Thought some of you might find this interesting: American capitalism - http://www.economist.com/opinion/displaystory.cfm?story_id=E1_RPTJPVV What's wrong with Wall Street Nov 23rd 2006 From The Economist print edition It is good that the world's leading market faces competition; bad that it has done so little to confront it NOT since the 1980s, when the nation was in a spin about the coming of the Japanese, has there been such anxiety in America over foreign competition. The familiar concern that China is going to steal the country's remaining manufacturing jobs has been compounded by a newer fear: that Wall Street is losing its grip on the world's money. Bankers and politicians worry that business will drain away from America's capital markets to financial centres overseas, particularly London and Hong Kong. Several committees are sweating away on reports, the most important of which is to be published next week, on how to stop the rot. America's treasury secretary, Hank Paulson, made it clear in a speech on November 20th that he shares their concerns. Although it is still the world's biggest market for capital, America's lead is shrinking fast in almost every area (see article). In some it has been overtaken. The most spectacular collapse has come in the market for initial public offerings (IPOs) of shares, where the New York exchanges, miles ahead a few years ago, now trail behind London and Hong Kong. American stockmarkets are actually shrinking as domestic firms go private or buy back their shares; and it isn't helping that foreign firms choose to list elsewhere. This raises two questions. How has America's status as the world's sole financial superpower been eroded? And what, if anything, can it do to turn this around? Onward, capitalist soldiers 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. But America is also responsible for its financial markets' decline by tangling them up in red tape. Nowhere is this clearer than the Sarbanes-Oxley act, an overhaul of corporate governance passed in 2002 in the wake of the Enron scandal. It's not all bad: parts of the law have successfully increased accountability to shareholders, and have been copied by regulators elsewhere. What's more, there is evidence that such rules lead to higher stock valuations because they suggest a commitment by managers not to abuse shareholders. But Sarbanes-Oxley went too far. The notorious section 404 on internal controls greatly increased the reporting burden on companies. Smaller firms, in particular, suffer. 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. More economists, please Towards shareholders, to start with. 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. Sadly, this is tied up in the much broader tort-law problem that bedevils American capitalism. 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. Will America sort out its problems before the rot goes too far? The review of Sarbanes-Oxley shows the world's largest economy is aware of its shortcomings, and responding to them. Both parties recognise that reform is needed; though there is a danger that rising anti-business feeling (see article) may persuade the lawyer-friendly Democrats otherwise. Still, even if reform fails and America falls behind, there will be compensations. Diversification has provided big financial institutions with a hedge against national decline, and it continues apace. The New York Stock Exchange is buying Euronext, a big European exchange, and sounding out the Tokyo bourse. NASDAQ, meanwhile, has launched a hostile bid for the London Stock Exchange (see article). And New York's investment banks are minting money overseas, not least from all those IPOs that have gone elsewhere. To many American capitalists, geography has never seemed less important—though that should not stop them untangling Wall Street.