Strengthening U.S. Capital Markets: A Challenge for All Americans

One of the most urgent yet least understood competitive challenges facing the United States is the continued global leadership of America’s capital markets. The problems that began last year in the subprime mortgage markets and quickly spread to the credit markets and across our economy are just the latest stark reminder that capital markets don’t matter just to Wall Street.

Every company—large or small, public or private—needs capital. New ideas, innovations, and jobs must have financing to take root and grow. Individuals, too, rely on capital markets. A clear majority of families now invest in our markets, depending more than ever on them to fund retirement, college tuition, and a high quality of life. The capital markets are also a source of well-paying jobs for the millions of Americans who work in the financial services industry.

In short, the continued success of U.S. capital markets is as important to Main Street as it is to Wall Street. Every citizen, family, and business has a critical stake in ensuring that our nation is home to the strongest, fairest, and most efficient markets in the world.

Yet today our leadership in this area is slipping. Our competitive edge has dulled, and we must take immediate action if we are to get it back. The challenges facing our markets are compelling. We have refused to modernize the oversight systems that were created more than 70 years ago. We have piled on senseless and contradictory regulations that no one can understand. We have added exorbitant costs to transactions. And still our gigantic regulatory bureaucracy was unable to detect and avert the subprime crisis and its reverberations through our economy.

We have permitted a handful of class action lawyers to extort investors through the threat of frivolous lawsuits. We have allowed special interest investors to misuse and abuse our legal and regulatory process to advance political or social agendas at the expense of all investors.

We have seriously confused genuine fraud with legitimate risk taking. In the name of protecting investors from fraud, which we must do, we are foolishly attempting to drive all risk from our markets.

In addition to these domestic challenges, we face robust global competition from overseas markets. The reality is that America is no longer the sole capital markets superpower. Fortunately, there is widespread recognition that our capital markets are losing their edge. A report by the Chamber of Commerce’s bipartisan Commission on the Regulation of Capital Markets in the 21st Century and complementary reports and studies by the Committee on Capital Market Regulation, New York Mayor Michael Bloomberg and U.S. Senator Charles Schumer (D-NY), and the Financial Services Roundtable have all documented the seriousness of the declining competitive position of the U.S. capital markets.

We have made some progress in addressing these challenges. In 2007, accounting and auditing reforms, including a more cost-effective implementation of the Sarbanes-Oxley Act, were implemented. Proxy access efforts that would have further empowered special interests at the expense of ordinary investors were beaten back. The U.S. Supreme Court’s decision in Stoneridge delivered a blow to abusive securities class action lawsuits. The Chamber played a role in these positive developments through strong advocacy before the legislative and regulatory branches of the government, in the courts, and in the court of public opinion.

There have also been setbacks. The subprime financial crisis has lent credence to the view that every market downturn or business failure must necessarily produce a plethora of new regulations and lawsuits rather than the thoughtful and prudent regulatory reform that the Chamber and others advocate.

The Chamber has organized itself to be a strong advocate for sensible capital markets reform. We are absolutely committed to a sustained, well- funded, and broad-based campaign to ensure that the U.S. capital markets are the most attractive in the world.

Leading the Chamber’s effort is the newly established Center for Capital Markets Competitiveness (CCMC), which has hired an expert staff and attracted an outstanding voluntary board of business leaders chaired by Richard H. Murray, chief claims strategist at Swiss Re. Building on the Chamber’s proven record in this arena, the center has developed an aggressive, four-part action plan to drive the modernization of our financial system in 2008 and beyond:

• Establish a modern and coherent regulatory structure.
• Restore fairness to legal, regulatory, and enforcement processes.
• Implement a global corporate financial reporting model.
• Promote innovation and the long-term interests of all investors.

The pages in this report outline specific strategies and actions we have identified to achieve these critical goals. I urge you to review our plans and visit our website (www.centerforcapitalmarkets.com) to learn how you can support our efforts and contribute your own perspectives and ideas.

Treasury Secretary Henry M. Paulson, Jr., recently stated: “Truly competitive capital markets must inspire investor confidence. When it comes to regulation, balance is key. The right regulatory balance should marry high standards of integrity and accountability with a strong foundation for innovation, growth, and competitiveness.”

The Chamber strongly supports these views, and we are prepared and committed to play a major leadership role. Our mission always has been— and remains—to help create American jobs, expand prosperity, and reward success. Competitive and efficient capital markets—overseen by a modern, coherent, and balanced financial regulatory system—are critical to the success of that mission.

Thomas J. Donohue
President & CEO
U.S. Chamber of Commerce
March 2008