Under the Sarbanes-Oxley law, regulators have imposed incredibly expensive requirements for auditing American businesses, costing our economy $35 billion annually, and reducing the value of the U.S. stock market by hundreds of billions of dollars.
But it did nothing to stop Countrywide Financial from making risky mortgage loans to irresponsible borrowers with bad credit, as CEI’s John Berlau explains, even though Countrywide was a “paragon” of Sarbanes-Oxley compliance. The reason is that Sarbanes-Oxley regulations focus attention on the trivia of companies’ “internal controls,” such as which employee has access to which computer password, rather than important things that really matter to a company’s long-run financial health and survival. Countrywide’s “wholehearted embrace” of Sarbanes-Oxley’s mind-numbing regulations distracted its attention away from looming dangers.
As I earlier explained, although Sarbanes-Oxley was passed in response to the Enron scandal, it will do nothing to prevent another Enron. Indeed, Sarbanes-Oxley violates the Constitution by vesting regulatory powers in an unaccountable agency, the Public Company Accounting Oversight Board (PCAOB), which has created volumes of red tape. CEI argues in court that the provisions of Sarbanes-Oxley setting up the PCAOB are unconstitutional.
I earlier wrote about how risky mortgage lending was encouraged by federal regulations like the Community Reinvestment Act, and by the threat of discrimination charges and lawsuits against lenders that behaved responsibly by refusing to lend to bad credit risks.