Chapter 5
Accessible Capital
This article is the fifth installment of “American Competitiveness
The United States has many advantages in the global financial
– A National Assessment through the Eyes of Job Creators” – a
marketplace. We have enjoyed a long track record of effectively
ten-part report that explores how well the United States is
connecting savers and investors with borrowers, but the financial
positioned to excel in today’s tightly-contested global economy.!
crisis that began in 2007 and recession that followed struck a
The series examines America’s standing in each of the eight
damaging blow to the U.S. financial system.
factors that job creators consider most important when determining where, in a world of expanding alternatives, to locate, invest, grow, and hire.
Though America remains a safe haven for capital from around the world and borrowers continue to enjoy historically low interest rates, access to capital remains constrained. Banks have
In previous chapters we addressed the important dynamics of
toughened their loan underwriting standards to comply with
having ample customers, manageable costs, and an excellent
regulatory requirements and limited access to capital continues
workforce.! We now address another key question in job
to plague small businesses and consumers seeking loans.2
creators’ decision making calculus: will we, our suppliers, and
Cheap financing is of little utility to entrepreneurs if it can’t be
customers have reliable access to affordable capital?
accessed by them.
As Secretary of the Treasury Tim Geithner observes, “The ability
Alarmingly, the United States continues to slide down the
of entrepreneurs to access financing is essential to building a
international rankings of the quality and efficiency of our financial
more competitive economy.”1 Assuring such access requires a
markets, and the accessibility and affordability of capital.3
nation to have ample capital stock that is distributed efficiently
Continued economic malaise, high-profile scandals, and political
through a vibrant financial marketplace serviced by well-run and
dysfunction have shaken confidence in the soundness, oversight,
trustworthy institutions.! Companies and consumers must also
and future of our system, provoking high levels of risk aversion
have diverse sources of capital.
among policymakers, regulators, lenders, and investors.! Fear 2
and uncertainty about the direction of our financial markets do
The Organization for Economic Cooperation and Development
not stem merely from the psychological hangover of crises and a
reports that “while the U.S. remains an attractive investment
long dip in the business cycle. They have far deeper causes
destination in many respects, it is uncertain for how long
rooted in a set of monumental systemic defects that include out-
foreigners will continue to accommodate debt and equity claims
of-control national fiscal imbalances, a deteriorating business
against U.S. residents at the recent pace.”5
environment, a massive, outdated regulatory complex, and a corrosive litigation system.
The Simpson-Bowles Commission issued a loud and clear warning: the pile up of federal debt “will drive up interest rates for
These obstacles must be overcome if the American economy is
all borrowers—businesses and individuals—and curtail economic
to enjoy the availability of affordable capital necessary to finance
growth by crowding out private investment. By making it more
enterprise, power robust U.S. job creation, and sustain the
expensive for entrepreneurs and businesses to raise capital,
strength of America’s financial services industry vying for
innovate, and create jobs, rising debt could reduce per-capita
business in a competitive global marketplace.!
GDP, each American’s share of the nation’s economy, by as much
Regaining our fiscal balance. The greatest threat to the strong
as 15 percent by 2035.”6
flow of capital for private sector growth is the continuing pileup of
Taxing policies.! Adding to the burden placed on domestic
massive sovereign debt.
capital accumulation by outsized debt is America’s anachronistic
The United States is the largest debtor nation on earth overall and has a debt to GDP ratio rivaling the sickest economies in Europe.! Outsized government demand for revenue raises the historic
tax policy, including the double taxation of the earnings that multinational corporations headquartered in the United States collect from overseas operations.
specter of public finances “crowding out” private-sector
The World Economic Forum ranks the United States 69th in
investment and higher interest rates, hiking the cost of business
restrictions on capital flows, largely because of our use of the
and consumer borrowing. Moreover, it portends still higher taxes
global income tax. The United States remains the only major
depriving the private economy of the resources necessary to
economy that has not transitioned to a territorial tax system. This
create jobs and support growth that among other things can
policy partly explains why more than $1 trillion in foreign earnings
finance a robust national treasury.4
of U.S.-based companies is held outside our borders, unavailable for investment here at home.7 3
In 2011, Andy Stern, former president of the Service Employees
in order to save for retirement.13! So it does not appear that the
International Union, editorialized on the importance of repatriating
United States can look to private savings as a substantial source
this money. He wrote, “One private-sector opportunity that could
of domestic capital anytime soon.
