Too much or little regulation of public companies?

by philg

http://www.nytimes.com/2011/02/14/opinion/14Salmon.html says that the Securities and Exchange Commission’s regulations for public companies are so onerous that all of the real investment is happening in the private equity world:

“Only the biggest and oldest companies are happy being listed on public markets today. As a result, the stock market as a whole increasingly fails to reflect the vibrancy and heterogeneity of the broader economy. To invest in younger, smaller companies, you increasingly need to be a member of the ultra-rich elite.”

An interesting statistic is that the number of U.S. public companies is down from a 1997 peak of 7000 to just 4000 today. That’s impossible to argue with, but perhaps the author is wrong about the reason.

The S.E.C. certainly is a rich source of annoyance for public companies, forcing them to file a lot of paperwork and making the CEO sign a statement that he is only looting as much as the buried disclosures say he is. But isn’t it possible that it is investors who are shying away from the public markets? The S.E.C. regulations don’t stop employees from looting from investors by issuing themselves enough options to dilute the cash investors by 30 or 50 percent (I wrote about this is my economic recovery plan). Nor do the S.E.C. regulations stop employees from repricing those options whenever the stock falls (so an executive whose job was to push the stock price from 50 up to 100 gets the options repriced at 20 after the stock falls due to some ill-advised decisions).

Let’s look at Robert Nardelli, named by CNBC as one of the “Worst American CEOs of All Time”. He received a mostly-unconditional $500 million in salary for trashing Home Depot and leaving its shareholders with a worn-out shell. At Chrysler, however, under the thumb of the private equity owners, Nardelli earned only $1/year and anything additional was to be based on the company’s success (Nardelli joined Chrysler in August 2007; the company went bankrupt in April 2009 (Home Depot paid $210 million just to get rid of Nardelli; you’d think that Chrysler would have handed him at least a few million of the taxpayer dollars that the Obama Administration gave them, but press reports suggest otherwise)).

Perhaps the Russians who are financing Facebook are too savvy to subject themselves to the depredations of U.S. public company executives. If companies aren’t going public, couldn’t it be because they can’t get the money that they need through an IPO? That the folks with the big dollars prefer to keep a closer eye on their money than is practical in the U.S. public market?

2 thoughts on “Too much or little regulation of public companies?”

  1. If you really want your blood pressure raised, Matt Taibbi describes the failure of criminal prosecutions against the financial industry in the latest Rolling Stone: Why Isn’t Wall Street in Jail?

    How prosecution is supposed to work:

    The major federal agency on the Wall Street beat is the Securities and Exchange Commission. The SEC watches for violations like insider trading, and also deals with so-called “disclosure violations” — i.e., making sure that all the financial information that publicly traded companies are required to make public actually jibes with reality. But the SEC doesn’t have prosecutorial power either, so in practice, when it looks like someone needs to go to jail, they refer the case to the Justice Department. And since the vast majority of crimes in the financial services industry take place in Lower Manhattan, cases referred by the SEC often end up in the U.S. Attorney’s Office for the Southern District of New York. Thus, the two top cops on Wall Street are generally considered to be that U.S. attorney — a job that has been held by thunderous prosecutorial personae like Robert Morgenthau and Rudy Giuliani — and the SEC’s director of enforcement.

    The relationship between the SEC and the DOJ is necessarily close, even symbiotic. Since financial crime-fighting requires a high degree of financial expertise — and since the typical drug-and-terrorism-obsessed FBI agent can’t balance his own checkbook, let alone tell a synthetic CDO from a credit default swap — the Justice Department ends up leaning heavily on the SEC’s army of 1,100 number-crunching investigators to make their cases. In theory, it’s a well-oiled, tag-team affair: Billionaire Wall Street Asshole commits fraud, the NYSE catches on and tips off the SEC, the SEC works the case and delivers it to Justice, and Justice perp-walks the Asshole out of Nobu, into a Crown Victoria and off to 36 months of push-ups, license-plate making and Salisbury steak.

    Taibbi then goes on describe how in practice, the SEC is extraordinarily reluctant to pursue criminal prosecutions. In 2004, Gary Aguirre, an SEC investigator, tried to interview John Mack, former head of Morgan Stanley, about an insider trading case (Mack appeared to have tipped off Art Samberg, a close friend, about GE’s acquiring Heller Financial, in exchange for a share of the Lucent spinoff; $10 million for Mack, $18 million for Samberg.) One of Morgan Stanley’s lawyers, Mary Jo White–herself the former US attorney for the Southern District of New York!–called the SEC’s director of enforcement, and Aguirre was soon fired (he sued for wrongful dismissal and eventually received $755,000). The SEC only got around to interviewing Mack after the statute of limitations had expired.

    Episodes like this help explain why so many Wall Street executives felt emboldened to push the regulatory envelope during the mid-2000s. Over and over, even the most obvious cases of fraud and insider dealing got gummed up in the works, and high-ranking executives were almost never prosecuted for their crimes. In 2003, Freddie Mac coughed up $125 million after it was caught misreporting its earnings by $5 billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but executives who had overseen phony accounting techniques to jack up their bonuses faced no criminal charges. That same year, AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to its collapse two years later, but no executives at the insurance giant were prosecuted.

    Taibbi notes that the problem is independent of party. The financial industry is a major contributor to both Democrats and Republicans (they’re the ones who have the money, after all); election campaigns in the US are hugely expensive; and the Supreme Court decided last year (in a 5-4 decision) that restrictions on campaign finance are unconstitutional.

    As Taibbi describes it, the result is straight corruption: the bankers are rich enough to buy off the cops.

  2. Well, there ARE “younger, smaller companies” still being attracted to the stock market. A couple weeks ago, Demand Media ($22 million in losses last year) had a seemingly successful IPO [http://tcrn.ch/htdRLA]. Recently, Pandora ($17 million in losses 2009-2010, break-even 2010-2011) recently filed to go IPO [http://tcrn.ch/ffDJ2v].

    And of course the stock market is full of banks, car companies, etc. that are horrendously unprofitable.

    So maybe it’s a GOOD sign that there are fewer companies in the stock market?

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