Where is America's place in the world?

By Frank Holmes
CEO and Chief Investment Office
U.S. Global Investors
March 16, 2007

When the Soviet Union dissolved in the early 1990s, we thought we knew that place. The United States would use its superpower status to lead the world into a promising future of peace and prosperity. As we know now, that road has not always been a smooth one.

I remain optimistic that we will achieve that ideal despite seeing some ominous signs in my travels around the world. Anti-American feelings are growing in many places, and not just because of backlashes over globalization and the war in Iraq.

There's no doubt in my mind that the United States has the world's best economic system. This country creates more wealth and produces more opportunities for the creative, the hardworking and the resourceful than any other nation on the planet.

But the U.S. government has recently taken some actions that have stirred up emotions in the world's business community. It has broadened its jurisdictional claims when it comes to prosecuting alleged financial crimes, and it has extended the Sarbanes-Oxley Act to foreign companies listed on U.S. stock exchanges.

Is the government overreaching, with no real checks and balances? Has the government gone from refereeing capitalism to strangling capitalism?

Many educated and sophisticated people have reached those conclusions based on what's occurred in the past few years. There are signs that these actions may damage the American economy by crimping our capital markets and cutting into future job creation.

Motivated by the 9-11 terror attacks, the United States signed a new treaty with Britain that made it easier to extradite suspected terrorists. Under this treaty, the U.S. need not even produce clear evidence of wrongdoing.

According to a recent article in The Guardian newspaper in England, the U.S. has sought extradition of 44 people from Britain under their bilateral treaty. Of that number, more than half faced charges alleging financial misdeeds. Only three were wanted for terrorism.

The ill will generated by use of the treaty actually led to an unusual act of civil disobedience last summer: a protest march in London by pinstripe-clad financiers opposed to the British government's decision to extradite three bankers to Texas to face Enron-related fraud charges.

In October, the government in Washington used legislation to reach across the Atlantic and crush the fast-growing Internet gaming industry, much of it based in London. Senate Majority Leader Bill Frist proclaimed that Congress had to protect Americans from "a serious addiction that undermines the family, dashes dreams and frays the fabric of society." But many outside the United States believe the true motive is to protect Las Vegas, Indian casinos, state lotteries and other lucrative domestic gaming franchises from overseas competition.

Such actions are perceived as arrogant and contribute to increasingly sour feelings toward America, even among our closest friends and allies. A survey this year by the Pew Global Attitudes Project found that 56 percent of Britons had a favorable view of the U.S., down from 83 percent in 2000. The slide has been even more dramatic in Germany, Spain and other countries, according to the annual Pew study.

Other data points support this sentiment. A French entrepreneur is marketing "Mecca Cola" around Europe to exploit this trend. Earlier this year Coca-Cola and Pepsi were banned in a large swath of India, a move many believe was rooted in anti-Americanism. And during the World Cup soccer tournament in Germany, the U.S. team was asked to not display the American flag on its team bus.

At stake here is more than America's global popularity. Foreign sales account for more than half of the total sales of companies in the S&P 500's energy and technology sectors, according to the ISI Group. For the S&P 500 as a whole, foreign sales are more than a third of total revenue. These sales translate directly to jobs and overall economic health at home.

We have seen several governments in developing countries begin to change policies toward international mining companies. This could have a profound effect on the United States, which imports 100 percent of its alumina and manganese and most of its oil, tin, platinum, nickel and zinc.

I worry that resentment of the U.S. government's application of our laws overseas could damage our economy by closing off important overseas markets to American businesses and limiting our access to vital natural resources. Already we see China is working hard to strengthen its ties with African and Latin American nations rich in oil, metals and other commodities that currently supply U.S. industries. On top of that, there are signs that the recent extension of the Sarbanes-Oxley Act (SOX) to foreign companies listed on U.S. exchanges may be hurting our domestic capital markets.

A number of these foreign companies are opting to withdraw from U.S. stock exchanges because SOX, created to restore investor confidence in the wake of the Enron and WorldCom scandals, is so restrictive and the cost of compliance so onerous.

Others are avoiding America altogether. Last year, 19 U.S.-based companies went public on the London Stock Exchange, as did many other companies that might otherwise have come to America if not for the regulatory burden.

In fact, only one of the world's 25 largest IPOs in 2005 took place in the United States, whose pools of capital are the planet's widest and deepest. In 2000, U.S. exchanges accounted for almost half of the IPO equity for non-U.S. companies, but by last year, that figure was down to single digits.

A nation with an overreaching government presents risks to investors that are not unlike those faced by investors face in violence-prone or politically unstable countries. In all of these cases, there are business uncertainties that discourage investment and suppress job creation. In an op-ed piece in the Wall Street Journal earlier this year, Nasdaq CEO Bob Greifeld wrote of the insight he gained while traveling overseas to meet entrepreneurs. "The constant refrain I hear is that when it comes time to do an IPO, they will be reluctant to list on American markets. They will look elsewhere to raise capital, and the main reason they cite is SOX."

Non-U.S. companies going public in London raised more than $16 billion in London in 2005, according to Thomson Financial, nearly five times more than the level seen on the New York Stock Exchange. In past years, New York was the larger market.

The trend worries New York Mayor Michael Bloomberg so much that he has commissioned a study to find out why his city has lost its dominant position in the IPO market.

"There appears to be a worrisome trend of corporate leaders focusing inordinate time on compliance minutiae rather than innovative strategies for growth, for fear of facing personal financial penalties from overzealous regulators," Mayor Bloomberg and New York Sen. Chuck Schumer wrote in the Wall Street Journal in November. The SEC originally estimated Sarbanes-Oxley's compliance costs for all public companies at around $1.2 billion. That turns out to be a little on the low side - studies have since pegged the number at closer to $35 billion. With that amount of money, public companies could fund roughly a million jobs at the U.S. median wage or invest heavily in R&D for future benefit. Instead, they're paying huge fees to SOX lawyers, accountants and consultants.

Many promising new companies that might otherwise have conducted IPOs are instead raising capital in private offerings subject to far less regulatory oversight. Individual investors don't have access to these offerings, reducing their chances of getting in early on the next Microsoft, Google and the like.

And this year famed buyout firm KKR raised $5 billion in an Amsterdam public offering for a fund that can do private-equity deals in the U.S.

If enough companies cross over to the private side to escape regulators, the U.S. economy could feel pain. These companies may be reluctant to make job-creating investments because of higher capital costs. And small companies that remain public also may find it difficult to expand operations and hire more people because they're hamstrung by Sarbanes-Oxley costs.

To his credit, SEC Chairman Christopher Cox seems to recognize these many SOX-related problems and be willing to do something about them. He has acknowledged that public companies faced excessive compliance costs because of how the law was applied, and he says some relief is coming.

Trying to subject the world to U.S. law, be it SOX or questionable extraditions or online poker parlors, bring to mind the Law of Unintended Consequences. Good intentions when drafting federal policies can backfire when policymakers have not thoroughly analyzed the issues they are trying to address and the complexities of the industries that will be affected.

All this said, I remain confident in America's ability to reinvent itself in order to revive its entrepreneurial spirit and create sustainable jobs. Doing so will ensure that this great country reclaims its status as the leading capitalist nation on the planet.


CEO and Chief Investment Officer of U.S. Global Investors

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