Wall St crisis? Blame SarBox
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.
Readers' comments (18)
Christian Muller | 19-Sep-2008 6:44 pm
SOX
Sarbox is better know in the financial world as SOX. The regulations for these have been relaxed somewhat over the last 2 years, but regardless, all of the documented processes needed to comply with these regulations are not "new" requirements. They are rules that should have always been followed by any good financially minded company. The burden of SOX comes in the formal documentation adn regular testing of the newly required regulations.
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mmoor | 21-Sep-2008 1:46 am
Oh please!
Spoken like someone that does not have ANY clue of what is happening. SarBox did not have, does not have or will not have any impact on the goings on of Wall Street. Wall Street's woes can be traced directly to the repeal of the Steel-Steagall Act in 1999 (yes this a REPEAL of regulation). Without this law, the line between commercial and investment banking was abolished and fiascoes that we are now experienced were allowed to happen. What next, SarBox causes AIDS????
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John Dong | 21-Sep-2008 5:53 am
Good article.
timely opinion from a legal view.
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Kevin Crosthwaite | 21-Sep-2008 9:29 pm
Wall St. Crisis
John, I hope you send your article to all of the brilliant minds we have in the financial community, our current administration and by the way our presidential candidates. I am certain it would open many eyes. It certainly opened mine.
Thank you.
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Anonymous | 22-Sep-2008 12:02 pm
International Presence
Sarbox may have reduced listings in the US (helping London become the pre-eminent financial centre), however the investment banks long ago realised that they could make money on listings elsewhere, that is one reason why they have/had a global presence - including in particular in London (Lehman's £8bn in revenue just before insolvency sent to the US!?).
Please check on what proportion of those 1739 listings one of the five main US Investment banks acted as bookrunner/advisor. Then provide your comments. I think we will see it was not necessarily Sarbox that caused the problem.
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Sharaf Dabbagh | 22-Sep-2008 7:10 pm
Enlighting
I have learned more about the issue now, Thank you for your enlightening article.
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Alice Chancellor | 24-Sep-2008 4:03 pm
Excellent Article
Brilliand and insightful article, great analysis and the author is not afraid to tell the world and our leaders the truth behind this fiasco. I wish the author was running for public office.
I noticed that the one vulgar person who disagreed with the article was so uneducated and ignorant that he didn't even know the name of the Glass-Steagall Act he attempted to discuss (he called it Steel-Steagal), clearly his lack of understanding and knowledge doesn't stop at not knowing the name.
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Charlie Zhang | 24-Sep-2008 10:24 pm
Excellent Article
Excellent article, it is so true. I'm a lawyer in Beijing and there are so many Chinese enterprises that want to list their IPO’s in the US rather than in London or Hong Kong, but end up choosing another location because of Sarbox. For example, one of the largest software companies in China last year canceled their planned listing at NASDAQ as a result of Sarbox.
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Joshua Greenstein | 25-Sep-2008 5:39 pm
Fantastic Article - Editor please forward to our leaders
John Maalouf and Alan Greenspan are two of the only people who appear to have an understanding of this financial crisis. Fantastic article, please forward this to our leaders and presidential candidates.
I noted that one earlier commentator is under the mistaken impression that the U.S. investment banks such as Lehman that have offices in the U.K. made profits regardless of where the IPO’s were taking place, that is mostly incorrect. When the IPO’s left the U.S., after Sarbox (or SOX as some non-financial people like to call it) came into effect, many of the U.S. investment banks tried to follow, however they were for the most part unsuccessful.
The analogy would be losing $100 but finding a quarter, they made a very small amount of money overseas and John is right, they lost billions every year. This is why Morgan Stanley and Goldman are converting to commercial banks, in order to generate a new safe and steady stream of income to replace the lost IPO fee income.
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Mike | 25-Sep-2008 5:44 pm
Crisis isn't about IPOs
This isn't about SarBox, it's about sub-prime mortgages and derivatives. Lenders lent to people they shouldn't, then no-one understood where the losses were going to end up. Where IPOs take place is small beer in comparison.
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Steve Jones | 26-Sep-2008 11:30 pm
Extremely Insightful Look At Wall Street Crisis
Superb article, an extremely insightful look into the crisis plaguing Wall Street. Mr. Maalouf is exactly right, without the IPO revenue, which the investment banks were deprived of by Sarbox, Wall Street could not afford the losses from the risky investments in the subprime mortgage sector.
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Ed Tenant | 29-Sep-2008 3:05 am
excellent article
Sarbox is the greatest single threat to the U.S. financial services industry, what we need is to repeal this poorly thought out piece of legislation which only hinders the finance sector from acting efficiently, excellent article.
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Mr. Best | 27-Oct-2008 0:16 am
NFA does it again now for Forex
We haven't learned our lesson. This week the NFA and congress regulators fired anther dart into a much less known industry but as damaging will be the result. Brokers aka FDM's in foreign exchange "FX" until a year ago could participate as market makers with as little as 1mm. Now the industry has decided in the name of regulation and for the good of the people it should be 20mm. I have been in the industry now for 10 years and know many many brokers that will simply leave the country looking for a more capitalist society. If you don't think this matters you should know that the industry is about 60 billion a day in trade volume. All going off shore now!
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Skeptic | 13-Nov-2008 9:47 pm
What?
Sarbox did about as much to "cause" this crash as weak breaks would in a car driven by a drunk.
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Anonymous | 21-Nov-2008 6:54 pm
The regulators never learn
Exactly right, the regulators never learn. They keep over regulating the market and fail to see the negative ramificartions of their actions.
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Alistair | 23-Nov-2008 2:02 pm
Really!!!
It is a sad fact that business does not like being monitored but really needs it. SOX benefitted those businesses who complied because it exposed areas where controls were deficient.
The IPO's that failed to materialise obviously did not want these deficiencies exposed. Also, it is not only the American banks that are suffering now. Where are the foreign bank profit cusions they got from the IPO's America missed out on?
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Anonymous | 1-Dec-2008 2:29 pm
Sarbox is responsible for the decline in the IPO market
Sarbox is one of the greatest contributors for the decline in the US-IPO market. The section 404 of Sarbox is the most contentious aspect of the legislation requiring management and the external auditor to report on the adequacy of the company’s internal control over financial reporting (ICFR).
It is also the costliest aspect of the legislation for companies to implement. It involves the documenting and testing of the important financial controls both manual as well as automated, which in turn requires enormous resources of the company in terms of infrastructure and manpower allocation.
It requires an upgrade to the corporate IT infrastructure to comply with all the reporting requirements as required by Sarbox. Implementing SOX section 404 could potentially cost a mid-sized company approximately 5% of total sales revenue in the first year and approximately 2.5% of total sales revenue every year thereafter.
No wonder the accounting firms love SOX as it contributes to a fat portion of their total revenues for consulting on implementing and reporting requirements for Sarbox.
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Jared A. Carrington | 25-Feb-2009 2:19 pm
Brilliant Article
Brilliant article, Mr. Maalouf has hit the nail exactly on the head. The U.S. has regulated itself out of the investment banking industry, Wall Street as we know it is gone and now the country is suffering. Mr. Obama perhaps you should consider nominating Mr. Maalouf as your new Secretary of Commerce, he seems to be one of the few people who understand the cause of the current crisis and therefore how to solve it.
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