Tuesday, September 23, 2008

US equity prices

There's been an inordinate amount of punditry in recent days linking the rise and fall of US equity prices to the prospects of Wall Street bailout legislation in Congress.

I was just listening to such talk on morning television, along with admonitions that "bailout" isn't the right word. It's a "rescue." Well ... excuse me.

Either way, I'd like to interject some skepticism about that link. The market didn't rise Friday, I submit, because it had decided that the "Paulson plan" will pass and prove wonderful. The market rose Friday because the SEC banned short selling on a wide range of stocks.

If you arbitrarily exclude a certain class of sellers, then you've jiggered the prices in favor of a rise. How complicated a concept is that?

Likewise, I submit, the market didn't fall Monday because the market has suddenly become worried Congress won't pass the bill after all.

More likely, it fell because evidence accumulated over the weekend that the SEC isn't all that serious about the short sale ban, and that it won't last. That, by the way, is very good news and we should welcome Monday's decline as part of the natural equilibrium-seeking process for unjiggered prices.

On the broader point, Gordon Crovitz had a fascinating op-ed piece in yesterday's WSJ, under the headline "Information Haves and Have-Nots."

The money quote. "There are now about half as many Wall Street analysts as in 2000. Former New York Attorney General Eliot Spitzer eviscerated the profession with $1.4 billiuon in settlements and a new mandate for how the industry would be structured, which made the analysts uneconomical....The now-former senior executives at Bear Stearns, Lehman and Merrill must wish they had been able to retain all those star banking analysts."

Another Spitzer legacy that has contributed to our present troubles was his Ahab-like pursuit of Hank Greenberg, effectively kicking him out of the executive suites of the insurance company Greenberg did so much to build -- AIG.

The US government has now effectively nationalized AIG, on the ground in essence that Greenberg's successors couldn't handle the job. Well ... why does he even have successors???

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