PrintPrint EmailEmail ShareShare CiteCite


U.S. Capital Markets' Competitiveness: Challenges and Choices [Rush Transcript; Federal News Service]

Speakers: Harvey Goldschmid, Dwight Professor of Law, Columbia University, R. Glenn Hubbard, Co-Chair, Committee on Capital Markets Regulation; Dean, Columbia Business School, Arthur Levitt, Senior Advisor, the Carlyle Group, and Former Chairman, Securities and Exchange Commission, and Frank G. Zarb, Hellman & Friedman, Llc, and Former Chairman and CEO, the Nasdaq Stock Market, Inc.
Presider: Alan Murray, Managing Editor and Columnist, The Wall Street Journal
May 15, 2007
Council on Foreign Relations New York, NY

ALAN MURRAY:  Well, welcome.  Thank you all very much for coming.  At my breakfast table we talked about whether Rupert Murdoch was going to buy The Wall Street Journal.  But I guess that's not the principal topic of conversation this morning.

This meeting is part of the McKinsey Executive Roundtable Series on International Economics.  I would like to remind everyone that it is an on-the-record discussion.  And I'd also like to urge you right now to turn off your cell phones, if you haven't done that already.

A little more than a year ago, someone, somewhere was tabulating the largest initial public offerings in the year 2005, and looked down at the list they had put together, and to use the words of my 14-year-old daughter, said:  Oh, my God.  Look at this list of the top 20.  The largest 20 IPOs in 2005, only one of them was in the United States.  The rest were in Hong Kong, London, wherever. 

This quickly became the most popular statistic in Lower Manhattan.  I heard it cited over and over again.  Within short order, we had not one, but two blue ribbon study groups that were put together to deal with the competitiveness issue.  The secretary of the Treasury was giving speeches on it.  And people everywhere were wondering if the New York financial markets had finally had their Detroit moment.  (Laughter.)

I was a new resident of Greenwich, Connecticut, at the time, and I looked around me and saw the 30,000-square-foot houses going up in the neighborhood and said, well, wait a minute, this doesn't look like Detroit to me.  And if there's a competitiveness crisis in the New York financial markets, somebody forgot to tell the partners at Goldman Sachs and Merrill Lynch and J.P. Morgan and the hedge fund operators, and so on.

So what we're going to discuss this morning is what's really going on here?  Do we have a crisis of competitiveness in the financial markets, or is this just someone crying wolf to get some changes in regulation and other things that they'd like to see?

And to discuss it, we have the most qualified panel I think you could probably put together on the face of the Earth today. 

Harvey Goldschmid is senior counsel of Weil Gotshal.  He's an ex-commissioner of the SEC.  Maybe if we have a Democratic administration, he'll go back to the SEC.  We'll wait and see.

Glenn Hubbard is the dean of the Columbia Business School; former chair of the Council of Economic Advisers for President Bush.  Chaired the principal study on capital market regulation that came out recently.

Arthur Levitt, senior adviser to The Carlyle Group; a former head of the SEC; a champion of investor protection.

And Frank Zarb, who is the managing director of Hellman & Friedman; former CEO of the NASDAQ; former chairman of AIG.

It's a great group to put together here.  It's a little bit incestuous.  All of you have worked for -- let's see, Harvey, you worked for Arthur at the SEC.  Arthur, you and Frank worked together on Wall Street years ago.  But I have a feeling that's not going to keep you all from disagreeing with each other on

HARVEY GOLDSCHMID:  And, Alan, I have to add; Glenn and I are colleagues from Columbia.

MURRAY:  And you're colleagues at Columbia.

GOLDSCHMID:  I've taught since 1970.

MURRAY:  So it is a little incestuous.  But I know these four gentlemen; it doesn't stop them from disagreeing with each other when it suits their purposes.

I want to start with Glenn Hubbard because he did co-chair the Committee On Capital Market Regulation, and ask him the fundamental question we're here to talk about this morning:  Is there really a capital markets competitiveness problem?

R. GLENN HUBBARD:  I think we definitely have a problem.  We don't have a crisis, I think, in your words.  American capital markets are the envy of the world.  That's true today just as it has been true.  The American economy is also the envy of the world.  It doesn't mean, however, that we're not doing some things to ourselves that may put that in jeopardy.

In the committee, we focused on a number of areas of self-inflicted wounds that I think are worthy of discussion, partly because they affect competitiveness.  I sell a thousand MBAs every year into that Lower Manhattan market, so I do care about competitiveness.  But I'm also an economist, and I think the bigger issue is really what are we doing to the depth, liquidity and value in American capital markets.  What are we doing?

The biggest problem I think is our litigation system in securities class actions.  These are extremely inefficient.  They are very costly for our economy.  Action here doesn't simply require legislation, although that would be great -- far-fetched, but great -- there's also things I think the SEC could be doing in clarification of 10b-5.  In regulation, Sarbanes-Oxley, on balance --

MR.     :  10b-5 being -- ?

HUBBARD:  The securities class action litigation.

We also felt as a committee that there are substantial benefits from Sarbanes-Oxley, but the implementation of 404 was clumsy and costly.  One can see that, as I do as a director of companies, as well as an economist. 

We also felt that there needs to be a greater consideration of shareholder rights, frankly, to make America's capital market more competitive.  On the other end, the committee endorsed majority voting, for example, and viewed classified boards and poison pills with some skepticism.

But I would say our biggest overriding feature was cost-benefit analysis.  People here have probably seen the movie, "Bruce Almighty."  American capital market regulation sometimes has the flavor of the movie "Bruce Almighty," that you make some changes without thinking of the costs, and then you realize that you've created a great deal of harm.  I think we can avoid these.  I think we need cost-benefit analysis in the SEC.  The rest of the world does it.  The Treasury and the Fed and the government do it.  Time for the SEC to do it.

MURRAY:  Harvey, let me get you to respond to the three things in particular that Glenn talked about:  rolling back parts of Sarbanes-Oxley, Section 404; class action litigation reform; and increased shareholder rights.  What do you think, is there a need for all of those?

GOLDSCHMID:  Well, let me start with where Glenn was, though.  Is there a problem?  It's certainly not a crisis.  I think Glenn has it closer to right when he talks about early warning, canary in a mine shaft,  But there's really not even that. 

If you look at our markets, as everyone in this room knows, I think, they're thriving in terms of the economics over all.  We're trading roughly half the world's shares.  And a fascinating and important figure is that there's an enormous premium, an extraordinary premium for trading on our exchanges.  If you're a German company listed on the New York Stock Exchange, you'll receive -- and the data vary -- but something like a 30 percent value increase for being willing to list and to take our regulatory scheme.

The bottom line is that we're not talking about a wild litigation climate or an overly aggressive SEC, we're talking about a system that produces value because it has rigor and intelligence and integrity in the way it works.

