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June 13, 2006
Inflation Fears From Highly Placed Sources
Yesterday I made note of an opinion piece by Kevin Hassett, wherein said Mr. Hassett opined that the seeds of today's monetary policy challenges were
sewn sown during the considerable period of time that the Federal Open Market Committee held the federal funds rate at 1%, and nurtured by the too-measured pace at which that accommodation was removed during the last year-and-a-half of Alan Greenspan's tenure. (The Hassett article was also noted by Claus Vistesen -- hat tip to Edward Hugh for bringing Claus's blog to my attention.)
... Bank of England Governor Mervyn King says that "global interest rates may have been too low for too long".
"During the fastest three-year period of world economic growth for a generation, monetary policy around the world may have simply been too accommodative," said King in a speech to business leaders in Edinburgh. "Even though the monetary stimulus around the world is now being withdrawn, its effects are still being felt."
Oh yeah. Comments yesterday by at least one Federal Reserve official were generally interpreted as hawkish.
All eyes, then, on today's U.S. Producer Price Index and tomorrow's Consumer Price Index reports.
UPDATE: Tim Duy has a terrific round-up of commentary within and without the Federal Reserve, including links to many items I should have linked to (and would have, had only real life not intruded on my blogging).
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March 06, 2006
A Former Fan Turns On Sarbanes-Oxley
Bob Greifeld, president and CEO of Nasdaq, writes in today's Wall Street Journal (page A14 of the print edition):
I have been a sometimes lonely but consistent supporter of the principles of Sarbanes-Oxley, despite the crescendo of corporate criticism it has engendered. I have supported SOX for two basic reasons. First, it is a tough but essential step toward restoring investor confidence through greater transparency, accountability and improved corporate governance. Second, based on our experience at Nasdaq, I was convinced that, after the initial legislative shock wore off -- particularly regarding the costs of Section 404 -- that the benefits of SOX would prove compelling and unassailable. I expected that its onerous reputation would diminish with time.
I was dead wrong on the second point. Anguish over SOX in this country is not abating; if anything, sentiment has hardened and the perception gap abroad is now wider than ever. As the CEO of a U.S. stock market, I am in frequent contact with a broad spectrum of business leaders, many of whom list on our exchange. When it comes to SOX, their message is clear: The burden of compliance is onerous, the cost is significant, and it falls disproportionately on smaller companies that are least able to pay. Our research has shown that the burden on small companies, on a percentage of revenue basis, is 11 times that of large companies.
This reaction seems like a particularly bad signal:
In my travels to countries like China, India and Israel, I meet with the new generation of international entrepreneurs who are building businesses and dreaming of the day they can take their companies public. The constant refrain I hear is that when it comes time to do an IPO, they will be reluctant to list on American markets. They will look elsewhere to raise capital, and the main reason they cite is SOX.
The culprit according to Mr. Greifeld is, not surprisingly, the infamous section 404:
SOX is important; by and large, it works. We have had three years to assess its strengths and problems. Perhaps 90% of complaints have their genesis in 20 lines of text. We lay the widespread misperception about the cost and difficulty of compliance at the feet of the famous Section 404. So the time has come to address those 404 concerns without diluting the essential investor protections that are the true legacy of SOX. Specifically, we should adopt the recommendations of the SEC's Advisory Committee on Smaller Public Companies, which has proposed an exemption from 404 for companies with less than $128 million in market cap and revenues under $125 million. Companies with up to $787 million in market cap, as long as they had revenues less than $250 million, would receive partial exemption. The companies exempted account for only 6% of U.S. market cap, which means 404 would still apply fully to 94% of equity market capitalization.
Nasdaq strongly supports the committee proposals for smaller public companies.
I've often wondered how much Sarbanes-Oxley, section 404 specifically, has to do with this picture (updated from past posts):
I wonder about one more thing. How much of the historically high cash-flow to investment ratio is accounted for by the 6% of businesses that the Nasdaq folks would not exempt from 404.
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May 17, 2005
Sarbanes-Oxley: The Accountants Aren't Helping
From the Wall Street Journal (page C3 in the print edition):
Regulators issued a rebuke to accounting firms, saying their interpretation of a controversial Sarbanes-Oxley rule had been too strict and resulted in unnecessary costs for some public companies.
The Securities and Exchange Commission and the Public Company Accounting Oversight Board urged accountants to be more flexible in their approach to a rule requiring that companies assess their internal controls over financial reporting. Regulators said auditors had become "overly cautious" and "mechanical" and needed to exercise judgment when interpreting the rule.
