On 10th Anniversary of Enron Collapse, Time for Sarbanes-Oxley to Go

Click here to read this post by John Berlau of the Competitive Enterprise Institute Blog.

"Ten years ago today, Enron Corp. filed for bankruptcy. Today, with all of its dealings with banks, it would probably have been deemed “too big to fail.”

But luckily, this was before Hank Paulson and Tim Geithner occupied the Treasury Department. Enron was allowed to fail, and its executives were punished for fraud under decades-old securities laws.

While there was certainly damage to employees and, temporarily, to surrounding businesses in Houston, the bankruptcy barely caused a blip to the larger economy. The economy, already reeling because of the 9/11 attacks three months earlier, soon had a remarkable recovery.

Rather, the most damaging action of the Enron affair occurred in the aftermath of post-Enron reform. This would be the Sarbanes-Oxley Act of 2002. Ten years later, even the Obama administration agrees that Sarbox’s crushing burden of accounting mandates is holding back economic growth.

And Sarbox has little to show in results for investors, having failed to stop Lehman Brothers, Countrywide and now MF Global, which was run into the ground by a former politician who had championed the 2002 law. Jon Corzine’s bio on the website BigThink.com states glowingly, “As a member of the United States Senate, Corzine co-authored the Sarbanes-Oxley Act, a piece of legislation designed to crack down on corporate malfeasance crafted in the wake of accounting scandals surrounding Enron, Tyco, WorldCom, and other major corporations.”

Yes, it turns out Corzine may have been more of an expert than we thought on alleged “corporate malfeasance.” And as noted in the October report of President Obama’s Council on Jobs and Competitiveness, Sarbox has crushed the dreams of thousands of honest entrepreneurs for every scandal it may have stopped (and I don’t know that it has stopped any.)

Pointing out that “the data clearly shows that job growth accelerates when companies go public,” the Obama jobs council noted with dismay that there were fewer U.S. venture-backed initial public offerings (IPOs) in 2008 and 2009 than in any year since 1985. As I have noted previously, the data also show that even the recession years of the early ’90s had more IPOs than any year since Sarbox went into effect.

Obama’s council blamed, among other things, “unintended consequences stemming from . . . Sarbanes-Oxley regulations.” It then amazingly called for exemptions from many provisions of Sarbox for companies with up to $1 billion in market capitalization.

Yet just as amazingly, exemptions that did not go as far as the Obama jobs council recommended were killed this week by three GOP House members who seemed to be in the grip of the powerful accounting industry, which gets rich off the mandates that are so costly to entrepreneurs and the economy as a whole.

This Wednesday, the House Financial Services Committee was scheduled to vote on H.R. 3213, a bill by Rep. Stephen Fincher that would exempt firms with market cap of $350 million and below from the “internal control” mandates of Section 404. This was a far lower figure than the $1 billion put forward by Obama’s council and applied to just one section — albeit the most costly section – of the law.

Yet as I reported Tuesday in National Review and The Wall Street Journal writes up in an editorial today, GOP Rep. John Campbell (R-Calif.) and Steve Pearce (R-N.M.) had actively worked against the bill. House sources also told me that Rep. Jim Renacci (R-Ohio) was leaning no, and his office did not return my query to confirm or deny.

And, as noted by the WSJ and Ben Smith’s column in Politico, committee member Michele Bachmann apparently would not return from her presidential campaign to break the tie, even though she — like fellow candidates Newt Gingrich, Ron Paul, and Jon Huntsman — has called for repeal of Sarbox. Smith notes that in contrast, Paul, also a committee member, was ready to return. So the Fincher bill granting modest Sarbox relief had to be yanked.

As I noted in NR:

A claim made by … Pearce, Campbell, and the accounting lobby is that internal-control audits are essential for fraud detection. Yet financial analysts looking at the subprime scandals in Sarbox’s wake have come to the almost opposite conclusion. By requiring resources to be spent on auditing “internal controls” that were trivial for shareholders yet lucrative for auditors — such as employee passwords and possession of office keys – Sarbox Section 404 actually diverted attention away from ensuring accurate reporting of a company’s financial condition.

Commenting on corporate misstatements during the mortgage bubble, respected analyst Janet Tavakoli had this to say on Sarbox to housing journalist Robert Stowe England in his new book Black Box Casino: “Sarbanes-Oxley did nothing. It didn’t work. It was a total waste.”

But who knows? Maybe Sarbox is doing exactly what its champion Jon Corzine wanted it to do!"

Why We don't Need To Worry About China Or Become Like Them

See The new China Syndrome: Andy Stern writes one of the worst WSJ op-eds ever by James Pethokoukis of AEI.

