Robert Reich on American Capital Markets

I too have trouble worrying about American capital markets as long as its players are earning so much money. For an example on this latter point, see:

http://online.wsj.com/article/SB116614488587050944.html?mod=home_whats_news_us

or

http://dealbook.blogs.nytimes.com/2006/11/22/wall-street-and-the-penthouse-effect/?excamp=GGDBwallstreetbonuses



A private-sector group called the Committee on Capital Markets Regulation has just offered up a number of measures to ease up regulatory burdens on companies that list their shares publicly in the US, in order that the US financial market stays competitive internationally. The group has the support of Treasury Secretary Henry Paulson, who has also fretted publicly about American stock exchanges becoming uncompetitive because of too much regulation.

But the idea that American capital markets are losing their competitiveness is total nonsense. Returns to the financial sector in the U.S. are higher than in any other sector of the economy, and now higher than ever before. Investment bankers are awash in money. So are hedge fund managers, private-equity managers, the managers of large pension and mutual funds. Year-end bonuses will hit a record.

Uncompetitive? What are they talking about?

It’s true that the percent of big global initial public offerings listed on U S stock exchanges is declining while the percent of IPOs done through financial centers in London, Hong Kong, and elsewhere is rising. This year, the U.S. accounted for 28 percent of all new equity raised in the world’s largest financial markets, down from over 40 percent in 1995.

That doesn’t mean Wall Street is becoming uncompetitive. Capital markets are now global. So of course other financial centers are going to gain a larger share of IPOs. Meanwhile, Wall Street is doing deals all over the world. Mergers and acquisitions in Europe, China, Latin America. Hedge funds taking in money from all over the globe.

American capital markets are fully competitive. America is still the world’s largest magnet for foreign capital. Foreign investors held over $2 trillion of US stocks last year, more than the total stock market capitalization of all other markets except the UK and Japan.

In fact, foreign companies that list both on a US and a foreign stock market typically trade at a premium over foreign firms that list only outside the US. Why are investors willing to pay more for listings in the US? Because the US capital market is more stable and transparent, and its tough accounting standards give investors better protection. In other words, because of the very regulations that the Committee on Capital Markets Regulation wants to get rid of.

The Committee has come up with a bad solution to a problem that doesn’t even exist. Hank Paulson should disregard their report. To paraphrase an old saying, if it aint broke, don’t break it.