« Links: Stiglitz and Sachs | Main | What's the Probability of a Recession? »

Friday, November 24, 2006

Criticism of Sarbanes-Oxley Legislation is "Utter Nonsense"

Robert Reich says Treasury Secretary Henry Paulson is "either naive or doesn’t want you to know the truth" when he utters the nonsense that Sarbanes-Oxley legislation "could be damaging America’s economic standing":

Oh Henry, by Robert B. Reich, America Prospect: Treasury Secretary Henry Paulson issued a solemn warning this week. He said public companies are going private at a record pace because of regulatory burdens like the Sarbanes-Oxley legislation, which could be damaging America’s economic standing.

This is utter nonsense. If Paulson thinks public companies are going private because of regulations like Sarbanes-Oxley, he’s either naive or doesn’t want you to know the truth.

Companies that go private return to the public market within a few years. That’s the whole point... When they go public again, their stock sells at a far higher price than what the equity firm that took them private originally paid for it. ...

Sarbanes-Oxley has absolutely nothing to do with it. That law, remember, was put into place to regain the confidence of investors ... who got clobbered when CEOs looted their companies by pumping up share prices with false accounting, and then cashing in their stock options before reality caught up. Enron was the tip of a huge iceberg.

That iceberg is still with us. In fact, public companies are restating financial results at a higher pace than ever before. ... The Securities and Exchange Commission reported ... that more than half these restatements are due to companies misapplying basic accounting rules or having the wrong data... Without Sarbanes-Oxley, investors would never know the truth.

Paulson says he’s worried that Sarbanes-Oxley is causing public companies to go private. He’s got it backwards. He ought to be worried about the real reason so many public companies are going private. It amounts to a new kind of CEO looting.

CEOs advise their directors and public shareholders that the private buyout is in the best interests of the company. Then after the public shareholders sell out to the private equity firm, the CEOs stay on. At this point the CEOs typically make fixes -- new products, additional job cuts, new deals with suppliers or distributors -- that increase company profits. The result is to drive share prices sharply up when the company goes public again.

Had the CEOs made these fixes before the private equity deal, the original shareholders would have benefited from the increase in the share price. By making the fixes after the deal is done, CEOs and their equity partners take all the booty for themselves.

It’s a scam. ... If [CEOs] give any advice at all, they shouldn’t be allowed to remain with the firm after it goes private. If Paulson wants small investors to stay confident the market isn’t rigged against them, he should not seek to weaken Sarbanes-Oxley. To the contrary, he should expand the law to prevent this new form of CEO looting.

    Posted by on Friday, November 24, 2006 at 08:00 PM in Economics, Policy | Permalink  TrackBack (0)  Comments (32)

          

    TrackBack

    TrackBack URL for this entry:
    http://www.typepad.com/services/trackback/6a00d83451b33869e200d8350158bc69e2

    Listed below are links to weblogs that reference Criticism of Sarbanes-Oxley Legislation is "Utter Nonsense":


    Comments

    Feed You can follow this conversation by subscribing to the comment feed for this post.