Warfare’s capital casualty

Benn Steil, Senior Fellow and Director of International Economics with the Council of Foreign Relations, argues in an opinion piece in the Financial Times that “it was the earlier efforts of another congressman [and not of Paul S. Sarbanes and Michael G. Oxley] which in fact sparked the exodus [of foreign equity listings from New York], by deliberately mixing domestic market regulation with foreign policy.” The congressman in question is Rep. Christopher Cox (R-CA) as he then was, the current Chairman of the SEC. (See also Steil’s previous article on the same topic, here.)

Steil traces the current state of competitiveness back to two Commissions’ reports on US national security issues, in particular in relation to China and ‘weapons of mass destruction’, respectively. Both reports were presented to Congress in 1999; one of the Commissions was chaired by Cox, the other by former CIA Director Dr. John M. Deutch. The Deutch Commission, following findings of the Cox Commission, referred to the waging of ‘economic warfare’ in relation to US capital markets as being essential:

[J]ust as good intelligence is essential to successful military action, so too is good intelligence on key points of leverage in the government of a proliferating country essential for tailoring economic tools to achieve maximum influence. In addition, we should ensure that we have in place the legal mechanisms required to exercise this leverage. For example, the Commission is concerned that known proliferators [of weapons of mass destruction] may be raising funds in U.S. capital markets.

Subsequently, the SEC established the Office of Global Security Risk, under then-SEC Chairman William H. Donaldson. The Securities Industry Association, in a letter to Donaldson, had warned against ‘politicising US capital markets’:

America’s capital markets play a crucial role in fueling U.S. economic growth, creating new jobs, and providing the financing for innovative and new technologies that transform the U.S. economy. We believe that the prinicipal effect of politicizing the U.S. capital markets — however worthy the foreign policy goal — in order to try to influence the behavior of foreign countries would be to damage the U.S. capital markets.

After discussing a few examples of affected companies - including AOA Lukoil (RTS: LKOH; LSE: LKOD; OTC: LUKOY) and PetroChina Company Limited (HKEX: 0857; NYSE: PTR) - Steil concludes:

[I]t was the relentless capital markets sanctions campaigns of the late 1990s that first signalled to the world that the US would use its regulatory power over foreigners for political purposes. Christopher Cox thus became the most important founding father of the capital markets sanctions movement, a movement earning pride of place in the pantheon of diplomatic dopiness.

For your convenience, a selected list of the sources and entities he cites:

Heidi Crebo-Rediker and Douglas Rediker of International Capital Strategies, in their article on foreign policy and capital markets in the Wall Street Journal (entitled ‘Capital Warfare’, via YaleGlobal Online) just a few days earlier, come to the following conclusion:

[A]s long as politicians think the U.S. can afford to play protectionist politics with the CNOOC’s and Dubai Ports World’s of the world, then these proposed solutions [of reforms to Sarbanes-Oxley, shareholder litigation and regulatory fixes] are unlikely to stem the tide.

For more on reports on capital markets competition, see these two previous posts: on the Paulson Committee Report and on the Bloomberg/Schumer and Daley/Culvahouse Reports. (Subscribe to WV&Z here.)

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