FSA clamps down on insider dealing - or does it?

In recent days the FSA, the British Financial Services Authority, has conducted a series of well-publicised arrests of market professionals suspected of illegal insider trading. This may well be seen as an indication that the authorities have a firm grip on insider dealing but we would caution that clamping down on this practice is far from easy. Small players trading for their personal account may well be netted by increased supervision but the really big fish in the pond are institutions, especially hedge funds, that can easily mask insider trades among the multitude of trades they conduct on a daily basis. 

US Lobbies stonewall increased shareholder influence

Pro-Gov campaigns for a long time to restrain corporate managements from apportioning a disproportionate share of company profits for themselves. Lobbies like the Chamber of Commerce - who does NOT represent the shareholders of large public companies - and corrupt members of Congress are stonewalling legitimate proposals to increase shareholder influence in companies. It is absurd to exclude the real owners from substantial decisions and it is high time that their fiduciaries - esp the large investment institutions - take more responsibility. Non-US shareholders should also take the gloves off and start making their voices heard - just like some US institutions (and 'activists') have been doing for a long time with respect to non-US companies. Finally, regulators and governments outside the US should support interventions in favor of more corporate accountability. At the moment, the executive 'class' has a free hand to help themselves to the fruits of enterprise that should really accrue to the investors/risk takers.

Lehman, Cerberus and Bawag - Private Equity needs more transparency

A news report about the curious connection between Lehman and the Austrian BAWAG bank makes reference to the fact that Cerberus, the 'Private' Equity firm that took over the bank, has brought this investment into the Dutch Promontoria Sacher Holding. The report states 'that there the traces of this investment get lost. It is not known which other large investors besides Cerberus have stakes in the Dutch Holding and are therefore investors in BAWAG.'
While not asking for an outright ban on buy-outs we are for a long time calling for regulations that would force 'Private' Equity firms and their investors to disclose more information about their business. In this case it is not possible for depositors in the bank to make an informed judgement about the ultimate guardians of the institution. The ultimate stakeholders in the unnamed investors (likely to be pensioners and other public savers) are also kept in the dark about the activities of their trustees (management of their funds) as well as the terms and conditions of their investment.
One has to wonder about the tax status of this construction and where taxes are ultimately to be paid.

Tommy Hilfiger: another black eye for public shareholders

News that the 'Private' Equity owner of Tommy Hilfiger has decided to flip the company for a tidy profit is bad news for the public shareholders who sold the company in 2006. We do not quarrel with the decisions of some - and the majority - of the erstwhile owners but this is another confirmation that 'SELLER BEWARE' should be written in block capitals on any offer to buy out the shareholders in a listed public company. All-too-often the process does not really reflect the long-term value of the company and rides roughshod over the philosophy of listing a company in the first place. As share prices fluctuate they will invariably most of the time deviate from the 'true value' of the company. This should not be an invitation for short-term speculators to take advantage of the situation. Holding the shares of a business should be a long-term commitment and dissolving the company should only be done in extremis, with the support of the overwhelming number of shareholders and after a price-finding process that does not favor a bidder (be it another company, a 'private' equity firm or management)

Shorts, Lehman and Price Discovery

An article in the Wall Street Journal makes the point that short sellers help price discovery and cites the example of David Einhorn's (correct) criticism of Lehman Brothers in Spring 2008.
But what does this article prove? That the world should thank Einhorn for helping to precipitate the collapse of Lehman Brothers? If the short sellers have such a big heart they should just state their concerns and hope that management or the other shareholders - who are the ultimate controllers of a company - act upon the advice. That is at least what one would expect a responsible owner to do. One look at the share register of most listed companies makes it clear that most companies are effectively controlled by the same small circle of large institutional investors (BlackRock, Fidelity etal) and in a rational world it should not be beyond the power of the highly-qualified and well-paid professionals among their staff to be responsible guardians of the investor's interest. These firms are the ultimate force behind nearly all of corporate America (and by extension the World) and they can no longer hide behind arcane regulations or passing the buck to the governments.

Who needs Credit Ratings?

Warren Buffet certainly does not need them as he prefers to do his own analysis. We also suggest that investors do their own cooking. The only instances that makes ratings useful for investment decisions happen to be the situations where the consensus and/or ratings appear to cause a mispricing in the underlying security that allows a canny investor to benefit by taking the opposite side of the trade. As long as ratings are based on hard facts, usually numbers found in company accounts or data in national statistics, it is a simple matter of arithmetic to deduce the risk associated with a particular issuer. Where ratings rely on judgement calls they become highly subjective and should not be worth more than any other market opinion. Conflicts of interest exist when ratings agencies are given access to non-public information. As it is not possible for other investors to verify the information themselves, some lazy or naive investors get seduced to put excessive reliance on ratings decisions. This risk is exacerbated when laws or customs give ratings an official blessing - for example by requiring collateral posted with the European Central Bank to be of a certain credit quality testified by a rating.

CEO Pay: Adding insult to injury

A report that companies are already trying to circumvent the SEC's new regulations relating to more transparent disclosure of CEO Pay highlights the sorry fact that company managements still see themselves as a class apart that is able to run roughshod over the concerns of their owners and the wider public. The absurd system of 'incentive compensation' allows the CEO of Eli Lilly to get away with a whopping 45 per cent increase in 'compensation' for the year 2009. This brings the total to an eye-watering £20.9 million. But the company's management tries to put a different spin on it by claiming that 'fair value' (to whom?) of the CEO's compensation is only $15.9 million. Assuming that both valuations are correct this demonstrates that compensation for top executives is much too complicated in the first place. We guess that this is intentionally as it opens lots of opportunities to game the system. We wonder whether employees down the pecking order also have such difficulty valuing their pay packages. Both the percentage increase as well as the absolute number of pay for Lilly's CEO illustrate that reform of top executive pay is overdue.

Enron and Greece - where is the difference?

We wonder where the difference is between Enron supposedly manipulating its accounting and Greece manipulating its officially reported debt levels. Answers from the regulators please!

How to regulate High-Frequency Trading

An interesting article in Barron's highlights the problems surrounding 'High-Frequencey Trading' (HFT). Pro-Gov has for a long time called for a public discussion of this practice. Is it distorting the level-playing field to the disadvantage of ordinary investors? Somewhere the supposed profits that are generated by HFT must come from and we assume it is not just a technological zero-sum game for the market participants that engage in this practice