Now, in terms of the proposals -- and in terms of if we've lost something, it's not in our control.  The rest of the world has gotten more prosperous, the rest of the world has gotten better in terms of regulations.  It's now a world in which if you're privatizing a Chinese company or a French company, you often want to keep it close to home in terms of national markets.  Our markets are thriving; if they're going to remain strong, we've got to keep up the vigor and the integrity and the quality of what the SEC does.

Now, let's take some specifics for a second that Glenn talked about.  And I should say, we're both colleagues and friends.

HUBBARD:  But they know what that means among professionals.  (Laughter.)

GOLDSCHMID:  Oh, no, we're not using that.  (Off mike) -- (laughter).

10b-5 and principle-based regulation.  There can't be any greater principled regulation than 10b-5, which is a key fraud section in the federal law.  It basically says, don't defraud, don't manipulate, that's it.  Now it's taken us 40 or 50 years to work out the contours, but remember, if you want principle-based regulation with just a few words, you're going to have a great deal of uncertainty that comes from it.  You need much more thought and balance as to where principles work and how they'll work.

Cost-benefit.  Everyone agrees -- when I sat on the commission, everything we did had to have a kind of cost-benefit calculus in our minds.  Will it do more good than harm was a basic part of how you make decisions.  The SEC had cost-benefit in every rulemaking.  We had economists, and we've had it for years in making rules.  What Glenn may be talking about and the report talks about is 12 more hurdles in cost-benefit on the formal level.  That will slow things down.  If you're against regulations, that may be good, and it may make them vulnerable in terms of litigation.

If, on the other hand, you think regulations can be good or deregulatory -- the last thing I did at the commission in the public meeting -- and one of the things I am proudest of -- was to deregulate the new issue process in the United States.  We got rid of a lot of waste since 1934, a lot of wheel spinning, a lot of economic foolishness and made the system work much more efficiently and sensibly.  If there had been an ability to challenge that on a high-hurdle, cost-benefit level, the commission might still be working on that deregulation now.  Too many hurdles can only create harm.


MURRAY:  Yeah, but, Harvey, I just want to -- just to summarize your good friend Glenn Hubbard's report here, is there anything in it that you think you would agree with?

GOLDSCHMID:  Oh, yeah.  I mean, cost-benefit can be something you think about.  There is some of the litigation items -- getting rid of pay to play in class-action.  That would be consensus --

MR.     :  I'd add --

GOLDSCHMID:  -- in terms of oversight.

There is certainly a desperate need to look at how the global situation is evolving today.  There are all kinds of other things, but to some degree, one of my real faults with the report and two others that came after it is they took our eye off the key issue.  They're focused on things like get rid of all private litigation, or put hurdles there to save AGs and others, or make the SEC weaker with, you know, safe harbors and other things, getting rid of civil penalties or limiting.  Those are going to create real harm.  There are a lot of things that ought to be done to make us stronger.

MURRAY:  A very quick response before I get --

HUBBARD:  Two quick points.  I agree with you, Arthur.  I am exactly suggesting we should raise the bar for cost-benefit analysis, even if it means being more slow.  In a private company, you would do that.  Every other aspect of American regulation we do that.  The fact is, all the interesting studies we're now debating were produced outside the SEC by people who are trying to contribute to the debate.

On the issue of the listing premium, we'd seen a decline in listing premium, and more important than the decline, it's occurred for firms from countries with good corporate governance.  We've simply added the cost.  That's a very disturbing trend.

HARVEY GOLDSCHMID:  One footnote, Alan, just a footnote.  (Laughter.)

MURRAY:  I should not have started with the professors.  That's the problem.  (Laughter.)

HARVEY GOLDSCHMID:  The decline -- the decline came before 202.  After Sarbanes-Oxley, things actually went up in terms of the premium.

MURRAY:  Maybe we'll come back to it.

MR.     :  We'll come back to it.

MR.     :  We'll come back to it.  I won't take a year.

MURRAY:  I'm going to let you do clean-up.

Frank Zarb, we're hearing two very different views of the competitiveness problem.  Sort it out for us.

FRANK ZARB:  I really counted on being last; with Z always I'm last.  (Laughter.)  I thought then I could -- everything would have been said, and I think a lot has been said.  Arthur, obviously, has a lot to say.

But I think sometimes it's useful to take a look at the history of our financial world here in this country.  It tends to make us take ourselves a little less seriously, and there's been over the years a yin and yang in this debate over regulation.

In 1929 there was a very famous economist -- and some of you are economists -- by the name of Joseph Lawrence, and he criticized then the Federal Reserve, who was trying to do something that was probably an early Sarbanes-Oxley.  And he said that -- now a famous piece -- he said Wall Street is an innocent community and it's being mercilessly persecuted by flannel-throated fanatics in the Congress.  (Laughter.)  Flannel-throated fanatics in the Congress. 

By 1938 -- '29, '30, the reform had run its course.  In the meantime, there was a guy by the name of Richard Whitney, who I guess is today's version -- or those days' version of Skilling.  And Whitney, who in the early '30s said this exchange was a perfect institution, in 1938 he was sentenced to five to 10 in Sing Sing.  (Laughter.)  And at the end of 1938, the SEC chairman, then Chairman Douglas, said to the world, "The day of the Wall Street crackdown is now over."  So there's a certain kind of cycle here of varying forms of reform that come and go.  There's a tendency to overkill when there are defects, and then a correction. 

I would say on the point of markets -- companies making decisions as to where they're going to list -- that's what it gets down to, for those of you -- and there are some important of you in the room here -- who have advised foreign companies as to what they do with respect to their capital raising, I can assure you that our regulatory structure is on the list but it is not at the top of the list.  When you make a decision where to raise capital, you look at depth, you look at vitality, you look at a whole range of things, your market model, and down the list you're going to have to add in the cost of a Sarbanes-Oxley. 

Litigation, on the other hand, if you sit at this table and make these decisions with these company heads, they're more likely to make a determination in terms of business structure.  They won't have a plant in the United States, they won't distribute their product in the United States because they're concerned of the litigation.  So there's a bigger, bigger picture here.

Then finally I would say that keep in mind that all of this move  toward regulation is really a political force.  And it started, in my lifetime, in -- particularly we were then working together -- in the '60s, the time that McDonald's and Kentucky Fried Chicken went public, and the beginning of the middle class getting into the equity markets and everybody else getting into the equity markets via institutions and pension plans and mutual funds.  These people getting into the equity markets were voters as well as investors.  And once there were that number of voters, Congress was going to pay attention.  So there's a very important political element to this cycle.

MURRAY:  Let me ask you one thing about that, Frank, before we turn to Arthur.  In trying to figure out the answer to this question, why did only one of the 20 largest IPOs list in the United States in 2005, I went to the London Stock Market website because a lot of them, particularly smaller companies, were listing on the London Stock Exchange.  And they had a study asking that -- it was a marketing study, obviously, but it's that very question, why are people listing here instead of in New York.

And you know what the number one thing they mentioned was?  It wasn't regulation, it wasn't Sarbanes-Oxley, it wasn't litigation.  The number one thing they mentioned --

MR.      :  (Off mike.)

