MANAGING risk is one of the hardest balancing acts in business: taking positive risks while avoiding negative ones and trying to weigh potential losses against the known competitive cost of avoiding them.

Politicians find it even harder to get the balance right. They bear the risks of something going wrong but others usually bear the cost of excessive zeal. Where the risk is catastrophic, there is no ready solution. Where the risk is of financial loss, it should be easier to make a judgment. Are the losses caused by action to protect people greater than the loss being guarded against? For America’s reaction to the Enron and WorldCom scandals, the answer appears to be yes.

An analysis by Peter Wallison, of the American Enterprise Institute, suggests that the cost to the US economy of the Sarbanes-Oxley Act of 2002 may be several times the peak market value of Enron and its fellow corporate villains. These costs vary from direct expenditure on formal internal controls and audit fees, which are up 57 per cent, to more nebulous costs, such as boards of directors spending more time and brainpower on compliance than on the company’s business and strategy.

The biggest long-term loss to Wall Street is the business it is driving away. Some is smaller companies going from stock market listings to private equity ownership, which is largely unregulated. These losses outweigh new listings on the New York Stock Exchange (NYSE) or Nasdaq. More visible is new business lost to foreign exchanges, mainly in Europe and particularly in London. In 2000, Mr Wallison claims, 90 per cent of the new equity capital raised by companies outside their home territory was raised in the US. In 2005, the US hosted only one of the top ten foreign offerings and only one of the top 25 global offerings.

America’s harsh bureaucratic cure has been more costly than the disease of lax boardroom practice. America’s Securities and Exchange Commission (SEC) admitted as much this week. From now on, it will allow foreign companies to float on US stock exchanges before they comply with the trickiest and most expensive part of Sarbanes-Oxley: but they must still do so when they file their first annual accounts with the SEC. This concession looks more like a gesture to critics than a boost to Wall Street.

Both Nasdaq and the NYSE, helped by US global investment banks, have been trying to follow these banks across the Atlantic to buy the London Stock Exchange and Euronext, the Paris-led federation of exchanges. Like banks, they are following the business.

In the first half of 2006, Euronext hosted 62 new listings. In the second quarter, it claims to have been the European leader for raising capital.

New York’s loss is more starkly London’s gain. The City of London may have lost some ground in insurance but has strengthened its role as the world’s favourite financial centre, hosting a fifth of cross-border bank lending, 30 per cent of foreign exchange trading, 40 per cent of financial derivatives and international equities trade and a claimed 70 per cent of the global secondary bond market.

It has become the preferred offshore centre for Russia as well as an international outlet for Indian and Chinese businesses. No wonder the City was happy to hold its nose to win the Rosneft float. The UK has a better balance of regulation: enough to create confidence, but not so overbearing as to put foreign clients off. The authorities sensibly seem to turn a blind eye to foreign companies flouting the sillier parts of UK governance codes, which are as blameworthy as America’s for driving companies to private equity.

Like textile manufacture 200 years ago, the City of London has become the most dynamic and important value-adding sector in the UK economy. For that reason, much to the DTI’s dismay, the Treasury wisely vetoed statutory operating and financial reviews at the eleventh hour. The DTI was not alone in being annoyed. The Treasury upset corporate responsibility and environmental pressure groups that aimed to exploit what was originally intended as a help to investors.

They have discovered the drawback of the City’s key role. By virtue of its economic importance, it has become to Britain as farmers are in France: the one constituency governments dare not antagonise. So policy is bent to spend billions on new railways and cover much of the South-East with new housing to bring more millions of commuters in to service the financial centre, creating many unrewarding lives and flinging a great deal more carbon dioxide into the air. Nor need City earnings trickle down far: Hackney, an adjacent borough, has the lowest percentage of its population in work of any part of England.

As the old IRA demonstrated, the City is also the most effective target for terrorism. But then, 150 years ago, Messrs Marx and Engels thought that Britain’s pre-eminent manufacturing industry might be the ideal ground to breed world communist revolution. Fortunately, they were wrong.

graham.searjeant@thetimes.co.uk

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