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Sarbanes Oxley Is Super Great! Really! An Enthusiastic Case For A Questionable Regulation

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We’re generally fans of the Wall Street Journal opinion page. But yesterday the page ran an exceptionally unconvincing pair of articles—one by First Trust economist Brian Westbury alleging that business coverage was unduly bearish and the other by former Goldman Sachs partner Thomas Healey arguing that Sarbanes Oxley is an amazing success.
Let’s start with Healey’s piece on Sarbanes Oxley. The first thing indicator that something is wrong with Healey’s argument is the hyperbolic language he uses. “The last five years have made it irrefutably clear. Sarbanes-Oxley (Sarbox) is a textbook case of how regulation should ideally work in a democracy,” Healey writes. Lots of over-confidence there. Irrefutably clear? It’s like he’s surprised we’re even debating Sarbanes Oxley. And all that talk about democracy is just jingoistic smoke. You can almost sense the message: if you oppose Sarbanes Oxley you’re against democracy. Anti-american, even.
And that’s just when he’s getting started. By the time he’s done he’s really gone over the edge. “As Sarbanes-Oxley prepares to mark its fifth anniversary, there's only one valid conclusion to draw. This milestone in responsible corporate governance and accountability has more than fulfilled its mission to the public,” he writes. Get that Sarbanes Oxley critics? Your conclusions are invalid! Invalid! Invalid!
We almost feel gross reading this kind of thing. It’s like a guy who keeps telling you his girlfriend is really, really hot. You want to give him points for his dedication and enthusiasm but at some point you start suspecting she’s a minger.
The space between Irrefutable and Invalid were filled up with arguments in favor of Sarbane Oxley that struck us as surprisingly weak. We came away thinking: Is this really the best the supporters of Sarbanes Oxley can offer? This Healy guy is a former Goldman partner, Reagan treasury official and a senior fellow at Harvard’s Kennedy school. But look what he comes up with:
“A powerful argument for Sarbox can be made simply by examining the performance of financial markets since the landmark act was passed.” This is worse than just an ordinary post-hoc, ergo-hoc fallacy. It only seems plausible if you concentrate on what is easy to see—a five year bull market—and ignore how well the economy might have performed without the economic drag of the regulation. Sure Sarbanes Oxley didn’t cause a five year bear market—but that’s like saying that just because a victim survived, you shouldn’t charge the guy who stabbed him with the crime. It’s an argument but it’s not quite as powerful as Healey imagines.
”Considerable attention has been given to the fact that U.S. companies spent an estimated $6 billion in 2006 complying with the provisions of Sarbox…That's not an insignificant expense, but critics should weigh this against another incontrovertible fact: The cost of compliance pales in comparison to the $60 billion stockholders lost on Enron alone.” Let’s use some more Latin: this is a non-sequitur. There’s no convincing evidence that Sarbanes Oxley could have prevented the collapse of Enron or warned investors in time to get earlier. Without such evidence, counting Enron’s $60 billion on the ledger for Sarbanes Oxley makes no sense. What’s more, that $6 billion is just the direct cost of complying with Section 404 and doesn’t count many of the indirect costs of the regulation. So we’re dealing with imaginary benefits and under-counted costs.
“Finally, there's the oft-heard charge that Sarbox is an insidious threat to the U.S. financial markets. How else to explain the fact the U.S. has been steadily losing IPOs to other countries? The facts tell a different story. Truth is, the U.S. continues to be the world's leading financial market, commanding 45% of global mutual fund assets and 70% of global hedge funds.” This is more “the victim survived” sleight-of-hand. Look at this good thing, and ignore the costs.
Healey’s case for Sarbanes Oxley is so weak we’re tempted toward the conspiratorial notion that maybe he’s secretly an opponent who is attempting to undermine the regulations by marshalling super-bad arguments for them. A double agent of some sort. After all, if the arguments in favor of Sarbanes Oxley were really this bad, it would be on the fast-track to repeal, right?
Well, it would be if we lived in a democracy where regulation worked “ideally.” But we’re stuck with the one we got.
Sarbox Was the Right Medicine [Wall Street Journal]