Economy

Spitzer, Schumer & SarbOx, Cont.

Regarding this morning's post on Spitzer, Schumer and SarbOx reform, I somehow missed this item from Ben Smith of the Daily News. Ben, a man in the know, says that while Spitzer "doesn't quite seem to buy Schumer's premise of New York's threatened competitiveness," he's open to some changes to Section 404, which lays out the onerous internal controls that critics charge are the main reason for the IPO exodus overseas, and that the two men are discussing specific changes.

That said, the idea of a governor of New York disinterested in Wall Street's troubles (in his CNBC interview, Spitzer flatly states that the IPOs have gone overseas almost entirely because Europe and China are growing, and not very much at all because of regulation) is disturbingly passive. The trouble with this argument, of course, is that while Europe may have a booming IPO market, it has little other economic growth.

An interesting point over at The Conglomerate—only six of the report's 32 recommendations are focused on SarbOx, and those propose relatively minor changes:

Mostly, the report seems to see the problem as the upsurge in white-collar prosecutions or the 'liability risks' associated with being a public company in the US. The report does focus on the need to enhance shareholder democracy (a point I will post on later) as well as the need to reform the regulatory process. However, many of the recommendations center on ways to reduce the nature and intensity of corporate prosecutions. Hence, the report recommends such reforms as allowing directors who act in good faith to be insulated from out of pocket damages in securities actions, ensuring that entity liability is sought only in exceptional cases, prohibiting the DOJ from seeking waivers of attorney-client privileges or seeking denials of attorneys fees for their officers and directors, and protecting auditing firms by creating safe harbors for certain conduct or otherwise capping their liability.

In short, less power to the Eliot Spitzers of the world.

What's striking is that Spitzer and the Greenberg Commission agree on the key point—both argue that SarbOx reform is not the main reason for the IPO exodus. While Ben mentions that in his editorial board meeting with the News, "Schumer had nothing but praise for Spitzer, and expressed the hope that he could bring Eliot along with some of the changes to Sarbanes-Oxley, including ending the requirement that CEOs personally attest to the accuracy of their annual reports," it still seems to me that the governor-elect's indifference places him on a collision course with Senator Schumer and Mayor Bloomberg, who have been public and impassioned in their calls for reform. And the question remains: Where does Hillary stand?

Spitzer Sneers at Schumer's SarbOx Reform

New York governor-elect Eliot Spitzer come out swinging against the new report from the Committee on Capital Markets Regulation's calling for Sarbanes-Oxley reform on Friday in an impassioned CNBC appearance:

"What this report is really about is reining in prosecutorial fraud," Spitzer claimed. "The heart of this report is an effort to rein in state prosecutors."

Part of this is personal—the blue-ribbon private group is funded in large part of Spitzer target and foe Hank Greenberg, the former head of insurance giant AIG, and is surely all for stripping away the prosecutorial discretion of state A.G.'s.

But Spitzer is yet again missing the forest for the trees.

Having run on and originally dedicated his Attorney General's office to a largely unsuccessful anti-gun agenda, Spitzer then began aggressively using the Martin Act, a then-obscure, nearly century-old statute granting the attorney general very broad powers to peruse criminal or civil charges against anyone involved in fraudulent stock or bond trading in New York, to go after Wall Street firms. While a state prosecutor pursuing stock market fraud is itself odd, and speaks volumes about the lax environment at Bush's SEC, what's odder still is the self-defeating nature of New York's A.G. policing Wall Street. It's the equivalent of the California A.G. taking on the movie business.

And despite the state's reliance on Wall Street, which provides more than 20% of all tax revenues, Spitzer seems more interested in maintaining A.G.s' prosecutorial prerogatives than in Wall Street's long-term health.

His stance also sets up a fight with Senator and new hero of the Democratic Party Chuck Schumer and New York City Mayor Michael Bloomberg, who last month took to the pages of the Wall Street Journal to call on Congress for SarbOx reform, arguing that New York's future depends on its financial markets remaining competitive.

Spitzer, though, claimed that the migration of IPOs overseas had little to do with over-regulation and was mostly a result of increased capital in China and Europe—none of which explains why only 5 per cent of the value of all IPOS was raised in America last year, down from 50% in 2000. He also declared that the Committee's proposed reform package "is dead-on-arrival in Congress."

In the Times Of London, the Manhattan Institute's Walter Olson the big question: "New York's other highly visible elected official, Hillary Clinton, has conspicuously kept her distance from the cause of reform. Could one of her constituents perhaps approach her, before the tumbleweeds arrive?"

This looks to get fast and furious: Treasury Secretary Hank Paulson has called for a review of corporate laws and regulations and is planning a high-level conference early next year to discuss the options in detail. Later this month the SEC chairman will release updated guidance on how section 404 of Sarbanes-Oxley should be interpreted and early next year the US Chamber of Commerce will produce its own blueprint for action. Before then, the results of a McKinsey study on US market competitiveness commissioned by New York Mayor Mike Bloomberg and Democrat congressional heavyweight Charles Schumer should be out.

More to come…

Es Tu, Spitzer?

