The reflective mood
may itself have been triggered by my vernal equinox relocation to this European
base, for the spring and summer – with possible impact on my publication
schedule, but also a refreshed exposure to perspectives on this side of the
(At this point, it
would be obligatory for mainstream media to pause for a white-bread definition
of short selling and a summary of the SEC’s rule. Happily in an evolved
environment, all that is needed is this link to the SEC’s release of February 24, which in turn leads to Chairman Mary
Schapiro’s speech, and the supporting
staff paper – to all of which the
curious are referred for details.)
I have observed the debate on short sales restrictions to be binary and polarizing – that, as with handgun control or gay marriage or abortion rights, coherent but non-negotiable views reside at the ends of the spectrum, with compromising positions difficult to articulate inside the black-or-white extremes.
Events over the
last two years leave me less sure. On the one hand, it’s hard to generate much
sympathy for the special pleading of John Mack of Morgan Stanley, or of Lehman’s
Dick Fuld before its September 2008 collapse – especially with the recent
release of the Proustian-length exposition by bankruptcy examiner Anton Valukas
Nor, in pursuit of honest symmetry, is there any popular sentiment for reining in the pernicious speculative effects of upside exuberance. Imagine the vitriol that would be poured on a regulatory rule imposing a “downtick rule” before buying a stock experiencing a daily uplift of ten percent.
And yet, even the
ursaphobic are deserving of respect – some days, the bear really does eat you.
Which leads to the hard and subtle question: how much regulation is the right amount?
And there, I
suggest, the SEC’s “10% price drop” is a filter with much too large a mesh.
As its staff paper spells out, on an average day from 2001 to 2009, a 10% trigger would have hit some 4% of covered securities – and nailed some 1.3% even during an interim period of supposed low volatility.
For a sympathetic
but skeptical observer, government interference at the two-sigma level is just
way too much.
Not least, the administrative burdens on both market participants and the regulatory agencies themselves will be enormous, yet with no more than SEC's repeated say-so on the benefits to broad-based legitimate activity, while consuming energy and resources better deployed to the real problem cases.
Many examples demonstrate
that where a sector’s violations emerge from a very small part of the
population, enforcement efforts that are imposed universally achieve only massive
waste and minimal effect -- where targeted programs would be more effective at
far less cost and disruption:
- Most modern automobiles are essentially clean and non-polluting; the bulk of vehicle emissions come from a very small number of “dirty” cars and trucks – which can be effectively identified by mobile, low-cost “drive-by” monitors rather than broad and expensive inspection programs.
the Clinton-era imposition on personal charitable donations, requiring useless acknowledgement letters that have done nothing but stuff files and eat
up time, paper and postage while adding no benefit to IRS tax enforcement.
- Transportation “security” in the post – 9/11 era has reduced the effectiveness and civility of air and rail travel at every level, all to the anxiety and unease of the general public -- but at the imposition of full body pat-downs and loss of gels and toothpastes, has failed to identify dangerous shoes and underwear – when contrasted with the nearly-invisible (and when well-used) highly-focused intelligence.
And closest to the
subject, as I asked recently (here), what good has been accomplished by all the
expenditure of corporate and agency time and budgets required under the Sarbanes/Oxley
law – ostensibly functional for six full years as of the undeterred collapse of
Lehman Brothers and the worldwide financial markets oscillations that followed?
Recent research brings forth the learning that the causal factors for the types of problems cited above are not uniformly spread through a population, but cluster within a small sub-set of the whole – a proposition that calls for dramatic re-engineering of law enforcement and regulatory policy.
A good place to start would be with short-sale limits calibrated to the really impactful – not 4% per average day, but perhaps 4% per year – situations that would be recognizably dramatic, readily identifiable and agreed as worth attention on a consensus basis, while generally leaving alone both the markets’ longs and shorts.
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