American Enterprise Institute

March 13, 2006

[Edited transcript from audio tapes]

8:45 a.m.	Registration
9:00	Presentation:	Henry N. Butler, Chapman University, AEI-Brookings Joint Center for Regulatory Studies
		Larry Ribstein, University of Illinois College of Law
9:40	Discussion:	Richard Booth, University of Maryland School of Law
		Alex J. Pollock, AEI
		Peter J. Wallison, AEI
	Moderator:	Ted Frank, AEI
11:00	Adjournment

Proceedings:

Mr. TED FRANK:  Good morning, I’m Ted Frank, Resident Fellow here and director of the AEI Liability Project.  We have a very exciting program for you this morning.  Some might find it more than a coincidence that the day before AEI is holding a program on the effectiveness of government regulation on corporate governance, we had a very vivid demonstration of the effectiveness of the government monopoly on water service.  On behalf of AEI, I deny everything, but I can’t vouch for where the Cato Institute was at 2:30 yesterday. 

[Laughter]

I think it was AEI’s Sam Thernstrom who first pointed out to me that if we’re going to have a program promoting a monograph, it seems kind of silly to have scheduled it three months before the monograph is actually physically available.  I apologize for this, but I want to assure you that it was not a failure of internal controls, but rather that we were very excited about what Henry and Larry have to say here, and we wanted to get that information out as soon as possible and hold this program. 

I think it’s a very important paper, a very comprehensive look at Sarbanes-Oxley, and I think they also especially single out a very important problem with Sarbanes-Oxley beyond the costs and benefits that have been discussed in the media over the last few months, and that is the very hidden landmine out there of the problem with civil litigation in Sarbanes-Oxley that has not yet manifested itself and we’re going to hear from a number of people on that.
So, without further ado, I give you Larry Ribstein.

Mr. LARRY RIBSTEIN:  Thanks to AEI for putting this together.  I’m very glad to be here this morning.  First of all, I should say that the PowerPoint that was distributed in the materials and for that matter, the draft that you have, has been a little bit superseded.  This is definitely a work in progress, partly for the reason Ted mentioned and partly because the events with respect to Sarbox are evolving so rapidly.  And when we first conceived of this project, it was Sarbox was a done deal.  This was our initial thought on this.  Sarbox was a done deal.  It’s water over the bridge or over the dam or under the bridge.  Let’s look at the lessons from Sarbox for the next piece of big government regulation of corporate governance and see what we’ve learned and do it better the next time. 

And then the PCAOB lawsuits overturned the PCAOB as well as the whole Sarbanes-Oxley Act was filed.  And this suit appears to have some legs, and if it does have some legs, it could lead to congressional reexamination of the Act.  Plus, I think the criticism of the Act has really been picking up lately.  It’s also coming from some unexpected sources, like Nancy Pelosi and the LA Times, and so you start to wonder, could there really be a basis for a movement to get something done?  And I think there is.  And so that’s why the paper has evolved a bit from just what can we do about the future to what can we do now; plus, taking into account recent data and so forth.

So there is a lot of stuff that you’re going to see and hear that’s not perfectly in the paper or in the PowerPoint.  There’s also a lot of stuff that you’re not going to see and hear.  This paper is 40,000 words as it stands right now.  We only have time to really hit the tip, and I urge you to look at the rest, which is in your materials. 

The way Henry and I are going to go about this is, I’m going to give a little bit of an introduction, or continue the introduction. Henry’s going to go through about half of the policy discussions that we have in the paper, and then I’m going to pick it up from there.  I hope we have plenty of time to talk about this later and I think we do under the schedule.

Okay.  The first point I want to make is you could say, with respect to most statutes, “Congress looked at it.  It’s a major piece of legislation.  We had committees.  Congress took a careful look at it.  Why undo it now?”  Bottom line here is Congress did not take a careful look at it.  This was a piece of panic legislation.  It went through Congress like -- I have some metaphors I don’t want to use on the spur of the moment because I’m tired, but you can imagine the metaphors.  It ended up with a vote of 521 to 3 and was rushed through by both parties amidst the press crying for blood, prosecutors crying for blood, nobody speaking for business really.  The Republicans basically caved in.  There was an initial narrower version of SOX that went through the House. By the time it got to the Senate there it was a cloture vote.  There were basically no amendments on the floor except for Schumer’s amendment about executive loans, which tightened the Act, didn’t pull it back at all. 

So it really hasn’t been thought through.  There was virtually no consideration given to cost; no consideration given to the possible effects of the internal controls provision, for instance, which has been the most controversial provision; almost zero consideration given to the effect on foreign firms cross listed in the U.S.; almost zero consideration given to the effect on small firms; and we’re seeing the results today.  But, the point is that this Act as a matter of policy anyway, is not entitled to even a bit of a presumption at this point.

And just a little political chart to keep in mind for our little analysis later on, on what needs to be done, this is why it went through:  You see everybody on the left side of the screen and there were plenty of people against it, but not nearly as well organized as the people on the left.  Just merely investors -- how do we know the investors are against this?  Well, we’re going to talk about Ivy Zhang’s data showing a $1.4 trillion market lost in reaction to the SOX enactment event.  That’s a pretty good opinion poll of what investors think of the effects of SOX.  So we have some very important people on the right side of the screen, but they really weren’t taken into account in the political process.
 
So, that’s what we’re talking about today, the fact that this was not really considered well.  It’s had effects far beyond anything Congress thought about for a second and we’re going to talk about what those effects are and then later on talk about what to do about it.  But now, Henry.

MR. HENRY BUTLER:  Great.  Thank you, Larry.  It’s a pleasure to be here, Ted; appreciate the organizing the program.  Our approach in this paper is to really take the perspective of dealing with SOX and taking serious the notion that SOX is an investor protection act, an antifraud act, and try to see if it actually comes anywhere near achieving those types of goals.  And related to that are questions like was SOX necessary?  Did Congress get it right in the process of moving in that direction? 

And we take the perspective of agency theory, which is the corporate law and economics approach to the corporation where we view the shareholders as the principals and the managers and executives of the firms as the agents are supposed to be acting on behalf of the shareholders.  This is a more stylized version of the traditional Berle and Means separation of ownership and control problem.  We’re concerned about getting managers to act in the shareholders’ best interest.  Part of that could be to not commit fraud, but the primary thing that we’re often concerned about is maximizing the value of the corporation.  And what we want to talk about with this then is can SOX do what shareholders want, which is to maximize the value of their firm.

One of the implications of agency theory is that it’s costly to monitor managers, to get them to act in the shareholder’s best interest.  And as a result of that, we will see some agency costs, some firms where profit is not being maximized because it’s not worth the expenditure of resources to control all managerial behavior.  That is, there will be some agency cost to take place and that’s the rational perspective from the shareholder’s point of view, that the world is not perfect, it’s not worth it to try to achieve perfection in terms of getting the managers to act in the shareholder’s best interest.

A similar point can be made with respect to fraud.  Fraud is costly to detect and to get rid of.  And from an investor’s point of view, you want to invest in getting rid of fraud up to the point where the marginal benefit is equal to the marginal cost.  In that world, in that analysis, the optimal amount of fraud is not zero.  From an investor’s point of view, you’re better off tolerating some fraud rather than over-investing and getting rid of fraud.  So, any public policy that has the goal of trying to achieve zero fraud is not good policy from the perspective of the shareholders.  It’s not what investors want, and in fact, it’s not what we want in society.  There are some big costs associated with achieving that goal, which is basically what we’ll be talking about throughout the paper.

Now, in terms of the risk of fraud, it’s important to keep in mind when we’re talking about investor protection that investors can diversify their portfolio.  In fact, the presumption in all financial economics is that when we’re talking about investors, we assume that investors hold diversified portfolios of assets and so they can diversify this risk of fraud, assuming that fraud is not happening in all firms at the same time.  But, SOX does not allow such efficient risk-bearing by shareholders.  In fact, you could argue that Section 404 of SOX, the internal controls provision, is basically an explicit goal of going towards zero fraud.  And from a fellow policy view that just doesn’t make any sense; that we’re trying to get rid of too much fraud.  And this is not to say that fraud is a good thing, it’s just that it’s not always worth getting rid of.

Similarly, there’s another problem that comes up with this pursuit of zero fraud and that is that we need to worry about the agent’s behavior in a world where there’s a lot of liability associated with mistakes or failure to comply with antifraud provisions, because we’ll then end up with a lot of risk-adverse behavior by managers, by attorneys that work for firms, by auditors who will be, as part of their actions, over-investing and getting rid of fraud.  And this is basically not what shareholders want.  It’s a bad deal for shareholders.

In trying to take a broad perspective on SOX and decided whether or not it’s good public policy, balancing costs and benefits and so forth, one of the things that we do in the paper is we try to drop back and say, if you want to think about the benefits of SOX, you should think what would the world look like today if SOX had not been passed.  Would we have ramped fraud and a crashed stock market?  And our conclusion is no, we wouldn’t.  It’s possible we could actually have less fraud than we have.  And it’s not clear that the stock market has done any better as a result of the passing of SOX.  Certainly the Enron trial has all taken place in the context of laws that were on the books prior to SOX coming around.

So, what are some of the mechanisms that would step up to the plate to take care of the problems that were occurring in 2001 and 2002 that led to the adoption of SOX?  And we can separate those and talk about those in a lot of different categories.  Basically these are institutions or market forces that would result in protecting shareholders.  And one of those is the incentives of stock analysts to look for information; to ferret out information that suggests a company is more likely to be engaging in fraud versus another company; and they could make money by being the first people to discover that information.  So there are strong market incentives to search for fraud.  When there are strong incentives to search for fraud that deters fraud taking place in the first place. 

