Tuesday, November 07, 2006

What’s wrong with the “NY-Lon debate”

I’ve been too grumpy to write recently because of a case of bubonic plague (or a nasty cold — can’t quite figure out which at the moment). However, an op-ed in the Financial Times today (“The NY-Lon Debate”) forced me away from my hot toddy long enough to get even more grumpy.

The FT notes a recent Wall Street Journal op-ed by New York City Mayor Michael Bloomberg (a Republican) and New York Senator Charles Schumer (a Democrat) (“To Save New York, Learn From London”). This op-ed demands changes to the Sarbanes-Oxley Act, U.S. shareholder litigation rights, and U.S. accounting standards (where did that come from??) in order to allow New York to fight back against the London onslaught on our financial markets.

Bloomberg’s opinion makes sense. To call Bloomberg “anti-regulation,” of course, would be a joke, given his nanny-state ideas about banning smoking, trans-fats and pretty much everything else he thinks is bad for you. But, as a former businessman and financier, you might expect him to be sensitive to anything that might impact the U.S. financial industry, if not the U.S. financial market (which isn’t at all the same thing).

For Schumer, on the other hand, the irony is just overwhelming. After all, Schumer was one of the foremost advocates of the strong version of the Sarbanes-Oxley Act, even adding his own provision banning corporations from making loans to their own executives. During SEC Chairman Christopher Cox's Senate confirmation hearings, Schumer also asked for (and received) assurances that Cox would not “roll-back” SOX. Best of all, of course, is that Schumer’s concerns about excessive regulation and litigation for some reason don't seem to include New York Attorney General Eliot Spitzer. Gee, I wonder why that is?

(The answer is because Schumer is an opportunistic hypocrite. Yeah, I know — big surprise.)

But back to the Financial Times op-ed. My favorite parts says:

...New York has now fallen behind London in raising capital for international companies. New York needs to overhaul its markets and its regulation but its verve as a city, its depth of human experience and its access to US capital mean that a fightback is guaranteed.

The question for New York is whether the damage is permanent. A 1963 tax law, which made it unattractive for foreign entities to borrow in New York, suggests that it may be. The 1963 law created London's Eurobond market but, on repeal in 1974, bond issuance stayed in Europe. Even if Sarbox disappeared tomorrow, New York might not win back business - such as Russian share issues - where London now has critical mass.

New York, though, should never be underestimated as a financial centre or as a city. It has great strengths. It is home to most of the world's top investment banks. It has the world's most efficient clearing and settlement infrastructure. And it can draw on the companies and investors of the world's largest economy.
My first question, as usual, is, what are these “international companies” we keep hearing about? For me, at least, an “international company” is a company with international operations. And if you are looking at that, New York is still by far the largest market for international companies. It’s just that most of the companies with international operations trading in New York happen to be headquartered in the United States. Notwithstanding the pain of Sarbanes-Oxley, no major U.S. public company has made London its primary listing.

Yet for London, “international” apparently means what we in the U.S. call “foreign.” So what about these foreign companies? While over the past year or so more non-British issuers have listed on the London Stock Exchange than non-U.S. issuers have listed in New York, foreign listings on the New York Stock Exchange still exceed those on the LSE. The difference, of course, is proportion — foreign listings are a relatively small proportion of total NYSE companies, while they make up a much larger proportion of the LSE.

And that gets me to my second question: why are foreign listings so important anyway? I’m not quite sure I’ve seen an answer to that, in either the Bloomberg/Schumer article or the FT op-ed. As the Financial Times notes, part of New York’s strength is that it can “draw on companies and investors from the world’s largest economy.” But isn’t that actually all of New York’s strength? Particularly the investors part? Right now, London is a world marketplace. And, as such, the City of London makes a profit off of the transactions that take place on that market. But the London Stock Exchange increasingly is a market for foreigners. It is not necessarily where British citizens put their money. The proportion of UK households invested in the UK capital market is approximately half the proportion of U.S. households invested in the U.S. capital market. For the U.S., then, a capital market is not just a place where financial firms turn a buck (or a pound) as middlemen, but a place where U.S. companies go to get low-cost capital and — more importantly — where U.S. investors go to get a high return on their dollars.

This point is underscored by several recent articles on the LSE’s Alternative Investment Market (AIM). An FT article last week by Sarah Spikes (“Evolution's profit warning highlights problem of dependency on Aim market”) notes that the poor performance of companies listing on the LSE’s low-cost/low-regulation exchange have put a serious dent in the profits of several investment banks. Indeed, over the past six months, as both the NYSE and NASDAQ have grown, shares listed on AIM have lost 20 percent. At the same time, many small and medium-sized UK enterprises are finding it far more costly to raise capital on the AIM than they expected. (See “Over-optimism causing UK mid-market failures”). Spikes’ first article quotes Andy Brough, a fund manager who specializes in small and mid-cap UK stocks for the UK investment firm Schroders as saying, “Surely the point of AIM should be to make money for investors, not just to make money for the stockbrokers that list companies on AIM.”

Indeed. Which brings up my final question. If the goal of a well-run capital market is to make money for investors and provide cheap capital to hungry companies, should it really be U.S. regulators’ concern if London now has a “critical mass” in certain areas — for example, Russian share issues? Given the corporate governance problems now plaguing Russian companies (see the Guardian’s Terry Macalister, “The Russians are coming — and bringing the threat of scandal to the City”), bragging about how your exchange is attracting the lion’s share of these questionable listings is a bit like a West Virginia trailer park bragging about how it is beating the pants off Martha’s Vineyard in the fast-growing mobile home market. It may be true, and it may be true that trailer park developers in West Virginia are making a ton of cash, while real estate developers in ritzier neighborhoods are getting hosed. But is it really the job of financial regulators to protect the profits of the “real estate developers” of the financial markets (i.e., the exchanges and market intermediaries)? Shouldn't the focus rather be on investors and issuers — no matter how many multi-billion dollar Rosneft or ICBC IPOs the market intermediaries lose out on?

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