Delisting isnot a cure-all
European companies with a listing in the US are up in arms over the cost of complying with the Sarbanes-Oxley Act. In common with many US businesses, they are especially exercised about the requirements of Section 404 on internal control.
Yet there is a curious aspect to this backlash. For as Lynn Turner, former chief accountant at the Securities and Exchange Commission, points out, Section 404 does not mandate a single new control beyond those already mandated by Congress in 1977 in the Foreign Corrupt Practices Act. Nor is there anything that goes beyond the Treadway Commission's recommendations in 1992 on internal control, which have long been regarded in the US as best practice.
Part of the problem is that the enforcement climate is tougher. Auditors, with the Public Company Accounting Oversight Board at their back and the demise of Andersen playing on their nerves, have also become hyperactive on the internal control issue. For larger companies whose controls are already in good shape, compliance may carry a genuine additional cost burden. And it is undeniably the case that the SEC's conditions for delisting are needlessly obstructive.
Yet before concluding that the New York Stock Exchange is regulating itself out of existence, European and Asian businesses should think carefully about the costs of delisting. Investors derive considerable comfort from the knowledge that a rigorous internal control regime is in place. The majority of German companies with US listings that are reported to want to go home may find that their cost of capital takes a big jump if they retreat into a German bunker.
There is already a risk that capital costs in Europe will rise relative to the US on the basis of derogations from international accounting standards. If companies are seen to opt deliberately for a weaker control regime, that may compound the difficulty.
Everyone else's problem
"The right time for America to debauch its currency, as all right-thinking countries who issue debt in their own currency should want to do, is when a falling dollar inflicts more growth pain on countries with appreciating currencies than it does inflationary pain on the United States. Now is such a time." So says Paul McCulley, a managing director at Pimco, the world's largest bond fund manager, in an essay on Pimco's website. I rubbed my eyes.
There was a time when no respectable bond fund manager would have argued so bluntly for policies designed to wreck the value of fixed interest securities. But we now live in a world of global capital flows and a multiplicity of different kinds of IOU, including index linked debt. And sure enough, if you turn to the monthly investment outlook on the same site by Mr McCulley's boss Bill Gross, you find that he puts much emphasis on hedges such as Treasury Inflation Protected Securities (Tips) and German bonds, as well as being short of the dollar.
We now have a near consensus in the investment community that the dollar can only go down. So it would not be surprising if a bear market bounce soon emerges. Asia, remember, is still awash with surplus savings looking for a home. And there is a big contrarian in the market: China's officials have stated categorically that the yuan-dollar peg will not be changed at a moment when the US is applying pressure for upward revaluation. Note, too, that the yen is approaching territory that may prompt renewed intervention. Even eurozone central bankers must be thinking about it.
There is, incidentally, a striking asymmetry in this new dollar area between the US and Asia. The US pursues an interest rate policy while the dollar goes hang. China pursues an exchange rate policy, which is vastly more important for domestic monetary conditions than interest rates - unless, of course, you happen to be a heavy domestic borrower with no export revenues to protect you from the impact of the recent interest rate rise.
Barmy in Brussels
The world is hostage to unprecedented global imbalances. The euro has taken the full brunt of the dollar's decline as Asian central banks engage in mercantilist exchange rate management and peg their currencies to the dollar. As the US exports deflationary pressure to Europe via a "strong" dollar policy that entails endemic dollar weakness, the European Central Bank persists in setting interest rates without regard to the wider global picture, so that a weak eurozone recovery is wilting in its tracks.
If ever there was a time for the British to be grateful for sterling's independent position outside the eurozone this is it. Yet Peter Mandelson, the new European Commissioner for Trade, has popped up with the cheery suggestion that there should be a deadline for the UK to go into the monetary union and swap sterling for the euro. Heaven (or Gordon Brown) preserve us from this lunacy.