Dan Gross: Lessons From Motown

A world-beating made-in-the-U.S.A. industry, long insulated from foreign competition, dominates global markets and cheerily doles out stratospheric wages and benefits. As it begins to lose market share, executives write off international competition as a low-quality nuisance. When the foreign ripple becomes a wave, corporate chieftains look to the government for help and blame regulations and plaintiffs' lawyers for their woes, rather than confront their own untenable cost structure.

Detroit and the auto industry, circa 1985? Yes. But it also sounds an awful lot like New York and Wall Street, circa 2007.

Wall Street's loss of global market share in initial public offerings has reached a crisis level. In 2005, 24 of the globe's 25 largest IPOs took place overseas. So did nine of the 10 largest of the class of 2006, including the record $20.6 billion IPO of Industrial & Commercial Bank of China, which was staged in Hong Kong. Last month, DLF, the Indian real-estate company, held a $2.25 billion IPO—in Mumbai.

American worthies have responded by doing what they always do come crunch time: they formed a blue-ribbon commission. The Committee on Capital Markets Regulation last November issued a well-publicized interim report that blamed regulations such as the Sarbanes-Oxley law for scaring off foreign companies. To be sure, the culprits behind the apparent demise of the once dominant U.S. IPO industry are legion: globalization, mercantilism, national pride and, yes, Sarbanes-Oxley. But the report glided over the fact that Wall Street, like Detroit, now suffers an enormous cost disadvantage (and a declining quality advantage) vis-à-vis foreign competition.

In the United States, the standard underwriting fee remains unchanged from its historic level of about 7 percent—that's the price a bank like Merrill Lynch charges to usher equities into the public markets. A 2006 report by Oxera Consulting (commissioned by the London Stock Exchange and the City of London) found that median fees for companies going public on the LSE were about 3.25 percent. The Bank of China paid a 2.5 percent underwriting fee when it went public in Hong Kong last year. And UBS charged a paltry 1.5 per-cent for taking Western Mining public in Shanghai. A Chinese company seeking to raise $1 billion could thus save $55 million by avoiding New York.

Michael Bloomberg, the billionaire mayor who knows a thing or two about luxury products, famously said of Gotham: "It's a high-end product, maybe even a luxury product." Indeed. New York underwriting fees are so high because investment bankers are the Prada of American financial-services workers. I-bankers fly first class (never coach), tool around Manhattan in Town Cars (never the subway) and hold closing dinners at the finest steakhouses (never the corner bistro). To ensure that things go smoothly, they hire New York's best (read: most expensive) lawyers, accountants and flacks. In its report, Oxera noted that there was a "perception among some of the companies consulted" that such ancillary costs were highest in the United States.

In the 1960s and 1970s, American auto companies easily brushed off Toyota and Honda as low-quality foreign competition. Until recently, American financial firms could do the same with foreign stock exchanges. No longer. In 2001, American exchanges accounted for a whopping half of the world's stock-market capitalization, according to the World Federation of Exchanges; by June 2007, that number was down to 37 percent. As foreign markets have been raising their games, U.S. markets have suffered some of their own exploding Pintos. In August 2005, Refco, the commodities trader, raised $583 million in an IPO on the NYSE, which routinely boasts of its high standards; amid charges of fraudulent accounting, Refco filed for bankruptcy nine weeks later. This June, the most anticipated IPO of the year—the Blackstone Group's NYSE offering—promptly sank by 20 percent.

Just as Ford acquired Volvo, and Chrysler merged with Daimler, Wall Street firms have responded to declining market share by looking abroad. The New York Stock Exchange last year purchased Euronext, and blue-chip Wall Street firms are bulking up overseas operations. But just as foreign investments couldn't preserve GM's market share, foreign expansion may not reverse New York's IPO slide. For years, Wall Street bankers have advised clients to scour the globe for low-cost sources of materials and labor, and to coldly outsource whenever possible. That same logic now leads companies to consider non-New York listings. Wall Street firms have criticized Detroit's habit of paying out wages and benefits that are clearly unsustainable to unionized blue-collar work forces. Now the bell may be tolling for Wall Street's guild of white-collar workers, who view 7 percent underwriting fees, massive bonuses and second homes in the Hamptons as entitlements.