"Call it the China Syndrome. An American visits Rising China and is immediately gobsmacked by the place. Giant airport terminals, speedy bullet trains, ubiquitous construction cranes, the Shanghai skyline. Everywhere you look, Stuff is Happening. And it’s all shiny new. Compared to China and its seemingly perpetual 10-percent annual growth rate, New Normal America just doesn’t rate. Then the gobsmacked American comes to a realization: America Must Become More Like China. Free-market capitalism is out, state-managed capitalism in. I have seen the future and it works!

I give you Andy Stern, former president of the Service Employees International Union (via the WSJ):

The conservative-preferred, free-market fundamentalist, shareholder-only model—so successful in the 20th century—is being thrown onto the trash heap of history in the 21st century. In an era when countries need to become economic teams, Team USA’s results—a jobless decade, 30 years of flat median wages, a trade deficit, a shrinking middle class and phenomenal gains in wealth but only for the top 1%—are pathetic. …

While we debate, Team China rolls on. Our delegation witnessed China’s people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.

Several observations:

1. Last time, I checked, the U.S. is 6-10 times as wealthy as China on a per capita GDP basis. On a purchasing power parity basis, China sits between Bosnia and Herzegovina and Albania.

2. Playing economic catch up from a low level is a lot easier than leading the pack. Indeed, developing nations often never close the gap with advanced economies, especially those with a rapidly aging population, low levels of consumption, and undervalued currency — like China.

3. Building infrastructure is easy and doesn’t take brilliant bureaucrats to do. Innovating is hard, and something government has shown precious little ability to do. How’s industrial policy working for the EU?

4. Stern wants government to intervene more in the market. Yet America’s problem in the 2000s was government interfering in the market and creating incentives that favored a chosen industry, housing. What America needs is more Schumpeterian, creative destruction sans government’s thumb on the scale.

5. As Warren Buffett puts it, ”It’s only when the tide goes out that you know who’s been swimming naked.” When China does slow, we’ll see just how efficient a capital allocator Beijing has been. The Chinese Miracle is stuffed to the gill with bad loans. State capitalism is really Crony Capitalism.

6. Maybe we need more “economic teams” like, say, public employee unions and government. American students are sure benefiting from such teamwork.

7. I think what folks like Stern really envy is the lack of democracy and accountability where technocratic elites can make all the decisions without pesky tea parties sticking their nose in."

Even with cutbacks, cities will have plenty of teachers for our kids and cops to keep us safe

See Joe Biden and the Myth of Local Government Layoffs STEVEN MALANGA in today's WSJ. He is senior editor of the Manhattan Institute's City Journal. Excerpts:

"But this hyperbolic rhetoric ignores a decades-long growth of public employment that has left many municipal governments with nearly historic high levels of government workers relative to the population—even after the cutbacks of the last few years. Hiring increases have so rapidly outpaced the growth in the population that retrenchment is inevitable.

Take local education workers. Hiring has far outpaced the growth in student enrollment, driving down the number of students per teacher in American public schools to 15.6 in 2010 from 26.9 in 1955, according to the National Center for Education Statistics. Robust hiring has continued even during periods of enrollment declines, including from 1971 through 1984, when the number of public-school students fell virtually every year, declining in total by 15%, while the ranks of teachers grew by 7%."

"local education employment is back to about where it was in 2006 after recent cutbacks. Sound terrible? Maybe not so much when you consider that public-school enrollment has been stagnant since 2006."

"In 1955, teachers constituted about 65% of local education workers; today, despite years of rapid gains in teacher ranks, they amount to only about 40% of the eight million local education workers.

Per-pupil spending in public schools has grown to $10,500 today from $2,831 (in 2010 dollars) in 1961, according to the National Center for Education Statistics. Has the spending paid off? Mean scores on the SAT's reading test are down 7% since 1966, while reading scores for 17-year-olds on the National Assessment of Educational Progress test, administered since 1971, are flat over that time."

"Starting in the early 1990s, when America's crime rate peaked at 758 violent crimes per 100,000 people, police departments started hiring rapidly. From 1992 through 2008, according to the Department of Justice's Census of State and Local Law Enforcement Agencies, the ranks of state and local cops and other law-enforcement personnel soared by one-third, to more than 1.1 million. That growth far outpaced the country's population increase in the period, driving up the percentage of law-enforcement personnel relative to the general population by 12%.

Results? Violent crime is down by 47% since 1992. The property-crime rate has fallen by 75%."

"New York City's experience is illuminating. Gotham made a big commitment to expand its police force as murders hit an all-time high in 1990. An income-tax surcharge provided the resources to boost police hiring by about 15%, or 5,000 officers, to nearly 40,000 over the next several years. The city's crime rate then plunged, falling 70% in the 1990s."

"Elsewhere the ranks of police officers have fallen by less than 1% after rising by 9% since 2000 alone."

