Is Wall Street Losing Its Luster?
Markets abroad are making inroads
Meanwhile, Wall Street shows signs that it's doing just fine. Bloomberg's own study concludes that financial services in New York City, which make up 15 percent of its economy, were the city's fastest-growing sector from 1995 through 2005. Financial services grew at 6.6 percent annually over this period—almost double the city's overall growth rate.
Wall Street firms like Goldman Sachs, Lehman Brothers, and Bear Stearns posted record earnings last year, and their workers were showered with $23.9 billion in bonuses. Lloyd Blankfein's $53.4 million payment at Goldman marked the largest bonus ever received by a Wall Street CEO.
"There is not much evidence of a canary in the coal mine," says Prof. Harvey Goldschmid, a former Securities and Exchange Commission member who now teaches at Columbia Law School. Explaining that he's concerned that "extreme regulatory changes" are being advocated under the guise of protecting American markets, Goldschmid adds: "When you look at actual figures, initial public offerings are up recently, the premium given to companies cross-listing in the United States has increased, and in general, Wall Street is in very good shape."
Also, globalization of the markets far precedes America's post-Enron regulatory reforms. A recent Goldman Sachs report showed that while there has been a decline in the U.S. share of world equity market capitalization since the 1970s, the chief cause has been the rapid economic growth and natural maturation of overseas markets in places like London, Hong Kong, Shanghai, Moscow, and Dubai. In some areas, such as global foreign exchange, the United States has never dominated. That crown belongs to London.
This doesn't mean that the U.S. market is shrinking—far from it. It's just that other, newer markets abroad are growing.
"London, Hong Kong, and Dubai are all close to large emerging economies with growing pools of capital," the report concluded. "Trends that have supported the growth of domestic capital markets in countries like China—including privatizations, rising household wealth, aging populations, and improved corporate transparency and governance—are likely to occur elsewhere as well."
As last week's stock market swoon in China revealed, emerging markets remain a dangerous and volatile place to park your money. That volatility could slow the growth of these markets. However, for investors, access to relatively more mature global markets remains a good thing.
"From an ego standpoint, Wall Street is not happy with it, because Wall Street would prefer to do everything itself," says Sam Stovall, chief investment strategist at Standard & Poor's Equity Research. "But for the health of the global equities market, [this enlarging of the pie] is better, because what it means is you have secure markets around the world."
Ethiopis Tafara, director of the SEC's Office of International Affairs, adds that Sarbanes-Oxley-like reforms "have been undertaken in all the major markets," which is one reason for their maturation; the regulations make them more attractive to issuers and investors.
With the global market rapidly changing, now may be the wrong time to start chipping away at America's regulatory framework. The flurry of mergers and alliances among the world's stock exchanges will one day lead to truly combined markets. This greater reach, at a probably cheaper cost, could be good news for American investors. But it will also increase the prowess of, as SEC Chairman Christopher Cox recently put it, "high-tech securities swindlers [who] intend to exploit the fact that regulators can't always engage in hot pursuit beyond their borders."
Combating them will require greater cooperation among world regulators—last year the SEC signed agreements with its counterparts in London, China, and South Korea—and continuing improvement in the quality of regulation around the world, experts note. A rollback in U.S. regulation of its markets would buck that trend.
"If Sarbanes-Oxley went away, it would be a green light for the sharp operators to take advantage of the regulatory void," says Willamette University visiting law Prof. Meyer Eisenberg, who was deputy general counsel of the SEC from 1998 to 2006. "And it would, in effect, be saying that we have collective amnesia and can't remember what happened three or four years ago and how many people were blindsided by the Enron, WorldCom, and other scandals, which were the reasons for Sarbanes-Oxley in the first place."
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