Corporate Governance

Bear Stearns, Corporate Governance, and the Capital Markets: The Regulatory Response (Part 4)

By J. Robert Brown

Many are calling for a regulatory response. It is quite a shift from this administration. Recall that Paulson was behind the Committee on Capital Markets Regulation, which issued a series of interim recommendations. Despite including a few tepid proposals for reform that favored shareholders (it refused to recommend access), the report was an unabashedly anti-regulatory diatribe, favoring principles over rules (this is code for regulatory lite), the adoption of rules only if supported by "empirical evidence to the extent possible," something that would have undone most of SOX and prevented regulators from heading off anticipated problems (how can you quantify the benefits of reduced fraud or increased integrity of the markets), and restrictions on shareholder litigation.

The Report ignored the decline in the number of shareholder suits being brought as the full force and affect of the PSLRA was felt (suits for the last two years are at their lowest level in a decade) and ignored evidence that the investment banking firms contributed to any problems of competitiveness. In considering whether underwriting business was going overseas because of higher underwriting fees in the US, the report had this to say:

• Another oft-mentioned competitive disadvantage of the United States is the higher underwriting fees companies have to pay to make public offerings here. The LSE study finds that the gross spread in the United States (5.6 percent) is 60 percent higher than the gross spread outside the United States (3.5 percent). This difference is not likely to drive the listing decision either. First, all U.S. IPOs are sold with extensive book-building (a method for determining the best offering price), and companies are willing to pay higher fees to get better pricing on their equity. Second, most of the firms that cross-list do not do an IPO in the United States, because they are already public in their own country. The gross spread difference for a follow-on offering is less, ranging from a 3.0 percent higher spread in the United States for small offerings down to a 0.93 percent higher spread for large offerings.

Translates?  We will ignore the role of investment banking firms in this problem in order to focus on our pet concerns, excessive regulation and shareholder law suits.

As Arthur Levitt rightfully noted in the WSJ in an editorial titled "Regulatory Overkill," while regulators (including "the head of the New York Stock Exchange, the leadership of the U.S. Chamber of Commerce and the secretary of the Treasury") were dithering over regulatory concerns, Rome metaphorically burned.  As Levitt put it:

• Their concern was not with diminishing transparency, lax accounting standards, or the growing inability to measure the risk of new financial instruments and opaque trading mechanisms. No, their concern was regulatory overkill -- that the NYSE was losing listings to overseas markets. How ironic that this group was fixated on a questionable measure of market health, while the seeds of today's market turmoil were being nourished not by regulatory excess, but by fundamental failures in oversight at almost every level.

Full post as published by The Race to the Bottom on March 27, 2008 (boomark / email).