Paulson's folly

Commentator Robert Reich

TEXT OF COMMENTARY

SCOTT JAGOW: Seems about every week, we hear of a private equity firm buying a public company. This week, it was Blackstone Group buying a huge office real estate firm. Last week, we learned Clear Channel would be going private. In fact, this year, private equity's been involved in 17 percent of all mergers and acquisitions. Low interest rates have something to do with this. And private equity firms have a lot of spending money. But this week, Treasury Secretary Henry Paulson pointed a finger at government accounting regulations. He said laws like Sarbanes-Oxley have saddled public companies with too much of a burden. Commentator Robert Reich believes Paulson is wrong.


ROBERT REICH: If Hank Paulson thinks the flood of private equity-backed acquisitions of public companies is occurring because of regulations like Sarbanes-Oxley, he's either naive or doesn't want you to know the truth.

Companies that go private return to the public market within a few years. That's the whole point of the deal. When they go public again, their stock sells at a far higher price than what the private equity firm originally paid for it. So the private partners, along with the CEO and other top executives, make a killing.

Why else do you suppose private equity firms are raking in so much money? Why else do you think CEOs have been so eager to do these deals? Sarbanes-Oxley has absolutely nothing to do with it.

Sarbanes-Oxley, remember, was put into place to regain the confidence of investors, many of them small investors who got clobbered when CEOs looted their companies by pumping up share prices with false accounting, and then cashing in their stock options before reality caught up. Enron was the tip of a huge iceberg that's still there.

In fact, public companies are restating financial results at a higher pace than ever before. And these aren't just technicalities. The SEC reported last Friday that more than half these restatements are due to companies misapplying basic accounting rules or having the wrong data to begin with. Without Sarbanes-Oxley, investors would never know the truth.

Paulson is worried about Sarbanes-Oxley, but he really ought to be worried about the surge of equity-backed acquisitions. It's a new kind of CEO looting that goes beyond false accounting.

Here the CEO advises directors and shareholders that the sale is in the best interests of the company. And then after the company goes private — and shareholders are bought out — the CEO stays on and makes fixes that drive share prices up when the company goes public again. This way the CEO collects a bundle that otherwise would have, and should have, gone to the original shareholders.

If Paulson wants small investors to stay confident the market isn't rigged against them, he shouldn't try to weaken Sarbanes-Oxley. He should expand it to prevent this new form of CEO looting.

JAGOW: Former Labor Secretary Robert Reich now teaches public policy at the University of California at Berkeley. In Los Angeles, I'm Scott Jagow. Thanks for listening and from all of us at Marketplace, have a great holiday.

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