March 5, 2007
"The [Public] Corporation Will Disappear"
Holman W. Jenkins, Jr., of the Wall Street Journal quote Nobel laureate Myron Scholes in the Weekend edition that "the [public] corporation will disappear." His point: the move from public markets in favor of private equity markets is caused by risk management contracts (derivatives) competing with equity. He also notes the impact of regulation has affecting the trend. His point only makes sense if one does not "look through" investors. A public corporation has over 500 shareholders (300 on the way out). We are calling corporations private is they have less than 300 shareholders even if each of those shareholders is itself a pool of multiple investors. If we "looked through" the funds and counted individual investors, the 300 shareholder limit would be shaky for many newly converted "private companies." In other words, his argument does not rest on risk management as much as it rests on a legal rule that does not permit "look through" judgments. [ Recall the ill fated hedge funds rules which do use "look throughs"] It suggests to me that an old, old standard, the 300 shareholder rule should be reconsidered and SEC regulation (for IPOs and for periodic reporting requirements, including Section 404 of SOX ) should scaled with the total capitalization of the firm. This is the primary request of the Small Business Advisory Committee that reported to the SEC last year. The SEC rejected the request out of hand; it should look at the scaling regulation question again.
The Sub-prime Lenders Mess
Sub-prime lenders who securitized the loans (bundling them and selling them as debt securities) are in a bind (there stock prices have tanked) and the SEC, Department of Justice and many plaintiff lawyers are circling. This is not a market failure. If these folks oversold these collateralized debt securities with misleading claims, they will be held accountable to investors who have suffered losses.
I have opposed Regulation NMS since it was first proposed -- several times in posts here. The Regulation restructures, in fundament ways, the interrelationships of the country's securities trading markets. The application of the final rule has been held up for several years. Now, in the teeth of a market correction, we are going to role out the new rules, rules that further tax the computer systems of markets by adding another layer or routing rules. Markets must route orders to each other to prevent "trade throughs." The NYSE sought the new rule to protect its market share and may find that it will backfire because its new "hybrid" computer system will not be as good as the computer systems of smaller and faster ECNs. This could be good.
In Friday's Wall Street Journal we have yet another article on University marketing tactics. Daniel Golden's "To Boost Donor Numbers Colleges Adopt New Tricks." In an example of revenue smoothing that would put major corporation fraudsters to envy, we have universities spreading very small donations, $30, over five and six years to claim the donor in the percentage of alumni giving figures in later years. There is no authority, other than public embarrassment when practice come to light, to hold universities accountable for gross distortions by some of what they are and what they do. Just ask the folks at U.S. News & World Report. There are well know "tricks" in post graduate employment numbers and in mean standardized test scores, among others. How ironic that academics, that call for sanctions on private business who are subject to a plethora of anti-fraud rules, live in institutions that often would not satisfy the basic standards of Rule 10b-5 when it comes to sending in numbers for ranking services.