Wednesday, July 30, 2008

Thomas Donlan on trade, SEC actions

Barron's editorial page editor Thomas G. Donlan has a few things to say about the SEC's latest move to protect financial firms from supposed rumor-mongering and naked short-selling in this week's Barron's editorial commentary.

In, "Swatting an Imaginary Fly", Donlan reminds SEC officials (and Barron's readers) that short-sellers are not to blame for the very real problems facing certain banks and financial companies.

"The SEC also denounced false rumors and undertook to fish through traders' e-mails and phone records in search of rumor-mongers. Its reasoning was simple:

"False rumors can lead to a loss of confidence in our markets. Such loss of confidence can lead to panic selling, which may be further exacerbated by "naked" short-selling. As a result, the prices of securities may artificially and unnecessarily decline well below the price level that would have resulted from the normal price-discovery process. If significant financial institutions are involved, this chain of events can threaten disruption of our markets."

The SEC cited the example of Bear Stearns: "During the week of March 10, 2008, rumors spread about liquidity problems at Bear Stearns, which eroded investor confidence in the firm. As Bear Stearns' stock price fell, its counterparties became concerned, and a crisis of confidence occurred late in the week. In particular, counterparties to Bear Stearns were unwilling to make secured funding available to Bear Stearns on customary terms."

Talk about putting the cart before the horse: The SEC has formally declared that false rumors drove Bear Stearns over the edge. In fact, as even the commission's version of the sorry tale makes clear, the rumors were true. The falsehoods were told by Bear Stearns spokesmen, who declared that everything was hunky-dory.

The new investigations and regulations aren't designed to protect investors, but to deceive them. The SEC decided to support the market reputations of 19 banks and other financial institutions in the face of well-warranted criticism.

Yelling "fire" in a crowded theater is a terrible thing to do -- unless there's a fire."

The SEC, in Donlan's view, is an agency that has resorted to regulating speech, an exercise it finds easier than identifying and prosecuting fraud.

Read on for a further view of why our capital markets are ill-served by such "protective" measures (and hear David Einhorn's take on the recent SEC actions while you're at it).

Added note: Thomas Donlan is also the author of a new book entitled, A World of Wealth: How Capitalism Turns Profits Into Progress.

His recent interview on the Financial Sense Newshour broadcast provided an overview of his new book, and an interesting discussion on why free markets and free enterprise are the best options for meeting society's needs and wants, while delivering increased prosperity for the greatest number of people over time.

Enjoy the interview and the discussion.