offer the quickest—maybe the only—viable short-term proposal for investment and growth is to allow U.S. companies to bring back up to $1 trillion earned overseas that is now sitting in foreign banks and to pay U.S. taxes on the earnings at a reduced corporate rate … Companies could then invest their after-tax dollars in expanding operations, building infrastructure and creating jobs.”8
Regulating our competitiveness. Joining fiscal imbalance, outdated tax policy, and poor national savings another major s threat to capital access and affordability is an outdated regulatory structure and the mis-regulation it begets. Sensible rules are vital to the integrity of the national and global financial system and a sound regulatory system is absolutely indispensable to the market confidence of lenders, investors, and borrowers.!! While
Saving ourselves.! Another systemic impediment to the
the economic benefits provided by sensible rules and an efficient
availability and cost of capital is the United States’ meager
regulatory systems are incalculable, so is the damage caused by
personal savings rates, which ranks among the world’s worst.! In
poor and inefficient rulemaking and oversight.!!
the nearly three decades leading up to the financial crisis, the U.S. savings rate had fallen more than that of any other mature economy, from 20.6 percent of GDP in 1980 to 12.7 percent in 2008.9 It continues to trail the savings rate of most other nations, including European countries, Japan, and China, where workers typically save from 5 percent to 40 percent of their income.10
Swift technological change and global competition will continue to challenge a large, growing, and ponderous U.S. regulatory system established more than 75 years ago—one that is failing to keep step with modern practices, methodologies, and technology. Mis-regulation, in its many forms, and ponderous administration of rules pose a substantial drag on the economy to
On the heels of the recession, many Americans are reducing their
the point that the “medicine” of regulation can be as bad or worse
debt and paying off bills.11 Nonetheless, the IMF believes that the
for the public interest than the problems they purport to remedy.!
U.S. savings rate will decline even further, as baby boom retirees tap savings rather than earned income to meet expenses.12 Employees, especially those of small businesses, continue to face barriers to accessing investment vehicles and financial institutions
A major complaint lodged at last year’s White House conference, “Access to Capital: Fostering Growth and Innovation for Small Companies” is the delay caused by a regulatory system that doesn’t adapt agilely to an evolving marketplace and by 4
regulators who behave defensively—they delay making decisions
the needs of the 21st century, the Dodd-Frank law builds on a
on key issues, because making the wrong decision can be career-
bad foundation, creating new structures on top of already
ending and indecision is consequence-free.14 In a global
excessive and dysfunctional layers; and fears that an increasingly
economy that requires speed, agility, and clarity to compete,
balkanized regulatory structure will mean conflicting priorities,
regulatory molasses is poison.
disparate timetables for action, and jurisdictional clashes over turf
When Washington indecision, delay, inaction, or overreach isn’t sowing economic uncertainty, contradictory direction from policymakers is taking its own toll.! Banks are only one source of capital, but their example is instructive. As the Milken Institute points out, “Banks are being given mixed signals. On the one hand, they are being told by members of Congress and the
and authority—all conditions that slow down processes and create confusion in an economy that relies on clarity and speed. The practice of regulatory arbitrage—the transfer of funds to markets with less burdensome rules—is hardly novel for banks or other financial entities and poses a legitimate danger to our economy.16
Obama administration to start lending again. However, regulators
The 848-page law mandates over 250 new rules spread out over
are instructing banks to build their capital reserves …They can’t
a dozen agencies.17 Dodd-Frank has now expanded to over
defy the laws of physics and add to reserves (which regulators
8,843 pages of regulations. According to Davis Polk, “This
are encouraging) while simultaneously increasing lending in any
staggering number represents only 30% of required rulemaking
dramatic way, heeding the call from Washington.”15
contained within Dodd-Frank.”18 This bureaucratic expansion is
The concern about policy and regulatory confusion is intensified by the ill-defined scope and complexity of the Dodd-Frank legislation that has greatly expanded the regulation of U.S. capital markets. The legislation has created extensive new bureaucracies
taking place even though, as Maria Bartiromo points out, “four hundred agencies [were] overseeing AIG, and they all missed the debt that was taken on at the company’s financial products division.”19
with far-reaching powers and vast rule-writing authority, the limits
According to one Federal Reserve Board member, the massive
of which are yet unknown—a significant source of uncertainty for
new regulations associated with Dodd-Frank could burden small
all stakeholders.
and regional banks, leading to further consolidation in the
The Committee on Capital Markets Regulation (CCMR) points out that while we need to modernize our regulatory system to meet
banking industry and encouraging the growth of even bigger financial institutions.20 The paradoxical result might be greater 5
concentration and less competition in the financial services
away from the United States, causing an exodus of job-creating
industry, fostering even larger institutions that are deemed “too
firms and innovation.
big to let fail.”
