Soccer Dad

Sarbanes's legacy

The Baltimore Sun had a front page article about retiring Senator Paul Sarbanes A quiet shepherd of wiser policies a glowing review of the career the state's soon to be former Senator.

Of course the article heaps praise on him for his final legacy to the country, the Sarbanes-Oxley act.

Former Sen. Phil Gramm of Texas, then the senior Republican on the committee, said Sarbanes' approach made him easy to work with.

"You couldn't ask for someone to be more fair or more accommodating," Gramm said. "You knew where he was coming from. It's no secret that Paul and I differ pretty substantially on a lot of issues that he thinks are important and I think are important. But I never questioned his sincerity about anything, and I never questioned his intellect or his integrity."

The overhaul package they developed passed the committee 17-4, and won unanimous approval in the Senate. As the Senate and House went to conference in the summer of 2002, months before the midterm elections, Democrats were pushing Sarbanes to draw out the process.

Rep. Michael G. Oxley of Ohio, the Republican chairman of the House Committee on Financial Services, called Sarbanes' response "statesmanlike."

"The Democratic leadership wanted to just beat up President Bush and the Republicans that whole month of August," he said. "But to his credit, he was having none of that. He thought it was important for the country to get this sordid chapter behind us."

The result was the Sarbanes-Oxley Act of 2002, a package that required publicly traded companies to report the effectiveness of their internal financial controls and to engage independent auditors to attest to them. Some hailed the legislation, saying it codified the transparency necessary to restore investor confidence in the nation's financial markets. But corporations continue to complain about the cost of meeting its provisions.

Yes, those pesky corporations.

But they have a point.

After noting that none of the Sarbanes-Oxley reforms would have prevented the collapses of Enron or Worldcom, William A. Niskanen writes in "Enron's last victim: American Markets"

The negative repercussions of the act on businesses might have been worth it if the act had achieved its primary goal: substantially increasing the confidence of investors in the accuracy of the accounts of firms listed on the exchanges. But that does not seem to have happened.

The best measure of investor confidence is the price-earnings ratio — the price that investors are willing to pay for each dollar of a company’s reported earnings. The overall price-earnings ratio for the Standard & Poor’s 500-stock index, however, has declined continuously since the Sarbanes-Oxley Act was being drafted in the spring of 2002.

Several leaders of the new Democratic Congressional majority have endorsed a relaxation of the audit requirements and other parts of the act. That is encouraging, but it is not enough. The basic structure of Sarbanes-Oxley is unsound.

That's more the legacy of Sarbanes. The feeling that something needs to be done, so we craft legislation to give the appearance that something's being done.

His son, now my representative (though I've seen nothing in his literature that he represents my views at all) wants to create a neutral scientific board that would direct pharmaceutical companies which avenues of research to pursue. Though John Sarbanes presents his plan as a way of cutting costs would certainly stifle innovation imposing a cost on society and almost certainly raise costs of some drugs too.

Perhaps I'm too much a cynic, but I prefer to trust corporate interests to politicians. Politicians are too isolated from the business world to appreciate the consequences of their actions. Unfortunately it appears that Paul Sarbanes has passed his instincts onto his son.

Blogdigger tags: Paul Sarbanes, John Sarbanes, Politics, Economics.

Posted by SoccerDad at January 4, 2007 8:22 AM