One thing you could think about the last few decades’ improvement in market efficiency and speed and data and computerization and all that good stuff is that people get mad about increasingly smaller forms of cheating. Time was, huge stock manipulation got you in trouble, but the sort of window-dressing manipulatino that added 30 basis points to your quarterly returns went unnoticed. “What’s a basis point?,” contented stockholders would ask. Now there are academics who study that sort of thing and the Wall Street Journal to tell people to get mad about it.
The Journal’s quest to catch all the corporate insider traders is a good time, and seems to be claiming some scalps; their latest takes a skeptical look at 10b5-1 plans, which allow insiders to sell stock while they have nonpublic information pursuant to a plan that they put in place when they didn’t. Some skepticism is justified – as we’ve discussed, the ability to amend those plans can let you do some pretty shady stuff if you’re determined – but it’s worth noting that 10b5-1 plans are basically a replacement for, y’know, “just buy stock when you’re feeling lucky, corporate executives.”
The Journal cites approvingly a 2010 AFSCME proposal to Moody’s regarding 10b5-1 plans that would have required immediate disclosure of 10b5-1 plans, no termination outside extraordinary circumstances, a 90-day waiting period before any trades can be made, and no trading by executives outside of the plan. That would definitely prevent executives from abusing 10b5-1 plans; it would also have the effect of preventing them from trading at all, outside of just mechanical selling to pay kids’ tuition etc. Certainly any sort of trading based on knowledge, opinion, or judgments would be ruled out.
And why not? Obviously a corporate executive, even one without “material nonpublic information,” should have more insight into his stock than the average public investor. (“Material” is a pretty squishy concept; ask Reed Hastings.) Why should he profit on that? Shouldn’t everyone have exactly the same information he has – right down to the price targets at which he’s going to sell?
Meanwhile, in another part of town, John Carney has a very clever post pointing out that
- Lloyd Blankfein thinks that corporate bonds are overpriced,
- Lloyd Blankfein is in the business of running Goldman Sachs,
- Goldman Sachs is in the business of selling corporate bonds, and
- If he really thinks that shouldn’t they shut down their corporate bond selling business for a few years?
Carney is probably mostly kidding: the point is less “no financial intermediary should sell any products that its CEO doesn’t personally think are going to increase in price,” and more “isn’t it weird that Goldman got in so much trouble for selling mortgage-backed securities while also betting against mortgages?” Goldman, obviously, had no material inside information on whether house prices would go down across America; similarly obviously, it has no material inside information about whether there’s a bond bubble. I mean – it talks to clients, it sees the market, perhaps as an aggregate it develops a more informed view of the market than the average investor, but … isn’t that what it’s supposed to do?
A while back I said “Financial markets are basically about information asymmetries, real and imagined, and financial regulation is largely about limiting those asymmetries to socially acceptable kinds and quantities.” Your main job in investing is to find where you have an information advantage and take advantage of it; your secondary job is to make sure that your advantage isn’t the sort that gets you sent to jail. That second part may be getting harder.