Happy Birthday Sarbanes-Oxley Act!  Seven years old this July.

Yes, fans its time for my annual tribute to SarBox — the law that Congress passed that saved us all from financial destruction.

Cynics might point out that SarBox didn't prevent the biggest stock market bust since the Great Depression, but don't let that spoil your anniversary celebration.

No, I'm not blaming the current financial mess on SarBox.
Yes, perhaps SarBox killed IPO markets.
Yes, when IPOs died, it's probably just coincidence that Wall Street revved up securitized toxic mortgage sales.

Point is: it's impossible for regulation to solve financial market problems while PT Barnum's "There's a sucker born every minute" remains true.  Fleecing "suckers" (that's you and me, if you're wondering) is big business that regulation can't eliminate.  As long as there are suckers, the sucker industry just adapts to changing circumstances, like insects.

An old movie comes to mind — new tenant in a roach infested tenement building sprays bug spray.  Spraying starts a mass movement of roaches to other apartments.  The angry neighbors, then all yell out the windows "Who's the nut who's upsetting the roaches?"

That scene hits home, because I grew up in tenements and it graphically illustrates the problems of financial market regulation.  Roaches prosper as long as there's food. Spraying just moves them.  Until people stop being suckers, regulation just shifts abuse from one type to another.

That's not an argument not to regulate, but we should remember that not being a sucker is our only real protection.

Current regulatory efforts have changed seven years after SarBox, because now Government owns everything.  Post- Government Takeover, Wal-Gov owns everything.  Now, one part of government regulates another part of government operated as Wal-Gov.  It'll be interesting to see how that works.

One Wal-Gov positive is we can conduct regulatory experiments.  People have argued forever whether regulation is beneficial or detrimental to shareholders.  Both sides make heated arguments that generate more smoke than light.  Both sides point to contradictory statistics.  No one ever changes their position.

Before Wal-Gov owned everything, regulating some companies and not regulating other companies in the same industry was unfair.  Now that Wal-Gov owns everything, regulators could divide industries in half.  Turn half the companies over to full regulation and exempt the other half.

Then step back.  Wait to see which companies' shareholders prosper.  That should settle the question whether regulation benefits or hurts shareholders.

How would the experiment work?  Take executive compensation for example.

Pro-regulation Argument:  Shareholders would benefit, if CEOs and other officers' compensation is capped at a multiple of the lowest paid employees.  Say 10 times more.  That leaves more money for shareholders.  Being an executive is so great, people wouldn't quit over compensation.  If some executives quit, they can easily be replaced, because there are lots of qualified, eager candidates for every position.

Anti-regulation Argument:  High compensation motivates top talent.  Great executives are hard to find.  Hiring star candidates is the critical difference between company success and failure.

We all have thoughts about which view is correct.  But does anyone really know for sure?

We can find out, if Wal-Gov is willing to conduct my proposed experiment.

If not, just pass the bug spray.

For further information regarding the issues described above, please contact James F. Verdonik.

_____________________________________________________
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.