June 21, 2007
Credit Suisse Case on the IPO Market
The Supreme Court held In Credit Suisse Securities v Billing, consistent with its past history, that securities laws cede jurisdiction over market structure of the securities markets to the SEC, pre-empting the federal antitrust laws. The ruling was not a surprise. I agree with the holding but not he SEC use of its power; the SEC has favored antifraud enforcement over competitive concerns and, in my view, overly micro-structured the securities markets to limit otherwise healthy competition. Justice Stevens concurring opinion reminds me that judges, when they step out from making jurisdictional decisions and decide to comment on market forces, are often, well, just out of their league. Justice Stevens pronouncement that underwriting syndicates cannot fix prices and the suggestion that they can is "frivolous" is a laugher. The market for underwriting has very few players (there are five or six large investment banks) and underwriting fees for stock are an amazingly stable 7% across time, across types of companies, across size of offerings. To say that the few underwriters, participating in each others offerings, have informally or formally colluded to fix a 7% rate is not frivolous; it is plausible, even probable. Then there is the "underpricing problem." Watch the Blackstone IPO on its first day. Why do American IPOs average, 15% or more underpricing on the first day? There are competing theories, some are market based and some are not (they are based on the market power of investment banks). Stevens is way out of his league in his pronouncements in his concurrence and he was sanctimonious in tone when he wrote them. Why make such statements without an adequate record or investigation? Put on the robe and some judges get instant smarts.
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