The guidance comes in response to growing complaints from businesses about the cost of complying with the regulation, which requires that companies assess their internal controls to ensure their financial reporting is accurate and reliable...
Executives have complained about the rule, saying auditors are performing massive reviews that aren't tailored to a company's size or specific risks. They complain auditors are driving up costs by looking at things that have no bearing on the accuracy of a company's financial statements.
Studies have estimated the cost to companies at about $3 million a year. Some companies have said they have stopped hiring and are considering moving work overseas to deal with the costs.
I continue to think this is a much under-appreciated story.
UPDATE: A few days old, but here is a related post from Brad DeLong.
UPDATE II: The SEC report is here.
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April 21, 2005
More On The Aftermath Of Sarbanes-Oxley
It seems that the more obvious demands imposed by Sarbanes-Oxley in financial accounting - the expense, the time investment, the extra audits - are just the tip of the iceberg. The required mix of "proper" business controls and personal liability is causing a chain reaction that affects boards, organisational structures, professional advisers and the daily efficiencies of all public companies - and many private ones, even though technically they are not covered by the act.
The results are having an impact on the way companies hire, structure their organisations, work with lawyers and accounting firms and even choose software systems. They are also driving higher-than-anticipated expenditure in unexpected areas...
Sarbanes-Oxley has also forced a change in companies' relationships with auditors and lawyers. "What it has done is made your outside accountants regulators," says Anthony Abbate, president and chief executive officer of Interchange Bank, a New Jersey-based finance house, and an outgoing member of the Federal Reserve Board.
In the past, he or his chief financial officer could ask an auditor for an opinion on a proposal. Now, he says, "they don't even want to hear about what you're doing. If they say, 'Yes, you can do it,' or they remain silent, they become complicit and subject to their own regulatory body. So you're basically flying on your own."
It appears that not even the "going dark" option is a full solution.
With companies coming to realise the knock-on effects of Sarbanes-Oxley, some are busily trying to jump ship by going private. But in the long run, that will not be a solution.
For a start, private companies such as Wise Metals Group, a Baltimore-based producer of aluminium cans, have become subject to the same tough regulation since starting to offer public bonds...
Private-company status is also no haven from Sarbanes-Oxley. If a private company wants to leave open the possibility of an acquisition, particularly by a public company, it will probably have to show that it is compliant with Sarbanes-Oxley.
The article does note some unexpected positive aspects of Sarbanes-Oxley, but even these might be filed in the category of "creative destruction":
But if there are unintended consequences, they are not all negative. Mr [Michael] Critelli [chief executive of Pitney Bowes] found that the regulation could be used as a tool to force changes he wanted to make at Pitney Bowes - such as increasing shared services. "It turned out to be a blessing," he says.
Combine this with the post-recession oil shocks, and it's almost a wonder that the U.S. economy has done as well as it has.
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April 20, 2005
Thoughts On The State Of The U.S. Economy...
... from John Irons and Arnold Kling in the newest edition of the Wall Street Journal Online's Econoblog feature. John laments the impotence of fiscal policy as a stabilization tool --
This is one of the real risks of the deficit -- that we won't be able to use spending or tax policy to soften an economic downturn.
-- but if you ask me, this goes in the column of backhanded blessings. For my money, tax and expenditure policy should always be about the long run.
For his part, Arnold makes an observation that I have long felt deserves more consideration than it gets:
I think that for the last year and a half, Sarbanes-Oxley has had a major dampening effect. In any year, a large corporation can pursue no more than two or three key initiatives. Senior management doesn't have time to pay attention to more than that and still run the baseline business. And without senior management focus, people lower down cannot get cooperation across departments or division, which you usually need to execute a new initiative. For a lot of companies, Sarbanes-Oxley compliance has been one of the top three priorities for the past year or two, which means that at most one or two other major projects have been on the plate.
I'd really be interested in seeing some serious post mortem on this.
UPDATE: Thanks to Roland Patrick for point me to his post at Let's Fly Under the Bridge related to the effects of Sarbanes-Oxley. In his post he links to an Orange County Register article on the topic, which includes this observation:
Since that regulatory law passed in 2002, hundreds of publicly traded companies, including several in Orange County, have taken this step, which is simpler and cheaper than buying out shareholders and going private. Hundreds more could soon follow, says attorney Thomas Magill, partner at Gibson, Dunn & Crutcher LLP in Irvine, who assisted Anacomp in going dark.
If you are interested in this topic, read the whole thing.
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