Escape From New York

November 10, 2006 Topic: Economics Tags: PostmodernismSociology

Escape From New York

Mini Teaser: Over-regulation chases capital overseas—with negative repercussions for the U.S. economy.

by Author(s): Maurice R. Greenberg

Politicians in Washington have a tendency to define "national security" in terms of external threats to the country, such as terrorism, and to think of U.S. power as primarily defined by military force. In so doing, they often neglect the economic component of national security. Moreover, they can be oblivious to their own complicity in passing legislation that ends up having a negative impact on the vitality and health of the U.S. economy.

Without a dynamic economy that creates jobs, generates tax revenues, fosters technological innovation and-very importantly-attracts both domestic and foreign investment, America's ability to sustain its global position and competitiveness, including but not limited to its military superiority, is jeopardized. One cannot-and should not-divorce the health of the country's economy from its national security.

However, a trend that seems to have gone largely unnoticed in Washington-although it is of great concern here in New York-is the increasing preference of companies to move out of U.S. financial markets for more attractive locations overseas in order to raise capital. In 2001, 36 percent of the world's initial public offerings (ipos) were undertaken in American capital markets. Four years later, we had lost one-third of our share of the ipo market-the U.S. share in 2005 had fallen to 24 percent. More significantly, it is no longer automatic that the world's largest ipos (in dollar amounts) occur within the boundaries of the United States. Increasingly, London and Hong Kong are seen as the premiere locations to do business. In 2005, of the 25 largest ipos worldwide, only one took place in America. Nine were listed on European exchanges; five  others were in London; even Australia, a country we usually do not consider a center of global finance, had three.

At the same time, major American companies are "going private"-buying back their stock and de-listing themselves from the U.S. exchanges. Koch Industries has purchased Georgia-Pacific; this deal, valued at $13 billion, has made Koch the largest privately held company in the United States (as ranked by annual sales). hca, the largest operator of hospitals in the United States, has a $21 billion plan to take itself private.

The marketplace is sending a very clear signal. The culture of over-regulation-and the Sarbanes-Oxley legislation is a very prominent example of this-is imposing untenable burdens on public U.S. companies that are listed on American exchanges. New companies choose not to list here. Existing companies go private and then are free to go overseas in search of fresh capital. And for companies that cannot go private, managers are increasingly losing their appetite for risk and innovation, settling too often for what will keep them out of trouble rather than doing what will make their companies succeed.

It is amazing that politicians, faced with these realities, will shrug and ask, "So what?" Who cares if twice as much foreign equity is traded in London than in New York, or that London's Alternative Investment Market (aim) is now the leading market for smaller companies-with a growing number of U.S. companies listed there? For one thing, it means that talent that previously was attracted to New York is lost to overseas competitors. Moreover, the diminishment of U.S. capital markets injures the health of the American economy. And an over-regulated economy, which sends the message to business to avoid any risk and places a premium on compliance as opposed to rewarding innovation or growth, is dangerous for America's future. The United States cannot survive as a nation of service industries; our competitive advantage in the global marketplace is our ability to create the new products that the world will need and that only the United States can provide.

Many of America's leading companies could not have been built in the current regulatory environment. This speaks volumes in and of itself.

Let me be clear: I am not an advocate of de-regulation-I am an opponent of over-regulation. I have always stood for what I termed in an op-ed I wrote for the Wall Street Journal as "enlightened regulation"-a "regulatory scheme that demands transparency and fairness without stifling free enterprise and innovation."

But some in Congress seem to think that the solution lies in the extension of U.S. regulation overseas; that, if U.S. firms purchase exchanges in other countries, the provisions of the Sarbanes-Oxley regulations can be applied to their trading operations as well. We have already received a clear message from the British: If the London Stock Exchange is bought by Americans, they will not permit any imposition of Sarbanes-Oxley provisions to firms that list there. The reality is that the rest of the world is not always going to follow the lead of the U.S. Congress. Britain's Economic Secretary to the Treasury, Ed Balls, has made it clear that the British government will protect its markets from any "heavy-handed and inflexible" regulation being imported from abroad, noting that the uk Financial Services Authority would continue "to safeguard the light touch and proportionate regulatory regime that has made London a magnet for international business."

And when the U.S. Congress plays politics with business, this also has a profoundly negative effect. We are still feeling the consequences of the whole Dubai ports debacle. Even though port security is handled by the Coast Guard, not the owners of the port facilities, members of Congress whipped up so much opprobrium over the deal that it fell through. It didn't make our ports any safer, and overseas capital that might have been invested in the United States is being redirected to other markets perceived to be friendlier. Trade and investment are not one-way streets. How we treat others is the way we must expect them to treat U.S. companies.

Nor is the rest of the world going to sit back and not take advantage of the U.S. predicament. Peter Weinberg, a former ceo of Goldman Sachs International, wrote in the Financial Times earlier this year:

"The U.S. financial markets enjoy an enormous incumbency advantage as the largest, most liquid and most transparent in the world. However, current trends present a unique opportunity for the City to take a big step forward, by making itself as appealing as possible to enormous flows of foreign investment capital, and driving down the cost of doing business through consolidation."

And we should pay attention to what Balls said on his recent trip to Hong Kong-calling for a "strengthened partnership" between the "two leading global financial centers" of London and Hong Kong. This has profound implications for the future. Already, major Chinese companies seeking a non-Chinese listing tend to go to London-major firms such as Sinopec and Air China are listed both on the Hong Kong and London exchanges. And the world's largest expected ipo will be the listing of the Industrial and Commercial Bank of China in Hong Kong.

New York isn't going anywhere anytime soon, but how does the United States benefit if New York becomes the equivalent of Frankfurt-a major regional center, to be sure, but no longer the indispensable global exchange? It certainly means that the United States will increasingly have to turn to overseas centers to fund its capital and current account deficits; it also means that, over time, non-U.S. currencies will become more of a commodity in international capital markets, helping to erode the supremacy of the dollar.

Congress keeps worrying about the next 9/11 attacks as the major challenge to U.S. security-and they should be commended for this vigilance. But for the long-term security of this nation, politicians must also avoid steps that strangle the American economy-and jeopardize the very foundation of American strength.

Maurice R. Greenberg is chairman and ceo of C. V. Starr & Co.

Essay Types: Essay