How Regulators Herded Banks Into Trouble

Click here to read this article by Peter Wallison in today's WSJ. The subtitle is: "Blame the Basel capital standards for over-investment in mortgage-backed securities and now government debt." Excerpts:

"In the U.S., this shock came when the 10-year housing bubble deflated and U.S. financial institutions were weakened by a sudden loss in value of the mortgage-backed securities (MBS) they were holding, especially those based on subprime mortgages. Mark-to-market accounting did the rest, requiring banks to write down the value of their MBS assets until they appeared unstable or insolvent.

In Europe, the problem is similar and so is its source. Europe's banks, like those in the U.S. and other developed countries, function under a global regulatory regime known as the Basel bank capital standards."

"the Basel rules require commercial banks to hold a specified amount of capital against certain kinds of assets."

"Under these rules, banks and investment banks were required to hold 8% capital against corporate loans, 4% against mortgages and 1.6% against mortgage-backed securities."

"these rules are intended to match capital requirements with the risk associated with each of these asset types, the match is very rough. Thus, financial institutions subject to the rules had substantially lower capital requirements for holding mortgage-backed securities than for holding corporate debt, even though we now know that the risks of MBS were greater, in some cases, than loans to companies. In other words, the U.S. financial crisis was made substantially worse because banks and other financial institutions were encouraged by the Basel rules to hold the very assets—mortgage-backed securities—that collapsed in value when the U.S. housing bubble deflated in 2007."

"Today's European crisis illustrates the problem even more dramatically. Under the Basel rules, sovereign debt—even the debt of countries with weak economies such as Greece and Italy—is accorded a zero risk-weight."

"In the U.S. and Europe, governments and bank supervisors are reluctant to acknowledge that their political decisions—such as mandating a zero risk-weight for all sovereign debt, or favoring mortgages and mortgage-backed securities over corporate debt—have created the conditions for common shocks.

But that is not all that can be laid at the door of regulators. Examiners and supervisors operating "by the book" tend to disregard the judgments of bank managements in favor of regulator-approved methods of assessing credits and carrying reserves. As banks begin to conform to regulator preferences, natural diversification declines and all banks start to look pretty much alike. Then, like genetically altered plants, they are vulnerable to a pathogen—like MBS backed by subprime mortgages—that sweeps through the population."

How Does the U.S. Health-Care System Compare to Systems in Other Countries?

Click here to see this report by Robert L. Ohsfeldt and John E. Schneider. He are some of their graphics:

This first one shows that the U.S. is right on the trend line when how much a country spends on health care is a function of its income or GDP. It is a non-linear relationship. The r-squared is higher .926 than in a linear regression (.846).



This next one shows that cancer survival rates are higher in the U.S.



This next one shows how well the U.S. does on life expectancy once violent deaths are taken out (something doctors can't control).

If Everyone Else is Such an Idiot, How Come You're Not Rich?

Interesting post about Netflix by Megan McArdle. Click here to read it.

"When I catch myself thinking along these lines, I try to stop and ask a simple question: "If everyone else is such an idiot, how come I'm not rich?"

If you see a person--or a company--doing something that seems completely and inexplicably boneheaded, then it's unwise to assume that the reason must be that everyone but you is a complete idiot who is blind to fairly trivial insights such as "people desire inexpensive and conveniently available movie services, and will resist having those services made more expensive, or less convenient". While it's certainly true that people do idiotic things, it's also true that a lot of those "idiotic" things turn out to have perfectly reasonable explanations.

And in fact, if management of all these large public companies really were the staggeringly malevolent yet totally hapless lackwits that so many seem to believe, it should be really, really easy to get rich by outwitting them. Oh, sure, they'd probably get all their rich friends in Congress and Kiwanis to gang up on you, but since, according to the internet, almost all those people are also too dumb to come in out of the rain, you should be able to defeat them with a couple of well-placed banana peels.

If you've found it maybe not quite that easy to make a pile of money by outguessing all these benighted fools, then perhaps you should consider the possibility that they aren't quite as stupid as you are making them sound when you sniffily ask "Why don't they just . . . ?

Quite often, the answer to that exasperated "why don't they just . . . ?" is green, and it folds."

Doctors pressured to work faster to move SS disability cases

See Doctor Revolt Shakes Disability Program from the 11-21 WSJ. Excerpts:

"Doctors had to work faster to move cases. Instead of earning $90 an hour, as they had previously, they would receive about $80 per case"

"it no longer mattered if doctors strayed far from their areas of expertise when taking a case."

""The implication there was that you really didn't have to be that careful and study the whole thing," said Rodrigo Toro, a neurologist who analyzed cases for the Social Security Administration for more than 10 years."

