Posts Tagged ‘SEC’

Why Does Our Financial System Need Reform?

March 28, 2009

Treasury Secretary Tim Geithner and the Obama Administration are pushing for powers to regulate all aspects of the financial system.  These areas include hedge funds, private firms, and derivatives.  They also want the power to intervene with any company to make sure their collapse will not bring down the financial system.

While these ideas sound great, especially in the middle of the crisis we’re in, they are misguided attempts to intervene, when intervention is the last thing we need.  The perfect example of the need to get involved when it was not necessary was the Sarbanes-Oxley Act after the Enron case.  Everyone wanted regulation, so we strapped every publicly traded company with the huge burden of archiving every piece of data for 7 years.  However, the executives that were in charge of Enron were found guilty of fraud, and the company was bankrupted and dissolved.  The system for weeding out Enron worked, but our government felt the need to act, so they did.

In the current crisis, if we did not bail everyone out, would we need to regulate hedge funds, private equity firms, and derivatives?  Those were fringe investments to begin with, but since the Federal Reserve made credit cheap and easy to obtain, they became too large.  Warren Buffet even called the derivatives market the “financial weapons of mass destruction.”  If we let them fail and liquidate their assets, they would go back to being fringe investments only for specialty firms or the super rich people of the country.

By propping them up, we now have the need to regulate them.  By regulating them, we are acknowledging their existence as a major part of the financial system, when they should only be bit players.  Our system needs to be cleansed of these bad investment vehicles and instead we are implementing rules to legitimize them.

Also, the power to intervene with any company by the Treasury Department is setting a dangerous precedent for the future.  They want the power to take over a company and sell off assets before the company collapses.  Looking at how well the bailouts and toxic assets plans have gone, I question whether they really know what is best for our system to begin with.  Why not just let the companies go bankrupt and liquidate their assets letting the market set the prices?

Also, I question whether these reforms and protections will really help.  We all knew the derivatives market was a problem waiting to happen, and all of the financial geniuses who are now calling for regulation just sat back and watched.  The SEC had rules to prevent things like Enron from happening, but it still happened.  Madoff kept a ponzi scheme going for decades and the SEC couldn’t figure it out.  How can we expect our government to regulate when they have failed us so far?  If another bank does commit fraud or crooked accounting and it slips through the cracks, can we sue the government for their lack of oversight?

These broad government regulations just give us a false sense of security because we think the government is looking out for us.  That gives us the impression that they are watching what funds are doing, and they know that their investments are legitimate.  We fail to do our own due diligence because we think the government already has for us.  Then we will again be burned when the government fails to regulate like they promised.

We need to let the market liquidate the bad investments and let the companies that made these decisions fail.  Once that happens, we can see how widespread the problem was and if there is a need for sweeping regulations.  If anything, we need to regulate the Federal Reserve to make sure that our boom-bust economic policy comes to an end.  We can treat the symptoms (hedge funds, private equity and derivatives) only after we treat the cause of the cancer, which is the Federal Reserve.

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Why More Regulation Will Not Help

March 25, 2009

Treasury Secretary Tim Geithner wants to have the authority to intervene in any hedge fund or other company that is big enough to bring the banking system down.  The goal is to create oversight and regulation that will help protect us from another recession like we’re in now.

However, we are already supposed to have government agencies looking out for us, and the Supreme Court just ruled that even if they are in place, they are not responsible.

The case I am referring to is one where the Court ruled that even if there is an FDA approved label on a drug, the drug maker and patient are responsible in case something goes wrong.  I can’t remember the specifics right now, but the drug was causing potentially fatal side effects, and the Court just threw it back in the face of drugmakers.

They just passed the buck back to the drugmakers, doctors and patients.  Why then, does the FDA exist in the first place?  If they are supposed to be monitoring drugs that go out to make sure they are safe, why can they shed any sort of responsibility?

I’m sure the same thing would happen if a lawsuit was ever brought against the SEC.  The onus would end up falling on the investor and mangers to do their own due diligence.  Look at all the fraud that had to occur to create the real estate bubble.  Have they brought charges against anyone?

Why then, do we continue to believe that a regulating body will help at all?  Has government regulation proven to be effective?  And even if it works, when something goes wrong, they don’t have to bear any responsibility.

What we need is some good, old-fashioned tough medicine.  Let these banks fail.  Show them that you will not be there to stop their collapse.  If banks knew that they did not have the government as a backstop, they would make wiser decisions.  The moral hazard we have created is going to lead us to our demise as a nation.

We do not need more government regulating bodies, especially ones that have all the authority, but ultimately no responsibility.  The only proven regulator has been the free market.  Let’s let it work.

So, This is What the SEC Does

November 18, 2008

Today, the SEC announced it was bringing insider trading charges against Mark Cuban.  He sold a large position in Mamma.com (some lousy search engine) with some insider info and saved himself about $750,000 in losses.  The big part of this dispute is that the SEC says he pledged to keep the information confidential and therefore could not act on it.  Cuban says he never said anything about confidentiality, and therefore could trade with the knowledge he had.

Not that it really matters, but the information was that the company was going to do a PIPE the next day.  A PIPE is “Private Investment in Public Entity” which means they sell a number of shares to private investors to raise money.  The disadvantage is that it dilutes the amount of shares outstanding, which in turn makes each share worth less.  So, Cuban sold his shares before the announcement of the PIPE and the subsequent decline.  He sold only a portion of his position and saved himself $750,000 by selling early.

This was all done back in 2004 too!  They spent 4 years researching this?  You have to be kidding me!  What a waste of taxpayer dollars and government resources.

While the entire financial system is crumbling and hundreds of billions of dollars in shareholder equity has been lost and we’re printing trillions of dollars as well, the SEC is investigating a deal by Mark Cuban that equated to less that ONE MILLION dollars?

This is our government in a nutshell.  Instead of going after the CEOs of the financial institutions that wrecked our economy, they go after Mark Cuban for $750,000.  The decisions by the heads of subprime lenders and Wall Street firms that securitized and sold these assets have cost us all billions of dollars.  How can there not be any investigations into these firms?  What a joke!

What about AIG?  They got bailed out to the tune of $85 billion and then sent employees on a luxury retreat that cost over $400,000!  That’s our money!  Cuban’s trade, while it was unethical if not illegal, was his own money and mainly benefitted himself.  AIG was using taxpayer money to pamper themselves.  Where are the fines for this?  Why isn’t anyone in jail yet?

The SEC needs to look at the CEOs and officers of Goldman, Merrill and any other big Wall Street firm.  I can bet that they had “planned” sales that happened to occur right before a drop in stock price.  Just because it’s “planned” doesn’t mean they were not setting up these sales with inside knowledge.

We should all be outraged that during this time of crisis, the SEC is busy investigating Mark Cuban for three quarters of million dollars.  The top 100 employees at any of these investment banks were getting bonuses many times the money Cuban saved himself.  These bonuses were created by financial instruments like mortgage backed securities, that the SEC was supposed to regulate.  Now look who is footing the bill – the average Joe.

If they really want to crack down, they should go back and put every exectutive of an investment bank or subprime lender or AIG in jail right now.  Christopher Cox, the head of the SEC should be forced to resign as well.  He just let all this happen and then has the gall to go after Cuban.  His lack of leadership is criminal in itself.

Of all the “change” Obama wants, the first one he should make is to get the SEC to actually do it’s job and not try to make martyrs out of celebrities.