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

Babcock/VT: Three Cheers for Andy Brough!

Time and again Pro-Gov has warned that many mergers get pushed through at the expense of the selling shareholders. Giving the bidder access to the target's books tilts the favor against ordinary shareholders who are left with less information on which to base their decisions. The same can be said to the tactic of 'sounding out' the major institutional shareholders. All communication should be strictly on a public basis - similar to the regulations for disclosure of information in public offerings (esp in the USA). So we are glad that Andy Brough tries to put a spanner into the Babcock bid - after all, the shareholders of the bidding company are also often reduced to being the unwilling accomplices of a CEO's ambitious empire building.

Compensation: Baseball benchmark sanctioned by Obama

When President Obama states that the compensation of CEO's is not excessive when compared to what some sports stars can earn he tacitly assumes that the compensation of sports stars is set in a free market. We want to point out the they benefit from the protection of intellectual property rights. We would argue that this protection may well be to the detriment of the public good and should therefore scaled back.

Lessons to learn from Cadbury takeover

When the outgoing Chairman of Cadbury calls for new regulation of takeover bids it leaves a sour taste in the mouth. Presiding over another sell-out and than complaining about the alleged role of hedge funds in the bid smacks a bit of the pot calling the kettle black. We have repeatedly argued that current takeover rules are stacked in favor of the bidding party. Simple rules like restricting the right to vote to a certain percentage and to shareholders holding shares for longer than one year and taxing short-term capital gains on the same level as ordinary income (without any let-out for foreign holders, esp those located conveniently in tax havens like the Cayman Islands) would go a long way to return control of public companies to long-term shareholders. Preventing new owners of companies from dumping excess staff on the social security system financed by the taxpayer would prevent new owners from pursuing a 'slash-and-burn' strategy. The argument that any company that is listed is open to bids does not hold water either. Selling a company as a whole should only be a last recourse and subject to extremely onerous rules. Listing a company means above all that any shareholder should be - and is - able to sell his shares at any time. Anyone investing does so in the knowledge that he can sell again. That does not mean that the company itself should be sold. Investors should hold shares because they think that they will be worth x in a number of years, not because they can flip them in a few nano-seconds (High-Frequency Trading is a new cancer that is spreading rapidly!). The rules set by the Takeover Panel are plainly self-serving as the Panel is basically controlled by representatives of the corporate finance industry that profit handsomely from merger and acquisition activity.

Santander to float Bradford & Bingley?

It is just a bit over one year that the shareholders of B&B got expropriated by the British Government and saw control of the business handed over to Banco Santander shortly afterwards. So it may ruffle a few feathers among the investor community if there is talk that Banco Santander may float a stake in B&B or some other holdings in the UK on the public markets here. While Santander appears to be the laughing third party in this sorry affair one would hope that the effort of the previous owners of B&B to get satisfaction in the courts gets a boost from this slap in their face. After all, the situation at B&B cannot have been all that bad. Forensic accountants to the fore! And what about all that talk about 'Human Rights'?

New Look: Thanks a billion!

News that New Look will do an IPO - again - is another slap in the face of gullible institutional shareholders who agreed to a buy-out by management and private equity funds in 2004. Now the public will again be asked to pay vast profits to them - courtesy to their fiduciaries in the investment and pension management industry and a dysfunctional market for corporate control.