Wall Street, Washington Huddle on U.S. Markets
Wednesday, March 14, 2007
The bulls of Wall Street converged on Washington yesterday, clogging narrow Georgetown streets with black-windowed Town Cars as they met to discuss the worrisome state of the U.S. markets.
But at the same time Treasury Secretary Henry M. Paulson Jr. and such financial luminaries as the leaders of J.P. Morgan Chase, Charles Schwab and the New York Stock Exchange fretted about losing ground to international rivals, one of the nation's largest investment banks reported a record first-quarter profit.
The irony was not lost on Warren E. Buffett, described yesterday by Paulson as "the world's best known and most successful investor" and a man who has "forgotten more about capital markets than any one of us has known to begin with."
For his part, the Oracle of Omaha (and in full disclosure, a Washington Post Co. board member) said business leaders brought government scrutiny on themselves after numerous scandals shook investor confidence. During calls to loosen rules on companies and accounting firms, Buffett pointed out that corporate profits have never been higher as a percentage of gross domestic product. "That cannot be regarded as a broken capitalistic system," he said at the Capital Markets Competitiveness Conference.
Earlier, inside the grand Georgetown University meeting hall, surrounded by rich red and blue stained-glass walls and Catholic imagery of sacrifice, Paulson opened the program with a call for "more rigorous cost-benefit analysis of new regulation."
Most of the speakers, from institutional investor advocate Ann Yerger to Clinton-era Treasury secretary Robert E. Rubin, seemed to agree that rules adopted five years ago, after the Enron debacle, could use at least minor tweaking. Costs for accounting reviews remain high, and corporate board members spend too much time on process as opposed to substance.
The harmony mostly ended there. Supporters of the movement to streamline regulation cited statistics showing that a smaller number of public companies chose to list their stocks on U.S. exchanges in the past few years. But the data reflect a decade-long trend and do not consider the rising tide of globalization or the fact that U.S. investment banks are continuing to profit from underwriting fees no matter where the stocks are listed, several speakers said.
Former Securities and Exchange Commission chairman Arthur Levitt posited that arguments advanced in three industry-funded reports about America's losing record on initial public offerings were "specious." He went on to declare himself "really impatient" with industry pleas to import British-style oversight. Regulators in Britain bring a handful of enforcement cases each year, while U.S. watchdogs file more than 600.
Panel members gently clashed on whether it is too risky for executives to sign off on the accuracy of their financial reports in the current climate, with J.P. Morgan Chase chief James Dimon calling the U.S. litigation system "a crapshoot" in which executives' actions are reviewed in hindsight and companies can lose but never win.
Yet a short while later, former Federal Reserve Board chairman Paul A. Volcker said that forcing executives to sign on the dotted line promotes a strong dose of accountability. His successor, Alan Greenspan, cheerfully interjected that "You could go to jail" in the event of phony financial filings. "Some of the stuff that's gone on in recent years is outrageous," Greenspan said as he recommended even harsher penalties against executives who threaten investors' belief in fair play.
There was universal agreement that consensus and action on the most intractable issues, including whether to impose more curbs on class-action lawsuits, would be difficult to achieve with Democrats in control of Congress and with less than a year before campaign 2008 is likely to induce a regulatory stalemate.
"I don't think our political system is capable right now of engaging in cost-benefit analysis," said Rubin, now a board member at Citigroup.
Seizing the spirit of competition, Yerger, the investor rights advocate, urged business to consider adopting European policies that allow shareholders to offer advisory votes on executive pay and to nominate board candidates, an anathema to industry groups. No one on the panel seconded her motion.
A select group of 50 delegates spent the rest of the day sequestered behind closed doors to entertain proposals to streamline regulation, introduce new protections and competition among audit firms, and stamp out aggressive class-action lawsuits.
It was, attendees later reported, only the beginning of a long-running conversation about the power -- and the limits -- of American business interests.