An op-ed authored by Hal Scott, the head of the Committee on
In fact, the American Bankers Association believes that the law
Capital Markets Regulation, highlights that “our public markets
could drive more than 1,000 banks out of business by the end of
are increasingly unattractive to foreign issuers, those who have a
the decade.21 Such concentration is bound to fall hard on
real choice as to whether to use our markets—unlike large U.S.
borrowers.! In the meantime, banks, businesses, and other
public companies that are generally trapped here.” He goes on to
investors continue to hold large stockpiles of capital, in part
point out that “the U.S. share of global IPOs by foreign
because they do not know what activities will be allowed once
companies was 14.2 percent in 2010, compared to 28.7 percent
Dodd-Frank is finally implemented.22
from 1996–2006.”24
Litigation.! Each new rule will, of course, become another
David Weild, a former vice chairman of the NASDAQ stock
platform for lawyers to launch costly lawsuits that scare away the
exchange, explained the implications of this trend: “Issuers have
investment and risk-taking on which new job creation relies.
to put themselves through a grinder to go overseas, so any
As The Economist described, “Companies must hire costly lawyers to guide them through a maze created by other lawyers. They must also hire lawyers to defend themselves against attacks by other lawyers on a playing field built by lawyers. The cost—
significant percentage of overseas listings is a sign that our markets have become hostile to innovation and job formation.”25 In part, he ascribed this continuing drop-off to America’s “unique securities class-action litigation system.”
roughly $800 a year for every American—is passed on to
Scott noted that in 2010, “company payouts funded by
consumers. The benefits are hard to detect. Americans are
shareholders amounted to more than $3 billion, and in previous
probably no less likely to be injured or cheated than the citizens
years it’s been as high as $17 billion. That's no way to attract
of countries that spend a fraction as much.”23
foreign companies to U.S. markets.”26 The U.S. Chamber’s
These burdens and risks diminish our economy’s attractiveness and stifle job-producing economic activity. Indeed, flight to avoid over-litigation is one of the factors leading IPO and venture capital
Commission on the Regulation of Capital Markets agreed. It notes a leading criticism of U.S. capital markets is that the “heavily litigious environment imposes significant costs disproportionate to its benefits. For example, civil penalties amounted to $4.74 6
billion in the United States during 2004 compared to the $40.48
home for productive use. The United States’ stability,
million in penalties imposed in the UK.”27
transparency, and rule of law continue to make us a safe harbor
As Graham Bowley, who covers financial markets for the New York Times, noted, “the extra annual cost of maintaining a public listing, including complying with Sarbanes-Oxley rules, can be typically much higher in the United States: $2 million to $3 million each year depending on the size of a company compared with a cost as low as $320,000 on AIM or $100,000 to $300,000 in a market like Taiwan, according to advisers.”28 In a competitive
for investment capital from around the world. We have sophisticated capital markets, a broad array of institutions, and enormous experience. We offer a rich mix of financial products and services to meet the varied needs of borrowers, large and small. We have the resources, the knowhow, and capacity to build on these strengths to make America the best place to save, invest, and borrow.
global economy where nations are vying for capital to finance
America has an extensive “to do”!list in order to seize on these
growth, pushing capital and financial services overseas is not a
advantages and to provide job creators with the reliable access to
winning strategy.
the affordable capital they need to finance economic growth and
For this reason, capital market regulation and litigation is another
support higher levels of employment.
area crying out for a concerted U.S. effort to reconcile disparate
·!!!!!Restore confidence. We must restore confidence in the U.S.
international rules and standards. Such reconciliation can help
financial system by ensuring market efficiency and integrity
ensure that needed protections are implemented uniformly,
through a modern regulatory structure that is lean, agile, and
without placing American firms at competitive disadvantage and
won’t smother lending and investment with ill-conceived rules
depriving our economy of needed capital.
and added costs.! We must remedy the nation’s extreme fiscal
Bottom line. A country can’t remain attractive to job creators and competitive in the global economy without capital and credit that is more accessible and affordable then found elsewhere. We Americans have much going for us. We enjoy the wealthiest economy in the world. Our multinational companies perform well overseas, earning enormous sums that can be attracted back
dysfunction by following a steady and sure path to solvency.! We must coordinate globally to avoid unilaterally imposing rules that would erode the competiveness of U.S. capital markets and U.S.based capital providers. ·!!!!!Increase capital supply at home.! We must enact and sustain tax policies that reward domestic savings, investment, and private-sector growth. We must reform the double taxation of 7
overseas earnings by corporations headquartered in the United
know how to exercise their authorities prudently and responsibly.