In today's Wall Street Journal OpEd [subscriber's only link] on threats to New York's status as the world's financial capital, Mayor Bloomberg and Senator Schumer list "four factors that bear close attention: globalization of the capital markets, overregulation, frivolous litigation and incompatible accounting standards," and call for a reassessment of the "balance of innovation and regulation."

So far, so good, but what all four points have in common is that they're outside of the power of New York City or State to address—and what the leaders omit from their essay is as important to New York's future as a financial captal as what they address. Here, then, are four more factors unmentioned by the senator and mayor that they should consider:

1) Eliot Spitzer is about to be elected governnor based largely on the name he made for himself as state Attorney General: The Sheriff of Wall Street. Will Governor Spitzer watch out for New York's most important economic sector, or continue to play sometimes overbearing watchdog?

2) New York City and State both tax Wall Street to the hilt to fill the coffers and support their super-sized governments. Regulatory reform is well and good; why not reform the economic climate as well to create a more appealing place to do business?

3) While London and Hong Kong are addressed, there's no mention of the Chicago merger, and the domestic threat it poses to New York's continued supremacy.

4) Terror. Obviously, terror and the fear of terror effect all business capitals. That said, it does seem an odd omission.

Here's hoping that in addition to pushing the feds for change, New York's leaders are looking at what they can do to help themselves.

Urban Mall Watch

Following up on yesterday's discussion of downtowns, St. Louis thinks it can revitalize itself with an urban mall near its downtown ballpark. We'll be watching.

Elsewhere, the Times of London reports on the revival of the downtown mall in Britain and on the continent. John King at the San Francisco Chronicle considers the Westfield and selling the urban mall. (Favorite quote: a veep of design at San Fran's new mega mall explaining that "We wanted an experience that reflects the complexity of the city… We wanted to reflect that this is not just a machine for selling.") Salt Lake City seeks to create the mall as hub, not island.

Downtown Rundown

Stadiums, malls, bells and whistles all can serve a role, but the future of downtowns continues to depend on the overall viability of the city. For those cities with the potential to go either way, the issue comes down to whether or not the choices they make attract businesses and people, to go along with stadiums and symbols.

There's a lot worth reading on urban downtowns today, beginning with the redoubtable Otis White's look at cities including St. Louis, Phoenix, Detroit and Philadelphia with "downtown discounts," where class A office space is cheaper in the burbs than the business district.

Continue reading   Downtown Rundown

Decline of the Financial Services Middlemen

In Cities like New York, Chicago, and to a lesser extent San Francisco, where high housing costs are already pushing away jobs, you can add the additional problem of the declining demand for financial services middlemen, as electronic trading allows the buyers and sellers to interact directly.

Investment Executive reports:
One of the biggest changes to hit financial services industry in the coming years will be the demise of the middleman, according to a new report from IBM. Traders, analysts, fund managers and others who stand between investors and their money will come under pressure to deliver or depart by 2015, the report suggests.
In a global survey, IBM, in cooperation with the Economist Intelligence Unit, spoke to more than 400 executives who run 296 of the world'’s largest exchanges, broker/dealers, asset managers, custodians, hedge funds and regulatory bodies. These executives overwhelmingly believe that more profit will flow to investors in an increasingly transparent marketplace. The report says three forces are expected to rearrange the structure of global capital markets by 2015. Complete marketplace transparency, instantaneous and uniform global networks and a growing need to commit to a permanent state of risk are the underlying forces bubbling up to shape the new single market for the world'’s capital. "“Power will shift from the traders who have benefited from merely facilitating transactions to the buyers and sellers who take positions on either end of the trade," said Sarah Diamond, head of IBM'’s financial markets consulting practice, in a release.

Hat Tip Bob

Bankrupt New Orleans

The seven leading candidates in the upcoming (April 22nd) New Orleans Mayoral election were on display last night in a nationally televised debate notable for its lack of substance. The city is on the verge of bankruptcy, but the fiscal crunch was addressed only indirectly. Part of the city’s problem in borrowing money from private lenders, or encouraging the federal government to send more funds, is the widespread understanding that local politics is deeply corrupt. But only one marginal candidate chose to take up the issue. The incumbent Ray Nagin, once known as as Ray Reagan for his ties to local business, was never pressed by the other two top candidates, businessman Ron Forman, a Republican turned Democrat, and Lieutenant Governer Mitch Landrieu, a member of Louisiana’s most prominent political family. All three talked blandly about how New Orleans would return to its former “glory.”

(New Orleans) Government could go broke in a month
Sunday, April 16, 2006
It's not hard to understand why …. banks are skittish about doing business with New Orleans, which needs the money to pay for police, firefighters and other basic functions. Although Mayor Ray Nagin likes to talk about how New Orleans is bouncing back more quickly than he thought it would last fall, his government will run out of money next month without another major infusion of cash….. Though city officials have already slashed spending by a third and laid off 2,400 workers, New Orleans' current population of around 200,000 simply can't pay for the services -- and carry the accumulated debt -- of a city that was more than twice as large before Hurricane Katrina. …
4/17/6 Times Picayune: Mayoral candidates joust in front of national audience