MURRAY:  No, it was investment banking fees.  That the investment bankers charged 6 to 7 percent in New York and they only charge percent over here.  Now, I know I've probably offended half of our audience here.

ZARB (?):  Same investment bankers.  (Laughter.)

MURRAY:  It's the same investment bankers.  Is that an issue?

MR.       :  It's relative to the size of the -- it's too small relative to the size of the transaction.

MURRAY:  Three percent of the transaction?  I'll take it.  (Laughter.)

MR.      :  No, that's not it.  That's not it.

ZARB:  On the point you made, and we ought to go to Arthur, the fact is that these investment banks today are truly so international that they can deal with your question anywhere in the world, and do, and are more likely today to advise you not to list in the U.S. just for capital reasons and not for regulatory reasons.

MURRAY:  Does that hurt U.S. competitiveness?  In other words, is U.S. competitiveness being hurt by investment bankers telling people to list overseas?

ZARB:  Of course.  When I ran Nasdaq and we used to compete with these listings all the time, some of the biggest problems I had were with U.S. investment banks who made a really good, cold analysis and said, "You know what?  Your business model is better in London.  You don't need the capital access that you get from the U.S. listing."

MURRAY:  Arthur, make sense of it all for us.

LEVITT:  Well, when Goldman Sachs decides to list a company in the U.K. or in Hong Kong, it doesn't make a particle of difference to their bottom line.  When Merrill Lynch decides to do the same thing, New York doesn't lose very many jobs, if any.  I don't accept that argument as being anything but specious. 

But overlying all of this is a fundamental sociological phenomenon.  We're in the midst, in my judgment, of the most polarized environment between the business community and the investor community that I think we've seen in the past 40 years.  And it's understandable.  The same members of Congress who opposed virtually every pro-investor initiative  that the commission put forward during the '90s became latter-day Elmer Gantrys after WorldCom, calling for Draconian solutions, most of which would have crippled the business community.  And as a consequence of that, we did get Sarbanes-Oxley.  And we did get a well-informed broad-reaching media that pilloried the business community to a point where they said, this is enough; we're not a bunch of criminals; we're going to fight back. 

As a consequence, we've seen things that I think are very destructive to not just the process of raising capital but our whole society, which goes to the foundation of what's made our markets great.  And that foundation is investor confidence in the fairness of the system, where the system has both fierce competition and fair competition.  And we have the spectacle of the Chamber of Commerce bringing suit against the SEC, the business roundtable being a more aggressive critic today of the SEC than any time in recent years, and the proliferation of groups such as the Scott-Hubbard group and the Bloomberg group and the McKinsey study and the Treasury group, the whole bunch of them publicly criticizing the regulatory process. 

I think that we can always improve on a process which is fundamentally inefficient almost by definition.  But they're not at the core of the problem, in my judgment.  I do not believe that private rights of action should be curtailed.  I think it is a fundamental investor protection.  Our system is the most liquid and the best protected system in the history of markets because we have the enforcement efforts of the SEC, the enforcement efforts of the stock exchanges, the self-regulatory bodies and private rights of action. 

MURRAY:  Not curtailed at all, you don't see any need to rein in the excesses of class action lawsuits. 

LEVITT:  I don't think there are substantial excesses of securities litigation.  If you want to talk about tort reform in a larger sense, of course I probably have been the victim of as many of those as anyone in this room, and I understand them well.  But private rights of action, the right of investors to protect themselves, I believe, is fundamental to our system.  That's not where the emphasis should be. 

If you want to talk about irrational accounting standards, as we endeavor to coordinate both domestic standards and international standards, that is a real impediment that has to be addressed, not addressed by giving companies the right to pick and choose between principle-based standards on the one hand and GAAP on the other hand.  That is a hopeless muddle brought about by the inability of the FASB and the international standard-setters to come to some rational reconciliation.  But I think that issue is much more relevant than the issue of the cost of regulation, the issue of private rights of action and saying we are -- the IPO issue.  I believe the IPO issue is a non-issue and is -- really confuses what the really important issues are today. 

MURRAY:  Glenn, I want you to respond to that, but let me frame a question for you based on what Arthur just said.  If you think about accountability in capital markets, there's sort of three ways you can get it.  You can get it through regulation.  You can get it through private litigation, private rights of action.  Or you can get it through shareholder action.  As I read your report, you're sort of saying, let's have less regulation; let's have less litigation, and in return we will strengthen the rights of shareholders.  Have I got that right? 

HUBBARD:  That's exactly right.  To Arthur, I guess I'd have to say, well, you know, there you go again.  (Laughter.) 

If I look at the whole -- you know, on private rights of action, in our report at least -- I can't, you know, speak for the Chamber -- we certainly didn't rule out private rights of action.  What we said was, the SEC needs to clarify materiality, going back to Harvey's point about the principle.  But second, we said, shareholders should be able to amend charters, whether for a mature company or in the context of an IPO, to say, you know, we're not going to have class action, and let people sort it out themselves.  And if you're correct that the capital market will punish such a vehicle, we'll learn that in the private marketplace. 

I think that shareholder rights are very important here.  I think our regulations have been very poorly implemented.  And I, you know come back to the theme that I began with -- what's wrong with looking at a tradeoff between costs and benefits? 

GOLDSCHMID:  You know, there's another point about this that we haven't mentioned, and that was the report's suggestion about the redundancy of enforcement efforts, which would tend to curtail the state actions.  And I think that is very, very wrongheaded.  I have seen many, many instances where responsible state regulators acting as the local cop on the beat have been able to uncover wrongdoing that federal regulators never would have seen. 

MURRAY:  Well, let's not talk about many, many instances, because we all know the unstated point was Eliot Spitzer. 


MURRAY:  Was -- is Eliot Spitzer a force for good or a force for bad? 

GOLDSCHMID:  In my judgment, he was very solidly a force for good. 

HUBBARD:  (Off mike) -- talk about Eliot Spitzer.  (Laughter.) 

MURRAY:  No, no, you have to talk about Eliot Spitzer.  I get to ask the questions.  We know that's what it's all about.  That's what's caused this. 

HUBBARD:  No, what we said in the report was simply that when there's a matter of national importance, the SEC should have the right to go first.  If the SEC drops the ball, fumbles, is asleep at the wheel, then yes, of course. 

MURRAY:  Was the SEC asleep at the wheel in the early 2000s?  Did Eliot Spitzer cross the lines you drew in that report?

HUBBARD:  Well, again, I don't want to comment on particular presidential --

MURRAY:  No, but come on!  That's what it was all about. 

HUBBARD:  No, I think that the presumption ought to be, if you have a national -- nationally important matter, the SEC goes first, before state AGs.  In variety of states --

MURRAY:  So Eliot Spitzer crossed the line.

HUBBARD:  In a variety of states, we have had AGs cross an economic line. 

(Cross talk.)

LEVITT:  I'd like to respond to that.  (Laughter.)  I don't think Eliot Spitzer crossed the line at all.  For a variety of --

HUBBARD:  Come on!  I didn't say Eliot Spitzer crossed the line.  (Laughter.)  Be clear.