States and encourage them to bring those earnings home for
We must ensure that policymakers and regulators act with
investment. We must ease federal “crowd out” by reducing the
accountability for the health and success of our financial markets,
federal deficit and national debt.!
not just with an eye to eliminating risk and absolving themselves
·!!!!!Attract capital from abroad. We must overhaul the U.S.
of responsibility for potential problems along the way.
business climate through tax and regulatory policies that invite capital from abroad by making it as safe, simple, and rewarding
The 21st Century economy requires dependable,
as possible to save and invest here. We must reform the U.S. tort
affordable, and just in time delivery not only of goods and
system to stop scaring away foreign direct investors for fear of
services, but of the capital needed to keep the engines of
unwarranted and excessive legal risk. We must promote
commerce humming.! This will require the strength, vision,
coherence between U.S. and foreign financial rules to promote
and commitment to turn our extensive national “to do” list
the integrity of markets while ensuring that America doesn’t lose
into a “done” list.
out from regulatory arbitrage. ·!!!!!Ease access. We must promote alternative means of linking
!
lenders and borrowers, such as utilizing the Internet and other
!
modern platforms that ease transactions costs, speed processing, and promote access to a diversity of financial products. ·!!!!!Reduce mis-regulation and encourage regulatory reform.! We must ensure that the rules flowing from Dodd-Frank and the exercise of authority it grants do not unduly impede the ability of
! ! ! !
job creators and consumers to obtain affordable capital and credit via a diverse range of financial products that meet their needs. We must ensure that U.S. regulators have operational and technological understanding of modern financial markets and 8
9
End Notes
1 Timothy Geithner, “Remarks by Treasury Secretary Tim Geithner at the Access to Capital Conference,” U.S. Department of Treasury (Washington, DC; March 22, 2011). http://www.treasury.gov/press-center/press-releases/ Pages/tg1112.aspx
2 Committee on Capital Markets Regulation, the Global Financial Crisis: A Plan for Regulatory Reform (Cambridge, MA; May 2009), ES-2.! http:// www.capmktsreg.org/pdfs/TGFC-CCMR_Executive_Summary_(5-26-09).pdf
3 Klaus Schwab, “The Global Competitiveness Report 2011-2012,” World Economic Forum, Switzerland, 2012, pp. 362–43 http://www3.weforum.org/ docs/WEF_GCR_Report_2011-12.pdf. See also: International Monetary Fund, United States: Selected Issues Paper, IMF Country Report No. 10/248 (Washington, DC; July 2010), 8. http://www.imf.org/external/pubs/ft/scr/ 2010/cr10248.pdf
4 Jose Vinals & Nicolas Eyzaguirre, United States: Financial System Stability Assessment (Washington, DC; International Monetary Fund, July 9, 2010), 15.! http://www.imf.org/external/pubs/ft/scr/2010/cr10247.pdf
x
5 Organization for Economic Cooperation and Development, “the
9 Schwab, et al., the Global Competitiveness Report 2011-2012,
Challenges of Narrowing the U.S. Current Account Deficit,” OECD
362-363.
Outlook No. 75, May 2004. http://www.oecd.org/dataoecd/ 4/58/31920358.pdf 10 Richard Dobbs, et al., Farewell to Cheap Capital: The Implications of Long-Term Shifts in Global Investment and 6 National Commission on Fiscal Responsibility and Reform, the
Savings. (McKinsey Global Institute, December 2008), 38. http://
Moment of Truth (Washington, DC; Executive Office of the
www.mckinsey.com/mgi/publications/farewell_cheap_capital/
President, December 2010), 11. http://
pdfs/MGI_Farewell_to_cheap_capital_full_report.pdf
www.fiscalcommission.gov/sites/fiscalcommission.gov/files/ documents/TheMomentofTruth12_1_2010.pdf 11 Market Watch, “U.S. Households Reduce Debt 10th Straight Quarter,” Wall Street Journal, December 9, 2010.! http:// 7 “Roughly $1.43 trillion currently sits overseas in perpetuity,
www.marketwatch.com/story/us-households-reduce-debt-10th-
according to Citigroup estimates.” See: Vishesh Kumar, “Bring on
straight-quarter-2010-12-09
the Corporate Tax Holiday,” CNN Money, April 29, 2011. http:// finance.fortune.cnn.com/2011/04/29/bring-on-the-corporate-taxholiday/
