Killing it like a hooker in Hong Kong

Kevin Hassett’s misguided Regulation FD rant

This is probably the most idiotic article I’ve ever come across on Bloomberg. Kevin Hassett mouths off about Reg FD in such a convoluted misguided way that it makes me wonder… If he’s a adviser to John McCain, then the US is going to be headed for some real economic trouble if McCain wins.

In the old days, if you were a big customer and heard speculation that a firm such as Bear was in trouble, you might call up the boss and ask him about it. If the rumor was that the firm was flat broke, then he might invite you to his office and show you his list of assets to calm you down.

Alternatively, if a chief executive received a number of troubling phone calls, he might summon a highly respected analyst to his office and open up his filing cabinets. If things checked out, the analyst would then issue a report saying that the bad rumors were unfounded. If he tried to get cute and profit personally from the opportunity, then insider-trading laws would apply.

Such a common-sense response to false rumors is now a crime. The law makes innuendo-based attacks far too easy.

Well, why can’t you just publish your news on Bloomberg? Tell everyone that you are OK, instead of just sharing it with one or two people? The law certainly makes widespread publishing OK.

What Mr. Hassett is really saying is that there are reasons why a company should not disclose information in the full public domain. Those reasons include legal liabilities that the information must be true (ie the company cannot spread counter-rumors). In effect, Mr. Hassett says that short sellers can use rumors to drive prices down, but the company cannot now use rumors (ie assertions not completely evidenced) to counter.  And he blames Regulation FD.

Oh boo hoo. First and foremost, there is absolutely no damn reason that any company should not be able to announce anything it wants to the broader market under FD. Just beware, no favoring privileged insiders.If that affects disclosure standards by companies, tough. If you really want to make them disclose more, just modify accounting standards or laws. Anything they disclose on their own is optional anyway, and you are dependent on an illusory faith in good governance.

A second stupid part of this article

A study by economists Armando Gomes, Gary Gorton, and Leonardo Madureira of the Wharton School at the University of Pennsylvania found that earnings-forecast errors for small companies skyrocketed after Reg FD was passed, suggesting that it is mucking up information transmission even in normal times.

Yeah no shit. But Mr. Hassett assumes that information transmission is of the utmost importance. This is patently untrue. If information transmission was the only factor in market design, one would actually allow insider trading. Insiders would be able to transmit their knowledge most efficiently by trading on the stock. The stock price would then reflect all information, both public and private. Efficient market hypothesis, strong flavored.

He of course does not discuss why information transmission could be secondary to fairness.

I can’t believe this guy is a director of anything.

April 15, 2008 Posted by | Uncategorized | , , | 1 Comment

Dismal long term view from the Roach

Insight: Watch out for aftershocks
By Stephen Roach

Published: April 14 2008 17:15 | Last updated: April 14 2008 17:15

The author is chairman of Morgan Stanley Asia

But do not confuse that possibility with an all-clear sign for the real economy, stock markets or the political cycle. As the US slips into recession, a chain of increasingly powerful feedback effects is likely to follow. The after-shocks of this crisis will shape the landscape for years to come.

Financial markets have breathed a sigh of relief that the worst may now be over. Maybe that is the case for the crisis, itself.

Every financial crisis is different, but at some point, they all end. It is hard to know if the end of this one is at hand, but there are grounds to believe the worst of the fire-storm may be burning itself out.

Among the reasons: liquidity injections by central banks, especially the US Federal Reserve, have erred on the side of overkill. Moreover, some of the actions have been unconventional, especially the opening of the Fed’s discount window to investment banks for the first time since the 1930s.

And the failure of Bear Stearns is reminiscent of similar catharses that have marked the bottom of earlier crises, from the failure of Herstadt Bank in 1974 to the demise of Long-Term Capital Management in 1998.

However, there is far more to the macro end-game. This crisis has been big enough to have triggered a host of feedback effects that should endure long after financial markets begin to heal.

First and foremost, there is the impact on the real economy. This is particularly true of the US, where income-deficient, housing-dependent consumers are caught in a vice between a cyclical erosion of labour income and the bursting of housing and credit bubbles. Add to that a steep recession of homebuilding activity, and risks have tipped decidedly to the downside for fully 78 per cent of the US economy. As a result, corporate profits should fall well below expectations, especially for the non-financial component of the S&P 500. As indicated by the recent earnings shortfall at General Electric, such optimism, in the face of recession, points to especially painful feedback effects for the stock market.

Second, there are lagged impacts on the broader global economy. In an era of globalisation, the world economy has become tightly linked through cross-border flows of trade, financial capital, information and labour. Export-led developing Asia has been a big beneficiary of the surge in global demand and world trade over the past five-and-a-half years. Now that the global business cycle has turned, Asia will have a very hard time decoupling itself from a consolidation of the US consumer.

Third, it seems quite likely that bruised and battered financial institutions will have to contend with an additional round of pressures. Until now, financial intermediaries have been hit mainly by crisis-related disruptions on the credit front. But as is typically the case with erosion on the demand side of the real economy, a cyclical deterioration in loan quality for households and businesses is coming.

Fourth, feedback effects could also hit commodity markets – the sole surviving bubble in an increasingly bubble-prone world. By now, most are convinced that commodities are in a permanent “super cycle”, with the limited expansion of supply failing to keep up with a growing appetite on the demand side of the equation sparked by commodity-intensive economies such as China and India. However, with global GDP growth in 2008-09 likely to fall well short of the near 5 per cent average pace of the past five years, a cyclical correction in the prices of oil, base metals and other non-food commodities seems likely.

Fifth, a political backlash to this crisis is likely to lead to a new wave of re-regulation. Just as the bursting of the dot-com bubble and an outbreak of corporate accounting scandals led to passage of Sarbanes-Oxley Act of 2002, US politicians now seem equally committed to a recasting of the regulatory framework governing financial markets. The US Treasury has already fired an opening salvo in what is likely to be an intense and drawn-out debate. As an added twist, look for the US Congress to rewrite the Fed’s policy mandate to make the central bank more accountable for avoiding destabilising asset bubbles in the future.

April 15, 2008 Posted by | Uncategorized | , | Leave a comment