Asymmetrical Information

I usually try to ignore my press clippings - it helps me sleep easier at night. But, you sir, have dumped pigeon shit on me. First of all, of course there are legal and regulatory issues to consider. That’s obvious. But I don’t think that getting Merrill Lynch to settle for a large sum of money without admitting or denying any wrongdoing is going to solve much. I’m trying to think outside of the box and suggest a solution, while you seem to prefer the status quo. Secondly, your point about that 15-year-old kid Jonathan Lebed is spot on. But Lebed was attempting to manipulate the market! Or, in the words of the SEC’s Arthur Levitt: “Buy, lie, and sell high.” In other words, he maintained a position in the stock at the same time that he was touting the stock -without disclosing this fact. Moreover, he created numerous alternate personalities to give the impression of size. But, as the story you linked to from the New York Times (excerpted from chapter 1 in NeXT: The Future Just Happened) makes clear, the difference between the 15-year-old-kid stock market manipulator and the rest of the cast of Wall Street manipulators is unfortunately quite small, even negligible. And, as the article makes clear, the SEC regulators don’t have a clue about what’s really at stake. So your comment about the “long arm of the securities regulator” would be more aptly expressed as “the withered, stump arm of the securities regulator.”

In the commentary you promised about securities legislation, you might mention, oh, I don’t know, maybe one of the following:

(1) The efficacy of the two major securities laws in the USA, both of them drafted during the 1930s in response to the Great Depression- and their suitability for the technology-led reality of the 21st century
(2) Whether the current problems on Wall Street are simply the case of a few “bad eggs” or whether it is a systemic problem
(3) If it is a systemic problem, which of the following solutions do you advocate: a regulatory solution, a self-regulatory solution, a market-driven solution, or perhaps, let’s do nothing. All your exclamations about “compliance infrastructure” are well-taken, but I specifically took pains to note that the hypothetical research blogs were not buying and selling stocks. That's the whole point.
(4) The purpose of US securities laws, which as I understand, are basically to protect “widows and orphans,” not, say, the wealthy New Jersey investment banker. Maybe that's why hedge funds are not regulated- people assume that millionaires know a thing or two.
(5) The legal and regulatory difference between “investment bank,” “brokerage,” and “independent research firm.” In a recent edition of Crain’s NY Business, you might be interested to read about the growth of independent research firms as a counterweight to Wall Street research.

Yes, yes, caveat emptor. Of course! Why didn’t I think of that! I can suggest one for you: “Bulls make money. Bears make money. Sheep get fleeced. And pigs get slaughtered.”

Anyway, have a nice vacation in London. Maybe snap a few photos of pigeons in Britain and run a special “Rapid Droppings” to replace your Staten Island pigeons.

1. I did not dump pigeon shit (see bird correction below) on you. I like the idea, but know I couldn't do it, and neither could many other professionals.. Simply put, I'd love to run an investment blog but I can't because regulations make it impossible. I NEVER discuss investments here. Two other bloggers have written to me to express the same frustration.

Allow me to restate my point - blogs could be an interesting independent source of invesment information, as you point out. However, existing regulations would make it difficult, if not impossible, for them to exist as you describe them.

2. Who says I prefer the status quo? Regulations enforce the status quo. I'd love for your idea to be more workable.

3. I read Next as well. Lewis did a great profile. His story reinforces my point - he did something only a few shades apart from Wall Street, but he did it on the periphery (and on the 'net) and the SEC came down on him as hard as they could. Once again, regulations fought hardest for the status quo.

4. I am intrigued at the way you relate the Merrill settlement to this. My point relies more on the longstanding (but still growing) restrictions on all forms of client communication/marketing imposed on those involved in the securities industry, and the penalties for those outside the securities industry who start to act within it (like Lebed, or our aspiring bloggers).

Look more closely and you'll see the bird is a Jersey City Seagull, You'll also see that you and I might actually agree on many of your comments about regulation.

Anyway, I look forward to coming back to this, unless its passe in the blogworld by my return.

Cheers.

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