversees auditors, change guidelines for the Sarbanes-Oxley rules.

Section 404 requires managers of companies that are publicly traded in the US to evaluate their international financial controls and hire outside auditors to sign off on those assessments. Under Sarbanes-Oxley, executives also must personally certify the accuracy of financial results.

All of that takes money. Companies probably spent $6 billion in 2006 to comply with the Sarbanes-Oxley law, according to a study by Boston-based AMR Research Inc.

On average, a company spends about $4 million a year to comply with section 404, according to surveys by Financial Executives International, a Florham Park, New Jersey-based organization representing 15,000 corporate financial executives.

Accounting costs are only part of the equation, says David Chavern, senior vice president at the Washington-based US Chamber of Commerce.

''The real worry is that if going public in the US means you are subject to Sarbanes-Oxley and large securities class-action suits, then it makes it harder to raise capital,'' he says.

Race to the Bottom
Rob Nichols, president of the Financial Services Forum, a Washington-based Wall Street lobbying group, says he backs revising Sarbanes-Oxley implementation guidelines. Gutting the law would be a mistake, he says.

"We don't want a race to the bottom,'' Nichols says. ''IPO data doesn't tell the whole story. It would be disingenuous to link IPOs to Sarbanes-Oxley exclusively.'' In December, the SEC and PCAOB proposed new guidelines for Sarbanes-Oxley implementation.

There's no denying that the centre of gravity has begun to shift in the world of finance.

Like America's factory workers, US bankers, brokers and traders confront the challenge of globalization, says John Silvia, chief economist at Wachovia Corp.

This medley of economic, financial, trade and technological interrelationships is levelling the competitive playing field between the US and the rest of the world. Since 1979, the US has lost a net 3.5 million manufacturing jobs, or 34 percent of its factory workforce, according to the Bureau of Labor Statistics.

Wall Street Threat
Wall Street isn't immune. In the past few decades, a confluence of powerful forces "" from the political and economic integration of Europe, to the triumph of capitalism in the former Soviet Bloc, to the emergence of China and India as economic powers, to cheap, ubiquitous telecommunications - has heightened global rivalries for deals and trading.

"In the 1980s, the only place was the US,'' says Robert Steel, US Treasury undersecretary for domestic finance. ''Now, there is much more competition.''