November 2, 2007
India and Thailand Governments Learn the Hard Way
The governments of both India and Thailand decided to control "foreign investors" in their domestic stock markets. Each government was worried about excessive speculation in their markets and blamed foreign investors for their troubles; each government threatened their own legislative "tricks." The effect of both effects was the same: Their markets plummeted and they withdrew the controls in a torrent of accusations about incompetence. Goverments have, thoroughout history, believed they have more control over trading markets than they in fact do. One by one governments learn they can destroy their markets very quickly but they cannot "tailor" them to show comfortable, steady growth.
The federal government will soon face a very ticklish question. How to handle the effect of "sovereign-wealth" funds (government based hedge funds) on the United States trading markets. With up to $2 trillion to invest, and estimates of up to $10 trillion in ten years, the funds could dominate our trading system. Government based motives could trump profit motive at the discretion of the sovereign funds and roil the markets. What to do? Force more disclosure on the sovereign funds that we do no private funds?? This problem will test our international negotiators. In any event, the next post should warn our lawmakers.
Buyouts Compared: Cablevision Systems and Affiliated Computer
Several weeks ago the shareholders of Cablevision Systems rejected a buyout bill in which the purchaser was the controlling shareholder, the Dolan family. The independent directors of the board of Cablevision supported the bid (after rejecting two lower bids), with advise from Morgan Stanley and Lehman Brothers. The Dolans said they would not sell the company to anyone but themselves, a declaration that necessarily constrained the price. Yesterday the independent directors of the board of Affiliated Computer delayed acceptance of a bid that included participation by the CEO to look for other bidders. The search for other bidders failed and the ACS management wrote them a letter demanding that they each resign. And they did. The board now cannot accept any deals in which the CEO participates because it has no independent directors; the CEO now must get the remaining inside directors to appoint new outsider directors who judgment will not be conflicted (this is choice, who will take the job???) or wait until the next elections.
These buyouts in which insiders or controlling shareholders participate have always had a stinky odor and the courts have struggled to craft rules that allow those that are legitimate and disallow those that are not. Right now, the rules are too lenient. Insider buyouts (MBOs) that fail should carry a stronger individualized, financial penalty for the insiders that attempted to steal their company from the minority shareholders.
A New Cause of Action for Mortgage Holders??
Democrats in the Houses are considering a bill to allow home owners to sue mortgage lenders, those who originate the loans and those who repackage the loans and sell them to other lenders, for loans in which the borrower does not have a "reasonable ability to repay." So we will solve the sub-prime crisis by unleashing an army of plaintiffs' lawyers on our banks. This of course will substantially deter any lending to those in the bottom half of the income curve in our population and otherwise blow up the securitization market in mortgage loans (you cannot price a package of loans with an overhang of unknown litigation potential). The Democrats are disabling those less well off from buying homes at market driven - competitive rates, to help them of course.
Judges and Disclosure Control
Judge Strine, in an open hearing on the SLM Corp. buyout, refused to let a spectator leave his courtroom after a ruling from the bench. The reason? The spectator wanted to inform traders in Sallie Mae stock. The judge wanted all traded to get the information "at once." The Judge, in essence, was imposing his own version of Reg. FD on courtroom spectators. This is over the top. Spectators in open court should be able to pass on information as they please. If a judge is sensitive to disclosure problems he does not hold hearings in open court (a practice I am not condoning; Judges are too quite to impose confidentially orders already). This information control fetish is not healthy for the public functioning of our court system.