Firms can also send signals through their changing their board structure, through their interaction with the stock market that basically takes steps to indicate their honesty, the truthfulness of their financial statements.  The hedge funds and other players in the market can take large positions in firms which signals to other firms or to other players in the market that the governance systems of those companies are in good shape.  The Delaware Court system, which is where over half of the Fortune 500 companies are chartered, can be evolving to respond to some of the concerns that came out of Enron.  Larry will be talking a little bit more about that later on.  Stock exchanges altered their rules in response to some of the perceived problems in this.  That’s more of a market response than it is a regulatory response. 

The upshot of what we have to say on this, though, if there were no SOX then other institutions and market forces would have stepped up and would have bolstered the investor confidence to the extent that investor confidence needed to be bolstered, to basically solve the problem that SOX was aimed to look at.  So there’s an alternative set of institutions and market forces that would have filled the supposed gap that SOX was filling, and by its very nature then, SOX did not have a whole lot to add.  The potential benefits of SOX have been way oversold relative to the reality of where we would have been if SOX had not been passed.

Given that small potential for benefits, which is basically zero benefits, there are tremendous costs associated with SOX.  And we have a number of them listed in the paper about going through and trying to identify what those costs are.  Some of them can be identified as the direct compliance costs that accountants are likely to count.  And some of these numbers are quite large.  One of the estimates that we refer to is $6 billion will be spent on compliance on SOX in 2006.  That’s real money, the $6 billion, but that’s only the accountants really doing their math.  That’s when someone says well this is how much money we wrote a check for for someone or the CEO of a company said he spent 25 percent of his time working on compliance issues this year.  For example, if a CEO gets paid a million dollars a year and he spent 25 percent of his time on SOX compliance, the numbers would say that’s $250,000 that went towards compliance.  That’s the way accountants think.
 
Economists think about it, well, what else could the CEO have been doing with his time, and one of the reasons the CEO is paid is to add more value than what their salary is.  And that’s the opportunity cost question.  We are diverting the attention of management away from the hard business of maximizing shareholder value and as a result of that, our argument is it’s harming shareholders.

There are lots of provisions that we could talk about.  One that I would like to focus on is the one requiring that independent directors on the audit committee.  I’m sure Peter will have something to say about this, but independent directors are a traditional panacea of corporate governance scholars: “If we just get these independent folks who have no strong financial interest in the business, spend most of their time thinking about other things, involved in monitoring this business, the shareholders would be better off as a result of that.”  The academic literature suggests that there’s really no benefit associated with the majority of firms for being independent.  But, it’s costly to do that.  You have to go out and shift your board around.  You have to hire additional people and that’s certainly one of the costs that we should be concerned about.

Another one of the provisions, the insider loan provision, it doesn’t look like it has any big costs associated with it and certainly there were some abuse of insider loans by Tyco and some of the other firms.  But, you need to think about the productive role of insider loans.  Insider loans are often times used to help attract managers to a firm, to get them to move from one firm to another by making it easier for them to buy a home, to help them buy stock in the company so that they can act more like shareholders by having a larger stake in the company and to just come along and have a broad brush ban on insider loans is a big mistake, from an economic organizational theory point of view.

Another problem with SOX is changing the dynamics of the operations of the firms, the role of lawyers, for example, in the firm as lawyers are very productive and key members of business in terms of the need to provide candid advice.  If they all of a sudden are turned into the role of watchdogs where they’re supposed to report everything that anybody could possibly question, it basically changes the dynamic of that and interferes with the productive role that they could carry.

We mentioned killing trees because we’re ultimately environmentalists, and we’re worried about all the paper shuffling that goes along with this.  There’s a lot of shifting of risk that goes on with Sarbanes-Oxley by imposing liability on executives, personal liability that makes it very difficult for them to diversify that.  If you impose more risk on them, we would expect them to change their behavior and not take as much risk, financial risk, primarily in terms of entrepreneurial risk and so forth.

Just trying to make sure I touch on things.  One thing I did want to touch on is the bigger problems that we have with the small firms that obviously is receiving a lot of attention in the press and with some commission issues dealing with this.  And we certainly think that that is a problem.  It’s basically a problem of the relative impact on small firms is larger than the impact on large firms.  Think of it as a fixed cost that gets spread over and more dollars in large firms.  To some extent, the smaller firms were the wrong target here.  The scandals that led to SOX were large-firm phenomenon, but we ended up with internal controls that apply to everyone.  And so that’s going after the wrong folks.  The small firms are not the ones there.  It certainly discouraged firms from going public.  It also encouraged some firms to de-list and to go private.  These are a real cost to our society.  One of the great strengths of our economy is our market system, our capital markets, and basically to move firms out of the public market is not a good thing and certainly it is not where we need to go. 

The last thing I wanted to mention then is the criminalization provisions in SOX.  This is a classic story of perverse incentives.  It sounds great; we’re going to criminalize this type of behavior.  Well, the concern with that is that when criminal penalties are looming over rational business decisions, rational business decisions stop being rational and so it can actually have the perverse effect of having corporations spend a lot more money on compliance than they would if we had traditional civil sanctions associated with these activities.  So we have much more risk adverse behaviors as a result of that. 

I’ll turn it over to Larry.

Mr. RIBSTEIN:  Okay.  We obviously have more stuff to say with 40,000 words, but there is definitely some stuff at the end that we want to hit.  One thing is if you get rid of SOX then people are going to say what’s left.  And then all the fraud comes back.  And the answer is, what’s left is what was there before and what really was not responsible for the problems that led to SOX, which was a very well evolved sophisticated system of state regulations of internal governance.  And making a mistake, what made SOX different from a lot of previous federal regulations, is that it did take over areas of regulation that hadn’t been left to the state, areas of internal governance, not simply the sort of disclosure regulations that the federal government had regulated before. 

I have some specifics listed on the slide.  Again, this goes to whether we need federal law, but there’s also a positive cost to this or a negative cost, obviously, and that is federal rules, even specific rules, take a chance of eviscerating, eroding a general system of state regulations of corporations.  You can’t keep grabbing pieces out when you’re grabbing out the vital organs of the system.  And gradually the state court, the state legislators no longer have the freedom to operate in terms of coming up with a coherent system of a corporate governance law.  And you’ve killed what has been called the genius of American corporate law.
 
A lot of talk about foreign firms: again the problem here is this is not just disclosure regulation.  This is regulation of internal corporate governance. To the extent that foreign firms were cross listing in the U.S., they were looking for strong U.S. disclosure law.  They weren’t looking for laws that tried to regulate internal governance of these firms that looked very different in many cases from the internal governance of U.S. firms, most of the firms subject to Sarbox.  And so it’s not at all surprising that when the foreign firms found out that this Act was coming down the pipe, their stock prices reacted negatively and there is some really good evidence of that, in Kate Litvak’s study. 

And then it shouldn’t have been at all surprising from that for foreign firms withdrew in large numbers from the U.S. market.  And most disturbing of all is the significant reduction in new public offerings by foreign firms in the U.S.  Where are they going?  London, particularly; several other stock exchanges like Hong Kong are competing aggressively for this business.  There are a lot of dollars in it.  And basically London from somewhere in 2002, you could say that the London stock exchange slogan for the last four years has been, “We’re not the U.S.” And that’s not a position that U.S. security markets want to be in. 

As for the litigation time bomb, (and obviously we’re coming close to the allotted time, but I just want to highlight this so we can talk about it later in more detail).  A lot of these come under 404 Disclosures.  These are the new kinds of disclosures that executives have to come up with about internal controls.  Why is this a litigation problem?  Because if they fail to highlight internal controls, fail to disclose changes, fail to spot “material” problems, even if they haven’t committed fraud themselves--they haven’t stolen a dime--they could be held liable for misrepresenting that the internal controls were adequate.  So this is a brand new basis of 10b-5 liability; meaning a brand new basis for fraud-on-the-market damages, based again, not on the standard kinds of misrepresentations, but on a new kind of fraud, that is, failure to list some problem, some risk in the certification of the financial statement.  And how are these going to be evaluated when they get to court? 

Well, I can tell you, the next downturn in the stock market, the trial lawyers are going to be looking more anxiously than anybody; not anxiously, but more avidly at this.  And what they’re going to see is massive fraud-on-the-market damages. 

So what are they going to do?  They’re going to try to find somebody to hang the damages on.  Well, the way to hang the damages -- and I think maybe Richard is going to talk about this a little bit later -- you need some wrong-doing.  And so far, as bad as fraud on the market liability has been and the Supreme Court sharply criticized it in their recent opinion in the Dura case last summer, but as bad as that’s been, at least you needed some wrongdoing to hang it on.  The liability was excessive even if you had the wrongdoing.  But SOX gets rid of that messy little detail of wrongdoing and basically says you’re a liar if you certified, knowing of some little detail like the accountant chewed too much gum on the job or whatever, and you didn’t put it in the report, knowing the possibility that the gum might stick to the auditor’s statement and might cause some problems down the line. 

Obviously, I’m being a little excessive here, but the point is, anything could happen.  When the stock goes down, there’s going to be a search for what kinds of glitches in those internal control certifications might be pinned on those things that are happening.  And will the courts deal with this in the proper way?  The courts are subject to bias like every human being.  And one bias that’s definitely prominent here is the hindsight bias.  It did happen.  You can’t get around that.  It’s a natural human tendency to say this risk that might have been very remote up front, well, we’re not up front now, we’re not ex ante, we’re now and we know it did eventuate in damage and it’s going to acquire a lot more importance now than it would have been when the relevant decisions were being made.