"Several doctors said medical opinions were now prone to inaccuracy since many specialists don't have the backgrounds to make decisions outside their areas of expertise. The new policy could make doctors more likely to award benefits to those who don't qualify and deny benefits to those who are entitled,"

"an eye doctor was assigned back-pain cases, several doctors said. A dermatologist reviewed the files of someone who had a stroke. A gastroenterologist reviewed the case of someone with partial deafness,"

"many of the doctors haven't practiced outside their specialty in decades,"

""People who shouldn't be getting [disability] are getting it, and people who should be getting it aren't getting it," said Neil Novin, former chief of surgery at Baltimore's Harbor Hospital,"

"Dr. Novin said, he was pressured by a supervisor to change his medical opinion and award benefits to someone he didn't believe had disabilities that would prevent the person from working.

"I will not sign my name, MD, on this," Dr. Novin recalled telling the official. He said he was cited for being "offensive and intimidating" and fired. Dr. Novin can't recall details of the case, he said, but it was outside his area of specialization."

"Supervisors told them that certain ailments should be considered "severe," even if the doctors disagreed."

"some doctors have complained to the Social Security inspector general that they have been pressured to change their medical opinions to conform to targets or goals set by SSA officials"

"a doctor in the Alabama disability determination office who approved between 80 and 100 decisions a day. Another Alabama doctor signed off on 30 cases an hour after performing only a "cursory review of each case." The investigation said several doctors complained of pressure from superiors to approve a higher number of applications to meet statistical goals."

"The Social Security Disability Insurance program paid $124 billion in benefits in 2010, up from $55 billion in 2001."

The CPI was up only 23% in this time. The SSDI was up 125%. The CPI increased 2.35% compounded annually while SSDI increased 9.45%. It increased at 4 times the rate of inflation.

How Terrible: Walmart Plans to "Dump" Six Stores, 1,600 Jobs and $21 Million in Charity on Wash. D.C.

Great post by Mark Perry of "Carpe Diem."

"Washington, D.C.'s unemployment rate has been rising over the last year, and at 11.1% in September was more than two percent above the 9% jobless rate for the country (which has been falling, see chart above). Further, more people in the District are now unemployed - 37,034 - than at any other time in the city's history. So you would think that if an employer promised to bring 1,600 permanent jobs and 600 construction jobs to the city, and also pledged $21 million in charitable donations over the next seven years, that District residents would be thankful, grateful and appreciative, and would welcome that employer with open arms.

Well, think again if that employer is Walmart, and if the District resident is Washington Examiner columnist Jonetta Rose Barras who editorialized yesterday in a column titled "Occupied by Walmart":

"It was bad enough that District elected officials, particularly Mayor Vincent C. Gray, stood by as Walmart announced its intention to dump six stores into neighborhood commercial corridors, creating an environment ripe for the retail behemoth to bully small businesses. The executive exacerbated that short-sighted economic development strategy by signing the "Community Partnership Initiative."

Despite the peacocking by Gray and others after the agreement was signed, the District is receiving mostly crumbs. Walmart has committed to providing $21 million in charitable donations over the next seven years, an average of $3 million a year. That's a pittance."

MP: So instead of gratitude for the thousands of new jobs and millions of dollars of charity Walmart will bring to the District, Ms. Barras ungratefully describes that as "mostly crumbs" and is outraged because Walmart is "dumping six stores" into the District and giving "only" $21 million in charity to the city??

I'm pretty sure that most District residents view this differently, and are grateful that Walmart is "dumping" six stores, 1,600 permanent jobs, 600 construction jobs and $21 million on the District. Especially the 37,000 residents who are unemployed.

Update in response to some of the comments:

A few years ago, when Walmart opened a store on Chicago's west side it created more than 400 good-paying jobs, made the neighborhood safer and helped to revitalize and stabilize the area, which then attracted new stores including a Menards, a CVS pharmacy, two new banks and an Aldi Grocery Store. Local Chicago alderwomen Emma Mitts credited Walmart for attracting many new stores to the neighborhood, and says that "traffic is so heavy on the weekends that it's hard to get up and down the strip, and that's a good thing and I'm so grateful for it."

Although Walmart frequently gets blamed for putting local merchants out of business when it opens a new store, this story provides some evidence to the contrary - by stabilizing a rough area on Chicago's West Side and attracting thousand of customers for "everyday low prices," Walmart actually helped to attract new businesses to this Chicago neighborhood, including direct competitors like Menards, CVS and Aldi.

In other words, Walmart provides many significantly "positive externalities" and "spillover benefits" to the communities in which it operates, even though it frequently gets more attention for some of the "negative externalities" and "spillover costs" it might impose. For neighborhoods like the west side of Chicago, it sure looks like the positive externalities (jobs, tax revenues, great safety, more commercial activity, etc.) far outweigh any negative externalities."