Sunday, June 1, 2008

Insider Trading: A speculation

Paul Rose, an assistant professor of law at Moritz College of Law, Ohio State University, has circulated a draft of a paper, it seems, will be published later this year by the North Carolina Law Review, simply entitled “Sovereigns as Shareholders.”

As that title implies, the article deals with "sovereign wealth funds" (SWFs) and their investments, especially their equity investments, and discusses a variety of legal puzzles that may arise.

One scenario briefly addressed in that article is that of a peculiar sort of insider trading. An SWF, as the arm of sovereign nation Z, could learn that another arm of said sovereign is about to bring an enforcement action against, or impose a costly regulation to the disadvantage of, company X. The SWF may then sell (or short) its company X stock, and/or increase its investment in the equity of one of X’s competitors.

My own take, frankly, is that this is the sort of speculation (Mr. Rose doesn’t adduce any example of such an event in the fifty-plus years during which SWFs have operated) that helps stoke irrationality on the subject.

But, hey, let's speculate. Assume away my usual caveats about why 'insider trading' itself is considered problematic. Would it be possible to keep such maneuvers a secret? It seems to me that what Z and its fund were doing in such a case would be very visible, and would work against the fund’s long-term return as diversified investors, while also undermining Z as a desirable business climate.

These are probably two good reasons why it hasn't happened.

Go, Buckeyes! Go, Tarheels!

Of course, ideally I'd rather not have sovereigns investing in US equity. I'd rather all the equity of private-sector entities be truly private in character. For that matter, if ideally I'd rather not have sovereigns. Period.

But the world does have sovereigns, and one of them, the US, owes a heck of a lot of money to many of the others. Those others are naturally going to re-invest that money somehow, and it is in general a good thing that they invest much of it back in the US, in forms which subordinate themselves to market principles. This isn't a situation that should cause hysteria.

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