LEVITT:  I think the -- two of the issues that he dealt with, not the first one, which was the most highly publicized one, but two of the issues that he dealt with -- the notion of compromised research -- were issues that several commissions of the SEC, going back some years, including the ones that were there while I was there -- we could have addressed that issue.  Certainly we were aware of it, and we didn't. 

Eliot -- this was a fluke.  What occurred was, someone came into the Boston office of the SEC and was turned away.  That whistleblower went to Eliot Spitzer, and the rest is history.  He performed a public service, probably set back the SEC some years.  It was an embarrassment, almost a humiliation to the commission at that point.  What he did in terms of investment companies, mutual funds completely uncovered new ground.  And other -- I know of other state regulators that have acted responsibly, working collectively with the SEC.

Have there been redundancies?  Sure, but the trade-off isn't worth it.  I would not curtail, and I certainly wouldn't say wait until the SEC does it and then come in, bring the states in.

MURRAY:  I know Harvey's chomping at the bit, but I think we have to bring in Frank here, because he sat right there at the center of that big Eliot Spitzer bull's-eye for a period of time.  Did Eliot Spitzer go too far?

ZARB:  In what?  (Laughter.)

MURRAY:  I'll let you define it.  In -- I mean, look, you watched the way he dealt with AIG.  You watched way he dealt with Marsh --

ZARB:  Now you're talking about style.  If you want me to address Eliot Spitzer's style, I'll respond to that.  But I think the real issue here is, was Eliot Spitzer -- did he overstep his bounds in terms of the mutual funds scandal or in terms of the research scandal?

MURRAY:  Should there be -- the issue is, should there be limits placed on the ability of state regulators to act?

ZARB:  That's a legitimate question, not whether his personality or whether he went --

MURRAY:  All right.  (Cross talk.)

ZARB:  We were getting lost in the weeds because we -- and part of it's politics, part of it's personalities, part of it's the news of the day.  The fact -- the question, I think, before the house is whether or not we need to reshape public policy in order to retain and build the strength of the capital markets in the United States of America.  I think --

MURRAY:  And should part of that reshaping be reining in state regulators?

ZARB:  I really think you could really get lost in the weeds, because that's such a secondary question and doesn't --

MURRAY:  Okay.

ZARB:  -- the impact on that is fleeting.  It's a moment in history and not significant to the bigger picture.  And I -- we still need to address the question.  And I'd be curious as to the rest of the panel's views --

MURRAY:  Okay.  Well, then let me go -- then let me go to Harvey, and I --

ZARB:  -- unless you answer it in your book.  Do you answer it in your book?

MURRAY:  I've been waiting for you to say that.  (Laughter.)

MR.     :  He knew he'd get more air time --

MR.     :  I read a terrific excerpt.  (Laughter.)

MURRAY:  The book is "Revolt in the Boardroom."  (Laughter.)  It just -- we're stopping here for a commercial message.  (Laughter.)  "Revolt in the Boardroom," published by Collins Press, which, by the way, is owned by Rupert Murdoch, I'd just point out.  (Laughter.) 

MR.     :  Is there any code you -- (inaudible)?

MURRAY:  (Chuckles.)  Just came out last week, addresses a lot of the issues we're talking about.  So please, buy it off of Amazon and boost my rankings.  (Laughter.)

Harvey, let's get back to the basic formulation of Glenn's report, which is less regulation, less litigation, more shareholder rights.  You're a shareholder rights guy.  What's wrong with that?

GOLDSCHMID:  Nothing but.  (Laughter.)  The need is for vigorous regulation, for enforcement and litigation in appropriate ways, as Arthur was suggesting, including state AGs, but also for shareholders' rights.  You don't need just one of them; you need them all with (a balance ?).

In fairness to Glenn's report, the shareholder rights section was sensible at least in two moderate ways.  It -- they ask --

HUBBARD:  (Inaudible.)  (Laughter.)

GOLDSCHMID:  I mean, it's kind of a B minus.

HUBBARD:  I'm growing on you -- (laughter) --

GOLDSCHMID:  They asked for a vote from shareholders for poison pills combined with staggered boards.  That makes sense.  They talked about the majority voting.  And then when it came to the key issues, the shareholder access to the proxy and other things, they basically backed away.  So it's mild when it should have been bold to really get shareholder access, which is the key to making the system work overall.

On arbitration, which is Glenn's other point that I wanted to touch, it's a -- "dumb" isn't the right word.  It's an unwise idea.  (Laughter.)  The idea that you're going to take hard-core fraud in this private sector and put it in arbitration in the shadows, without opinions, without discovery at times, without all the legal protections, without any public disclosure, it's just dead wrong.  I mean, it -- but to suggest that it's a shareholder right -- remember, shareholders would be voting on this with a one-sided argument in the proxy statement.  The FCC, as a matter of policy, should say what it said all through history -- this would be bad public policy, we want them out, and it happened.

But shareholder rights -- again --

MURRAY:  Glenn, you want to --

HUBBARD:  Quickly, on the point about shareholder rights -- the reason we didn't go further was we wanted to play by the same rules we asked the FCC to play by.  We looked at evidence.  So the studies that we had were really focused on the majority voting, poison pills, classified boards.  We didn't want to be in the position of opining on things that there wasn't solid academic evidence of.

On the issue of the arbitration, you know, I view it as a basic shareholder right.  It doesn't mean that there can't be FCC civil actions or DOJ criminal actions, but this is something shareholders ought to be able to sort out in the marketplace, and if I'm wrong, the share prices will be punished, and this vehicle will go away into the dustbin of history, as you suggest.

GOLDSCHMID:  Yeah.  But we're not anxious for shares to be punished, and we're not anxious for the system to be vulnerable and undisciplined.

MURRAY:  Okay.  Let's back up just for a second, because I think sometimes when we're here in Manhattan, we tend to forget that the capital markets exist not for their own glorification but to finance businesses.  And I talk to CEOs all the time, Frank, who say we have created a world where when we have to worry about regulation, we have to worry about litigation, we have to worry about newly empowered shareholders, some of them representing special interests coming out of some -- a hundred different directions, that we spend too much time on the defensive, too much time on compliance issues and not enough time growing the business, taking the risks that we need to make this business stronger.

Yeah, you were in that situation.  What do you think about that?

ZARB:  As always, there's some reason in that criticism, and there are -- as you look at the world markets and -- as I have had an opportunity here to do recently -- you will find that the U.S. in its macrosense is moving away a little bit from Sarbanes-Oxley by refining some of the burdens, and London and particularly the Asian markets are moving toward, so we're kind of moving toward an accommodation here which is a self-rationalization.

