As well as being rather good at making money, Warren Buffett has a talent for explaining complex problems in language any self-respecting executive can identify with. This week he got to work on the fading supremacy of America’s capital markets. In the heady years before the Enron scandal, the über-investor explained, American firms, auditors and banks sliced too many shots into the rough. The job of lawmakers and regulators was to steer them back on to the fairway.
But are they now pulling shots in the opposite direction? You would think so, judging from the increasingly voluble grumbling in recent months. Two weighty reports late last year bemoaned America’s loss of financial competitiveness, pinning the blame on everything from a culture of rampant litigation to the Sarbanes-Oxley law on corporate governance. This week, the noise reached a new pitch. First, on Monday, came a third hand-wringing tome, from the U.S. Chamber of Commerce, a business lobby group. On Tuesday Hank Paulson, the treasury secretary, assembled an all-star cast for a conference. And for anyone hungry for more, the Chamber put on a brainstorming session of its own on Wednesday, featuring Barney Frank, the head of the House finance committee. America remains home to the world’s largest and most liquid markets. But its lead is narrowing, worries Mr Paulson. This is partly due to financial improvements elsewhere, but also because of homegrown mistakes. He has made reform a top priority. His conference — which featured, among other luminaries, Mr Buffett, Alan Greenspan, Michael Bloomberg, Jeff Immelt, Arthur Levitt and Robert Rubin — focused on three areas of concern: regulatory structure, accounting and corporate governance.
Mr Paulson wants regulators to adopt a softer, more prudential system. It should rise above a “rules-based mindset that asks ‘Is this legal?’” and relies more on a “principles-based approach that asks ‘Is this right?’” There is, he added, not enough analysis of the costs and benefits of new rules. Moreover regulators have opted for expansion over efficiency.
Although the panellists agreed with this, by and large, they had priorities of their own. The Sage of Omaha railed against the pointlessness of much of the work done by audit committees (while joking that he does not get asked onto compensation committees because they prefer Cocker Spaniels to Dobermans). Mr Immelt chose to focus on the incomprehensibility of accounting rules. Mr Greenspan mused on the inherent inflexibility of financial regulation. Mr Levitt, a former head of the Securities and Exchange Commission (SEC), and Mr Rubin, who used to have Mr Paulson’s job, sparred over the class-action culture, the former seeing it as broadly good for investors, the latter as bad for everyone except lawyers. Mr Bloomberg, the mayor of New York, bemoaned America’s restrictive visa policy, which is depriving financial firms of talent. There was, oddly, scant discussion of the two most provocative proposals in the Chamber of Commerce’s report: to end quarterly earnings guidance (so listed firms can think more long-term) and to reorganise the SEC.
Investors treat these chin-wags with some scepticism. Where, they ask, is the discussion of America’s poor shareholder rights compared with Britain’s? Company owners have no vote on pay, for instance. Wall Street’s banking giants are more indifferent than frustrated. As they become more global, their home market’s fate seems less important to them. Goldman Sachs reported record quarterly profits even as Mr Paulson and his high-powered friends were gathering in Washington.
Others wonder whether America really does have much to worry about. Sarbanes-Oxley’s heavily criticised section 404, on companies’ internal controls, is already being loosened. The SEC is looking into a more principles-based approach to policing markets. Despite the much-lamented decline in initial public offerings, America still leads by a country mile in merger advice, hedge funds and so forth.
Indeed, it could do more to trumpet its strengths. Some of the firms listing in London and Hong Kong were unable or unwilling to meet the listing requirements of American exchanges. Those requirements generate a share-price premium over other markets (albeit one that has fallen a bit). Mr Levitt says he is sick of hearing about the strengths of Britain’s Financial Services Authority. He doubts it protects investors as well as its American counterpart.
Besides, no one expects big reforms soon. Bob Steel, a treasury under-secretary, accepts that on some issues the talking is likely to go on for years. Which leaves plenty of time for more conferences, more reports, and more slices and pulls.