Financial Markets

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Stephen Davidoff recently posted a piece on DealBook
entitled “A Push to End Securities Fraud Lawsuits Gains Momentum,” in which he notes
that “Halliburton is asking the Supreme Court to confront one of the
fundamental tenets of securities fraud litigation: a doctrine known as “’fraud
on the market.’”  He goes on to provide a
lot of interesting additional details, so you should definitely go read the
whole thing, but I focused on the following:

In its argument, Halliburton is asking the
Supreme Court to confront one of the fundamental tenets of securities fraud
litigation: a doctrine known as “fraud on the market.” The doctrine has its
origins in the 1986 Supreme Court case Basic v. Levinson. To state a claim for
securities fraud, a shareholder must show “reliance,” meaning that the
shareholder acted in some way based on the fraudulent conduct of the company. In
the Basic case, the Supreme Court held that “eyeball” reliance — a requirement
that a shareholder read the actual documents and relied on those statements
before buying or selling shares — wasn’t necessary. Instead, the court adopted
a presumption, based on the efficient market hypothesis, that all publicly
available information about

…

Really great piece by Justin Fox on “What We’ve Learned from
the Financial Crisis” over at the Harvard Business Review.  What follows is a brief excerpt, but you’ll want to go read the whole thing.

Five years ago the global financial system seemed on the
verge of collapse. So did prevailing notions about how the economic and
financial worlds are supposed to function. The basic idea that had governed
economic thinking for decades was that markets work…. In the summer of 2007,
though, the markets for some mortgage securities stopped functioning…. [T]he
economic downturn was definitely worse than any other since the Great
Depression, and the world economy is still struggling to recover…. Five years
after the crash of 2008 is still early to be trying to determine its
intellectual consequences. Still, one can see signs of change…. To me, three
shifts in thinking stand out: (1) Macroeconomists are realizing that it was a
mistake to pay so little attention to finance. (2) Financial economists are
beginning to wrestle with some of the broader consequences of what they’ve
learned over the years about market misbehavior. (3) Economists’ extremely
influential grip on a key component of the economic

…

The 2013 Nobel Prize in Economics winners were announced
earlier this week and the award was shared by three U.S. Economists for their
work on asset pricing.  Eugene
Fama of the University of Chicago, Lars
Peter Hansen of the University of Chicago and Robert Shiller of Yale University
share this year’s prize for their separate contributions in economics research.

The work of the
three economics is summarized very elegantly in the
summary publication produced by The Royal Swedish Academy of Sciences
titled “Trendspotting in asset markets”.  The combined economic contribution of the
three researchers is described below:

The behavior of asset prices is essential for many important
decisions, not only for professional inves­tors but also for most people in
their daily life. The choice on how to save – in the form of cash, bank deposits
or stocks, or perhaps a single-family house – depends on what one thinks of the
risks and returns associated with these different forms of saving. Asset prices
are also of fundamental impor­tance for the macroeconomy, as they provide
crucial information for key economic decisions regarding consumption and
investments in physical capital, such as buildings and machinery. While asset
prices often seem to

…

1. Russell
G. Pearce & Brendan M. Wilson on Business Ethics

 

This Essay
makes three contributions to the field of business ethics …. First, the Essay
identifies the dominant approaches to business ethics as profit maximization,
social duty, and ordinary ethics, and summarizes the claims made by proponents
of each perspective. We intend this categorization as a way to refine the
distinctions between and among various views of business ethics and to address
the conundrum that John Paul Rollert has described as the “academic anarchy
that is business ethics…. Second, the Essay explores the strengths and
weaknesses of these three approaches. It suggests that their emphasis on
viewing business persons and organizations as existing autonomously, rather
than within webs of relationships, helps explain why the field of business
ethics has had minimal influence on business conduct, as does the false
dichotomy between economic and ethical conduct that proponents of these
approaches often embrace…. Third, the Essay proposes an alternative approach
that would locate business ethics at the center of business conduct. This approach
embraces the relational character of business behavior. It offers a conception
of self-interest that recognizes the relational dimension of self-interest and
identifies mutual benefit as the…

Hardcover book forthcoming. 
Here is a description from the Amazon product page:

Since the 1980s,
society’s wealthiest members have claimed an ever-expanding share of income and
property. It has been a true counterrevolution, says Pierre Rosanvallon–the
end of the age of growing equality launched by the American and French
revolutions. And just as significant as the social and economic factors driving
this contemporary inequality has been a loss of faith in the ideal of equality
itself. An ambitious transatlantic history of the struggles that, for two
centuries, put political and economic equality at their heart, The Society of
Equals calls for a new philosophy of social relations to reenergize egalitarian
politics. For eighteenth-century revolutionaries, equality meant understanding
human beings as fundamentally alike and then creating universal political and
economic rights. Rosanvallon sees the roots of today’s crisis in the period
1830-1900, when industrialized capitalism threatened to quash these
aspirations. By the early twentieth century, progressive forces had begun to
rectify some imbalances of the Gilded Age, and the modern welfare state
gradually emerged from Depression-era reforms. But new economic shocks in the
1970s began a slide toward inequality that has only gained momentum in the
decades since.