I truly believe that these -- that kind of bitching and moaning has always been around.  God, I was around when the stock exchange eliminated fixed commissions.  Could you believe that?  We had fixed commissions on the New York Stock Exchange.  If you didn't go by their fixed commissions, you got excommunicated from the Exchange.  So the world was going to come apart.  I mean, the CEOs of the major firms were moaning and groaning.  So you've got to take some of that with a grain of salt.  Some of them does feed into the program.  But I've got to tell you, the giants of our business world, the Jack Welches, built companies over and above these burdens that were everyday, they were unique for the time.  And I always put my tongue in cheek when I hear a little bit too much.

MURRAY:  Could a Jack Welch do what he did in today's environment?  Some people say he could.

ZARB:  Nah.  I don't believe that.

MURRAY:  All right.  So you think we have the balance about right?

ZARB:  No, no.  I think there's a continuing ebb and flow.  There's a movement, and it's a different category --

MURRAY:  So --

ZARB:  -- and you'll have the question of states attorneys general, and then we'll have the insurance commissions.  But he could manage his company through all of that.

MURRAY:  Where are we relative to where we should be?

ZARB:  We're never there.  (Laughter.)

MURRAY:  Well, are we -- which side of it are we on?  Are we close?

LEVITT:  That's obvious.  We're -- we have moved toward, in the minds of the business community certainly, too much regulation.

MURRAY:  But how about in the mind of Arthur Levitt?

LEVITT:  We're a centrist nation, and we move from activist commissions, activist regulators to deactivist regulators, and then we come back toward the center.  We're moving a little bit toward the center now, not disturbingly so, in my judgment.  I think that this polarization that I spoke of is -- has happened many times before and will happen again.  I think that it's a question of balance.  That's the key word, and I think Frank has it absolutely right in terms of what's happening really in the globalized electronic market today.  And markets that never could have existed before are active competitors.  The U.S. no longer is the primary -- can assume the primacy in their capital markets, because it's just as easy to do business in other domiciles, which are becoming much better regulated than ever before.  No longer is it the Wild West out there.  And in some instances, their regulation is even more draconian than ours, and we've got to adjust to that.

But the central issues that I think we haven't touched upon is market structure.  How do we integrate our market with those going on in other parts of the world to produce a system which is faster and cheaper than other markets.  That's a key determinant; that it isn't just regulation, and to make regulation the overriding characteristic that we have to fight against, I think, misses some very important points.

The power structure has changed so dramatically.  The power structure has changed not because of regulation, but because of humiliation.  Go to any board meeting and the influence of both the board and the auditors is so much greater over those of management than ever before.  It's not going to be that way forever, nor should it be, but it is today -- to correct real aberrations that existed during the `80s and `90s.

MURRAY:  And it's not a good thing or a bad thing?

LEVITT:  I think it's a very good thing.  I think for years we had a culture of the board which was fraternal, and in my judgment, that culture should be one of skepticism, not fraternal.

GOLDSCHMID:  Well, I'll just --

MURRAY:  Yeah, go ahead.

GOLDSCHMID:  -- we'd be negligent if we didn't expose one bit of mythology here today before we're finished.  We have -- you and I have sat at the board table where we've heard the mumbles and grumbles of accountants and lawyers telling how awful all this garbage is that comes out of Washington, and then when you look at their billings, they're up twice to where they were before this happened.  (Laughter.)  In a way -- I mean, let me get this straight.  You're making a hell of a lot more money, and you really are in favor of reform?  So there's a certain amount of industry that's been built around what --

MURRAY:  But just -- yeah, I just want to get -- before we leave, Frank, to get back to what Arthur said, it's -- there's no company that I'm familiar with that has had a more dramatic transformation than AIG, and you were leading that transformation.  It went from a totally CEO-centric style -- where the CEO was chairman, the chief executive, all important decisions went through him; the board was hand-picked by him, pretty much did what he wanted -- to a completely different style where you have a non-executive chairman of the board -- that was the position you were in -- where the board chooses its own members, where the auditors and the compensation consultants all report to the board, and the CEO, by his own admission, has a great deal less unilateral authority than his predecessor did.

So having watched that change, what is the significance of it?  Is it a good thing?  Is it a bad thing?  Is it some of it good, some of it bad?

ZARB:  I think it's a matter of evolution.  There were other CEOs.  I worked -- Arthur and I worked closely with Sandy Weill for a good many years when he was sort of the same kind of CEO.  It's a movement and an evolution.  These companies are as good -- or in AIG's case, in my view, personal view, is a better company, and it was a better company every year for the last X years and continues to become a better company.  It's run well and doing just fine, but it's an evolution of the history within a corporation.

LEVITT:  It's the most extraordinary transformation of a company that I have ever seen, just extraordinary, and Frank was the architect of it.

MURRAY:  But Frank is saying that in terms of its effect on the basic business --

MR.     :  It's clearly a positive effect, clearly.  (Off mike) --

HUBBARD:  (Off mike) -- Arthur said that I really agree with, so I want to -- (laughter).

You know, this isn't the 1960s anymore.  This is a constant refrain in Washington -- when you make tax policy, you do regulation.  When you're in a global economy the world is different.

To this question about CEOs, I am concerned, as a board member watching a set of CEOs in a range of industries, that they are spending a lot of time away from the basic functions of a CEO guiding and directing the strategy of the company toward matters of compliance.  Now these are all matters of degree, and there's a balance, but I think we've gone beyond it.  I do think it is something American business needs to watch.

I would also point to the trend that so many business executives, whether they're the CEO or just under him or her, want to work in private equity, and it's not just about the money.  It is about getting out from under some of this regulatory hassle.

MURRAY:  So just before we go to Harvey, so in terms of where we are in that swing of the pendulum, I mean, are we off the fairway at this point?  Are we, you know, somewhere --

HUBBARD:  Well, the good part about this country is it's very hard to get off the fairway, but I do think -- you know, and I'm going to butcher this because I play tennis, not golf -- (laughter) -- but we want to get it toward the hole.  (Laughter.)

So you know, I think we've got work to do, but as I said, the first thing I said, we don't have a crisis.

ZARB (?):  Ask the best CEOs in America whether they believe the mechanism to examine internal controls is a good one.  They will tell you that they have followed those principles before Sarbanes-Oxley was ever conceived.  Examine the number of restatements, and you will find that over 96 percent of restatements in the past several years was on behalf of companies that are not obliged to follow Sarbanes-Oxley.  That's where the real problem is.  And investors don't care whether they lose money on a small company or a large company.  I think that's wrong-headed to hold them to a lesser standard.

MURRAY:  I'm going to get to you, Harvey, and you can have the final word before we open it up for questions.

But I have to follow up on that because I think you're right.  I have asked a lot of CEOs of the best large companies in the country, and they have said that Section 404 of Sarbanes-Oxley, which many people like to deride, was -- either forced them to do things they were already doing or should have already been doing and made them better companies.

But I think some of the strongest arguments against regulations have actually come -- there was an interesting piece by Bob Grady, who works for your firm, Carlyle, and heads the National Venture Capital Association, saying that venture companies have a real problem.  It's a huge cost burden to them, makes it very difficult for them to lift their shares in public markets.

LEVITT:  Should they be public companies?