I’m not going to go through all of these.  Again, this is just a summary.  For those who say well, SOX has been not too bad.  It’s done a lot of great things.  Well, one of the things highlighted is that it hasn’t necessarily done a lot of great things, but before you put too much weight on all the great things that SOX has done, think about the costs that we’re not really hearing that much about.  And they do tend to add up. 

Somebody would say okay, this is just a couple of law professors and they have some theories about SOX, but how do we know that SOX has been a problem?  Well, the answer is, just in the last four years--and keep in mind that a lot of the SOX provisions have only recently come online, and they’re not even fully online with respect to foreign and small firms—some provisions have been subjected to an enormous amount of study already.  The whole cottage industry out there of financial economists coming up with data and the studies that are listed on the screen are only the studies that have come out in about the last year, and they’re only some of the studies.  Roberta Romano’s article on Quack Corporate Governance lists the studies prior to around 2005.  I didn’t have room on the screen to even mention the studies that Roberta discusses. 

But the point is, there is a large, significant, mass of data about Sarbanes-Oxley’s cost.  Is there any data about benefits?  The answer is a tiny bit, and Romano criticizes some of that data in her article.  So it’s not at all surprising that the markets obviously had it right when they adjusted down $1.4 trillion in response to SOX.  That’s not at all surprising a data point. 
And as Henry was emphasizing, what’s going on here is we can find something -- Henry did a back of the envelope calculation of something like $300 million of direct costs, direct compliance costs.  That’s present value of projected future cost year by year taking $6 billion a year as approximate direct cost.  So that leaves $1.1 trillion of indirect cost.  You subtract the $3 billion from the $1.4 trillion that Ivy Zhang found. 

Where is that coming from?  And the answer is, it’s coming from the kinds of costs that you just don’t read about in the papers and the kinds of stuff that we’ve talked about today, opportunity costs of executive time and pending litigation, risk aversion problems and so forth.  And again, has it been worth it?  Well, I have a quote here, and I don’t know if we have time, but I think we have, we must have time for a one minute quote from Michael Oxley where he says: “How can you measure the value of knowing the company books are sounder than they were before?  No more overnight bankruptcies, retirees left holding the bag; no more disruption to entire sectors of the economy.  That’s a valuable return for investment.” 
That sounds to me like the MasterCard ad.  $1.4 trillion, but who can measure the fun that you get from Sarbanes-Oxley?  But, the fact is, the benefits are very difficult to find.  The costs are impossible to ignore, but at the same time, the benefits are very difficult to find. 

The fact that we’re not going to prevent the next fraud is already evident from the Refco bankruptcy, which was the precise kind of problem that should have been discovered by the internal controls provision. The first test that we have of the effectiveness of Sarbox, it flunked.  Refco happened despite Sarbox applying. 

So what should we do about it?  And here’s where we have some public policy recommendations that we’ve been really thinking about and we’re still thinking about it.  We now go a little beyond what’s in the paper in the PowerPoint.  Again, the initial purpose here was to think about future acts, but we started thinking about what could be done about SOX now.

Some highlights here: it’s not just about amputating small firms from the Act.  I hope you’ve seen from what we’ve talked about that this is a lot more than just the effect on small firms.  This is about getting rid of civil liability and federal liability for the internal controls provisions, possibly leaving it to SEC fines, possibly leaving it to state law.  But the liability provisions, I think the liability aspect is what’s really triggered a lot of the risk aversion and a lot of the indirect costs.  And that could be a big move, just taking a couple of lines or putting a couple of lines into the Act could make a big difference.  Changing the internal controls provisions substantively to make it more reasonable: instead of saying if you miss any kind of minor glitch in your certification, you can be held liable up to your ears, just say let’s introduce a little sanity here.  Let’s follow the state law approach of leaving something for business managers for business judgment. 

Flexibility, possibility of opt-in/opt-out: that’s something that the SEC’s Advisory Committee on smaller public companies is suggesting for smaller firms.  I think that could be broadened.  Our proposal on flexibility is it across the board proposal, not just for smaller firms.  As a fall-back, we could talk about exempting the companies for which the cost has been highest, I think the foreign firms and small firms, but I want to emphasize that it’s a complete mistake to think that the problems of SOX are going to be taken care of by addressing the small and foreign firms.  It goes a lot deeper than that.

The paper was written about avoiding the next SOX.  But, I think that maybe more important is what we can do now.  Some of these ideas, obviously, are similar to ideas on the previous slide, but make no misstate about it.  There will be another regulatory panic.  There will be an occasion for another SOX.  Let’s hope that when that comes people will actually be thinking about what happened with this SOX and avoid the disaster I think that SOX has been, and if you say that there’s nothing we can do about SOX, it’s too late, it’s water over the dam, yet, additional reasons for avoiding the next one. 

I’m sorry I went on maybe five minutes too long.

MR. FRANK:  We have internal controls.  We have an excellent trio of commentaries, all of whom, as you can by the wealth of materials within your folders have written widely on corporate governance and Sarbox issues.  Peter and Alex for AEI and Rich Booth out of University of Maryland and we’ll just go down the row here starting with Peter.
Mr. PETER WALLISON:  Okay.  I thought I was going to go last, but that’s okay.  That’s good; I still have some things to say.  If I waited until all my colleagues have gone, it would all be used up. 

Okay.  I just want to make a few points.  This is really an excellent paper in terms of its comprehensive elements.  It really covers so many of the costs and problems associated with SOX.  Yet, there are a couple of things that I would possibly add. 

First of all, just a note on SOX being passed; what I’m reminded of, if many of you hadn’t followed it at the time, is what’s going on right now with the ports controversy.  And that is a complete panic at about the same time during an election year in which one party was hoping to blame the other party for Enron and WorldCom and those events.  And the Republicans, being the other party at that time, panicked, thought they might in fact be blamed for what had happened at WorldCom and Enron.  And as Professor Ribstein said, they collapsed essentially and the bill went through almost unanimously. 

So, again, in the case of the ports, we’re seeing that again, tremendous overwhelming votes in Congress against the management of the ports by the Dubai company; no real debate going on in Congress about that issue.  They’re just responding to a panic they’re getting from home and that is really the kind of problem that this law came from.  It came from ill consideration, no consideration, and no thought given by Congress because they were simply concerned about passing something which they could point to -- both parties -- as a way of curing a problem. 

There are a couple of things in the report, however, that I’d like to add.  Professor Ribstein mentioned the Refco bankruptcy, but there’s even a later event than that, that is equally interesting and I recommend that you look at it, and that is the Rudman Report on Fannie Mae.  Fannie Mae, according to the Rudman Report, did every possible thing that could be done after Sarbox to install a sound and effective system of corporate governance.  And if you read the report -- granted, the report was intended, I think, to make the board look good --  but they did put into force every possible reform and they benchmarked themselves against all the best practices in the industry.  They sought and received coverage from some of the corporate governance companies that look at the quality of corporate governance and they received high marks from those organizations.

And yet, the management of Fannie Mae deceived the board, produced dishonest financial statements, so what we learned from this is that when you have a board made up principally of independent directors, almost entirely of independent directors, an audit committee made up entirely of independent directors, an independent accounting firm that was functioning after Arthur Andersen had been destroyed for not effectively looking at the financial statements of Enron and WorldCom.  All of those so-called gatekeepers were ineffective when a management actually wanted to commit fraud.  So many of the things that Larry was saying about the fact that fraud is always going to happen are absolutely true and all of these procedures that were put into place in the case of Sarbanes-Oxley to prevent fraud will be ineffective, even though they impose tremendous costs.

I want to just mention a couple of things about the Litvak Paper, because Larry mentioned it, but didn’t have time to go into how significant this paper is.  This is by Kate Litvak and it is entitled “The Effect of the Sarbanes-Oxley Act on Non-U.S. Companies Cross-Listed in the U.S.”  It’s a preliminary draft dated December 22, 2005 and it’s available on SSRN for those of you who look at that website.  What she did was really quite interesting.  She looked at companies that were cross listed; that is, European companies that were also listed on the U.S. markets.  So, by doing that, she was able to eliminate a lot of the noise that occurs when you try to look at U.S. companies in the U.S. context. 

Ivy Zhang has this wonderful paper in which, as Larry indicated, she shows a loss of $1.4 trillion based on an event study showing what happened as it appeared more likely to the market that SOX would be adopted.  The trouble with that analysis, although I think it’s a fine analysis, the trouble with it is there were an awful lot of other things happening at the same time. 

What [Litvak] does is take these cross-listed companies, match them with companies that were not listed in the United States, European companies that were not listed in the United States and then compare what happened to the stocks of these two companies as it became clearer that foreign companies that have cross-listed would be included under SOX.  And the answer to that is, as it became clear that they would, their stocks declined relative to the companies they were matched with.  And in the cases where there was debate going on, and it looked as though perhaps they wouldn’t, their stocks improved.  So the point is very clearly made in her very clever and well researched paper, and you all ought to take a look at that.

There are two items that are not actually covered in the paper that I thought I’d like to just mention here.  First, the effect on the U.S. markets -- and it’s not in the paper -- they have now begun to talk about it to a greater extent because more data, I think, has become available than when this paper was actually written.  But the London market announced recently that in 2005 it had 129 new foreign listings.  The New York Stock Exchange announced -- well, it didn’t announce, but just put on its website -- it had a net of 6 new listings.  NASDAQ had a net of 14 new listings from foreign firms. 

