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Cox, not Sarbox, is to blame for equity exodus

Author: Benn Steil, Senior Fellow and Director of International Economics
April 3, 2007
Financial Times


Paul Sarbanes and Michael Oxley, renowned authors of the 2002 Sarbanes-Oxley corporate governance reform legislation, have become America’s favourite whipping boys for the emigration of foreign equity listings from New York to London. But it was the earlier efforts of another congressman, one who now has far more influence over the competitiveness of the US capital markets, which in fact sparked the exodus by deliberately mixing domestic market regulation with foreign policy.

In 1999, two commissions reported to Congress on Chinese military links to commercial and financial activities in the US. The reports grabbed headlines with their focus on the purported role of the US capital markets in financing Chinese weapons development and proliferation. The first of these commissions was chaired by congressman Christopher Cox, now chairman of the Securities and Exchange Commission.

Mr Cox’s report created a political stir with the statement that there were “more than 3,000 [Chinese] corporations in the United States, some with links to the [People’s Liberation Army], a state intelligence service, or with technology-targeting and acquisition roles”. Previous estimates from the State Department and expert testimony before his committee had put the number of PLA-affiliated companies at less than 1 per cent of this figure.

The report of a second commission, under the chairmanship of former CIA director John Deutch, focused heavily on the final conclusion of the Cox committee report that China “is using US capital markets both as a source of central government funding for military and commercial development” and that the SEC failed to collect enough information to allow effective monitoring. The Deutch commission concluded that “it is essential that we begin to treat this ‘economic warfare’ with the same level of sophistication and planning we devote to military options”. It further concluded that “the United States is not making optimal use of its economic leverage” and should “assess options for denying proliferators access to US capital markets”.

This call to economic arms escalated through several draft congressional bills, demanding capital market sanctions against foreign companies doing business with targeted countries. National security hawks, human rights advocates, Christian fundamentalist groups, environmental activists and labour groups all called for Clinton administration action to bar specific foreign companies, particularly Chinese and Russian, from listing on a US exchange or raising capital in the US.

When these efforts failed, the homeland securities campaign shifted to the SEC. Congressman Frank Wolf, heading the House committee controlling the SEC’s budget, demanded that the SEC take action against Chinese and Canadian oil companies doing business in Sudan, with the aim of delisting them from the New York Stock Exchange. Although this effort failed as well, Mr Wolf succeeded in strong-arming the SEC into creating an Office of Global Security Risk to investigate the activities of foreign companies listing in the US. The initiative set off alarm bells on Wall Street, reflected in a letter to the SEC from the Securities Industry Association emphasising that such an office risked “politicising the US capital markets”.

The SEC’s pas de deux with Mr Wolf led directly to the Russian oil company Lukoil announcing the transfer of its planned NYSE listing to London, citing the “political risk” of a US listing. The effect of the move was merely to exempt Lukoil from US disclosure, governance and trading regulations, not to curtail its access to US capital. Yet it was feted in the press by former assistant secretary of defence Frank Gaffney as a “development of momentous significance”. The Canadian oil company Talisman reacted to congressional efforts to force it out of Sudan or off the NYSE by choosing London for its largest ever debt issue. Whereas non-US companies have little incentive to state publicly their intention of avoiding US political jurisdiction, there can be no doubt that this remains a critical factor in listing and capital-raising decisions.

There is a dangerous level of ignorance as to the workings of the global capital markets in parts of the US defence and intelligence establishment, which have been turning to foolish forms of domestic market regulation as a substitute for real foreign policy. Many of these individuals, such as Mr Gaffney, are associated with the William J. Casey Institute, which has published fantastical accounts of “successful” sanctions campaigns against Petro­China and the Russian oil giant Gazprom. When studying PetroChina’s Sudanese oil business in 2004, I found that its largest non-state shareholder was Warren Buffett, controlling 14 per cent of the public shares. He chose to buy 95 per cent of them in Hong Kong, rather than New York, highlighting the irrelevance of the sanctions campaign, which had no influence on the behaviour of either PetroChina or Sudan. Yet it was the relentless capital markets sanctions campaigns of the late 1990s that first signalled to the world that the US would use its regulatory power over foreigners for political purposes.

Christopher Cox thus became the most important founding father of the capital markets sanctions movement, a movement earning pride of place in the pantheon of diplomatic dopiness.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here (Subscription required).

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