Treasury taxies to runway of change

When the alarm is raised about New York losing out to London in the battle for capital, the message is unlikely to be lost on Robert Steel, under-secretary at the US Treasury.

Like Hank Paulson, Treasury secretary, he is a former Goldman Sachs banker who knows his way around the capital markets.

His first boss at the bank in the 1970s was Robert Rubin, Treasury secretary in the Clinton administration.

But Mr Steel also spent eight years with Goldman in London from 1986 “in the days when you could get a reservation at The Ivy”, he says, referring to one of the city’s infamously celebrity-packed restaurants.

Mr Steel says capital markets competitiveness has become “a cornerstone initiative or ambition” for the Treasury.

In the past six months, there has been a steady drumbeat of warnings about the health of the US capital markets. It started last November with a speech by Mr Paulson, followed by three high-level reports, the latest of which was sponsored by the US Chamber of Commerce.

As a first step in tackling issues at the Treasury, Mr Paulson last month unveiled plans for a bipartisan committee to study the “financial soundness” of the auditing profession.

A “rigorous analysis” will also be undertaken of why financial restatements soared to 1,876 last year, from 116 in 1997.

Asked why he thinks the US has started to lose out to foreign financial centres, Mr Steel acknowledges the emergence of rivals, spurred partly by the export of financial service skills from the US. “There are more people playing premier league.”

US regulations, built “one on top of the other” over time, are not helping.

But Mr Steel is quick to defend the US position where he sees it as still leading – citing, among other things, the fact that 45 per cent of global mutual fund assets are in the US, compared with 35 per cent in Europe and 11 per cent in Asia.

Yet some critics view the Treasury’s response so far as underwhelming given the rhetoric and the range of problems raised: overlapping regulations; the pervasiveness of US class-action litigation; and the Sarbanes-Oxley Act.

Mr Steel counters: “Let’s just think about it for a second. The tone of discussions today is so different from what it was a year ago. If you’d said ‘capital markets competitiveness’ a year ago, people would have had a blank look. Now, the term of art has been defined, there is focus and people are getting together to change things.”

Indeed, last week the Securities and Exchange Commission started studying a new system of “mutual recognition” with other global regulators as part of plans to allow foreign brokers and exchanges greater access to US investors without the burden of SEC registration.

Consideration is also being given to allowing US – not just foreign – companies to use International Financial Reporting Standards, rather than US Gaap.

Mr Steel also cites the emergence of a new auditing standard from the US accounting watchdog last month, designed to ease the burden of compliance with Section 404 of Sarbox by clarifying the scope of an external audit of a company’s internal controls.

Finally, he points to the Treasury’s “principles and guidelines” for hedge fund regulation, which he argues has become “the benchmark regulatory perspective for hedge funds around the world”.

Yet how much can be achieved, with expectations high on Wall Street, in the time left under the Bush administration?

First, the “tenor of the debate” framed by Mr Paulson has “made many of these things accomplishable”, Mr Steel says.

Yet the issues are “very challenging” and there is “not a lot of low-hanging fruit, generally”.

Even so, he says: “I’m excited about the ‘runway’ we have . . . we’ve plenty of time to do lots of great things. We want to start the discussion and begin the trajectory so that sustainable and real change can continue on, after the 18 months is over.”

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