Way back in 2002, when Sarbanes Oxley was passed, many hoped that it might mark an inflection point in that nasty bear market. I specifically remember thinking/hearing that the CEO and CFO having to sign off on financial statements might do just that. According to the internet (it must be true; it was on the internet), here is the timeline of the bill (colors correspond to the vertical lines in the chart below).
- April 24, 2002 - the House passed Representative Oxley’s bill (H.R. 3763)
- June 18, 2002 - the Senate Banking Committee passed Senator Sarbanes’ bill
- July 15, 2002 - the entire Senate grabbed for votes and passed Senate Bill 2673
- July 24, 2002 - the committee formed to reconcile the House and Senate versions approved the final conference bill. This marked the first of three final bottoms.
Liberally borrowed from the Wikipedia link above.
Thinking the passage of FinReg might do the same thing, I asked the fine folks at Strategas Research Partners–Dan Clifton, specifically, the firm’s Washington guy–to help us out.
In addition to his comments below on the subject, the firm also provided us with this nice overlay based on when the two bills were approved in Committee. (The green annotations are mine). So far, the similarity in the two lines is evident, but as Dan points out below, that was a different time, with the War in Iraq still in the future, etc.
Similarities: As you may recall the House and Senate were governed by different parties in 2002. The House, led by Oxley, has a mild plan. The Senate, led by Sarbanes, had a more aggressive plan. President Bush supported the House plan and with the 60 vote threshold required in a 51/49 Senate, investors assumed the more moderate plan would win out. The Senate passed the more aggressive version leading to a stand off between the House and Senate. Worldcom then declared bankruptcy, which occurred in the DC media market, and President Bush asked for a bill and told Oxley to allow the Senate to take the lead. This led to a more aggressive plan (one with higher costs to businesses). The S&P declined into the proceedings. It took more than 3 months later for the S&P to bottom out as investors digested the impact of the bill and investors became more bullish on the potential recovery. It is also important to note this ran into the run up of the War in Iraq which tended to overwhelm the other issues. Financial regulation occurred similar but over a longer period of time. The Worldcom event was the SEC action against Goldman Sachs, which led to more aggressive reforms. We also believe investors are at a similar point in the business cycle, looking for the upturn becoming self sustaining.
Differences: Financial regulation is more than 2,300 pages and we are still finding provisions we did not know existed. Sarbox was 60 pages and the main provision impacting cost was a couple of sentences. The financial regulation bill also outsources the details to regulators and spreads out the timeline in some cases as long as a decade. There will be continuing uncertainty but over time the banks can adjust to the costs.