The cause of the current financial crisis on Wall Street runs much deeper and is far more complex than is commonly believed. The disastrous effects of the sub-prime mortgage fiasco is merely the final straw which broke the camel’s back.
Sarbanes-Oxley, the ill-conceived, knee-jerk reaction to the accounting scandals of a few years ago, has caused significant damaged to the US financial services industry and is the single largest contributing factor to the turmoil currently taking place on Wall Street.
Sarbox, at it is familiarly known, has made listing in the US far less attractive to both domestic and foreign issuers and has driven IPOs, and their investment banking fees, overseas.
Although various studies have been put forth to demonstrate that Sarbox has had little or no negative effect on the US economy, those studies fail to take into account various subtle and complex latent factors, such as the Acts impact on the US investment banking sector. Although opponents of big business have focused extensively on the sub-prime mortgage crisis, they seem to be missing the bigger picture.
Certainly bad loans are a large part of the meltdown currently takFing place on Wall Street, however they are not the main factor behind the collapse and sell-offs of Lehman, Merrill Lynch and other venerable banking institutions.
During the 1980s and 1990s, the vast majority of the world’s 25 largest IPO?s were listed in the US. In 2006, however, of the top 25 global IPOs, only two were registered in the US and every one of the top ten were registered abroad.
For the first 11 months of 2007, approximately $255 billion was raised via 1,739 IPOs globally. But of those deals, only 178 IPOs were listed in the US, comprising a mere $39bn of the total raised.
At the larger investment banks, which usually act as bookrunners on these IPOs charge fees in the range of 7 per cent of proceeds, billions of dollars in underwriting fees have been lost since Sarbox came into effect in 2002, precipitating the investment banking failures we see today.
This is not the first time in Wall Street’s history that the investment banking sector has made bad investment decisions, however it is the first time Wall Street has done so without the support of large profits to help offset these poor decisions. As the results speak for themselves, it can no longer be disputed that the U.S in passing, and failing to repeal Sarbanes Oxley, is
regulating itself out of the financial services industry.
Needless to say, a strong investment banking sector is vital not only to the national and international economies, but to America’s role as a world leading nation.
John Maalouf is the chair of Maalouf Law, a New York-based law firm with offices in London, Hong Kong, Boston and Shanghai.