August 26, 2006
Bernanke's lecture on globalization is in the news. He takes the economists' view that globalization is healthy and remarks that the pace and size globalization of the last 30 years is without historic precedent. Anti-globalization advocates will not like the implications of his talk and redouble their efforts to "control" international trade to limit "outsourcing." His talk lacked a last, necessary argument that globalization is an inevitable economic force (like gravity is a physical force) that we cannot control or even manage -- we can only work within its pressures and effects.
Securities Class Actions Decline
The Wall Street Journal reports today that the number of securities class actions has declined significantly in the first six months of 2006. The indictment of Milberg Weiss has had a dramatic effect on the total number of suits filed. This is no doubt good news for main street and wall street. Those who did not see the indictment as affecting the securities class action business, and said so in print, need to re-assess their views.
August 21, 2006
The Delisting Debacle
Apple's failure to file timely financial reports with the NASDAQ has caused the NASDAQ to issue a de-listing warning to one of its premier companies. Apple has refused to list on the NYSE for years, preferring the NASDAQ for its support of the high tech companies. Will NASDAQ make good on its threat?? Unlikely. Some are now calling for delisting decisions to be made by the SEC or for delisted stocks to trade with a symbol. Why? Delisting hurts shareholders (stock drops by up to 15% almost immediately on delisting), shareholders already hurt by the executives poor behavior that creating the delisting problem. The argument is bad. Listing standards are contractual, between listed companies and the exchange. The remedies are contractual. The advantage of contractual listing standards is that exchanges can compete with each other for standards that make sense, that justify investor confidence. SEC overrides would disable the system. Indeed, the SEC role should be to encourage exchanges to enforce their existing rules.
If exchanges want to trade delisted stock for a period under a new symbol, let this change their listing requirements. See if investors agree. Exhanges that fail to enforce listing standards for "special" companies lose credibility and listing with them loses value. [Ask the Asian stock exchanges that run on "discretion."]
As for the shareholders, they chose the executives and should suffer the consequences of their failures. De-listing is a consequence. Shareholders in the future may demand better financial reporting integrity. Stock markets do not flourish because we erect safety nets after the fact for failed risk. Investors in Apple to the risk that the managers would report accurately; they were wrong, it is not unfair that they suffer the consequences.
Limited Partnership IPOs
Investment bankers are finally extending their decades of experimenting with limited partnership (LP) and limited liability company (LLC) IPOs into a more main line practice. LP and LLCs IPOs have tax advantages: they are flow through tax vehicles and are useful for investments promising high cash return (dividends) policies. Yet the bankers are messing up a good thing with too much complexity. Some in Wall Street cannot resist the temptation to use complexity of a new development to buffalo clients (recall the swaps being sold to CFOs and to Orange County) with false snake oil salesmen claims. Companies need to go with and investors need to invest only in IPOs that use simple, understandable versions of the LP and LLC.