Ultra-rich screw slightly less rich

New York Times reporter Stephen Labaton has an excellent article on how a group of powerful business executives have gotten together–with the blessing of the Bush administration–to gut regulations designed to improve the transparency of corporate finance that were created in the wake of Enron and Worldcom since, according to members of the group “corruption cases like Enron and WorldCom are falling out of the news.” Even Ben Stein, former Nixon speechwriter and current Republican activist, is pissed.

The proposals would make it more difficult to criminally prosecute corporate malfeasance and make it nearly impossible for shareholders to file civil suits alleging fraudulent investor relations. They are being timed to avoid public scrutiny as much as possible–“People involved in the committees said that the timing of the proposals was being dictated by the political calendar: closely following Election Day and as far away as possible from the 2008 elections.” They are also being crafted to avoid as little oversight as possible: “Most changes will be proposed through regulation, said [committee member and Columbia Business School Dean R. Glenn Hubbard], because ‘the current political environment is simply not ripe for legislation.’”

The proposals resemble an inside job. Treasury Department official Robert K. Steel, the brand-new deputy secretary for domestic finance, was on one of the private sector panels formulating policy changes until he was sworn into his new job last week. In his new post, he’ll be evaluating his own recommendations. Steel was appointed by the new Treasury Secretary Henry Paulson, a former chairman and CEO of Goldman Sachs who’s already spoken favorably about the plans to change the regulations.

The really amazing thing about all this is that it represents a move by the most well-off–Wall Street financiers and big-name accountants–against the slightly less well-off shareholders whose scrutiny and potential litigation the big names are looking to avoid. Talk about class warfare: how about a brazen use of political influence to increase the power of the very few at the expense of the more numerous but less well-connected? It’s enough to cast the whole enterprise of government into shadow.

posted by readbetween

  1. rich

    its a shame Sen. Sarbanes retired.

  2. Since you’re invoking the words of a conservative stalwart, perhaps you’ll be interested in what Chuck Schumer has to say about this. From the WSJ editorial today co-authored by Sen. Schumer and (RINO) Mayor Blumeberg:

    With the benefit of hindsight, the Sarbanes-Oxley Act of 2002, which imposed a new regulatory framework on all public companies doing business in the U.S., also needs to be re-examined. Since its passage, auditing expenses for companies doing business in the U.S. have grown far beyond anything Congress had anticipated. Of course, we must not in any way diminish our ability to detect corporate fraud and protect investors. But there appears to be a worrisome trend of corporate leaders focusing inordinate time on compliance minutiae rather than innovative strategies for growth, for fear of facing personal financial penalties from overzealous regulators.

    [And], what lessons can we learn from other nations’ legal environments? The total value of securities class-action lawsuits in the U.S. has skyrocketed in recent years, to $9.6 billion in 2005 from $150 million in 1997. The U.K. and other nations have laws that far more effectively discourage frivolous suits. It may be time to revisit the best way to reduce frivolous lawsuits without eliminating meritorious ones.

    The op-ed is behind the WSJ firewall but there is commentary at NRO which makes some sense.

    Being in the securities biz, I have written countless times about corporate malfeasance – such as I think that the back-dating of stock options is grand theft deserving of jail time. But it makes no sense that we have ineffective laws on the books that risk hurting our competitive position in international capital markets not to mention the burden it places on business that provides no discernible benefits.

    I have a lot of respect for Ben Stein but the upshot of Elliot Spitzer’s war on mutual funds has been an increase in fees to shareholders (mostly middle-income working households) and the packing of New York state’s coffers. I’m glad Spitzer brought the point to light but the outcome did not benefit those who he asserted he was protecting.

  3. readbetween

    There are doubtless some sensible revisions to make to the law and Spitzer is just as surely using the securities prosecutions to score political points. That said, some of the proposals would do more than just ameliorate corporate leaders “focusing inordinate time on compliance minutiae.” (And, let’s not forget that Schumer represents New York, including its financial district and the outlying counties where those folks work. He has something less than a purely disinterested stake in evaluating the claims of excessive regulation.)

    For instance, why shouldn’t shareholders be able to seek compensation for fraud in a civil suit? Leaving those enforcement measures to the SEC alone just creates a greater incentive for industry to coopt the agency responsible for regulating it, which points to what really grabbed my notice about these potential changes to the regs.

    I am more interested in how this is being done–without any legislative input and smokescreened by the election to avoid scrutiny–and how that exemplifies the way that these very powerful industries have captured the political process. It is almost surely symptomatic of the larger sense in which the government does the bidding of small, powerful industries. The school lunch program is straining under well-intentioned but harmful regulations too but there are no special panels bending the ear of the executive branch to fix that issue.

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