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Chronicle of the Conspiracy
Join us as we discover, document, expose and challenge the bad people, the bad institutions and the bad ideas that stand in the way of wealth creation -- and show you how to fight back!
Friday, November 01, 2002
GOOD JUDGMENT Federal judge Colleen Kollar-Kotelly's approval of the settlement between Microsoft and the Department of Justice, as well as a number of cooperating states, was the best possible decision -- given that Microsoft's business is a court's business to begin with (which it's not). Kollar-Kotelly struck a powerful blow against the state attorneys general who had tried to block the settlement, seeking harsher penalties and all manner of competitive remedies. The judge strongly rebuffed the states attorneys general's scorched earth approach of bringing "all existing allegations of anticompetitive conduct -- which have not been proven or for which liability has not been ascribed." She ruled, "This court has had little choice but to reject [those states'] remedial suggestions on the grounds that they are unjustifiably in conflict with the imposition as well as the rejection of liability in this case."Setting herself against the angry and punitive tone of her predecessor in this case -- Thomas Penfield Jackson, whose judgment was overturned on appeal because of its arbitrary harshness and because of the judge's clear prejudice in the case -- she wrote, "Ultimately, the goal of a remedy in an equitable suit is not the 'punishment of past transgression, nor is it merely to end specific illegal practices.' Equitable relief in an antitrust case should not 'embody harsh measures when less severe ones will do,' nor should it adopt overly regulatory requirements which involve the judiciary in the intricacies of business management."
Bravissima!
Posted by Donald L. Luskin at 7:50 PM | link
Thursday, October 31, 2002
THE STOCKHOLM SYNDROME AT THE WALL STREET JOURNAL? The markets, big business and Wall Street have been held hostage by politicians and regulators for so long that the hostages are starting to identify with their kidnappers. How else can you explain today's Wall Street Journal front pager, breathlessly recounting the high drama of how New York attorney general Eliot Spitzer, SEC chief Harvey Pitt, and NYSE chief Richard Grasso resolved their differences and finally agreed on how to give Wall Street stock research the third degree together. The report is loaded with fawning personal and social details normally reserved for reporting on the movements of celebrities in rags like People magazine -- what clubs they dined at, what they ate, and so on. It's a portrait of superstars drawn by a reporter who is deeply in awe of his subjects.Within this reportorial perspective, Harvey Pitt comes off poorly because he's the only one of the three who has deliberately tried to be something less than a superstar. Pitt respects the SEC's long-standing regulatory tradition of incremental change with informed industry participation. Spitzer, on the other hand, is portrayed as a dynamic crusader -- the brave gunfighter who's come in to clean up the town that was too tough for Pitt to tame. Grasso is portrayed as the wizardly counselor who managed to politely kick Pitt upstairs, leaving Spitzer free to unilaterally impose sweeping restructuring on a vast and venerable industry.
This is how the conventional wisdom gets formed. The issue at stake -- whether Wall Street stock research is or is not a crime-ridden wild-west town that needs to be cleaned up -- is simply assumed away. All that matters to a story like this is the melodrama of how the superstar posse of crime-busters resolved their relationship problems -- and what they ate -- on the way to rounding up the bad guys and slaughtering them. The effect is not only the idealization of regulators and politicians -- it is the embedding of the presumption of the righteousness of their cause, embedded so deeply that it is deemed not worth even mentioning while the idealization is going on.
Posted by Donald L. Luskin at 12:17 PM | link
Wednesday, October 30, 2002
DEFORMED REFORM The proposed restructuring of stock research at big Wall Street investment banks -- if "proposed" is the proper word when NY attorney general Eliot Spitzer is doing the proposing holding a rubber hose in his hand -- is an even worse-than-usual regulatory solution to a problem that isn't even a problem.The problem is securities fraud, pure and simple -- the giving of investment advice known to be false. Supposedly Merrill Lynch committed such fraud, as evidenced by an e-mail from once-superstar Internet analyst Henry Blodgett in which he privately called a stock he was publicly recommending a "piece of shit." With that Blodgett became the most expensive writer in history, costing Merrill $33.3 million per word in a $100 million settlement with Spitzer. Who knows if real fraud was involved. For a firm dependent on its credibility, up against the infinite prosecutorial resources at the disposal of Spitzer, 49 other state attorneys general, the SEC and several other layers of regulators, and an army of plaintiff's lawyers, it was probably the smart thing to do to write that check. That was just a down payment. Now Spitzer and his co-conspirators are giving the whole investment banking industry the third degree. No doubt every Wall Street firm correctly fears that in the thousands of emails sent with presumed privacy between employees, things might have been said that could be turned into fraud cases. So now the whole industry is scrambling to settle.
The proposed settlement does not address the problem of fraud. It is not a punitive cash fine designed to punish the fraud, make reparations to the fraud victims, or deter fraud in the future by making it prohibitively expensive. It's not really about fraud at all. Instead, it's about requiring big Wall Street firms to make a big, silly do-gooding gesture. Under the proposal, they must jointly pay a billion dollars into a fund that would pay for independent stock research -- performed by analysts not affiliated with the firms who put up the money. This research would then be distributed at no cost to the customers of the Wall Street firms.
It's hard to know where to begin in cataloging everything that's wrong -- no, just downright loony -- with this solution. First, it has nothing to do with the problem it is trying to solve -- fraud. It leaves the alleged fraud unpunished. All it does is make the alleged perpetrators perform a service behalf of their customers that they wouldn't otherwise perform and that the customers may not otherwise want -- it's not a deadweight cost like a fine paid to the government. And it's not at all clear how subsidizing independent research will make the world a more fraud-free place for investors. If affiliated research is fraudulent, then it should be outlawed -- what's the point of leaving the fraud in place and diluting it by increasing the amount of independent research?
Second, who is going to determine, and on what basis, which independent research organizations will be blessed with the subsidy, and which will not? If the criterion is customer demand, then the money will go to research firms that are already successful and need no subsidy. If the criterion is need, then the money will go to firms for which no customer has ever expressed any demand -- and presumably these firms produce the least valuable research. If the regulators pick who gets the money, we can be sure it will end up going to firms run by minorities, women, the disabled, and Vietnam-era veterans -- and others similarly unqualified to produce high quality stock research other than by the fact that they were lucky enough to be unlucky. If Wall Street chooses, it will go to research firms headed by people with the best connections on Wall Street, throwing into question the whole notion of their independence.
And third, there's no reason to think that anyone will even read all the independent research that will be subsidized. Most likely the big Wall Street firms will just dutifully mail it out to their customers en masse, reducing the perceived value of the independent research to that a statement stuffer that comes with the water bill.
This proposed solution assumes that the problem to be solved is the competitive structure of a profession. But the real problem is fraud. The attorneys general and the regulators should be focused exclusively on detecting, deterring and punishing fraud. Once that's done, investors will figure out who they want to buy their research from, and how it should be paid for.
Posted by Donald L. Luskin at 12:16 AM | link