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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.

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