Sunday, June 12, 2005

Free Bernie

The Sarbanes-Oxley Act is long overdue for a Republican clobbering, and in light of the March conviction of former milkman and Worldcom CEO Bernie Ebbers, fiscal conservatives ought to start making animal sacrifices to the gods in hope of this. I'm not at all optimistic in this regard. I become more mystified every day as to what exactly the congressional Republicans (and the Bush Administration) intend to do with their 2004 mandate, aside from feigning moral clarity at the mention of stem-cell research, bankrupting the federal government with aid to African countries (i.e. oligarchs), and pretending half-convincingly to know what's going on in North Korea before the next poor saps have to whip up an actual policy. But returning to 'corporate reform' - this AEI article by former Reagan counsel Peter Wallison says more than needs saying about the crass silliness that went into, and came out of, this frantic legislation:

http://www.aei.org/publications/pubID.22648,filter.all/pub_detail.asp

Wallison makes eminent sense in dispelling the fog of regulatory incoherence that has long controlled federal economic policy: "The strongest case for regulation can be made in cases of market failure, where competition or other market activity will not provide an optimal outcome, particularly in terms of product quality, price, and overall efficiency of production. Natural monopoly markets are the classic case for the efficacy of regulation, since in such instances regulation acts as a kind of substitute for competition. Regulation, as in local zoning laws, can also be appropriate when used to obtain socially useful ends that cannot be achieved by market activity alone...

In some circumstances, regulation can also be an effective substitute for the tort system--especially in cases where horrific losses can fall on some who cannot be adequately compensated by legal action after they have suffered a loss. The FDA’s pre-testing and licensing of drugs is an example of this. Its costs, paid by all companies and ultimately included in the cost of pharmaceuticals, are appropriate because neither financial compensation nor prosecution of wrongdoers can adequately place victims back where they would have been absent the loss or can effectively deter subsequent, equally costly, errors by manufacturers. Pre-emptive regulation of this kind, however, is (or should be) exceptional, because it is highly inefficient; it imposes regulatory costs on everyone to prevent a few cases of loss...

Sarbanes-Oxley does not fall into any of these categories. There is no indication--except in the fevered imaginings of the far left--that fraud and financial manipulation are endemic to corporate America. The losses in Enron, WorldCom, and other well-known cases were caused by fraud and other forms of deception by managements. These losses could be and are being compensated by civil actions under the securities or tort laws--many of which are currently underway--and it is highly likely that similar wrongdoing by others will be deterred in the future by civil and criminal actions against the wrongdoers, Bernard Ebbers being the most recent prominent example. The punishments have been severe. The managements involved are now unemployed, indicted, or convicted--and in some cases all three. The companies have suffered major stock market losses, collapsed, or merged. There is little reason to believe that other managements in the future, having seen these results, will have much incentive to follow the same path."

Sarbanes-Oxley is almost certainly the most intrusive and hyperactive piece of corporate legislation in this country's history: it's interesting to note that the grand-daddy of corporate law, the Sherman Anti-Trust Act (1890), prescribed a maximum penalty of $5000, OR 1 year in prison. Yes, I agree that Ebbers' actions are weightier than the net moral implications of most anti-trust cases. But Bernie Ebbers will spend the rest of his life in prison and his family is broke. Fair? Maybe. But the explosion of criminalization that will surely be among the most prominent legacies of the Bush Administration isn't. Amid all the president's posturing on corporate responsibility, and for all the bipartisan muscle-flexing that attended this much-ballyhooed crackdown, some conservatives have become irritable in urging a sign of political responsibility from their party. I wouldn't be expecting much, if I were Peter Wallison.

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