Bluff and Bluster?

The latest doomsday report about the future of the U.S. capital markets doesn't tell the whole story.

In January, a lengthy McKinsey & Company report, commissioned by New York City’s mayor, Michael Bloomberg, and senior senator Charles Schumer, lamented the prospect that the U.S. “is jeopardizing its lead in talent and falling behind in legal and regulatory competitiveness” compared with competing financial centers, such as London and Hong Kong. Was the consultancy’s report just part of a blusterous lobbying campaign on behalf of Wall Street or do Bloomberg and Schumer have a case?

The report makes some sensible points. It calls for clearer guidance from regulators on Sarbox — even for exempting foreign companies that comply with SEC-approved foreign regulatory regimes — as well as for securities law reform, and a shared set of principles for regulators to guide rulemaking and company conduct.

But what of the underlying data that McKinsey uses to support the idea that America is losing ground? True, America’s share of global IPOs has declined in the past few years, but there are forces other than regulation at play. Many of the biggest recent IPOs — Russian oil company Rosneft and Industrial & Commercial Bank of China, for example — have been privatizations where London and Hong Kong had a number of obvious natural advantages.

It’s also the case that, by virtue of being so large, New York’s exchanges have been disproportionately affected by certain global trends, such as a move towards private ownership and a declining requirement for multiple listings. London has been hit by these factors too.

Indeed, American capital markets have benefited from a private equity-driven tilt towards debt capital. Since 2002 — when Sarbox was introduced — the number of European companies going to the U.S. to raise debt capital has increased by 77 percent, and the volume of debt raised was up from $174 billion in 2000 to $396 billion in 2006, according to market tracker Dealogic.

In any case, predictions of mass delistings have failed to materialize, and those that have delisted rarely cite onerous regulations. Of the 12 European companies that delisted from the New York Stock Exchange in 2006, nine were because the company was taken over. Of the remaining three, French media and telecoms group Vivendi claimed it delisted to save costs — trading in its shares had dropped sharply since it reported huge losses in 2002, and particularly since it sold 80 percent of its entertainment division to GE in 2004. Tatneft, an energy company controlled by the Russian state of Tatarstan, delisted after repeatedly failing to submit audited accounts on time. Espirito Santo Financial Group, a Portuguese family-controlled company, cited increased costs of complying with U.S. regulations. But, more importantly, trading volume of its shares through Euronext (after it absorbed the Lisbon exchange) was six times greater than through the NYSE.

In the end, it may not have taken a 138-page McKinsey report to prove that Wall Streeters, if asked, will always plump for lighter regulation.

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