MURRAY:  Well, that's the question.

LEVITT:  I think there are a substantial number of smaller companies that seek for a variety of reasons public listings which in my judgment are not ready to be public listings.  I don't think it's a matter of, check the box, that because they have certain standards of distribution or earnings; I think for a variety of reasons those companies don't deserve to be public companies.  So I don't accept Grady's argument.  I think that there are over-arching reasons to deal with these issues, but they are not, certainly, the number of companies which don't qualify for listing.

MURRAY:  You want to respond to that?

HUBBARD:  Actually I agree with much of what Arthur is saying. What we recommended in the report was not that small companies be treated differentially.  In fact, we said the first best is everybody's treated the same, the SEC and the PCAOB should do a cost-benefit analysis, and I expect when they do that they'll find small companies are worse off. 

What we recommended was not doing a watered-down auditor at a station;  Our fear was that would confuse investors who might think auditors were seeing more than they did; but move to management at the station and just acknowledge this is different.  And I think where I agree with Arthur is that might lead to fewer public companies.  But I don't think we want to be in the business of having auditors attest to light standards.  I do think that could confuse investors.

MURRAY:  Harvey Goldschmid.  And tell us in your final comments here where you think we are in the grand balance of things.

GOLDSCHMID:  Let me start with 404.  It actually is the one -- it's one area in general of Sarbanes-Oxley where Glenn's report I give high grades.  And that's because they don't recommend changing Sarbanes-Oxley at all.  It's only 404 they address, and not in terms of the statute but in terms of the implementation. 

And it's quite fair to say there were bumps in the road on implementation.  I was at the commission and take some fault on that.  The PCAOB, the accounting profession, corporations in general, everyone can share a little bit of fault on the implementation of 404.  Although the SEC said it from the beginning, risk should have been taken into account to a greater degree in the 404 audits, you should have had more ability to rely, more judgment.  Those are consensus issues today.  That's all there is.  It was the one big expense item in Sarbanes-Oxley.  It's now being taken care of.  We implemented it slowly.  It's still not being applied to small corporations.  Non-U.S. corporations just came under it.  And (after it ?) forget about Sarbanes-Oxley.  There's no real expense or problem in Sarbanes-Oxley.

Stepping back, Alan, on the question of where we are today in terms of balance, corporate governance has gotten much better in the United States.  There's room for the balance of can you focus enough on the business.  But I go back to 1970, when I began teaching.  That was the year Penn Central went bankrupt.  In those days the average director of a public corporation -- remember, Penn Central was our largest railroad, our sixth-largest industrial corporation, and was the largest bankruptcy since the Great Depression.

The average director, carefully studied by the SEC and everyone else, worked 30 or 40 hours a year in those days.  Now, that cannot be a serious oversight or serious job.  Today we've gotten directors up towards 250  hours a year.  It's a demanding job.  One of the things we do best now is get rid of weak management.  If you look through our industrial and financial sectors, CEOs are more vulnerable today, and in many ways they should be.  Good ones ought to stay on, stay forever.  The weak ones we get rid of better and earlier than most other developed societies, and that's to the good.

But where we are, there are lots of things I think we've suggested I'd change or improve, not because of any fear about our competitive position generally, but because they're the right things to change.  But the glass half-full bottom line is things are actually in relatively good shape.  The SEC is a quality place, the attorney general, the redundancy of the system basically works, the safeguards and safety nets on a commission that may not be active enough at times or effective enough at times.  And overall, for me it's an optimistic picture.

MURRAY:  I know I said I was going to let Harvey Goldschmid have the last word, but Glenn's feeling a little outnumbered here.

HUBBARD:  And it's for a note of agreement.  I think what has been very helpful from everybody this morning is that while competitiveness gets this headlines, this is really all about investors; does our regime generate their ability to share risks, generate liquidity and get the best information.  So I think that is a very helpful note.

MURRAY:  Right.  Let's open it up to questions.  Please identify yourself before you ask your question.  Right here.

QUESTIONER:  Joseph McLaughlin.  This is a question for Glenn, but maybe Harvey might like to respond too.

MR.      :  Oh, no.  No, no.

GOLDSCHMID:  Joe will be friendly.  I know Joe.

QUESTIONER:  In about three weeks, a whole bunch of foreign companies become eligible to walk away for the first time.  Harvey mentioned a premium associated with being part of the U.S. reporting system.  Now, my question, Glenn, is does literature bear this out?  And if not, or even if so, especially if so, how can managements justify not only not coming to the United States, but leaving the United States?

HUBBARD:  Well, you raise an interesting point that, not surprisingly among economists, there's disagreement in studies.  But there exists a simple fact that while I believe, and I think most economists believe, there's still a premium to listing in the United States, we're not seeing the activity.  What we do know is that there has been a change in the listing premium in the wrong direction in recent years, and we know that in the cross-section, which is probably more interesting, we have seen the activity fall off for firms from countries with good corporate governance, which suggests we're just raising costs for firms that were already doing the right thing.  It's not that we're discouraging bad guys.  That is very unhealthy.

GOLDSCHMID:  Joe, the U.K. has no premium.  We have a large premium.  You can debate about where and how, but it's gone up since 2002, and for a New York Stock Exchange company, it's roughly 30, 32 percent.  That's dramatic and important.

One problem to what -- is the overall atmosphere created by these reports and for your overseas clients is that they feed into a mythology that's been out there -- U.S. wild litigation climate, U.S. harsh regulatory climate.  There's not a heck of a lot there when you get the facts.  I mean, the commission -- I have bias towards and I don't think you can say that about the regulatory.  Allowing companies to leave, as the commission just did, makes sense.  You can't trap them here.  But I think they'd be foolish, in general, if they leave, given the premium and other things.

MURRAY:  Very quickly.

HUBBARD:  I mean to Harvey's point, if what you have said is true, there are hundred dollar bills under every one of your tables, folks.  Please get them before you leave.  Because if there is a 30 percent, and growing, listing premium, if you calculate the effect, you know, on just the profitability of listing, every CEO must be an idiot for leaving this hundred dollar bill on the floor.  In economics, there are no hundred dollar bills on the floor, at least not for very long.  So I would submit --

MURRAY:  So in other words, the premium's not that big?

HUBBARD:  It's not that big, not even close.  And it's going in the wrong, not the right direction. 

MURRAY:  Yes, sir, right there.

QUESTIONER:  Thank you.  Roger Leeds from Johns Hopkins.  All of you agree, and everyone agrees that there's been a globalization of finance, financial markets on both the supply and the demand side.  There's been virtually no or very little convergence or globalization on the regulatory and oversight side.  And do you think in the future that there is going to be more convergence of oversight and regulation globally, and is this a good or a bad thing?

LEVITT:  I think there continues to be a great deal of convergence of regulation internationally.  The SEC has stepped up its efforts to meet with fellow regulators throughout the world.  And even more significantly, they have a very extensive program of training regulators from every regulated market in the world, which sends two of their staff people to the commission for periods of several weeks each year. 

