NEW YORK (CNN/Money) - You think Aug. 14 didn't matter? You think that the Securities and Exchange Commission ordering CEOs to swear to results was toothless?
The market begs to differ.
While pooh-poohing the certification process is a popular sport, the settling effect it had on investors is palpable. Even in the face of an uncertain economic future and an unsettled international situation, sentiment has gotten better. The corporate bond market, which basically seized up in July, has improved markedly. And stocks? The Dow didn't rally 260 points Aug. 14 for nothing.
"Don't underestimate the power of those certifications," said Banc of America Securities strategist Tom McManus. "They mattered."
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Counterpoint
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After WorldCom uncovered $3.8 billion in expenses fraudulently booked as capital expenditures in late June, investors basically threw in the towel when it came to trusting companies' accounting. As stocks swooned, worries about corporate misdeeds garnered more and more ink. A sense of foreboding began to cascade throughout the markets -- and beyond.
"It was a frenzy that got out of hand," said Weeden strategist Steve Goldman. "The certifications calmed things down."
The place where you can most clearly see the calming effect of the certification process is in the corporate bond market. Heading into Aug. 14, it got as bad as traders had ever seen it. Issuance of new bonds fell to its lowest level in seven years and all but the most solid names became almost impossible to trade. Even as stocks began to bounce back in late July, corporate bonds continued to suffer right up until Aug. 14, when they suddenly reversed course.
"If you had asked me on Aug. 13, I would have said certification didn't matter," said Banc One Capital Markets head of investment grade research Dave Novosel. "But it definitely was a factor. It had more significance than we originally thought."
That comfort level in the bond market matters because companies are able to use it again to raise needed cash. Since Aug. 14 there's been a flurry of bond issuance -- last week was the biggest week since March. Citigroup sold $1 billion worth of bonds. Goldman Sachs sold $1.5 billion worth -- half a billion more than planned.
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Nobody is saying the SEC's certification rule is going to eliminate fraud outright. Like putting in lights on an unlit street, it doesn't get rid of crime -- but it does bring down its incidence. In some way, however marginal, the chances of more Enrons and WorldComs have been reduced.
And let's not forget that the certification process already has had an effect on some companies. If it's entirely toothless, why did companies like Interpublic, Household International and AOL Time Warner issue earnings restatements?
More than anything, however, what the certifications helped do was convince investors that, while there are snakes, there's not a snake under every rock.
"In this market, perception is very important," said Novosel. "Maybe more important than reality."
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