Moses vs. Spitzer

By DAVID MOON, Moon Capital Management
January 22, 2006

When Moses descended from Mount Sinai with the first edition of the Ten Commandments, he saw that the Israelites were already so wicked that he became angry and smashed the tablets into the ground. Had this occurred in Tennessee rather than eastern Egypt, God would have called some sort of special session, and Moses would have returned to the mountaintop to ask the Omnipotent for a few hundred more commandments.

Clearly, the problem with the Israelites was that they didn't have enough commandments. Surely there wasn't anything wrong with their core beliefs or just the way they conducted themselves in everyday behavior. It had to be a shortage of laws.

That's why we need a special session for Tennessee lawmakers. It's not enough that bribery is already illegal in the state. We need some more laws to make it really illegal ' a new covenant between Nashville and its people. Let's make bribery doubly illegal by closing loopholes and limiting the types of currency that bribers can give to bribees.

One of my favorite areas of discussion is the permissibility of gifts of alcohol. Some folks want to make it illegal for lobbyists to give legislators alcohol. But what about other sinful temptations like Moose Tracks ice cream or copies of the Sports Illustrated swimsuit edition? I'm not joking. In some future ethics scandal, items just as silly will be at the center of the controversy.

Neither the Israelites' nor the legislators' problems were inadequate laws. It was inadequate people. Ten thousand new commandments can't correct that problem.

The same is true on Wall Street.

When investors lost fortunes as a result of fraud at Enron and WorldCom, scores of new legislation was heaped on public companies. Sarbanes-Oxley legislation not only requires significantly more public disclosure, but also every CEO and CFO now has to personally certify the corporate financial statements.

In the words of investment manager Marty Whitman, this is 'stupid, nonproductive regulation.' It requires a greater regulatory burden on corporations, yet adds very little protection, if any, for company shareholders. It does, however, create additional work for lawyers and accountants.

If there are bad people running public companies and those bad people want to screw the shareholders, Sarbanes-Oxley isn't going to stop them. Moses can march right back up the mountain and get the original commandments; the simple codified securities equivalent of 'thou salt not steal' pretty much covers the subject.

Three years ago when New York Attorney General Elliot Spitzer forced ten of Wall Street's largest firms to pony up $1.4 billion in fines for committing all sorts of frauds and misrepresentations against their clients, observers hailed it as a turning point for the small investor. Wrong.

Very little of the money has ended up for its intended purposes. The 'independent' securities research that the settlement was supposed to guarantee goes mostly unused. The only noticeable difference in most firms' research reports is that the pages of disclosures now often outnumber the size of the actual report. Otherwise it is business as usual.

It is often said that laws help keep honest people honest. I'm not sure I believe that, but even if it is true, more laws don't help keep honest people even more honest. I'm not even sure what 'more honest' is. But I do know that no number of laws can make bad people good, and that at some point additional laws simply add burden without benefit.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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