I think there's greater convergence today as companies (sic) such as Germany convert to a equity culture away from a debt culture.  So much of this is the culture of a particular nation.  And I think we're seeing an equity culture spread throughout the world. 

And I think the SEC -- the SEC budget for their International Division is higher today than it's ever been in history.  It's a major priority, and I think we're making great strides in that direction.

GOLDSCHMID:  Can I add to that answer?  It started with really the Levitt period that he began to break what was really a regulatory hubris here in the United States that we were the only people who know how to do it right.  And he fought within the institution bureaucracy who really were shut down to listening to compromise with other regulatory regimes so that there can be a leveling of the playing field.  So the movement began with Arthur and it has moved substantially since then.

MURRAY:  There's also convergence on accounting standards, right?  That has to be very important.

LEVITT:  Yes and no.  Yes, we've spent a heck of a lot of time.  No, in that the European Union and certain political leaders have interfered in the process, and what was moving toward a very logical convergence has been interfered with.  And today we have this -- what I call a "muddle" between the FASB and in the International Accounting Standards Board where companies can opt for a standard either based on principles or a standard based on GAAP.  I think that inconsistency is very disruptive and costly.

MURRAY:  So you're -- because the current chairman of the SEC has suggested that he would allow companies in the U.S. to use the international standards instead of GATT, you think that's a big mistake?

LEVITT:  No.  That's not what I'm talking about at all.  I think what is a mistake is the apparent effort of the FASB to reconcile the differences by saying -- rather than calling for reconciliation, companies can pick and choose.

MURRAY:  Can do what they want.

LEVITT:  And I think that's where the mistake is.

MR.     :  You lose your comparability and everything else.  I mean, serious convergence is in everybody's interests.  Companies will save lots of money.  It will be a far more effective system.  And pick and choose, you lose comparability, you lose consistency, you create, as Arthur puts it, a muddle.

MURRAY:  A question right here.

QUESTIONER:  Muriel Siebert of Muriel Siebert & Company.  Do we need global margin requirements?  Some of these private equity deals I understand are 8- and 9-to-1 leveraged.  What happens if we get problems in one or two of them?  Who's going to bail them out?

MURRAY:  It's a very good question.  I don't know who wants to take that on, but we've seen --

HUBBARD (?):  I'll give it a shot.

MURRAY:  We've seen this flood of liquidity in markets.  We saw what it did in the housing market, with the subprime loan thing.  Now I read stories about what's going on in some of these no-covenant private equity loans.  It sounds like subprime, just moved to a different sector.

HUBBARD (?):  The truth is, one of the most interesting developments in private equity of the past few years has really been something that has nothing to do with private equity, and it has to do with imbalances in international capital markets that are luring foreign saving from some key emerging economies to this country.  Not only are safe interest rates at a very low level for this stage in recovery, but risk spreads are just nonexistent. 

So it would be the case the private equity firms rationally should respond to such an environment with greater leverage.  Now the question is, how does it play out?  In the next few years, it's hard to see trends in the international capital markets fundamentally reversing from where they are, but it is the case that certain private equity transactions do look very, very rich, and the market may have to sort that out.

MURRAY:  Well, but to go to Muriel's question, if risk is being underpriced and that would inevitably cause people to take risks they shouldn't be taking, is there a public policy response, margin requirements or something else, to rein that in?

LEVITT (?):  No, the best response is going to be the actual response, where limited partners take a look at exactly what's happening, and they're going to shift their capital away from these higher-risk situations and less productive investments to private equity places, where it works better.

MURRAY:  So no public policy response. 

LEVITT (?):  No.  Market's going to work it out.

MR.     :  I would agree with that.

MURRAY:  Harvey?

GOLDSCHMID:  I think we've got to know more.  I think the public policy response is to know a lot more.  It's not only the margin issues, it's derivatives and the leveraging through derivatives instruments.  We ought to understand where we are better.  We know there's a vast amount of money in private equity today, in hedge funds.  We don't know how much.  Government has no idea of truly what's happening, and that cannot be healthy in an economy like ours.  I don't think there are clean answers at this point, but there's clear need to understand the international and domestic dimensions of leverage, of the amount of debt out there, of what's going on in our markets.

And it goes into other areas, too.  We know hedge funds are trading 30 percent or so, maybe more, of the shares on the New York Stock Exchange.  Now that may be perfectly all right and driven by computer programs, but we don't have any clean idea of what's going on.  And there a need for some kind of knowledge and oversight seems critical.

LEVITT (?):  How would you do that, Harvey?

GOLDSCHMID:  Oh, I'd do it the way we did it in the 3-to-2 vote -- but the court knocked it out -- with the ability of some combination of the Fed, the SEC, Treasury to be able to at least get in and understand what's happening at the firms.

HUBBARD:  Yeah, I'm very concerned about -- on the hedge fund front, about your allegations.  I don't think we have any systemic risk at the moment in hedge funds.  If some very wealthy people lose a lot of money, I lose no sleep over that whatsoever, as long as it has not posed systemic risk.


HUBBARD:  And I've seen no credible evidence that there's systemic --

GOLDSCHMID:  Yeah, but Glenn, one, we have no idea is one of the problems.  And two, it's not just wealthy people, although I protect their money, too. 

But we're talking about vast --

HUBBARD:  Believe me, as the dean, I have their interests at heart -- (laughter) -- but it's not from a policy perspective --

GOLDSCHMID:  So we're talking about the Columbia endowment --

QUESTIONER:  Pensions.

MURRAY:  Pensions.

GOLDSCHMID:  -- the pension programs are heavily in and lots of real people who are going to suffer an awful lot if the system breaks.

MURRAY:  Other questions?  Right back there.

QUESTIONER:  Merit Janow, Columbia University.  This discussion has focused a lot on IPOs, but there's been a huge increase in 144A transactions.  And I wonder if this distinguished panel might comment on that trend and what that's saying, if anything, about the premium issue and the competitiveness issue, because it's very underdiscussed, and it's dwarfing the IPOs.

MURRAY:  We'll do that, but somebody first has to say what a 144A transaction is.  Who wants to take that on?

HUBBARD:  These are the private placement transactions. 

MR.     :  Yeah.

HUBBARD:  In the report we do talk about this a fair amount.  This is exactly as you said, Merit.  You know, it's a mirror of what's going on.  And it is in part because, you know, it's a very different set of regulatory issues, and the question is, do we care or not?  I think we do, because I think we do care about the integrity of our public markets and don't simply want a private marketplace.  But I agree with you, it is an important issue.

GOLDSCHMID:  Yeah.  These are often private firms coming in that way, and clearly they're able to avoid a lot of our regulatory overlay by doing that.  And there is fear out there at times in other countries and other companies.  Much of it, I think, is unreal or -- when you clearly analyze it.  But their fear of the U.S., of our regulatory scheme, a lot of misinformation about our litigation process -- that part is unfortunately there.

MURRAY:  Other questions?  We've got time for a couple more.  Yes.

