August 21, 2009
FDIC and Private EquityWhen will this new bunch learn. Ms. Blair, the head of the FDIC, is running out of money to bailout the depositors of failed banks and will attempt to push failed bank purchases by healthy banks. The problem? She needs buyers. She has attacked and imposed heavy capital requirements on one of the best group of buyers, private equity funds. Now, she must eat crow and reduce the requirements and beg, beg the private equity funds back into the bank purchasing game. The private equity folks did not cause the current crisis, traditional financial institutions, regulated by the likes of the FDIC, did. Pick the right target folks.
August 20, 2009
The SEC has admitted that it lacks the expertise or the technology to monitor securities trading and that, therefore, it leaves such matters to the SROs, Finra and NYSE Regulation. Yet the SEC is close to proposing rules to "regulate" trading practices, flash trading and dark pools among others. What is wrong with this picture? The SEC, without data and expertise, is ready to impose trading rules on the markets. This follows a long history of the SEC micro-meddling in the market procedures and struggling with enforcement. It should reverse course: simplify trading rules and upgrade enforcements of the rules that are left (those against fraud). The effect would be to let markets innovate and to deter fraud in trading. Now we stop innovation and poorly prosecute fraud.
August 18, 2009
SEC Once Again After Shorts
The new SEC proposal aims at slowing down short selling, again. The proposal would force short sellers to limit sales to prices higher than the current best price offered by buyers (best bid price) of the stock. Since stock is traded in multiple markets, to meet the rule short sellers must wait until the best bid price in mutliple markets is exhausted by sellers before they can find a buyer. This may take time, and in the markets unknown time delay is a serious additional risk to the trade. The SEC is considering the rule as universal or as contingent on "circuit breakers," a percentage drop in the value of a stock. This stuff is bad. By building in a bias in favor of long positions, which is already too strong in the market anyway, the SEC encourages a boom and bust market -- the bias attaches (and people know trade on the bias as well as the fundamentals of a stock) until it reaches unsustainable heights and fails, very quickly when confidentence in the bias falls.
Fed Extends TALF to Repair Damage
On Monday the Federal Reserve extended its program to loan cheap money to those purchasing asset backed securities (TALF). Once again, after publicly trashing an entire industry, the securitization industry, the administration has quietly admitted that the industry's health is crucial to the country's health. The extension of TALF is an attempt to get the securitization process back into gear after public condemnation froze all investors from buying ABSs and MBSs. Moreover, new regulations threaten further the process (issuers must keep 5% of any deals sold through securization). The industry would be much, much better off had the administration (I am not using Obama's name any more) and its economic advisors not jumped on the condemnation bandwagon so quickly and trashed the reputation of an industry necessary to the finanical health of the country. Unfortunately, the TALF has had only very limited success in jump starting the new securitization pools and the dampening effect of the new regulations will not be over come by cheap loan money. Once again, the administration is trying to play it both ways -- doesn't work.
August 17, 2009
Supreme Court to Weigh in On Executive Pay
The Supreme Court has agreed to take a case on executive pay, Jones v Harris Associates. In case is on manager's fees in the mutual fund industry but the holding will have profound effects on corporate governance in all industries. The question is whether a mutual fund board of directors or mutual fund investors have adequate incentives to police executive fees, in this case the fees of the mutual fund managers. Judge Easterbrook, writing for the majority, said yes; Judge Posner, writing alone in dissent said no. On the facts, the mutual fund paid higher fees for managers managing its large public funds that it did for the same manager managing its private funds controlled by large institutional investors. The Court could go with the new "behavorial economic" theorists that say small investors make predictable mistakes in both voting (incumbants always win) and in investing (holding losers too long and chasing winners) and that the boards of directors selected by small investors are not accountable in fact to them. Or the Court could go with traditional economists that argue that investors power to sell their investments is power enough to control boards and executives that invest their funds and that other paternalistic overview systems (government oversight) would be worse, stifying innovation and competition. This case will reaffirm or change existing practice and either result will have ripples across the governance of companies countrywide.