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Unraveling Wall Street Reforms :

February 8, 2007 In The News

If you are to believe the former Goldman Sachs leadership triad of Treasury Secretary Hank Paulson, NYSE Group CEO John Thain and John Thorton, co-head of the recently created Committee on Capital Markets Regulation, America’s competitiveness is on the brink of extinction.

More recently, New York politicians – including New York City Mayor Michael Bloomberg, Sen. Chuck Schumer and, in one of the more classic examples of political flip-flopping, Gov. Eliot Spitzer, the former Wall Street crusader – have joined the fray. Their claim is that the record profits and $23.9 billion worth of bonuses Wall Street received this year are in jeopardy.
But if you choose to listen to another group, the Council on Competitiveness, led in part by Michael Porter, the venerable Harvard business professor and leading authority on global competition, you hear a different story, and certainly a more evenhanded solution.

Paulson’s committee includes Donald Evans, a former Bush Commerce Secretary who now heads a lobbying firm that represents the nation’s biggest financial firms; Robert Glauber, former chairman and CEO of the National Association of Securities Dealers; and the CEOs of two major accounting firms. Given the committee’s make-up, and knowing the charges and fines Goldman Sachs (nyse: GS – news – people ) racked up under Paulson’s leadership, it’s not surprising there isn’t one investor advocate on the committee.

Their solution: to fatten up the already outsized Wall Street pay packages by derailing post-Enron reforms and trampling upon the rights of individual investors. Among their other proposed “reforms” are severely limiting criminal and civil penalties for accounting fraud as well as eliminating a rule that allows individual investors to recoup losses from unscrupulous brokers through arbitration.

Paulson’s fingerprints can also be found at the NYSE, which is crying regulatory wolf. After Paulson was instrumental in installing Thain as CEO of the NYSE Group (nyse: NYX – news – people ), the once mighty exchange has dramatically lost its prestige. Yet Thain believes his leadership has nothing to do with the erosion of the NYSE’s market share, particularly in the initial public offering market. Like his former Goldman Sachs colleagues, he blames a heightened regulatory environment for the lucrative loss of initial public offerings. But the truth is that many of the recent IPOs overseas are floated by dubious companies, which Sarbanes-Oxley rightfully drove from the reach of American small investors.

Further, the companies that do meet the American standard for governance and transparency are understandably apprehensive because of the NYSE’s listing fees, which are much higher than its domestic and global rivals. In the past, those fees were justified, because an NYSE listing would generate increased institutional investment and floor traders could limit a stock’s volatility. But with the expected elimination of the bulk of its floor traders and loss of its regulatory function, the NYSE is fast becoming one of many electronic trading boxes – wiping out the value added.

The Capital Markets Regulation Committee insists that the NYSE’s listing fees are “trivial.” That might be true for multi-national corporations, but the smaller and medium-size companies that make up the IPO market would much rather spend that money elsewhere, say on research and development.

Which also happens to be the argument proposed by the aforementioned and more diversified Council on Competitiveness, led by a cross-section of thought leaders including Porter; Charles O. Holiday, CEO of Dupont (nyse: DD – news – people ); and Douglass McCarron, president of the International Union of Carpenters and Joiners of America, among many other representatives from business, labor and academia.

It’s unfortunate that lost amid the Paulson committee’s Wall Street money grab is the Counsel on Competitiveness’ bipartisan effort to pass the National Competitiveness Investment Act, which seeks to improve the United States’ competitiveness through increased investment in innovation and education in math and science. Also buried is the recent release of Porter’s “Competitive Index: Where America Stands,” which shows that the U.S. “is better positioned than perhaps any other country to benefit from the forces that are reshaping the global economy.”

Admittedly, some members of the more enlightened Council on Competitiveness may believe that post-Enron regulations are more onerous and prohibitive than regulations overseas. But while legitimate arguments perhaps can be made to relax some elements of Sarbanes-Oxley, the discussion and decision-making should not be driven by those whose previous collective misdeeds the legislation was designed to thwart.