A John Stossel special from 20/20 aired September 9, 1996
Are We Scaring Ourselves to Death (1of3)
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Saturday, July 31, 2010
Insider What?
The Wyly brothers have been recently charged by the SEC with insider trading. The SEC claims that Sam and Charles Wyly tried to stash away $550 million by using clever and complex offshore accounts while using insider trading. The brothers were on various boards (Michael’s, Sterling Software, Computer Associates, & Sterling Commerce) which let them trade using non-public information. This most likely case similar to Michael Milken back in the 1980’s when he worked at Drexel Burnham. From the SEC’s standpoint they want the brothers to admit they committed wrongdoing and to pay hefty fines and penalties. However did the Wyly brothers really commit a crime? I have a feeling that the brothers will make some large payout and most likely avoid any hard time. When you have a billion dollars you can hire superb law firms to be at your beckon call 24/7.
Legislation from insider trading came from the Securities Act of 1933. The basic idea was that corporate insiders had more knowledge than the average person and it was unfair that the corporate insiders were making lots of money off their “insider knowledge” of the company. What strikes me is how few insider trading cases there actually are. The SEC usually goes after the big money in hopes to undercover a great scandal that can not only make the organization look better but also help their funding (think fines and penalties). There really is no fundamental reason why insider trading should be illegal. The premise that the “corporate insider” makes oodles of money.
Michael Milken paid out $1.1 billion in lawsuits when he was convicted of insider trading (around $200 million in fines alone). I am quite sure the SEC could find some great new programs to finance with this money. Even though Michael Milken is a criminal in the eyes of the SEC what about all the companies that were able to be started or able to avoid bankruptcy because of his genius?
Now back to the Wyly brothers. The SEC believes that the Wyly brothers have done something wrong through their overzealous regulatory eyes. Insider trading makes the market less transparent and less efficient. Since people who really know the truth (insiders) are unable to convey what they know by buying and selling, the market has less information for other investors to use. If someone knew that the earnings of a company were not going to be good they could short the stock sending the market a signal of the truth. By waiting until the actual earnings come out there would be more surprises. Allowing insider trading would also decrease corporate fraud because people within the company could sell their options to signal that they did not have faith in the company. If there really was a scandal the market would be made aware and the SEC could take action much faster since they wouldn't have to spend years and resources trying making a case since the market would do it for them. The average person could also benefit because if they had valuable information they could sell it to some hedge fund or institutional investor. Companies could still voluntarily have rules against employees selling information, but the more information the market has the better. Insider trading already exists in other realms. For instance, if a geologist is offering to buy a house under Farmer Ted’s land and if the geologist knows there oil under the land the geologist does not have to disclose this. Only if the geologist was working for Farmer Ted would he have to disclose this information. Clearly, there is a situation of asymmetric information where one party knows more than the other but this is considered a clean and honest business transaction.
Sam Wyly started and created businesses from nothing and built them up reselling them for even more. His first business UCC started with only $1,000 and in eight years had $125 million in sales. He also cofounded Sterling Software and sold it for $4 billion. These businesses not only made him wealthly, but they also gave people jobs, wages, healthcare, and made other people better off as a result. Although the SEC may believe the Wyly brothers are bad and "greedy" men, I would contend that they have done wonders for the economy and have improved the lives of hundreds of thousands if not more. While the SEC may disagree with this we must remember the words of Milton Friedman who said ,“You want more insider trading, not less”.
Friday, July 16, 2010
IRS, Mail, & USPS
Interesting the IRS the organization that can’t even seem to follow its own rules is now not even able to deliver notices to taxpayers. According to the Treasury Inspector General for Tax Administration “The IRS sends out approximately 200 million notices and letters each year to individual and business taxpayers and their representatives at a cost of $141 million. In 2009, approximately 19.3 million of those mailings were returned to the IRS at an estimated cost of $57.9 million”. In a sample of 331 notices 37% were deliveried to an address that didn't exisit, 35% were the wrong address , 24% were delievered to an address where the taxpayer wasn't home (certified or registered mail). 72% of e the sample noticed didn't even go to were they were suppose to go.The United States Post Office is within the same city as the I.R.S. Yet what is even more interesting is that the USPS lost $3.79 billion in 2009. Let’s be reminded that the USPS does not pay taxes like ordinary businesses do! This story illustrates how comic if not tragic on how inefficient government programs are.
