Top Risk for Investors in 2009? The U.S. Congress

There are plenty of conflicts and problems going on around the world, each vying for the attention of global investors. The war between Israel and the Palestinians is currently on the front burner. It's a conflict that threatens to pull in Iran, which continues in its race toward a nuclear weapon. The wars in Iraq and Afghanistan are still going on. Terror attacks in Mumbai threaten to break the shaky peace between Pakistan and India. And Russia is flexing its muscles by threatening former Soviet republics and restricting the flow of natural gas to Ukraine and Western Europe.

Given all these seemingly intractable problems, which poses the biggest risk for investors? According to Ian Bremmer of the Eurasia Group, the top risk of 2009 is financial regulation in the United States and the rising power of Congress.

Bremmer reminds us that following our last financial crisis, Congress gave us the Sarbanes-Oxley act. We are likely to get something much more onerous this time. The bottom line is that there will be considerably more regulation. Congress will try to regulate everything from the rating agencies to complex financial securities. It will also reform the regulatory agencies. The risk is that Congress may make things worse by delivering bad regulation or simply going overboard in a manner that prevents innovation.

Bremmer also worries that government is getting involved in the actual management of private enterprises. It already holds large stakes in publicly-traded companies, and there is talk of a car czar to oversee the automobile industry.

Finally, Bremmer is concerned that fiscal policies meant to spur the economy may fail. Infrastructure spending, for example, may end up doling dollars to favored pork barrel projects instead of targeting the most worthy programs.

The Eurasia Group is perhaps the best political risk consultancy in the world. It certainly is an ominous sign that this highly-respected firm thinks the U.S. Congress poses the greatest risk to investors in 2009.

Comments

[Jim Guinn, II:]

The answer is not more regulation but enforcement of the existing regulations and transparent corporate governance. Could the Sarbanes-Oxley Act have discovered this Sub-Prime meltdown, no. However if the securities markets had transparency with their corporate governance and risk management programs as part of tehir SEC filings that would have allowed investors to understand the risks involved with the purchase of mortgage-backed securities.

Simply stated no matter how much the Obama administration and Congress pump into the economy through these governmental bailout programs the fact remains until we force public companies to adhere to the regulations they are required to in a transparent manner we will have yet another meltdown in a few years. We had the S&L scandals in the 80's, the Dot-Com Bomb start in the late 90's, the Enron's, MCI's Health South's in the early 2000's and here it is again. Oh and is you are thinking this is only a US based issue because our standards are week and adopting IFRS vs. GAAP is going to make it better may I remind you of Satyam.

It is my opinion that if any organization takes a dollar of government (tax payer) money as a condition for accepting the cash with in twelve (12) months they must have an enterprise Governance, Risk and Compliance (GRC) program in place. Such a program - if managed correctly - would force an organization to adopt a "standards based approach" to governing their business which in turn would allow top executives to understand the business risk associated to key business decisions in real time and quite possibly head off any additional disasters all the while knowing if they are in compliance with the regulations that are imposed on them by the various agencies that govern their industry.

Wow what a novel idea. A program that actually allows executives to govern the management of their business while understanding corporate risk and adhering to regulatory compliance requirements. Then all we will need is executives who are honest enough not to circumvent their own GRC program so inventors can reestablish trust.

Jan 11 10:05 AM

[Kunst:]

I wish we had a thumbs-up / thumbs-down option for SA articles.

Jan 11 07:56 PM