On January 22,2007, New York Mayor Michael Bloomberg and Democratic Senator Charles Schumer released a report purchased by the New York City Economic Development Corp. from McKinsey & Co., for about $500,000, saying that Sarbanes-Oxley corporate governance, internal controls, and class action lawsuits by investors should be curbed — according to a Wall Street Journal article.

Note: McKinsey & Co. is the same firm that praised Enron Corporation just months before it collapsed into bankruptcy and that trained now-jailed former Enron CEO, Jeff Skilling. (See: Jeff Skilling Tells the Truth about US Corporate Ethics.)

On January 23, 2007, New York Democratic Governor, Eliot Spitzer, who gained political points and a pass to the Governor’s mansion by masquerading as a defender of 401(k) owners, has now joined the band of those endorsing less protection for small investors.

Buying Reports From the “Experts”: An Old Lobbyist Tactic

The McKinsey report on less regulation should be evaluated in the context of a recent report from the “Committee on Capital Market Regulation“, another thinly disguised lobbying group for reducing investor protections under Sarbanes-Oxley, that has the support of Democratic Representative Barney Frank, Chairperson of the House Financial Services Committee.

Both reports essentially argue that the interests of the United States lie more in assuring excessive bonuses for Wall Street “Masters of the Universe” and higher prices for homes in the Hamptons, than in protecting tuned-out, small investors in Peoria or Dubuque.

Both Representative Frank and Senator Schumer receive their largest campaign contributions (by far) from Wall Street, while Mayor Bloomberg makes millions by selling services to financial institutions, and Governor Spitzer seeks to mend fences, looking forward to financing a future presidential bid.

Cheering on this highly effective lobbying effort we find the Wall Street Journal, whose bread is buttered on the institutional rather than the small investor side of the capital market.

“Not Everyone Hates Sarbox”, Says Business Week

Business Week, in a January 29, 2007 article, reports that these lobbying efforts have been so effective that “regulators are now planning to loosen the rules, probably before the year is out.”

However, the article goes on to say that there is a “growing chorus” of investors defending the Sarbanes-Oxley Act, including fund managers Duncan Richardson of Eaton Vance Management and Donald Peters of T. Rowe Price Group.

Supporter of Sarbox argue that:

• The law has resulted in much more reliable corporate financial statements;
• Tougher internal controls drive corporate productivity gains and profits;
• Required reconciliations of pro forma numbers have made it more difficult for CEOs to “spin results”;
• Reforms have led to fewer adjustments for unusual charges and write-offs that have been used to make earnings look better;
• Earnings reports now reflect expenses for stock options; and
• Executives have a firmer grasp of costs.

In any event, supporters of Sarbanes-Oxley and defenders of investor interests have far less financial clout that the big money on Wall Street that is behind the “Committee on Capital Market Reform”, the recently-purchased McKinsey report, and those “defenders of the forgotten man”: Representative Barney Frank, Senator “Chuck” Schumer, and Mayor Michael Bloomberg.

With the support of the Wall Street Journal, it certainly looks now like Sarbanes-Oxley is indeed “dead meat”. The drums are feverishly beating, trying to revive the anything-goes days of the 1990s bull market. I would expect further deterioration in the ethics of Wall Street under a Democratic Congress.

This entry was posted on Tuesday, January 23rd, 2007 at 12:06 pm and is filed under Equities, Corporate Managers, Individual Investors, Government Officials, Bankers, Brokers, Fund Managers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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