Sarbanes-Oxley author expects increased investment banking ‘oversight’ by Fed and SEC post sub-prime

Paul Sarbanes defends his 2002 act from critics, warning of amnesia.

Investment banks operating in the US will come under increasing supervision by the Federal Reserve and the Securities & Exchange Commission (SEC) following their role in the sub-prime crisis, according to Paul Sarbanes, the former US senator and sponsor of the 2002 Sarbanes-Oxley legislation.
Speaking at the Global Shareholder Activism conference in Paris on May 16, Sarbanes said institutional investors needed to be more active in pressuring investment banks and ratings agencies over the transparency of the investment products they sell. However, he said US regulators would almost certainly step in to hold banks to greater account following what he called “unprecendented” access to capital via the Federal Reserve discount lending window: “There will be an increased role for the Fed and the SEC in investment banking. You can’t get access to the Fed window like in the Bear Sterns/JP Morgan case and not think there will be more oversight in future.” Nonetheless, Sarbanes said he did not believe the sub-prime crisis would provoke US authorities to re-enact the Glass-Steagall act of 1935 – as some have suggested – which separated commercial and investment banking following the Wall Street Crashin 1929 and was repealed in 1999 by President Bill Clinton: “That’s just not going to happen.” Sarbanes, former head of the Senate banking committee, was the co-sponsor of the Sarbanes-Oxley act, which significantly tightened up public company accounting and investor protection in the wake of corporate scandals including Enron, Tyco and WorldCom.
The act has come under fire from critics in the US who claim implementation is costly and has damaged US competitivity by prompting companies to listing on stock exchanges in other markets, notably in London.
At the conference, Sarbanes defended the act from detractors who, he said blame Sarbanes-Oxley for “all life’s ills”.
He said: “There is a danger that amnesia could make people forget what happened: fraud, people losing their retirement incomes, huge stock market losses, conflicted investment analysts. In short a systemic breakdown. As Paul Volcker, the former chairman of the Federal Reserve and and Arthur Levitt, the former SEC chairman, recently wrote, there is a reason that the upfront costs are this much: for too long too many companies lacked sufficient internal controls.”