So we can see, as a result of SOX and, in fact, the London Stock Exchange had done a survey of their new listings and about almost half of those surveyed said they came to London Stock Exchange because of SOX.  It is having a major impact on the U.S. markets in comparison to foreign markets which are not subjecting companies listed there to the kinds of controls and costs that SOX imposes.

One final point and that is the question of how you justify this legislation.  What we have heard is that there are tremendous costs and not many benefits.  And there was this quote from Oxley, but mostly what you hear when you really argue with someone about the benefits of SOX is, “It restored investor confidence.”  That’s what it ultimately comes down to.  And you’ll certainly hear lawmakers saying this; you certainly hear it from the media; and you hear it a lot from corporate executives who are being questioned about why they spent hundreds and millions of dollars to comply with this law. 

However, I think if you look very carefully at what happened around the time SOX was passed, there are very strong indications that there wasn’t any loss of investor confidence. 
In late October 2001, Enron occurred and there was a tremendous amount of discussion about this terrible fraud that had occurred.  But the Dow continued to rise after Enron.  And it continued to rise for two or three months after that.  In June of 2002, this is June 26, 2002, the WorldCom fraud was announced and that was, in fact, the catalyst for getting SOX passed.  There had been a tremendous amount of talk in the press about the fraud that had occurred at Enron, and suddenly WorldCom came along and it was another huge fraud. 

The politics at the time, as I indicated at the outset were very, very tense.  And the Democrats were blaming the Republicans, the Republicans thought they might actually lose the upcoming election in 2002 as a result of this, and they decided to buckle under the pressure.  But, if you look at how the market reacted, you see how the market reacted.  You see some very interesting things.  As I said, the market had gone up after the Enron collapse had occurred, so you couldn’t really say there was any loss of investor confidence if the market continued to rise. 

After WorldCom, there were eight trading days until the President went to Wall Street on July 9 and called for stronger regulations of business through legislation and obviously, SOX was -- at least the Sarbanes Bill -- was what was on the table in the Senate.  During those eight trading days, the Dow rose 150 points.  You cannot say when the Dow rose 150 points after WorldCom that there had been a loss of investor confidence.  The President went to Wall Street on July 9 and he called, as I said, for stronger regulations.  That made it very clear that there was going to be tough new regulation of business. 

That day the market fell 179 points.  The next day, the Senate adopted unanimously the Sarbanes Bill and it was clear that that engine was not going to be stopped going through Congress.  That day, July 10, the market fell 282 points.  So, the point here is that if there was a loss of investor confidence, it was invisible from either the Enron or the WorldCom events.  Where there was a loss of investor confidence, I think, was in the good sense of the political class in the United States.  The fact that they had panicked and put into effect a very costly law that was going to reduce corporate earnings for years to come on the basis of very little evidence that such a law was necessary.  That’s the investor confidence that was lost.  It was lost in our government and in their good sense.

And I guess I’d like to end at that point.  Thank you.

MR. FRANK:  Thank you, Alex?

Mr. ALEX POLLOCK:  Thank you, Ted.  I think it’s great that Larry and Henry wrote this paper.  It’s a very good broad-ranging discussion all in one place, the background for the Sarbanes-Oxley Act, the political environment, which Peter has been touching on as well, the very many problems and shortcomings of this Act, and especially the unintended consequences.  Nobody knew what all this was going to turn into and what has happened.  That was expected by nobody.  And then there’s a very good list of proposed fixes. 

Speaking of fixes, my interest in this topic as a theoretician here at AEI, but as a general manager for a good bit of my career, including service as a chief executive and as a director of various organizations, is action.  I think it’s time to reform Sarbanes-Oxley, if not this year, pending retirements, maybe next year, and discussions like Larry and Henry’s paper I think get us going in that good direction.

There are a few points I especially liked in the paper I’d like to highlight.  One is, of course, the cost discussion, which can’t be lost track of, as the paper says.  The SEC initially estimated its proposed rules implementing Section 404 would impose an additional five burden hours per issuer in connection with each quarterly report, and this estimate was sharply rebuked, and they came up with a new estimate of $91,000 per company.  The current survey from the Financial Executives International seems to estimate $4.4 million per company.  Well, that’s an error factor of 50 times.  And Larry and Henry go on to speculate, amusingly I think, that one can only wonder how the SEC itself would react to an error of 50 times in the estimate if this had been in an SEC filing by one public corporation.

They go on to say that even though the costs are much higher than anyone in the government predicted, this is the unintended consequences, no one is advocating reconsidering the propriety of Section 404.  Now, a piece of good news is, this isn’t quite right.  There actually are members of Congress, not yet a majority, but all good things have to start with somebody thinking about it.  There actually are members of Congress thinking about reform of Sarbanes-Oxley, and we ought to be getting in all of the data and ideas which will help move that along, because this should be a learning experience.  You enact something, not knowing what’s going to happen, you then have three years, as we’ve now had three years, to observe what has happened.  And based on all the adverse things that have happened we ought to have some learning which can result in reform. 

Now, the second point in the paper I like is the discussion of audit committee independence, which Peter also touched on.  The paper says, what I think is a wonderful point: nobody, the authors write, nobody seems to have cared that the Enron audit committee was independent.  Nobody inquired as to the difficulty directors faced in overseeing auditors.  Nobody wondered whether this fix was necessary or effective and I think those are wonderful points.  And the paper goes on really to explain why we get this independence idea anyway.  I think about the stress on independence in which my colleague Peter has written on in a very enlightening fashion.  I think about it as what I call the independence fetish.  We all believe what we want to believe and here’s the explanation for why some of this independence fetish got into the Act. 

Corporate reformers have long loved the idea that directors who are not employed full time by the company and who are otherwise independent of the company and its insiders will aggressively monitor executives’ performance on behalf of shareholders.  The reformers have ignored theoretical questions such as why it’s logical to assume that one who is employed full time elsewhere will have adequate time, incentives, and information to be effective. 
This is a wonderful point.  It’s similar to a point made by one of my all-time favorite writers on finance and on corporate governance, Walter Bagehot.  And Walter Bagehot, 130 years ago on Lombard Street, wrote, “Not only would the real supervision of a large business by the board of directors require much more time than the board would consent to occupy meeting, it would also require much more time and much more thought than the individual directors would consent to give.  Directors of a company cannot attend principally and anxiously to fares of a company without ignoring their own business,” in which they are employed full time. 

This is to say that the most diligent directors -- and as I mentioned, I am a director a few things myself -- cannot possibly match the knowledge, the detail and the specific knowledge that the management has of the operations, risks, and opportunities of an enterprise.  If the directors could match that, they wouldn’t be the directors, they’d be the management.  And they wouldn’t be part time, they’d be full time, and therefore, they wouldn’t be independent.  So, it seems to me, what this boils down to is an issue of knowledge versus independence and it’s very unwise, and the Sarbanes-Oxley Act, in my view, was very unwise, to stress independence at the cost of knowledge. 

The paper refers to this as “taking the informed out of the loop.”  I think it’s a great thought and we ought to be balancing those with knowledge against those who are independent.  And an interesting contrast here would be how private equity investors treat boards, which of course, when you’re a private equity, you’re a large shareholder under Sarbanes-Oxley as a control shareholder, you wouldn’t be allowed to sit on the audit committee.  And all your knowledge, and you are the actual principal.  Nobody can be more principal than a very large shareholder.  So it seems to me we have to strive to reestablish the balance of knowledge and independence in various ways. 

Note that an independent director is by definition an agent.  And it is a little bit ironic that a discussion which starts off as trying to solve the problems of agents acting for principals ends up with one of its main ideas being to install more agents, namely independent directors.  And, while I’m at it, accountants and lawyers are also agents, and the people who are often called investors, namely the managers of institutional investment funds are also agents.  It’s actually a little hard to find the principals outside of small businesses, which tend to have much involvement by actual principal owning shareholders and private equity.
 
Now, a third point that I really like in this paper, which I think is a new and very important thought is this litigation time bomb.  And the thought -- I think it was Larry who said -- the “avidity” of plaintiff’s lawyers during the next stock market downturn or bust, it won’t be avidity, it will be Everest.  And this notion that with 20/20 hindsight, failure to have thought of something in advance could become a criminal act is really very serious, and so it is an excellent contribution of this paper [to focus on this problem]. 

And it seems to me that underlying this thought is a naïve view of accounting itself, perhaps held by many members of Congress and many commenters, that somehow accounting is this objective matter of laying out the truth whereas the reality is that accounting is dealing with, very often, extremely complex sets of facts interacting with exceptionally complex, even opaque and nonsensical accounting rules and what comes out must be, in a very large measure, matters of judgment.  And then to have a situation where with 20/20 hindsight, these matters of judgment can become criminalized, and that seems to me quite foolish and I think this is a really important point.

Turning to the future, the paper says something very important and that -- we know the costs of Sarbanes-Oxley are real.  If you believe they were actually achieving the reduction of fraud, they still might not be worth it, and for a lot of you, they would not be worth it, but there might be more of an argument.  However, as the paper points out, it is not clear that such regulations will prevent the next fraud, which will not be about special purpose entities or derivatives, but about some other practices that neither the markets nor Congress can now anticipate.  The paper goes on to say it’s entirely possible the next boom and bust will bring the next regulatory panic and with it another demand that Congress “restore confidence” to investors. 