Link to report: http://www.treas.gov/tigta/auditreports/2010reports/201040055fr.pdf
Goodbye Hollywood
Well is looks like Hollywood futures will not be premiering anytime soon. The House of Representatives and Senate banned movie box office trading. Clearly, Congress and Hollywood don’t really like the futures/prediction markets. These markets usually try to accurately predict the future based on how people are betting.We already have this with Intrade which predicts the winners for American Idol and political candidates. Basically, the way this market would work is that people could bet on whether or not a movie would make a certain amount of money. Despite what Congress and Hollywood it would be good to allow people to put their money where their mouth is and bet on their convictions. For instance, people who don’t know anything about horseracing stay away from the track. The same thing would happen with the Hollywood futures market. People who only knew the most would bet and others would stay away. We already a predictions market for political candidates, the stock market, and the price of commodities why not extend this to Hollywood. However, what if we were already able to predict the winners and losers of the box-office?Researchers at the Hewlett-Packard's Social Computing Lab published a paper that Twitters in essence can predict box office returns. Based on 3 million “tweets” researchers were able to figure out whether people liked or didn’t like a movie based on what people tweeted. In fact, the tweets were able to perform better than the Hollywood Stock Exchange (HSX). If we had enough “tweets” we could predict many more things. For instance, couldn’t we predict where people would be likely to go, what their eating, and how they like to spend their time? This looks like a marketing goldmine to me. Although, I think it would be hard if not impossible for the House of Representatives or The Senate to ban Twitter.
Link to paper: http://www.hpl.hp.com/research/scl/papers/socialmedia/socialmedia.pdf
Financial Regulation and Unintended Consequences
Yesterday, the Dodd-Frank bill was passed in the Senate with a vote of 60-39. The bill is 2,319 pages long and doesn’t fix anything. I would be willing to bet that no Senator or the President has read every word of the bill. Why not have a bill that requires people in congress to read a bill and have a little quiz before they vote on it? If someone in the Senate of Congress can’t understand 70% of a bill why in the world should they be voting on it? The bill will no doubt have unintended consequences. Also there will be no doubt that when we have another “Great Repression” as Niall Ferguson has labeled it that politicians will be blaming: greed, greed, and greed for the cause of the financial crisis. The “greed” argument is weak because if greed was the cause in the most recent crisis why haven’t we had more recessions? I concede that banks and financial institutions made bad business decisions, but that’s part of the profit/loss system. The government continues to bail out not only banks but companies (Lockheed Martin, Chrysler, GM). Bailouts create future moral hazard and will lead risk takers to take even more risk. Why don’t we get Freddie and Fannie Mac out of the mortgage business? I don’t understand why “affordable housing” should be set as a national priority. Now politicians Washington D.C. (a.k.a. Jupiter) are trying to dream up a fix when what they really need is less regulation and not more.Although no one in the world understands the bill completely let’s work with what we do know. The first part is the “Too Big To Fail”. Regulators would be able to break up trouble companies if the regulators felt the troubled firms posed a threat to the economy. Couldn’t regulators then break up BP if they felt it posed too big of a threat? Another part of the legislation regulates derivatives and requires hedge funds to register with the SEC. This is another idiotic move considering that many companies other than financial institutions use derivatives. In theory, insurance is a derivative because the premium is derived off the risk of the person who is getting the insurance. Stock options are also derivatives because they are based off the price of the underlying stock. Companies like Southwest hedge the price of fuel with futures or derivates contracts. Regulation will increase the cost of derivatives which will be passed on to consumers. The most damaging piece of part of the bill is that the bill establishes the Bureau of Consumer Finance Protection. The agency will establish rules for consumer finance and enforce regulations that cover mortgages, credit cards, and other financial products. Was the Senate aware that we already have the SEC, FTC, and contract law that already addresses this? Clearly, the Senate has not thought about all the unintended consequences that this will bring. As I write this (day after the regulation has passed the market is down -1.5% and the VIX (fear indicator) is up a whopping 10%. It looks like the law of unintended consequences is already at work. I am thinking of a new relationship between regulation and consumer knowledge. I see regulation and consumer knowledge inversely related since people “believe” that regulation will protect them. As regulation increases people will know less and have less incentive to know more. People today have more information than any other generation in history. Therefore there is no excuse to not know. My philosophy is when markets fail use even more markets.
Friday, July 9, 2010
TCU Admission Rates & Freshman Enrollment
The chart shows TCU acceptance rate and freshman since 1979. As the chart shows the acceptance rate has decreased from around the 90% range to currently a little below 60%. Freshman enrollment hasn't really seem to grow that much over a 30 year period. I attribute this to TCU wanting to keep smaller class size and since it is a private university it really doesn't need to worry about funding as much as public schools do. Hopefully TCU can keep decreasing the acceptance rate to be in competition with SMU, Rice, Baylor, and other schools within Texas.Source: TCU Fact Book
Tuesday, July 6, 2010
Paul Krugman on Colbert
Either Paul Krugman is schizophrenic or he needs to give back his Nobel Prize in Economics...
| The Colbert Report | Mon - Thurs 11:30pm / 10:30c | |||
| Unemployment Benefits - Paul Krugman | ||||
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