SEC: non-report on 1000 point drop in Dow Jones

After a weekend of heavy-duty gardening your correspondent is back to the real world. This comment on the SEC's effort to bring light into the precipitous 1000 Dow point decline on May 6 caught our eye: "If the SEC were charged with writing a report on the causes of the New Orleans flood, it would provide a hundred pages telling us how many cubic meters of water there were, how many molecules of oxygen and hydrogen the water contained, and plenty of assurances that water is usually good for the health, but it would forget to mention hurricane Katrina and the broken levy." (Mark Mitchell on www.deepcapture.com). We could not have described the lame response of the 'regulators' much more accurately. Thank God the 'accident' happened in the USA as a similar incident in London would have led to the creation of a 'Royal Commission of Inquiry' at the cost of millions of pounds in lawyer's fees.

Client or Counterparty?

The controversy about Goldman Sachs' sale of the Abacus CDO raises an interesting question: are counterparties of securities firms entitled to be protected beyond the requirements of the securities laws? In our opinion, the relationship between a trader (or any business) and a customer is by nature antagonistic: one wants the highest possible price while the other wants the lowest possible one. As noted by Adam Smith, the best safeguard is an open and competitive market. This allows the 'invisible hand' to produce an outcome where both parties to the contract pursue their own (egoistic) interests and the best outcome for both of them (and society) is produced at the same time.Unfortunately, too many customers of securities firms are lulled into complacency by PR, fancy 'research', 'seminars' and other freebies and forget to do their own homework. This applies not only to retail investors but paradoxically also to 'sophisticated' investors. Already the term 'client' is designed to make the customer's eyes glaze over and induce them to think that a friendly uncle is going to sell them the latest inventions of the quant wizards on the derivative desk. But the dictionary tells us that a client is 'One that depends on the protection of another'. In reality the term should really only be applied to clients of doctors or lawyers. Fee-based financial advisors in private banks and traditional money management firms can also claim to be on the investor's side.
To ask for full disclosure from a securities dealer would be like asking a Bond Street jeweler to disclose the production cost of the latest Rolex watch and 'advise' the customer on the merits of the purchase.

Goldman PR counterattack: Risking Overkill?

Goldman Sachs' PR machine is rolling and every television and radio station is running interviews with chief executive Lloyd Blankfein. It is OK to try to bring one's message to the public but when media appearances are so well orchestrated you risk overkill and create even more suspicions about the veracity of the message you try to convey.