Quattrone and Regulating Initial Public Offerings

It is not often that I disagree vehemently with a Financial Times editorial, but that is what I found myself doing when I read “Quarter for Quattrone: A reminder that regulating is more efficient than prosecuting” Financial Times, August 25, 2006. Analysing the lessons from the prosecution’s failure to establish its charges against Frank Quattrone, the star technology analyst of the dot com era, the Financial Times writes:

In retrospect, and certainly in light of what happened this week, it would have been far better if regulators had stepped in earlier to impose some discipline, perhaps by insisting that companies show some record of profit before coming to market. Prevention could be far more effective than prosecutions have proved.

The big advantage of a capital market dominated financial system over a bank dominated system is its ability to provide risk capital to innovative enterprises that have not established any track record. The Financial Times appears to be saying that we must stop the capital market from performing this function. I am reminded of the old age that a ship is safest when it is in the harbour but that is not where it is intended to be. A capital market that does not allocate risk capital will be much safer and much less scandal prone, but it will not be a market worth having.

The Financial Times would have been on much stronger ground if it had asked why the regulators chose the easy path of focusing the Quattrone prosecution on his alleged role in destroying potentially incriminating emails rather than on the substantive wrongs that he is alleged to have committed in the IPO process.

Posted at 9:16 pm IST on Sun, 27 Aug 2006         permanent link

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