March 15, 2007
The Summit: To Whom Should We Listen??
The March 13 "Summit" at Georgetown with some of the biggest names in the country in finance, organized by the current Secretary of the Treasury Paulson, is a continuation of his efforts to create a political consensus for reducing business regulation. He primary targets are parts of Sarbanes Oxley (Section 404) and class action (and derivative) litigation. We have had two non-partisan reports (Hal Scott's and Senator Schumers' committees) and a US Chamber of Commerce report and now the "Summit." The problem for observes is who to believe; many in the game have vested interests in spinning the facts to their advantage and they are good at it (they are pros). Rubin and Paulson are carrying the water for concerned CEOs. Are the CEOs just seeking another business advantage or are they speaking for something in the national interest?? It's hard to say. But there is one man who is candid to a fault and who know what he is talking about -- Warren Buffet -- he is a national treasure. His opinion??? "If something's wrong with he system, it hasn't seeped through to the operating results of business." Translated -- the CEOs have not made their case. Business performance, operating profits, are healthy; business to make there case must show that profits could be even better with less regulation -- something they have failed to do. An answer to Buffett cannot come in general caterwauling about how tough it is to do business in the United States, it must come in a careful analysis of the details of the rules themselves -- what are Section 404 costs versus Section 404's benefits.
Hedge Funds and Political Contributions
Senator Grassley has proposed a bill to register hedge funds [CR 2845-2846] and Representative Barney Frank is holding hearings on how to regulate hedge funds. The press is linking hedge fund activity to both current stock market corrections, the Asian market drop and the troubles of those in the sub-prime lending market. Then a revealing article in the Wall Street Journal -- hedge funds do not make significant contributions to political parties or candidates. We have a system of informal extortion in place. If a widely successfully company or new group of companies does not get involved (i.e. contribute) in the political process politicians threaten regulation. The threat induces the new company or group of companies to get politically active and join the fray (ie. with contributions). Recall the Microsoft problems of the 90s. Microsoft was attacked by Netscape, using Utah Senators and later the Department of Justice as vehicles, and article detailed how Microsoft had no political cover from political contributions. Microsoft learned. We also saw articles about how Microsoft and its founder did not give enough to charity; they do now. I suspect we will soon see articles about hedge fund managers and their lack of charitable activities.
March 14, 2007
Professors Hu and Black on Short Selling
Professor Hu and Black have published three pieces on short selling (University of Southern California Law Review, Journal of Financial Economics, and Business Law Journal) and recommended more regulation of the practice. All three articles discount the ability of the market to self police. I have made the point in a recent piece in our Entrepreneurial Journal. Those who loan shares to short sellers charge a fee and the fee will increase with the risk that those who borrow the shares will vote or otherwise use the shares to hurt the company. Those loaning the shares will get them back and are interested in their value. If so, those who short shares to hurt a company will suffer the economic consequences, just as a shareholder would, in the increased fees paid to the lender of the shares. There is evidence that fee increase do occur around short contracts entered into on the eve of record dates for example.