Now, it seems to me that not only is it entirely possible that we’ll have this next set of frauds and busts, but it is absolutely certain.  The testimony of financial history is unanswerable on this point.  Larry mentioned this and also Peter, when you look at the history of finance, when optimism settles on the investors and the entrepreneurs and the investment bankers and yes, the accountants and also the government, then we get carried away in the boom and as part of the boom we will always have frauds and problems. 

So look at the history of busts and the investigations that follow them and then the mechanical fixes that are supposed to prevent them from ever happening again.  Well, the first mechanical fix was the requirement to have external audits.  This goes back to the 1930s after the bust of ’29.  And then there were embarrassments in the ‘30s which gave rise to more formalized accounting rules.  And then there were big embarrassments in the ’60s and ’70s which gave rise to the requirement that listed companies have audit committees.  The audit committees themselves were at one time supposed to be a panacea for controls.  And then we had partner rotation.  And then in the ‘80s after all of the busts of the so-called Committee of Sponsoring Organizations or COSO, practices and now Sarbanes-Oxley; I can tell you for a certainty that no such mechanical things ever will prevent the next bust or the next set of frauds. 

And this reflects Pollock’s Law of Financial Markets, which is: when optimism settles on the market no matter what any legislator or regulator does, the market will create how ever much risk it wants; and the bust will follow the creation of the risks.  So you won’t stop it from happening again.  And in the meantime, all of these costs, which are immense, as has been pointed out, are very real.  So what to do?  The paper makes some very good recommendations and I’d like to highlight just a couple.

Since the next bust will come, the idea of providing that violations of these internal control issues can’t be enforced by private lawsuits or shouldn’t be able to be enforced by private lawsuits seems to be a very good idea.  It would be a very good idea to have Section 404 voluntary for everybody.  There's actually a bill introduced into the Congress last year, H.R. 1641, introduced by Congressman Flake of Arizona, which would do that.  I think it’s a great idea.  If we can’t achieve it for everybody, at a minimum, let’s achieve it for smaller firms.  I agree it’s not the whole problem, but it is an important problem. 

My notion on this one with a small business advisory committee to the SEC is apparently going to recommend that smaller firms be exempt from Section 404.  I would change the language and say that adoption should be voluntary with disclosure and explanation.  So if you’re a public company and you decide not to do all this, you simply disclose this to the investors.  You explain your thoughts and you let the investors decide.  If the backers of Sarbanes-Oxley are right, then investors really love all of this paperwork and bureaucracy, then they’ll demand that the company’s adopted, and the companies will.  If, however, those of us who think that this is primarily a waste and a way to take money away from stockholders and transfer it to accounting firms, all of the paperwork and bureaucracy, then when the companies announce that they’re not going to do it, the investors will like it.  We’ll find out.

Another important recommendation of the paper is a sunset provision of Sarbanes-Oxley.  It’s my view that most things should have sunset provisions.  I suggest the year 2011.  That would be five years from now.  It would be ten years from the first scandal.  So you’d have ten years to look at it and then reorient and make some better decisions. 

And finally, the paper suggests investor education.  That’s a good idea.  I’m not very optimistic about what one could do with investors, but you should try.  And I have a specific suggestion, which is you should try to make investors understand that they should not be confident.  The worst thing that you could do is run around and try to make investors confident, because a confident investor is a stupid investor.  That’s what makes booms.  That’s what sets up the bubbles.  What we ought to be working on is to make investors skeptical, indeed, cynical.

Then there are a few other things that I’d like to add should be done to reform Sarbanes-Oxley.  The PCAOB ought to be instructed by Congress that its standard, internal controls paperwork runs on a standard of “other than remote likelihood”, which is a wildly irrational standard.  It leads to all of the overkill that was so well discussed.  It ought to be changed to something like a material loss of risk or fraud. 

Congress ought to state clearly it does not have the naïve belief that accounting is something objective and simple and that the application of judgment to complex situations means that accountants must consult carefully with their clients and give them their judgments about this.  We’ve had absurd situations where accountants think they’re not supposed to advise their clients on the application of accounting standards because of Sarbanes-Oxley.

We ought to reform the PCAOB, as Peter Wallison has eloquently written on, to bring it under congressional control as  a regulatory agency, which it is in fact, if not in form, should be, subject to normal appropriations, oversights and normal appointments.  The PCAOB ought to be instructed to require a 404 internal controls review be applied to all public accounting firms themselves.  This is the Pollock Proposal for the expansion of Sarbanes-Oxley.  As a condition of the accounting firm’s public trust and the point is, if you’re going to practice on other people, maybe you ought to get practiced on yourself and see how you like it.
And finally, I think that Congress ought to mandate a study from the SEC and the GAO comparing the British principal’s based corporate governance and corporate risk approach of the Turnbull guidance with yet another detailed rules based approach in the U.S., namely Sarbanes-Oxley. 

So, in summary, I think this paper is an excellent contribution to learning about the actual unintended consequences and there are many and cost vastly in excess of benefits of the Sarbanes-Oxley Act.  And it helps give us a good conceptual and empirical basis to act on what we’ve learned and reform Sarbanes-Oxley.  Thank you.

MR. FRANK:  Thanks, Alex.  Rich?

MR. RICHARD BOOTH:  Thanks, Ted.  I hope that I wasn’t invited here to give some kind of balance to the presentation because I’m inclined to be even more critical of the Act than some of the comments I’ve even heard so far, and to find it, in particular, even more irrational than people have been able to portray. 

I am happy that I prevailed in going last though, because at least it gives me the opportunity to second the statements I’ve heard up to now about the independence fetish, which I think is just nuts.  And also this whole notion that accounting is some sort of science that will inexorably lead to a right answer in every case if only we’d get good enough accountants.  Both of those things are just incredible fallacies, it seems to me. 

But, I have some fairly specific points that go back to a more scholarly approach or a professor’s reaction to the piece that Larry and Henry did.  And I’d love to hear their comments about my comments.  These are sort of in the same order that they came up in the paper, but it’s not really on any particular theme here; it’s kind of a laundry list of things.

First, with respect to director independence -- aside from the independence fetish, which I think is a point well taken -- how can you expect -- independent directors don’t know where the bodies are buried.   The people that do know where the bodies are buried are obviously the ones who can actually stand on principles and say we have to disclose this to the market or we don’t need to.  Those judgments are hard to make and they’re even harder if you don’t know where to find the facts.  So, I completely agree with those comments about the silliness of insisting on independence. 

But, there’s another more important point.  Well, not necessarily more important, but there’s another point.  And that is that investors are really indifferent to this sort of thing.  Diversified investors -- and again, I assume that all investors are diversified.  I know that some aren’t, but certainly most are.  I did a little bit of independent research and by my estimates, not including nonprofits, at least 62 percent of all stock in this country is held through very well diversified investment vehicles.  Not just mutual funds, but pension plans and that sort of thing.  So, certainly the vast majority of investors are very well diversified.  And they should be the ones by whom we judge the wisdom of any regulatory scheme. 

Well, diversified investors want the highest return possible.  They don’t care about company-specific risks, because they can get rid of them through diversification, which acts like an insurance policy for them.  If a few companies go bust, in a portfolio of 200 or 300 companies there are always a few companies out there to make up the difference.  So for every Enron there’s a -- I don’t know what -- to perform particularly well during that period of time.  But it’s clear that the market did, because it didn’t go down until the Act got passed. 

What investors want is they want focused companies that stick to their knitting and you can see examples of this in the way the market operates.  Conglomerates are a thing of the past.  Investors say a gain when they were broken up because they were too unfocused.  The market almost invariably reacts positively to voluntary spin-offs and breakups of companies even to this day, and now that managers -- well, at least up until maybe five years ago or so, managers were primarily compensated with stock options.  They discovered that by pleasing stockholders they too can make more money, therefore they were completely willing to breakup companies that didn’t make sense and everybody won.

Here’s my point: to the extent that outside independent directors tend to homogenize the style of managers and make all companies kind of alike, we’re going back to the days of the ‘50s conglomerate where investing in a company was kind of like investing in a mutual fund.  That’s not what you want.  That serves managers who want to build empires, but it doesn’t serve investors who want each one of those companies to pursue the highest return, irrespective of the risk as long as the return is worth the risk, that is, as long as the return is positive.  The more we make everybody the same, the less advantage the shareholders will get out of it because they know how to diversify.  They can do that more cheaply than companies can and I think independent directors are really just kind of pushing all companies in to being the same.

Sort of the same point with respect to internal controls: it strikes me that internal controls are a way that companies compete with each other.  One of the things that a shareholder is buying is the ability of the company to keep track of how much money it has, how much money it’s making, to measure its performance as well as possible and to keep the market informed.  To the extent that what we’re doing is imposing the same methods of control on each company, we’re eliminating any incentives for companies to come up with better ways to keep the market informed or to keep their books.  I think Larry and Henry made this point in the article.  I don’t want to claim that I’m making a point that they didn’t make, but I think it’s one that deserves a lot of emphasis.

As far as accounting and certification go, I second Alex’s point here about the fact that Sarbanes-Oxley misconstrues how accounting works.  The act itself penalizes all misstatements equally.  The big penalty, aside from possible criminal and litigation things that I’ll come back to later, the big penalty is that in companies where there’s a restatement that’s necessary, the management has to give up its incentive compensation. 

