A Stitch in Haste

"London has a 26.4 per cent share of the global IPOs in which $1 billion or more was raised this year. New York has only 6.5 per cent. In 2001, the year before the Sarbanes-Oxley Act was passed, London had 8.7 per cent to New York’s 59.1 per cent, according to Thomson Financial. ... Many non-US chief executives have balked at the rules, which require them to take full responsibility for their accounts and can take thousands of hours and cost tens of millions of pounds to comply with."
--Times of London, 28 September 2006

It became necessary to destroy Wall Street in order to save it?

But have no fear — Bloomberg is here!

Michael Bloomberg, the Mayor of New York, is so concerned about the Big Apple ceding its status as the world’s financial centre to London that he has appointed consultants to look at the problem.

Mr Bloomberg's Economic Development Corporation, which is paying $600,000 for the project, may take a range of measures after the two-month investigation by McKinsey, the management consultancy. The measures could include putting together a committee of heavyweight Wall Street bankers to fight New York’s corner and lobbying to change some of America’s financial regulations, a corporation spokesman said.

Yeah right, good luck with that (especially considering that it's my tax dollars that are underwriting it).

Here we see the failure of hack politicians at all levels and across all time periods. Washington, in a binge of the Politics of the Warm Fuzzy Feeling, passed an insane law that is causing global firms not to list their securities here, and local firms to do the same (i.e., via a frenzy of management- and investor-led buyouts). When oh when will Congress repeal the Law of Unintended Consequences?

The local hack politicians of New York City, meanwhile, have for years — decades, generations — been content to lazily suck at the teat (leech at the blood?) of Wall Street to finance their limitless need for fiscal recklessness.

But City Hall is not more powerful than Capitol Hill, and Gracie Mansion is not more powerful than the White House. The whining of Mayor Bloomberg and his hired mouthpieces will not get Sarbanes-Oxley repealed — not even Wall Street itself has been able to achieve that.

What may, someday, force Congress' hand on Sarbanes-Oxley will not be New York City's increasingly tax-deprived fiscal woes, but a different, near-Randian phenomenon: the disappearance of corporate directors. It is now in some ways an irrational act to become a non-management director of a publicly-traded company. The pay is unexciting, stock options aren't what they used to be. Oh, and you can go to jail if anyone, anywhere, in the company screws up the books, intentionally or even accidentally. Would you agree to that deal? I wouldn't.

(Via Samizdata.)

If you want to see someone hell-bent on proving himself an ignoramus, then look no further than Michael Kinsley:

So free-market capitalism has decreed three different values for this company [taken private through a leveraged buyout]. One is set by the stock market: the value of all the company's outstanding shares, or "market capitalization." One is what the private investors are offering -- usually a bit more than the market cap. And one is what the private investors sell the company for a blink of an eye later -- which is usually a lot more than the other two. Which of these numbers is the true capitalist price? Which one represents the most sublime interaction of supply and demand?

This is, of course, utter nonsense.

Let's look at Kinsley's three supposedly inconsistent values for his hypothetical taken-private company:

1. The publicly traded price -- the "market cap" -- is indeed the net result of all the supply and demand curves for all the company's equity and debt securities by all the current and potential investors (and the company itself). Nothing exciting there.

2. The private price, which as Kinsley notes is usually higher than the publicly-traded market cap. But this is exactly what ought to happen and is a "contradiction" only to the financially illiterate. Two quick and easy explanations jump out. First is the control premium: owning (and therefore controlling) 100% of a company is not the same as owning "one million times one one-millionth" of that company through passive ownership of stock (which, recall, comes with no control over the day-to-day operations of the firm). Owning an asset that you fully control is more valuable than owning an asset that you do not fully control. This is not a difficult concept. Second is the regulatory cost of "listing" a company (i.e., having it trade publicly on stock exchanges). If you have investors, then you need to print annual reports, have shareholder meetings, staff an investor relations office, etc. Oh, and that pesky little Sarbanes-Oxley law. A private company has lower costs, ceteris paribus, than its publicly traded counterpart, and can therefore operate more profitably, ceteris paribus. Hence a private bidder can and should be willing to pay a premium to the publicly traded market cap. This is not a difficult concept.

3. The turnaround price. Two simple analogies should suffice here. First: You buy a home for $200,000, fix it up for $50,000 plus your own labor and effort, then sell it for $300,000. This is a "pricing contradiction" -- how? Second: Consider the same analogy, except it's a restaurant and you not only fix it up but also change the menu based on your own entrepreneurial research and risk-taking. The restaurant is a hit, profits increase and you sell out at a profit. This is a "pricing contradiction" -- how?

Those who are desperate to find flaws or contradictions in capitalism often end up inventing them, since they are rarely to be found. Kinsley's dumb rant is no different.

More thoughts from Liberty Papers.