Yet it is not quite as simple as that. Although capital flows more easily, there are additional costs in raising money overseas. And successful financial markets create a “cluster” effect of businesses servicing them. Hence it is in America’s interest to encourage a vibrant domestic capital market. And if it raises its game, other centres will have to do the same, which would benefit companies everywhere.
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.
Whatever the causes, the numbers bear out America’s slippage. It is still well ahead of Europe in hedge-fund and mutual-fund assets, securitisation, syndicated loans, and turnover in equities and exchange-traded derivatives. In all but one of these, however, the gap narrowed in 2005. Europe’s corporate-debt market overtook America’s last year, although America still leads in high-yield “junk” bonds, a distinction less dubious than it once was.
The loudest sucking sound has been in the market for initial public offerings, a crucial barometer of financial wellbeing. America’s share (measured by proceeds) has collapsed since the late 1990s. Five years ago the New York Stock Exchange dwarfed London and Hong Kong. This year it is being beaten by both.
Luigi Zingales, an economist who sits on the CCMR, says the figures suggest something fundamental has changed. He thinks the best guide to the competitiveness of America’s markets is the behaviour of overseas firms that choose to list their shares at home and abroad. Even after stripping out factors that might skew the result, America’s share of these “cross-listings” has fallen substantially in the past five years. Yet of the growing number of firms which are no longer cross-listing in America, more than 90% still choose to market their shares to investors in the United States under a rule known as 144A. This gives them access to the American market, but without the full registration and compliance costs.
Domestic firms are also fleeing the glare of public markets. According to Dealogic, more of corporate America was taken out of public ownership by private-equity firms (spending $178 billion) in the first ten months of this year than in the previous five years combined. Some cite Sarbanes-Oxley and other post-Enron costs as a reason, although, to be fair, private-equity is booming in the rest of the world, too.
Wall Street’s rivals are fighting harder for business. London is now the world leader in the trading of foreign-exchange and over-the-counter (off-exchange) derivatives. It is seen as the natural home for firms from emerging markets: big Russian companies prefer to list there. Goldman Sachs is beefing up its London office, adding functions that it currently has only in New York. Hong Kong has benefited from the emergence of China and become an intra-Asian centre for capital-raising as well as trading. There is also fierce competition to lead regional financial markets, especially with a flashy bid from Dubai to dominate the Middle East and its oil money.