It seems to me there are two really different kinds of restatements.  One is the result of utter fabrications, which we saw in Enron.  The other one is the result of simply characterizing the numbers the wrong way.  The market can figure out why the numbers are characterized the wrong way.  The market knew, as they pointed out, that Enron’s cash flow and WorldCom’s cash flow -- I mean you can measure the cash flow; it doesn’t make any difference what the accountants say the earnings are.  Analysts who believe their own work and clearly, some analysts saw that the cash flow wasn’t there and they nonetheless said well, everybody else seems to think this company is worth something, so I’m going to say invest in it.  You have to have the faith to believe in the numbers that you come up with.

I want to make one point here about compensation.  I don’t think that Sarbanes-Oxley does a whole lot about compensation except for the things we were just talking about, making people give back incentive compensation if they got it during the period when the financial statements were misstated.  But, it seems to me that they have it completely backwards. 
As I was saying before, the more we compensate mangers with options and equity, the more inclined they’re going to be to please the shareholders, breakup companies that don’t make sense, do those sorts of things.  So it’s odd.  It really is kind of strange that Sarbanes-Oxley made some feeble efforts to get the option thing under control, and mostly it was Schumer’s anti-loan provision I think that was kind of aimed at that, as one of the significant uses of loans to management is permitting them to exercise options.  You can get them elsewhere, but that was certainly one of the primary uses of management loans.  So there was an effort to undo this option thing.  But, why do we want to undo the option thing?  The option thing is just a way of inducing managers to go out and try to please the market.  Why do we want to undo that?  I don’t understand that. 

The one thing that I do think is perhaps a positive move in the right direction is the provision of the act that prevents managers from trading when employees can’t trade.  I think it’s a paltry reform.  What we should do is -- and sort of following up on the educational thing that Larry and Henry suggested -- we should do something about the fact that companies are tempted to use their own stock to fund what are supposed to be retirement plans.  If a company has what is billed to the employees as a profit sharing plan, that’s one thing.  You’re getting compensated when the company does well.  But, if it’s a retirement plan, people are led to think that they have a savings account that’s going to be good years into the future and it’s loaded up with 95 percent of company stock and you’re doing everything you can to keep investors from diversifying. I think there’s something really sinister going on there.  And one thing, oddly enough, it’s a matter of state corporation law.  The states generally permit companies to vote stock that’s held in a fiduciary capacity, I think we ought to get rid of that rule.  It’s a subterranean takeover defense that really is inducing bad investment decisions on the part of people who don’t really understand why they’re being induced to taking a risk. 

Enough of that, we can talk about that later if somebody wants to.  I think the criminalization is right.  It strikes me that making something criminal ought to be a last resort; if there are civil remedies that will do the work; we ought to stick with civil remedies.  I don’t know what the big deal is about getting so worked up about making white collar behavior necessarily criminal because it hasn’t been in the past and we ought to treat everybody equally and throw more people in jail, right?  There are too many people in jail as it is, but that’s for another show.

And as far as the litigation time bomb is concerned, this is the thing that I thought I might talk about the most.  It’s not really clear to me that Sarbanes-Oxley is going to create any new causes of action, but what it is going to do, and I think this is what they’re talking about, it’s going to create new elements, new pieces of evidence that Rule 10b-5 might have been violated.  So we’re going to be able to look at things that are misstatements that didn’t used to be misstatements that were necessarily actionable.  We’re going to be able to find knowing behavior scienter, which is required for Rule 10b-5 where we didn’t find it before. 

And I completely agree that it’s likely that fewer security fraud class actions will get dismissed next time around or once the plaintiff’s lawyers have figured out how to use Sarbanes-Oxley than in the past.  But, I have a fix for that.  And in the folder you received, there’s a shorter piece called the “End of the Securities Fraud Class Action As We Know It.”  If you don’t want to read it now, it’s forthcoming in Cato’s magazine Regulation,  I think the June issue it will be in. 

Essentially, this goes back to the shareholder diversification thing, so let me just sort of honk my own horn here for a second.  Shareholders don’t lose anything from securities fraud.  Because of diversification permits them to not care if one company goes bust because another company will do okay.  That same kind of insurance policy that shareholders get through diversification protects them from innocent types of fraud.  Just getting the numbers wrong and maybe even a few gross or recklessly get the numbers wrong.  But as long as somebody isn’t making money in the deal, as long as insiders aren’t taking money out of the company by pumping up the numbers, quick selling their stock and then letting the public know the truth like we saw in the Enron case, as long as they aren’t taking money out of the company but are just getting it wrong because they didn’t do as good a job of their own internal controls as they might have been able to do, that’s the same kind of risk that investors take.  That’s business risk.  We just didn’t quite have the metrics there in this company that you might have in some other companies.  Some companies will get it better, some companies won’t.  We don’t care and shareholders don’t care.  But, if somebody’s taking money out of the company, on the sly, then we do care about that. 

So what’s the answer to this?  Well, let me give you another problem first.  The other problem is that when there is a securities fraud class action of this sort, the investors who happen to buy at exactly the wrong time get compensated.  The people who sold at exactly the right time get to keep the money that they made, or the losses that they avoided.  The people who pay are the people who are still in the company. 

The company goes down -- when there’s a fraud, the disclosure causes the price of the company stock to go down by whatever amount the truth suggests, plus, whatever amount has to be paid to the people who bought the stock.  They’re not gaining or losing anything because they’re diversified investors, they’re equally likely to be gainers as losers and over the long haul or even just the short haul, with a little bit of trading it’s all going to come out in the wash, as far as the traders are concerned. 

The only people who lose are the most rational shareholders we have, who are the holdover shareholders who take a buy and hold attitude and don’t trade unless they have to.  They’re the ones that we’re penalizing with the current system.  How do we fix this?  (And they aren’t the only ones who lose.  The other people who lose at the company who finds that their stock goes down farther than it should have gone down.)
 
How do we fix this?  We fix this by simply having the company pursue the people who, in those cases where it happened, where people were gaining from the misstatement of the numbers, the company pursues the people who gained on the sly.  In other words, securities fraud class action shouldn’t be class actions; they should be derivative actions on behalf of the company.  And this doesn’t take legislation.  All it takes is the courts recognizing that it’s really the company that’s being harmed and that shareholders through diversifications aren’t.  All you have to do is characterize these suits as derivative actions instead of class actions and the problem goes away.  I’ll leave it at that. 

MR. FRANK:  Let’s have some intra-panel discussion.  I’m not sure there was a great deal of dissention, so let me start it off by throwing out a question.  We heard a lot of discussion about how we can let the market decide these things.  And for the skeptics out there, in the absence of SOX, how can publicly traded companies signal that they have better internal controls to communicate to the market?  Is there an argument that SOX, by setting a baseline for internal controls, is providing a more optimal level of internal controls than the market would provide because of the lack of signaling or are signals possible?

MR. RIBSTEIN:  We could say that providing a baseline, in other words, if we took some of the liability out of it, but left the internal controls provision in, or even if we didn’t, if we repealed 404 completely, you would have a kind of baseline that sets up signaling.  In other words, the companies that have already put internal controls reporting into place send a signal by withdrawing from internal controls provisions.  The market is going to pick that up.  That’s not necessarily a positive signal; although it might be in the sense that they’re signaling that they’re going to have lower compliance costs.
 
But, the point is that the market is going to pick that up.  That’s not some subterranean event that’s not going to show up as a blip on the screen.  And by the same token, companies that keep internal controls reporting, even though they don’t have to, are also sending the reverse signal.  The market is going to pick that up.  And to the extent that companies are penalized because it costs them more to raise money in the capital markets or rewarded because it costs them less to raise money in the capital markets, this is how the market is providing the discipline that the mandatory laws wouldn’t be providing.

MR. BUTLER:  And I think a similar or additional point that backs that up is that we have these corporate governance rating services out there, institutional shareholder services has a corporate governance quotient, which actually right now has a fairly small component dealing with internal controls.  It may be smaller than it otherwise would have been because SOX is there.  That is, if we took SOX out, they would have a stronger incentive to be monitoring what was going on and rating those things.  And to the extent that investors are paying attention to these quotients and so forth that we would have stronger incentives to see them adjust to however the firm wanted to go about doing it.

MR. POLLOCK:  Nothing could be a clearer signal when a voluntary system, where you voluntarily as the company adopted whatever program you thought was best and now you observe how the investors receive that set of decisions and explanations.

MR. FRANK:   Does anyone on the panel want to respond to anything that anybody else on the panel said before we throw it open to the audience?

MR. RIBSTEIN:  Well, I just had a couple of quick points.  One was in response to what Peter was talking about in terms of investor confidence and how that was affected by Sarbanes-Oxley.  It reminds me of the South Sea Bubble, which everybody thinks then led to the Bubble Act, in other words, that the Bubble Act was a result of the South Sea bubble.  We’re going back 300 years now.  In fact, the Bubble Act was the cause of the South Sea crash.  And we see these things happening throughout, but it’s neat and I really like what Peter said because it’s a really neat response to this whole investor confidence idea and it’s not the first time that investor confidence and negative stock market reaction has been a result of regulation rather than an artifact of non-regulation.

The other thing that I wanted to mention, and I’ll throw this out.  You can look at this as a tongue in cheek, but there’s been some talk of what would happen if internal controls reporting were applied to government agencies or Congress itself.  I don’t want to be complete facetious in saying that might be a solution going forward in the sense that when Congress fails to disclose all the costs that should have been quite obvious -- and by the way, they really should have been obvious, because very similar reaction happened in response to the Foreign Corrupt Practices Act 30 years almost where there was an outcry about the then equivalent of the now internal controls.  All you had to do is just look back and see what happened.  So I think you clearly do have a failure of internal controls disclosure in this case.  So what would the penalty be?  Well, I’m being very generous to Congress now.  Don’t put them in jail, but use that as a basis for revisiting the act.  In other words, this is another way of getting to sunset or other ways of getting rid of something that proves to be a lot worse than we thought.