QUESTIONER:  Hi.  I'm Trish Henry and I'm with ACE Insurance.  And I -- my question is for any of the people that disagreed with Glenn on the Eliot Spitzer, good or bad.  It's -- my experience --

MR.     :  (Off mike) -- Glenn did not say --

QUESTIONER:  I know, I know.  I didn't say he did.  (Laughter.)  Whether or not states attorneys general should stand down if there's a national issue -- I guess my question is if they're not going to stand down, we at least need some coordination.  Because it wasn't just dealing with the New York attorney general; in the wake of that, there's 20 states attorneys general, 25 departments of insurance, all with conflicting reforms that they want in place, all asking for the same information, 20 some private class-action, some security, some antitrust, and somebody up there who thinks that's a good thing -- defend that for me.  Why shouldn't there be some coordination?

MR.     :  I think there is coordination.  I think that the FCC chairman has as one of his responsibilities to coordinate with the major state regulators -- and there aren't that many of them, perhaps four or five or six -- to see to it that, to the extent possible, they act responsibly.  And, sure, these are all politicians, and they very often have private agendas.

But I think the incidents of abuse in that connection is outweighed by the fact that a substantial number of referrals to the FCC come from state regulators.  Right here in New York State, not only do we have state regulators, we have a county regulator who's been remarkably effective.  So I would be very reluctant to clip the wings of those regulators.  The basic forum for coordination is the association of state regulators, which -- (various FCC ?) -- pay a great deal of attention to and seeing to it that there's some coherence.  And when there is suggestions of legislative action, there is great coordination between the commission and the state regulators.  Could we improve that coordination?  I think it's a very, very important area of concern, and, yes, I think we can do more, but I think we will do it not by some regulatory clipping of the wings but just by the interface between the commission and the state regulators.

MR.     :  I would make modest amendment to that, and particularly your industry.  The notion of having a national insurance regulator bears public policy discussion.  And as you know, what that gets into is not only politics but economics.  Every state is able to both tax and to politically control one segment.

But the question as to whether the country would be better off with an national oversight in the insurance area is certainly worthy of public debate.  Whether we'll see it in our lifetime, I doubt it.

GOLDSCHMID:  And I want to just add again a small point.  There is wisdom in some amount of coordination and consolidation.  Arthur was very good at that.  But take the combining of New York Stock Exchange regulatory system and the NASD -- that makes all the sense in the world.  It's being done.  It will save two different groups coming into inspect and other things.  But again, it's a balance.

I was around -- I guess it was Columbia when the analysts scandals broke.  And the FCC had at least as much information as Eliot Spitzer needed.  The FCC didn't do anything with it; Eliot developed it, therefore, he deserved a great deal of credit.  And remember, the FCC has the power to pre-empt a deal when it wants.  If it makes a rulemaking, the states can't do anything.  They have to bend to the FCC's power.  So it's a matter of coordination, integration when it makes sense, and again, good balance.

MURRAY:  A question here and then a question here in the middle.  Right there.

QUESTIONER:  Yeah, David Braunschvig, Bear Stearns and Council on Foreign Relations.  Glenn Hubbard, what impact, if any, do you see on this global convergence of regulatory initiatives of the mergers of stock exchanges, particularly NYSE Euronext?  Is that something that can enhance such convergence and if so, in what direction? 

HUBBARD:  Well, I think it can.  I mean, it's important to remember why we're seeing convergence in a number of areas.  We've of course seen this in commercial banking regulation and now moving into securities.  I think it's healthy as long as we're getting the right information for investors.  So yes, I do think we'll continue to see that trend.  And I think it's made manifest in the combinations of securities institutions, not securities firms but securities institutions, like you mentioned, around the world. 

QUESTIONER:  Bevis Longstreth, Debevoise & Plimpton. 

The profit-seeking business model of the auditing profession has in some minds come into question recently.  Two developments in particular invite some question -- one, the too-few-to-fail problem and the other being the caps on liability.  And I wonder what the panelists would say to the possibility of whether the profit-seeking motive is simply incongruous and inconsistent with the function of a public auditor, and if so to consider the possibility of the bank examiner model going down the road? 

HUBBARD:  I mean, we talked about this at some length in the report.  I don't think that we should forsake the profit-seeking model in the audit profession.  I don't think that would be very desirable.  I do think, we have had problems with a number of competitors, as you suggested.  And the criminal prosecution of Arthur Andersen is viewed in the report as a tremendous mistake. 

And instead what we argue is for that as a very last resort if you indeed have a firm-wide conspiracy, but really to move toward caps on auditor liability, to make sure that we did have viable auditors, enforced in the banking way.  Remember, in the banking system when you take a regulatory action with a bank, you don't liquidate the bank; you change the management, and the regulator has the power to do that.  So I think there are things that we could do to prop it up, but I wouldn't want to turn the auditing world into the bank examiner world. 

QUESTIONER:  Let me just add quickly, those of you who sit on boards bear a key responsibility here.  If you have -- your auditors job is the certification.  Anything that dilutes the quality of that certification, for example, doing other business for the company, so because of the profit motive that certification might be clouded, anything that does that should not be there.  And any auditor that insists on selling products beyond where you think is an appropriate level shouldn't be your auditor. 

MR.     :  I think, I agree with Glenn that the Arthur Andersen case was a national economic tragedy which should never have occurred.  It represented politics at its worse, and it nearly repeated itself with another firm not too long ago. 

The major firms today are better managed than ever before.  The notion of caps, however, is a very complex issue that I think we have to ask ourselves, caps and what else?  If we are going to cite the accounting industry as being the object of a special protection that other industries are not afforded, what will investors get back in return? 

What will they get in return for diminishing the fear that accountants should have of the consequences of compromised or sloppy audits?  If we're talking about the possibility of some sort of independent directors for the profession, that should be part of the dialogue.  I think merely saying caps or no caps is too easy, too facile a response to a very important issue.

HUBBARD:  The question is really the trade-offs.  And without caps, at least the committee's view was the risk aversion that an auditor has is simply too large.  And Arthur's right, it's a matter of trade-off.  And that's why we felt having the banking model, whereas if you really did think there was a problem -- you have caps -- but if you did think there was a problem, a regulator could replace management might be a way to balance that out and reduce the risk aversion.

GOLDSCHMID:  Yeah, I think we'd all agree that there are too few accounting firms, and that is a serious problem.  It's one of those interesting academic problems in the sense of, in theory, others should replace them, grow, form joint ventures to be able to work overseas.  In practice, the branding seems to carry too much weight and it doesn't happen.  And so thinking about how to increase the number of firms is a very legitimate issue, although extraordinarily difficult, too.

MURRAY:  We're going to have to cut it off there.

If you want to explore further how these issues are affecting big public companies, I suggest --

MR.      :  Buy the book!  (Laughter.)

MURRAY:  --, you can buy "Revolt in the Boardroom." 

Thank the four of you.  It was a great discussion.  Thanks for coming.  (Applause.)








More on This Topic