12 The U.S. savings rate by 2%. International Monetary Fund, United States: Selected Issues Paper, 15.
8 Andy Stern, “Bring Home Foreign Earnings,” Politico (Op-ed), May 11, 2011. http://www.politico.com/news/stories/
13 Commission on the Regulation of U.S. Capital Markets in the
0511/54673.html
21st Century, Report and Recommendations (Executive Summary), 2.
xi
14 Ann Miura-Ko, remarks at the Access to Capital Conference, U.S. Department of Treasury (Washington, DC; March 22, 2011). See also: Emily Maltby, “Opinions Abound at Capital Access Forum,” Wall Street Journal, March 22, 2011. http:// blogs.wsj.com/in-charge/2011/03/22/opinions-abound-at-capitalaccess-forum/
18 Davis Polk, "Dodd-Frank Progress Report." Last modified July, 18, 2012. Accessed September 14, 2012. http:// www.davispolk.com/files/Publication/15a76992-d82a-4d15-a2dbfcde9effc3d0/Presentation/PublicationAttachment/ b82f9d23-0edc-49eb-af02ff97ff34bd56/071812_Dodd.Frank.Progress.Report.pdf.
15 Ross C. DeVol, From Recession to Recovery; Analyzing America’s Return to Growth, (Santa Monica, CA; Milken Institute, July 2010), 5, 22. http://www.milkeninstitute.org/pdf/ From_recession_to_recovery.pdf
16Joel F. Houston, Chen Lin, & Yue Ma, Regulatory Arbitrage and International Bank Flows (University of Florida; Warrington College of Business Administration, December 18, 2009. http://
19 Mara Bartiromo, The Weekend that Changed Wall Street, Portfolio/Penquin(New York; 2010), 91.
20 Steven K Beckner, “Fed’s Fisher: Dodd-Frank Legislation Could Have ‘Perverse Outcome.” iMarketNews.com, June 6, 2011. http://imarketnews.com/node/31800
warrington.ufl.edu/fire/docs/workingpapers/ RegulatoryArbitrageAndInternationalBankFlows.pdf 21 Paul Sperry, “ABA: Dodd-Frank Red Tape Will Kill 1,000 Small Banks,” Investor’s Business Daily, May 20, 2011. http:// 17 “Too big not to fail: Flaws in the confused, bloated law passed in the aftermath of America’s financial crisis become ever more apparent,” The Economist, February 18, 2012, http://
www.investors.com/NewsAndAnalysis/Article/ 572889/201105201812/1000-Small-Banks-May-Be-Shut-DownDue-To-Dodd-Frank.aspx
www.economist.com/node/21547784
xii
22 Glenn Hubbard & Hal Scott (Committee on Capital Markets Regulation), “Geithner’s Hollow ‘Speed’ Pledge to Business: To Reduce Uncertainty, the Treasury Secretary Says Dodd-Frank Regulations Will be Implemented Quickly. That can’t and Won’t
27 Commission on the Regulation of U.S. Capital Markets in the 21st Century, Report and Recommendations, 27.
Happen,” Wall Street Journal, August 5, 2010. http:// www.capmktsreg.org/pdfs/ 2010.08.05_Geithner's_Hollow_Speed_Pledge_to_Business.pdf
28 Ibid.
23 “How to Curb Your legal Bills: They Fell During the Recession, but Not Nearly Far Enough,” Economist.
24 Hal Scot, “Capital Market Regulation Needs an Overhaul,” Wall Street Journal, April 20, 2011.
25 Graham Bowley, “Fleeing to Foreign Shores.” The New York Times, June 7, 2011. http://www.nytimes.com/2011/06/08/ business/global/08exchange.html?_r=1
26 Hal S. Scott, “U.S. Capital Markets Need an Overhaul.” http:// www.capmktsreg.org/pdfs/ 2011.04.20_US_Capital_Markets_Need_an_Overhaul_by_Hal_Sco tt.pdf xiii