MR. BUTLER:  I thought he was going to suggest taking away their salaries, but he didn’t go that far.  But, with respect to the sunset provision, Alex recommended ten years, I don’t think we want to get into quibbling about that, but five would be a good one and it would be almost done by now.  We’d be remiss if we didn’t mention the litigation filed by the Free Enterprise Fund challenging the constitutionality of Peek-a-Boo [the PCAOB] and the appointments process for Peek-a-Boo.  That may be an effect of sunset provision that could lead to a force of serious rethinking of this and I think that would be a welcome step. 

We did recommend, of course, some amendments to change the act.  I don’t want you to go away thinking that we really aren’t in favor of just repealing this entire thing.  We just don’t see how exactly how to get that done.

Also, with respect to the litigation time bomb, I wanted to not really respond to Rich’s comments, but kind of add on a little bit with respect to that.  What we have with the massive internal controls provision is an incredible amount of documentation that companies have to go through and regular reporting of activities and so forth.  And this is part of a plaintiff’s attorney dream come true, in the sense that the discovery requests that we’re looking for the suit that’s based on a violation of inadequacy of internal controls.  A discovery request on a lawsuit with that is going to be massive.  It’s going to say we want all your documents dealing with internal controls. 

So all this stuff that we’ve gone through and the companies have been complaining about putting together is now fodder for litigation.  The fact that it’s so huge means that the cost of discovery will be huge.  The pressures towards settlement will be huge, and we may end up in a situation like with a lot of securities litigation: we’ll never have trials, it will just be blackmail and settlements and that will be it.  And it’s a very big concern given what the system spits out.

MR. WALLISON:  Can I just add a couple of things?  I just would like to go back again to the restoring of investor confidence idea and that’s why I talked about it, because when you strip away all of the costs and all of the alleged benefits in Sarbanes-Oxley, what you come down to and you hear it again and again is restoring investor confidence.  That’s why I wanted to address this.  And I do think when you finish up this paper and get it finally done, you address that issue because that is the thing that policymakers look at as the most significant thing. 

And it is based on a fallacy.  It is based on the idea that investors had run away from the market because of Enron or WorldCom.  And it is not true.  And so it can be easily disproved unless all of us who have grave doubts about this legislation continue to talk about the fact that there was no loss of investor confidence; the debate over Sarbanes-Oxley, which is just beginning, will be lost, because ultimately the people who are supporting it are going to say well, we have this vibrant market today and that’s the cause of Sarbanes-Oxley which restored investor confidence.  It is false.

Another point I’d like to make has to do with Section 404.  The SEC, when it adopted the regulations under 404 and you might take a look at this.  I’ve concluded that this is the case, but you may have a different view.  What Congress asked for in 404 -- it’s a very short section -- they asked for internal controls that would facilitate and make sure that financial statements were accurate. 

The SEC’s regulations have three parts.  The first two deal with exactly that question, having internal controls that would make the financial reports more accurate.  The third is internal controls sufficient for the safeguarding of assets.  That’s entirely different from whether your financial statements are accurate.  If you look at what it takes for a company to safeguard its assets, which is not mentioned at all in the Act, but only in the SEC’s regulations, you realize that that imposes a tremendous amount of costs because to make sure that all of your assets down to the paperclips are not stolen by your employees or not otherwise lost in the process of doing business is a very costly thing.  And there’s very little relationship to the actual benefits of safeguarding.

MR. RIBSTEIN:  Well, I just want to add that this is why all these companies have to change their passwords now.  And of course, if you change your password every month, your computer password, everybody forgets, it and you have this whole -- this might seem like a small thing, but it’s a tremendously irritating thing that’s a direct result of Sarbox and a direct result of the safeguard of assets point than the SEC rule.

MR. WALLISON:  And then, the accountants are required to audit the internal controls that the companies set up in order to make sure that they are effective.  Then, the accountants impose tremendous new requirements and they audit those requirements to make sure the companies have those in effect.  Then the companies complain that this is enormously costly.  They’ve spent tremendous amounts of money and they’re going to have to keep spending tremendous amounts of money on the internal controls issue.  They complain to the SEC and the PCAOB.  And the PCAOB and the SEC look at this and they say, well, the accountants are just not being reasonable about this.  You don’t have to look at all these tiny little things.  All you have to look at is the big picture. 

This, I think, is the worse kind of regulatory cowardice because in fact, if you understand what kinds of risks the accounting industry faces, you realize why they have to go down to the most minute details for exactly what you said, Larry.  And that is, if in hindsight it turns out that something you did not require to be an internal control, was, possibly, potentially the source of a loss in the company, the accounting firm, as well as the officers and directors of the company are going to have to bear the cost of that.  And yet, since it’s done entirely with hindsight, the only way that an accounting firm can protect itself against it is to be as particular as they can about what kinds of internal controls they require and audit and say are adequate.

MR. RIBSTEIN:  I just wanted to add that the PCAOB’s response reminded me of a line from the movie, "Collateral" where Tom Cruise as a hit man says, “I don’t kill anybody; the bullets leave my gun, so the bullets are the ones doing the killing.”

MR. BUTLER:  Well, I did want to comment on the point that Peter was just making in terms of the pressure to get everything included in the internal controls, and so forth.  There’s another that relates to the point that Rich was making about internal controls and the different ways of organizing businesses or the way business compete.  Alex, if you were sitting on two boards, boards of different companies, there is an awful lot of pressure for you, who’s going to be monitoring the internal controls, to make sure that both companies do the things the same way.  Otherwise you might find yourself in some litigation where it’s being thrown at you that Company A had internal controls here and Company B had them one way.  Which one is right?  And B is the one that had the problem and so forth, those pressures are huge and it’s really a litigation problem, a dramatic problem here that Rich made that we’re giving up some of our flexibility and the ability to compete for these things is a really important point.

MR. FRANK:  I’d like to open it up to questions.  We’ll start over there.

MR. JOHNSEN:  I’m Bruce Johnson.  I’m from George Mason Law School.  I wanted to ask about the public choice features of SOX.  It could be that there was just a hysterical press and gullible public and Congress facing an election year, but I’m wondering if there’s something deeper here.  Who might be gaining, what kind of rent seeking might be going on?  I don’t know who the cast of characters might be, maybe institutional shareholders, that’s possible, although some of them are subject to SOX so that makes it doubtful.
 
I’m also thinking maybe the accounting industry.  On the one hand there might be accountants who feel very comfortable with perpetuating the myth that somehow accountants can get at and report the truth.  So that’s a likely source of support for this.  On the other hand, the accounting industry and accounting hasn’t been static over time, it’s evolved, right?  And one of the things that kind of got us into this problem or some of these companies into this problem is that they see a high PE ratio, we must have growth opportunities, so we have to go out and make some investments, and we want to somehow tangibly express those potential benefits to the public using what is an incapable mode, at least at this time, of expressing them.  So, if Larry or Henry or any of the other panelists want to comment on possible public choice explanation for SOX, I’d like to hear it.

MR. RIBSTEIN:  Well there it is.  I’m not saying this is the explanation, but it’s the one we have so far, and it certainly includes professionals for compliance industry, not just accountants, but lawyers preparing all these reports and so forth.  But, and I think even business itself, some of the regulated entities, the big competition for entrenched market incumbents, is the next big idea, but where’s the next big idea going to come from?  It’s too risky to get financing because of the litigation risk under SOX.  So there’s a lot of blame to go around for SOX.  

The big problem, the public choice problem, is that the opposition is uncoordinated.  It may be massive in terms of investors, small business, entrepreneurs and so forth, but doesn’t have the kind of representation that the proponents of the law have and that’s why I think that we need to recognize this when we’re talking about sunset and so forth, ways to get some kind of process started that takes these other groups’ interests into account.

MR. POLLOCK:  I think that’s a really good question that you asked and obviously, as we all know, there’s no doubt that financially speaking the huge winners from Sarbanes-Oxley are the accounting firms themselves, at least the big public accounting firms all of whom are having huge record revenues and record profits, and I’m sure record partner distributions, and all of whom have a huge conflict of interest, speaking of the independence fetish, that the more voluminous bureaucracy requirements for getting your 404 certifications are, the more profitable the accounting firms become. 

This leads me to a proposal which is that the assessments for the PCAOB which are in effect, taxes on all public companies have very unusual regulatory structure should not be taxes on all public companies.  They should, like a normal regulator, be assessments on the regulated entities themselves, that is to say the accounting firms.  And this would at least capture some of the economic rents back that the accountants have obviously enjoyed.

MR. WALLISON:  Actually, let me add one thing and that is if you remember the political environment at the time that SOX was passed, the accountants were pariahs.  No one even wanted to hear from the accountants, and if you talk to any of the accounting groups in Washington, the AICPA and otherwise, they’d say we have to stay away from Congress.  We have to stay away from the SEC.  We can’t talk to anybody because we are the ones who are seen as responsible for Enron and WorldCom because we didn’t do our job as they all thought. 

So it’s really a puzzle, because if you follow the money which is what the press likes to do here, the money went to the accountants and the accountants were the ones who were supposed to be the victims of this law.  So it’s a really strange thing and maybe sometimes in the future scholars will be able to puzzle that one out, but it’s odd.

