The US looks poised to lose its mantle as the world’s dominant financial market because of a rapid rise in the depth and maturity of markets in Europe, a study suggests.
The change may have occurred already, not least because US markets are beset by credit woes, according to research by McKinsey Global Institute, a think-tank affiliated to the consultancy.
“We think the differential growth rates are so significant that it is quite likely Europe has overtaken the US,” said Diana Farrell, author of the report.
“They are now neck and neck, which means exchange rates are very important. It is a real change.”
Thank McCain Feingold for this problem. It has caused many companies, like Halliburton, to move offshore rather than deal with the resultant red tape. Several pieces in the WSJ have confirmed this as a major problem.
Don’t you mean Sarbanes-Oxley? SarbOx is my particular bugbear, at least.
One thing that has been noted to me by people in the financial sector is the time differential advantage of London over New York. London has a five-hour time advantage over New York, which makes it much more convenient to communicate with parties to financial transactions in East Asia, where many deals are being done currently. For example, a London-Hong Kong conference call can occur during normal business hours for both parties (9 a.m. in London and 5 p.m. in Hong Kong). A New York-Hong Kong call, where there is a 13-hour time differential, cannot–one of the parties has to stay up very late or get up very early. This is a “plus” factor that can tip a decision to use London over New York.
The most controversial provisions of Sarbanes-Oxley require a firm’s CEO and chief financial officer (1) to certify that they’ve designed the firm’s internal controls “to ensure that material information relating to the company” is made known to those officers; and (2) periodically to evaluate and report on the effectiveness of those controls.
These are reasonable requirements. So is the requirement that the CEO and CFO certify that the firm’s financial statements fairly present the firm’s financial condition (a requirement that has, incidentally, long applied in Britain).
Sarbanes-Oxley problems result not from the law itself but from how accounting firms have implemented the internal-controls provisions—notably with boatloads of costly nitpicking. That’s what produces the red tape. The irony is that Sarbanes-Oxley was itself a response to poor auditing and abusive conflicts of interest by those very same accounting firms.
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Ideological bias pervades the Wall Street Journal’s attacks on Sarbanes-Oxley. Many of those attacks make no distinction among the various provisions of the Act, but treat it as a single, undifferentiated whole.
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As for causes, remember that the huge fiscal and trade deficits that render the United States a large and chronic importer of capital. On balance, we do not furnish capital; we borrow it.
Steven [#3]: Good points about time differentials.
#4 is right – SarbOx is fine in principle, but the details of implementation are a pain (and ironic, giving more power to the very people who turned a blind eye and even enabled Enron). But it is also old news. The real advantages of Europe (London in particular) are (a) less saber-rattling by government toward hedge funds and private equity which often provide liquidity when other sources dry up, (b) much deeper bond trading activity, and (c) less dollar exposure. And let’s not forget that Europe (again, particularly London) is much more hospitable than New York to oil money from the Gulf region.
Here is a link to the McKinsey study, which requires registration to access. Exhibit 3.4 has the 2006 comparison information used for the FT article. Comparing this exhibit to the previous one (3.3), which has the comparative data for 1999, shows that the total U.S. financial assets have been growing signifciantly, but not as fast as Europe. Specifically, in 1999 total U.S. financial assets were $38.444 trillion versus $56.129 trillion in 2006. The European countries were $26.346 triliion in 1999 versus $53.238 trillion in 2006. As happens in so many news articles that report economic data, numbers showing relative trends are re-cast as suggesting an absolute decline. In the end, the development of robust overseas financial markets is only a good thing for the United States.
Excuse my earlier mis-identification of Sarbanes-Oxley.
Ken Starr, back at the end of 2006, suggested in the WSJ that Sarbanes-Oxley was unconstitutional: ” In short, the gov’t’s theory seems to be: ‘ Why worry ? There are no real problems here. If there are, the SEC can take care of them. ‘ But our constitutional system is not structured that way. Unelected commissions should not have the power to regulate, tax and even punish companies. “
Blaming Sarbanes-Oxley is ridiculous. The government has rejected a balanced budget. It has decided that manufacturing jobs in this country shoudl be outsourced. There is no plan for greater job creation.
Mr. Wilkins, you have either a brilliant view of things or you are very narrow-minded. I think the operative words ” supply and demand ” rather than ” the government ” should be applied.
Politically and organizationally, SOX is problematic. However, in one of those examples of unintended consequences, it has the potential to achieve something which is at present unimaginable (by most people). That is a complete revamping of the way that we process and handle stored data. Because of its requirements to audit the acquisition and manipulation of information, it will eventually produce systems which are designed more round the provenance of data rather than their content.
In a world which is currently swamped with misinformation, and which possesses a vehicle – the internet – that permits the effect of this to be magnified exponentially, the long term effect of this will be huge.
Wise counties never stand on their laurels and wait for the rest of the world to catch up (which they invariable will). Rather they embrace the challenges to inventing the new technologies that the world doesn’t yet know that it needs. Because of their focus on short term profits and quarterly earnings reports, most companies lack the vision and capital to do this. It usually takes a political commitment (however misguided or transparent) to provide the necessary incentive (and/or funds).
In the long run (if we are smart), Sarbanes-Oxley will prove to have been a huge blessing in disguise.