Tuesday, May 29, 2007

Sarbanes-Ox Was Another Step To Accelerate The Financial Doom Befalling Our Country


Wall Street Is Losing the Battle for Global Capital to London

Wall Street seems to be quickly losing ground on the world stage of high finance.
And the way things are going, the London Stock Exchange (LSE) may soon elbow out it trans-Atlantic rival -- the New York Stock Exchange -- for the title of top dog in global finance. That's because European exchanges, led by listings on the LSE, are siphoning off Wall Street's bread-and-butter business of initial public offerings (IPOs).
Last year, a flurry of new IPOs in both London and Hong Kong stole the show from Wall Street for the first time. In fact, IPOs in Europe raised US$86 billion in 2006, compared with just US$48 billion raised in the United States. And just today, Bloomberg reports that so far this year, Wall Street's competitors from across the pond are once again leading the IPO race.
In fact, offerings in Europe have raised US$37.8 billion so far this year. That's well ahead of the US$21.2 billion of IPOs sold on U.S. exchanges. According to one European banker, "The move towards favoring London is here to stay."
Tighter U.S. securities regulation is partly to blame, thanks to the Sarbanes-Oxley anti-fraud legislation, and other measures designed to clamp down on Wall Street excesses in recent years. And London also enjoys a competitive advantage in terms of costs, with IPO underwriting fees that are much cheaper than in the United States. But the London stock exchange also has financial innovation on its side, which at least partially explains why this exchange is doing such a brisk business these days.
London Leads the Way in Cutting Edge Securities Trading
It was the LSE that was the first to list a wide array of commodity-backed ETF-like products designed to track individual physical commodities. In London, you can invest in these products which track the price of everything from Aluminum to Zinc. This offers you a much bigger variety of commodity investments than are currently available from Wall Street ETF sponsors.
London also dominates the US$2.7 trillion-a-day foreign exchange market, accounting for nearly one-third of all trades, compared with a market share of just 18% for Wall Street.
Recently the LSE announced yet another financial first: Islamic bonds. In fact, the U.K. may become the first to issue bonds that comply with Islamic, or "Sharia law," which potentially means another capital market windfall coming London's way.
Catering to the Muslim Masses
The U.K. boasts a large population of immigrant Arabs and Pakistanis. In fact, the nation has such a large Muslim community, that Islam is Britain's second-largest religion. So London has a plan to make itself the global hub for Islamic Finance. But to do so, London-based investment bankers have to exercise some financial flexibility to stay in compliance with the teachings of the Quran.
The U.K. has already modified lending laws to make it easier for Muslims to take out mortgages and consumer loans. But now, London's high-financiers are going even further. They plan to issue U.K. government backed "Sharia bonds" whose covenants are compliant with Islamic law.
The teachings of the Quran, the basis for Islamic law, include prohibitions against gambling and alcohol among other things. But one of the more difficult items in Islamic law, at least when it comes to fixed-income investing, is that interest payments are outlawed.
Interest Income vs. Capital Gains
To get around this sticking point, the U.K. Sharia bonds will reportedly be structured so investors get paid a larger capital gain upon redemption, in place of periodic coupon payments.
London's Islamic bond trade could add up to very big business for British bankers. According to one, the current size of the Islamic finance industry is more than US$750 billion -- and it is growing at 15% to 20%.
London may end up attracting many hundreds of billions more from oil-rich Middle Eastern nations. In fact, many of these countries are already looking to diversify out of their dependence on U.S. dollars, as my colleague Jack Crooks recently pointed out his A-Letter last week .
This development just underscores the fact that the U.S. is loosing its preeminence in global financial markets. And it's yet another great reason why you should consider diversifying your wealth into leading offshore financial markets, like London and Hong Kong.

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