Speech delivered by Lionel Barber, U.S. Managing Editor
Financial Times
April 29, 2003 – Monaco Hotel
SEC’s International Institute for Securities Market Development Forum
Restoring Confidence in America
Ladies and Gentleman, you have gathered for this conference in Washington DC, the nation’s capital, and in some eyes, the capital of the world. Now Washington always takes on the character of the president. Back in Andrew Jackson’s time, it had much of the spirit of the frontier, with adventures and ruffians regularly camping inside the White House. Under Ronald Reagan, Washington was Hollywood on the Potomac. Under President George W. Bush, it started as Home on the Range, but it has now become unmistakably a war capital.
I first became aware of this during my last trip to Washington. I had invited myself to lunch with an old friend of mine who is a senior official in the Bush administration. Well, outside his office, a sleek black limousine was waiting and as we climbed in I noticed two bright yellow bags stuffed into the front seats. I asked my friend what on earth they were. Gas mask, he replied. Welcome to Washington.
September 11 was a tremendous shock to the American psyche-and to American confidence. It destroyed the myth of invulnerability. It was the first foreign attack on the mainland since, yes, 1812 when British boats sailed up the Potomac and pounded the White House. But this time the enemy came from within. And we are still living with the repercussions of the terrorist assault, from airline security, to civil liberties, to the most fundamental reappraisal of US foreign policy since the Truman administration.
All these developments have had an affect on confidence. A professor friend of mine whom I saw at Princeton last week said simply that America lost some of its can-do optimism. The country had become a “heavier” place. More precisely, I would single out four areas:
First, a sense of political unease and uncertainty, partly driven by the sense that this is a world in which America can no longer count on some of its friends. Of course, this is obscured by the decisive military victory in Iraq but consider other facts.
A German Chancellor who put 50 years of US-German friendship at risk by cynically mobilizing the pacifist vote and whipping up anti-American sentimement to cling on to power.
A French president tries to muster an international coalition to thwart American ambitions on a fundamental issue of security, that is United Nations backing for the disarmament of Saddam Hussein.
The US coalition against Iraq contains one serious ally – Britain – a few Australians and Poles. The White House says more than 40 countries are in the coalition but many cannot say publicly. Anti Americans wins votes in Germany, Pakistan, South Korea and Turkey. In some countries, serious commentators argue that President Bush is a bigger threat to world peace than Saddam Hussein.
Second, corporate confidence. America is still recovering from the effects of the bubble economy. It was a wonderful party in which many people became unbelievably rich – and, yes, the chairman of the Federal Reserve failed to take away the punchbowl. It also exposed some serious weaknesses in American corporate governance.
If you need refresher course in these failings, try reading today’s Financial Times. Here is what a Goldman Sachs analyst said in response to the question: what are the most important goals for you in 2000.
Above all, I would suggest, the crisis of confidence is a crisis in the American CEO and the concept of shareholder value. Over most of the past 15 years, it was blithely assumed that the interests of shareholders and management were aligned perfectly, in that if the CEO delivered his or her profits and earnings per share targets, the share price rose, and everybody was happy. Post-Enron, post-Tyco, and post WorldCom this is no longer the case.
Third, there is – or has been – a lack of confidence in the regulators. Now I hesitate to offer too many judgments before this expert audience, but Sarbanes-Oxley amounts to a revolution in corporate governance. After all, this legislation started as an attempt to deal with the failure of the auditing and accountancy profession. But thanks to the corporate scandals of last summer, it turned into an across-the-board attempt to strengthen corporate governance. And it had the power of Federal legislation which could trump state law.
Now Sarbanes-Oxley was passed in a rush. The US media praised its provisions because they were keen to jump on the reform bandwagon. Most businessmen and financiers declined to criticize the provisions ahead of the mid-term elections. So it falls to foreigners to tell hard truths. No less an eminence than Derek Higgs, the investment banker who led the British government’s inquiry into corporate governance, likens Sarbanes Oxley to the UK laws introduced in the 1990s to curb dangerous dogs. The results were ineffective, but the unintended consequences serious. In particular, the tendency to adopt a one-size-fits-all approach to corporate governance.
Finally, there is a need to restore confidence in the US economy. My colleague Alan Beattie, who covers the Fed, wrote an excellent analysis a couple of weeks ago. In theory, he said, many of the conditions seem to be in place for a resumption of growth in business investment. Borrowing for most companies remains low. Many are taking advantage of low long-term interest rates to fund-out their debt, reducing short-term borrowing in favor of long-term.
But there is still doubt about how much-pent up demand there is for capital spending. Capacity utilization stands at extraordinarily low levels. In March, manufacturers were using a lower proportion than since May 1993. The burden remains on the consumer, with a supporting role for government spending. Here the picture is mixed: real domestic purchases have been growing slowly, but it has leaked into imports. Hence the joke that the Fed is doing an excellent job in stimulating the economy-but its China’s economy that it is stimulating.
As for the fiscal side, I think many of you will know FT’s deep skepticism about the Bush supply-side tax cut. Enough to say it is far from clear how much will survive the Senate axe.
So where do we go from here? In the short-term, I am a cautious pessimist. On the political side, the wounds of the past few months will take a long time to heal. There is still a lot of loose talk about punishing certain-or should I say certaine…friends in Europe. The relationship between Schroeder and Bush is irreparable-though Powell and Fishcer are working hard behind the scenes.
The institutions that bind the alliance together are weaker than for some time. There is a lack of confidence in America among European allies. Nato has become little more than an OSCE in military uniform. Ever expanding membership has made it easier for the US to demand coalitions of the willing rather than wait for consensus-and the threat of being immobilized.
In terms of corporate confidence, I see some improvement. The Wall Street Settlement removes a major source of uncertainty-though firms will still be under threat from individual suits. And the e-mail treasure trove provides plenty of material for litigious investors. More generally, there is still plenty of evidence that some CEOs “don’t get it” and that there will be more scandals to come this year.
Look at the high farce in Alabama at Health South, where one CEO turned himself into a corporate Huey Long. Or at American Airlines where a formerly respected CEO elected to hide pension and other entitlements to top executives while seeking hundreds of redundancies from airline workers. That’s about as sensitive as peanuts being fired at a rhinoceros hide.
On the regulatory front, I am more confident. The SEC has new leadership. With great respect to Harvey Pitt, he was a brilliant lawyer but a medium administrator with no political touch. William Donaldson has both qualities and he has made a very good start, building on the excellent work which Mr. Pitt did at the end of his tenure when his job was gone. I am thinking of the sensible compromise on the proposal to export US-style audit committees and the interpretation of the other rules such as the wonderfully named ”noisy withdrawal” provision for lawyers.
Second, William McDonough’s appointment to the Accountancy Oversight Board is another vote in favour of a wise old head who will-at a generous salary-keep an eye on the wayward accountancy profession.
Finally, I would like to offer five benchmarks for measuring the restoration of confidence in America.
Thank you.