MR. BOOTH:  Just one other thing.  I thought about this earlier but didn’t bring it up.  There’s been some talk about the possibility of using insurance as an alternative to accounting; some kind of insurance policy that says -- and this kind of goes to the internal controls thing.  They don’t really have much competition in this area, especially now that we only have four firms, partly because of Enron itself.  You can think about conspiracy theories there, but why not permit an opt-out and have an insurance scheme?  You guys mentioned that, and I think that’s something that’s really worth pursuing.

MR. RIBSTEIN:  Well, this is one of those things that was derailed by SOX because I think that Joshua Ronin came up with that idea in 2001, just as SOX was being considered.  But it kind of got squelched in the regulatory aftermath of SOX as one of many things the market could do.

MR. FRANK:  I think there is sufficient pressure out there that the rule of don’t just do something, stand there was forgotten. 

[Laughter]

MR. FRANK: In the back?

MR. REES:  Matt Rees, Rees and Associates; one of the studies, and I don’t know if it’s in your study, but you often hear cited is the one that says that the companies that have the best corporate governance show a higher average annual return, and I think the study you see most often is the professors of Harvard & Wharton and it comes to about 8 percent per year.  I haven’t dissected the study.  I’m just wondering if any of you are familiar with the study and have any response to that general point.

MR. RIBSTEIN:  Well, obviously the firms that are going to have the lowest marginal costs of complying with SOX are going to react more favorably to it.  Firms that have the highest marginal costs who are responding are going to react negatively.  Now, one can turn that around it might say well doesn’t that mean that SOX is now causing these firms that weren’t complying before to comply.  The question that they always omit is, did they need to? And this really goes to the fundamental difference between the smaller firms and the bigger firms.  The smaller firms, the problems come from the top.  If you have a good responsible honest executive, that executive is going to be finding a lot of the problems that are percolating up from underneath.  You don’t need to exhaust the internal controls.  Conversely, if you have a dishonest executive, the internal controls aren’t going to do you a damn bit of good.  So you don’t just look at the cost for the smaller firm, look at the cost-benefit configuration, very high cost, low benefit, not at all surprising that you see their prices reacting more negatively than the bigger firms that are already doing some of things that SOX hasn’t been doing.

MR. NISKANEN:  [William Niskanen, CATO] Several additional costs of Sarbanes-Oxley, investor confidence looks like it has continued to erode after the passage of SOX.  The price earnings ratio on S&P stocks, the biggest stock around, has continued to fall from the second quarter of 2002.  So investor confidence has continued to fall. 

Second, is one of the costs of Sarbanes-Oxley is that the budget of the SEC has doubled over the past three years.  This is consistent with the usual pattern of rewarding failure in the federal government, because the last financial report the SEC had reviewed before Enron collapsed was the annual report for 1997; four years before.  So, SEC was not even a player during the period of time that Enron collapsed and had its budget doubled, most of that is being spent on lawyers, not statisticians, not economists or anything.
 
Third, it is that it is important to recognize where all of these ideas from Sarbanes-Oxley came from.  They were not invented by Sarbanes.  They reflected what was the conventional wisdom of the new reformers, the reform movement that had been accumulating for 20 or 30 years prior to that and had already been embedded in the new listing standards of the New York Stock Exchange and the NASDAQ, they had been endorsed, of course, by the CED, which is the real key whether this reflects conventional wisdom, which [indiscernible]. 
So these were not new ideas.  These ideas have been around for a long period of time.  These ideas have gone for 20 or 30 years without recognizing the accumulation of empirical evidence in the meantime that says that these ideas make no sense whatsoever. 

Fourth, the clear implication of your paper is that we ought to eliminate Sarbanes-Oxley.  I hope that you revive your own personal conclusion about this issue and not pursue an idea that political feasibility prevents that.  What is politically feasible depends upon what people are saying about the bill.  You shouldn’t assume that this could only be corrected at the margin.  Tweaking legislation is not a good idea when the fundamentals of the legislation are just profoundly wrong. 

The study that was just mentioned was the study of the comparative rates of return during the ‘90s of firms that had very few management protections relative to firms that had a lot of management protections.  As you know there has been an accumulation of many different protections over this period of time.  And what they found is that the top deciles of the shareholder-friendly firms had an 8 percent per year higher return than the top deciles of the management-friendly firms. 

And the implication of that is that nobody minds the store in good times.  This was a boom period, management friendly firms themselves were earning about 14 percent a year, and the shareholder friendly firms were earning 22 percent a year during that period of time.  And that study has been around now for a couple of years and ought to lead to probably Delaware legislation to limit these management protections that have accumulated over that period of time.
MR. RIBSTEIN:  I actually have two points on one of your points, which is about the conventional wisdom being finally reflected in SOX.  I look at that as a 17 year locust. They go to sleep, and then when a market panic comes, they all of a sudden wake up, and you hear all this creaking.  The other thing is, and you might ask, where are the proposals for the future coming from?  And we discussed in the paper a proposal by a professor at Brooklyn, Jim Fanto who just recently proposed this, of having the SEC send monitors to firms, instead of having regulation from the outside, each firm would have its own SEC monitor who would actually live on the premises and make sure that everybody does the right thing. 

So you might say this is just ridiculous, but the fact is that he comes up with I think a pretty good theory about why firms would actually like this.  That regulation is already becoming so pervasive, if all you can look forward to is some threat of personal liability or jail, wouldn’t it be better to have an SEC monitor that tells you before you mess up, so you don’t have that horrible risk, I could see this the next panic becoming one of those wonderful ideas that gets enacted into law, unless we start thinking seriously about -- so think about the Fanto proposal, don’t just think about these vague theories about what might happen.  Think about the Fanto proposal as a specific example of what might happen if we’re not more careful the next time.

MR. WALLISON:  There actually is something like that already happening and that is that companies in the mutual fund business had been required to install a compliance officer, who the SEC is trying to get to report to the SEC about those…

MR. RIBSTEIN:  He points out that this is already covered and is in effect in some sections.

MR. WALLISON:  That’s right.  So it’s not that far-fetched.  But what happened is that the SEC monitor will then end up testifying about how he was deceived just as the board and the audit committee and the accountant.

MR. NISKANEN:  [indiscernible]…has criminalized departures from GAP, from the General Sector of Accounting Principles.  In the meantime, there have been a lot of good empirical work recently that says a lot of things which GAP requires to be expensed are really capitalized; employee training, R&D, a good bit of advertising has downstream benefits and really ought to be capitalized.  Ebbers got a 25 year sentence for capitalizing some operating costs.

MR. BOOTH:  Just to follow up on that, any analyst worth his salt would have been able to figure out what the cash flow of the company was.  You can analyze the numbers, you know the cash is either or it’s not there.  It doesn’t make any difference whether you call it capital or expense and the guy’s in jail.

MR. NISKANEN:  [off mike]…this was at the time that they were reporting $2 or $3 billion earnings during that period.  This is an independent analyst who did this for us based upon objectives and [indiscernible]…

MR. POLLOCK:  That’s not a free cash flow, that’s a captured cash flow.
MR. WALLISON:  Let me just make a couple of comments since we have a little bit of time.  One is that just to respond to this earnings and cash business, there is an expression on Wall Street, which is earnings are an opinion, cash is a fact.  And in fact, there is data that shows that the business that Enron was in, there were several companies doing about the same thing there.  If you chart their stock returns along a chart, you would show that it was rather steady for the two years before Enron collapsed.  But, Enron’s returns were falling, like this, so that some investors had been looking at Enron’s cash flow and had seen that there was something wrong with this company, although they were reporting tremendous earnings, they weren’t reporting very much cash.  And that is a very good way to actually have some kind of monitoring and unfortunately, if you watch CNBC, if you watch MSNBC, if you watch the rest of them, all day they are talking about the earnings.  And everything you said about accounting was absolutely correct.  These things are based on judgments and estimates and they are in fact, opinions.  The only thing that is possibly real -- and even that can be distorted, but not as easily -- is cash, which is a fact.

A second thing I’d like to mention is that we have, that is AEI has commissioned a study from the University of Nebraska, a group there who are specialists in accounting and they are going to determine -- we hope -- through a survey, a statistically verifiable and supportable survey of 2,500 companies, what Sarbanes-Oxley has actually cost. Not only the accounting costs associated with the financial reports.  But the accounting costs associated with 404, the other costs associated with 404, including the consultants, the additional employees, the management costs, all of those things are going to be included so we’ll finally have a definitive answer to what 404 has cost and what it will likely cost in the future.

And finally, I had been looking for a while for someone to do a little bit of work on the question of risk taking, because I do think that there has been a real impact in talking to directors, talking to management, there’s been a real impact on company risk taking.  And I noticed that you cover the issue in your paper, unfortunately, by citing me.  And this is only my theory, but there has been at least…

MR. RIBSTEIN:  We’ll take that cite out.

[Laughter]

MR. WALLISON:  There has been one paper on this subject, a very good paper, but it approaches the issue of the risk taking entirely on the question of capital investment, which is a pretty good proxy for risk taking.  And in fact, I heard Alan Greenspan quoted as a reason that he believes that Sarbanes-Oxley actually has had an adverse impact on risk taking. 
Well, I’d like to get another approach to this issue, another proxy for risk taking, another way of evaluating this question and if you know of anyone or anyone in the audience knows of someone who can do some empirical work on this subject in a new way, please let me know because we’re willing to commission a paper.  Thank you.

MR. FRANK:  Any further questions and if not, I’ll declare the conference adjourned.  The monograph will be out some time this summer.  I hope you enjoyed the sneak preview and thank you to Larry and Henry and our panelists. 
[Applause]

[End of transcript.]