Jennifer S. Taub has updated “What We Don’t Talk About When
We Talk About Banking” on SSRN.  Here is
the abstract:

The run on the shadow banking system in 2008 is routinely
identified as the event that transformed the nonprime mortgage securities
meltdown into a full-blown Global Financial Crisis. Yet, the components of this
shadow sector have not been brought into the light let alone under adequate
regulatory supervision. The government-initiated reform measures enacted to
date lack consistency and cohesion. Too little attention has been paid to how
the varied pieces of this system interconnect with each other and with “real”
banking. For example, the multi-trillion dollar repurchase agreement (“repo”)
market was ground zero for the sudden, severe withdrawal of liquidity from the banking
system in the United States. Yet little has been done to address the dependence
upon this short-term, often overnight funding market. Conversely, some shadow
players like money market mutual funds, (MMFs) that were already subject to
heavy structural controls, have been further regulated. While these new rules
were designed to strengthen the funds, making them less prone to runs by their
own investors, these same changes may create even more instability and risk

…

On October 16th, the US Chamber of Commerce’s
Center for Capital Markets Competitiveness will host a half-day event to
examine trends from the 2013 proxy season and look ahead to 2014.  The day
will start with a presentation from the Manhattan Institute about the 2013 season
and then I will be on a panel with Tony Horan, the Corporate Secretary of
JP Morgan Chase, Vineeta Anand from the Office of Investment of the AFL-CIO,
and Darla Stuckey of the Society of Corporate Secretaries and Governance
Professionals. Our panel will look  back at the 2013 proxy season and discuss hot
topics in corporate governance in general.  Later in the day, Harvey Pitt
and other panelists will talk about future trends and reform proposals, and
depending on the state of the government shutdown, we expect a
member of Congress to be the keynote speaker. The event will be webcast for
those who cannot make it to DC.  Click here
to register.

Michael B. Dorff has posted “The Siren Call of Equity
Crowdfunding” on SSRN.  Here is the
abstract:

The JOBS Act opened a new frontier in start-up financing,
for the first time allowing small companies to sell stock the way Kickstarter
and RocketHub have raised donations: on the web, without registration.
President Obama promised this novel form of crowdfunding would generate jobs
from small businesses while simultaneously opening up exciting new investment
opportunities to the middle class. While the new exemption has its critics,
their concern has largely been confined to the limited amount of disclosure
issuers must provide. They worry that investors will lack the information they
need to separate out the Facebooks from the frauds. This is the wrong concern.
The problem with equity crowdfunding is not the extent of disclosure. The
problem is that the companies that participate will be terrible prospects. As a
result, crowdfunding investors are virtually certain to lose their money. This
essay examines the data on angel investing – the closest analogue to equity
crowdfunding – and concludes that the majority of the issuers that sell stock
to the middle class over the internet will lose money for investors, with many

…

Too bad I
didn’t have this information from today’s
Wall Street Journal to add to my arsenal of reasons of why I think the Dodd-Frank conflict minerals
SEC disclosure is a well-intentioned but bad law to address rape, forced labor,
plundering of villages, murder, and exploitation of children in the Democratic
Republic of Congo. I won’t reiterate the reasons I outlined in my two-part blog
post a couple of weeks ago.  According
to press reports, while acknowledging her responsibility to uphold the law, SEC Chair Mary Jo White mirrored some of the arguments about
discretion that business groups and our amicus brief raised on appeal to the DC
Circuit, and further explained, “seeking
to improve safety in mines for workers or to end horrible human rights
atrocities in the Democratic Republic of the Congo are compelling objectives,
which, as a citizen, I wholeheartedly share … [b]ut, as the Chair of the SEC, I
must question, as a policy matter, using the federal securities laws and the
SEC’s powers of mandatory disclosure to accomplish these goals.”  I couldn’t agree more. While I have no problems with appropriate and relevant disclosure, corporate responsibility, and due diligence related to human rights, Congress should…

According to Paul Volcker, the “financial system is broken.”  Furthermore, with regard to limits on the abilities of regulators, he says: “Relying on judgment all the time makes for a very heavy burden whether you are regulating an individual institution or whether you are regulating the whole market.” 

He’s right on that.  If we like markets (and I think we do), then we need to recognize we can’t always regulate (or, for that matter, buy) our way out of some of these messes.  I am now firmly of the mind that we should have a five-year moratorium (minimum) on financial regulation.  This goes both ways — nothing can be repealed and nothing can be added. 

I am of a mixed mind on the new financial regulations, but since they already passed, I say leave them alone and let the market adjust. Similarly, with regard to Sarbanes-Oxley, regardless of whether one likes it, it’s part of the current market, and companies have adjusted to it.  So – leave it all alone. Regulators need to work with what they have, and businesses have to work with what is there.

I happen to think that we have a fairly solid system in place, but there…