Category: Economy
Part II: "Transparent Markets"?
Sure They're Transparent -- As Long and Words and Meaning Don't Matter
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| By Robert Folsom |
Published: Wed, 30 Apr 2008 17:00:00 ET |
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Yesterday we talked about "transparent markets," along with examples of practices that are not transparent. We saw that these non-transparent practices are in fact "the way it's done" at Wall Street's biggest investment banks, with the full knowledge of ratings agencies and Federal regulators.
I also quoted Treasury Secretary Henry Paulson repeating Wall Street's article of faith about U.S. markets being the world's most transparent, from his speech arguing that too many lawsuits and too much regulation now threaten U.S. competitiveness.
A word about lawsuits and regulators: I do agree that there's too much of both. I also believe that the issue goes way beyond threats to competitiveness. Lawsuits, the fear of lawsuits, and stupid legislative "reforms" like Sarbanes-Oxley have done outright harm to the U.S. economy for a very long time. Annual tort costs alone exceed two percent of GDP. But these problems duly noted, lawsuits and regulations ain't what caused the subprime debacle. (If anything, subprime fallout is certain to produce an entire new class of lawsuits and stupid legislation.)
Markets and opportunities may -- or may not -- be "transparent." What's more important is for you as an investor to think independently about your financial choices, and never assume that bureaucrats and policymakers will reduce your risk for you. Click here for independent analysis.
Yes, I'll be the first to acknowledge that hindsight is 20/20 -- there's not much rocket science in figuring out why something blew up after it explodes. At the same time, it is fair to point out that any rational assessment of risk -- whether it's risks to competitiveness, or systemic risks to the financial structure itself -- must begin with probabilities. I say this because it is hard to imagine a scenario whereby the broken tort system or excessive regulation would cause a behemoth like Bear Stearns to implode in a matter of days. On the other hand, it is easy to imagine the rapid demise of any financial institution, if its depositors suddenly lose confidence in the quality of that institution's capital reserves.
And that is precisely what happened to Bear Stearns. The big hedge funds and other clients with billion-dollar accounts at Bear Stearns suddenly suspected that Bears' capital reserves were valued in ways that weren't so "transparent" after all. The equivalent of a bank run followed. Furthermore, when the Fed's bailout left the stock price at pennies on the dollar, Bear Stearns shareholders got a full dose of the brutal truth regarding transparency.
How many investors would have purchased those shares to start with, had they known that Bear Stearns treated illiquid assets as "securities," and counted unsecured debt as "capital"? In other words, if U.S. financial markets really are the most transparent in the world, investors should be able to safely assume that securities and capital are just that -- instead of something less than that.
Now, if you won't be able to sleep until you know all the details about how the SEC could go along with something this outlandish, go to a search engine and type in "Alternative Net Capital Requirements for Broker-Dealers That Are Part of Consolidated Supervised Entities". What you find may well succeed in boring you to sleep (if not tears) before you're done. If the short version will do, here's what Ben Stein said about the whole charade in his New York Times column: "It looks to me as if the inmates are running the asylum."
I humbly suggest that when it comes to your portfolio and financial future, you can do without the inmates and their asylum. The only sane conclusion to draw is that you're better off looking after yourself. A good method will help -- click here to see what we see.
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