Is Wall Street Losing Its Luster?
Markets abroad are making inroads
One by one, American industries are finding more fertile ground overseas. In industries from textiles, steel, and automobiles to high-tech electronics and software design, America no longer reigns supreme. And now some worry that America's crown jewel, Wall Street, is on its way out, too.
The hand-wringing is about the rapid growth of overseas financial markets. Everyone from President Bush to New York City Mayor Michael Bloomberg has weighed in, complaining that overseas competition, combined with overregulation at home, will leave America behind the curve.
"The financial markets are a cornerstone of New York State's economy," said new Gov. Eliot Spitzer following the release of one study casting doubt about their future. But "we are in danger of losing our pre-eminence as the financial center of the world."
Those are high stakes. But there is a good deal of debate over whether Wall Street really has anything to worry about. "I think the relevant data [have] been very overplayed so far," says Joel Seligman, president of the University of Rochester and a member of the board of governors of NASD, a private-sector securities regulator.
Those calling for change can indeed point to recent studies noting alarming trends. The Committee on Capital Markets Regulation says that America is losing stock listings, financing, and trading to other markets, in part because of "the growth of U.S. regulatory compliance costs and liability risks." Another study, commissioned by Bloomberg and New York Sen. Chuck Schumer, warns that a "thicket of complicated rules" could mean the New York-based financial services industry will lose out on up to 60,000 new jobs if something isn't done.
Looking at the top 20 global initial public offerings of stock, the market data firm Dealogic notes that only two of these IPOs—for MasterCard and KKR Private Equity Investors—went public in the United States last year, compared with nine in 2000 and 12 in 2001.
Treasury Secretary Henry Paulson will delve into what's affecting the competitiveness of U.S. capital markets at a conference in Washington, D.C., later this month. The U.S. Chamber of Commerce, which has railed against many of the post-Enron regulations—such as the Sarbanes-Oxley law, said to be at the crux of the problem—is also planning to release its own report at around the same time.
But folks are not unanimous on whether IPO numbers—or anything else presented so far—mean that America has become uncompetitive. While some companies are chafing at the high stock underwriting fees charged in the United States and a few have complained of regulatory hurdles, Thomson Financial recently noted that there were more foreign IPOs in the United States last year than at any time in the past 20 years, which hardly signals a regulation-induced flight.
And it's possible that some of the firms listing overseas would not be that welcome here. "There are an awful lot of dodgy companies that are being floated overseas that would never be allowed over here," says Jim Chanos, chairman of the Coalition of Private Investment Companies. "And that is a good thing."
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."
This story appears in the March 12, 2007 print edition of U.S. News & World Report.