ANYTHING GOES!

To: The Rittenhouse Review
From: M.P.
Date: March 17, 2003

Thank you for your recent post about the essay published in The Wall Street Journal praising insider trading. (See "We're The Wall Street Journal! We'll Print Anything!," The Rittenhouse Review, March 17, 2003.)

These guys are what George Soros calls "market fundamentalists." Anything goes -- On the assumption the market will adjust to insure fairness for all. That, of course, is completely wrong.

There's a huge problem associated with informing the public in a timely manner (say, about a company's "unreliable" bookkeeping), and Mr. and Mrs. America don't have the time to study the data and make decisions based on it. That's why we have regulation: Regulation makes an efficient market possible by ensuring there are common financial practices that we don't need to include in our analysis of a particular company's condition and outlook.

Anybody who wants a no-holds-barred approach to the market is merely making it easier for the scam artists to ply their trade. This extreme libertarianism leads to things like non-FDA-approved drugs (let the customer learn about and decide who to trust), unsafe products (if you get hurt, sue in court), and so on. [Ed.: Though the same "market fundamentalists" are now eagerly at work to limit liability for product manufacturers, physicians, and others.]

The after-the-fact pursuit of justice this philosophy leads to huge transaction costs that burden the economy writ large.

But as bad as the Journal article is, I think it does some good, demonstrating that Wall Street, or a portion thereof, is still unrepentant despite the massive scandals uncovered during the past several years.

No wonder the average investor continues to shy away from the market.

M.P.
(Name withheld by request.)

REGARDING THE CAMPAIGN

To: The Rittenhouse Review
From: David Salkin [ d_salkin@msn.com ]
Date: March 21, 2003

I must say that since you started talking about running for the senate, I have almost completely stopped visiting your site. I don't know why exactly, and it doesn't mean I wouldn't vote for you (because I probably would). I guess it's because I don't expect fair commentary on politics from someone wanting to be on the inside.

Best of luck with it anyway.

David Salkin

YOU MARCH, I'LL VOTE (FOR YOU)

To: The Rittenhouse Review
From: Rich Fritzson
Date: March 21, 2003

I recommend you try attending one of the larger anti-war marches or demonstrations. (See, "Who Marches Against War in a Cold Rain?", The Rittenhouse Review, March 20, 2003.)

I went to Washington, D.C., in October and again in January. I'm 49 years old. I don't like attending protest marches. I didn't like it during the Vietnam era and I don't really like it much now. They make me feel powerless, like I'm shouting at someone who has already left the room, slammed the door and locked it behind them. Nevertheless, I don't want my children (ages 19 and 16) to share that feeling.

When there are hundreds of thousands of people protesting there, are more than "true believers" around. We marched alongside people of all ages. For a while, I helped carry a banner held up by 10 people none of whom was younger than me. There were former hippies, current hippies, college students, lots of former military, senior businessmen, mothers and grandmothers, fathers and grandfathers.

We met a woman who had brought her 10-year-old grandson. She was legally blind; her thick glasses gave her an owlish appearance. He said they were going to look out for each other.

We learned something. We were marching to the Navy Yard along a street on which I'd never walked before. The crowd began to chant, "What do we want?…Peace!", etc. But on the sidewalks, the observers, the people who lived on that street, shouted "Justice!" whenever we shouted "Peace!" And I knew they were right.

Of course, being at a newsworthy event and then reading about it later teaches you to distrust what you read about other events. And we all need regular reminding of that.

One thing we all noticed on those days in Washington, one of which was very cold, was that no representative of the government, no congressman, no senator, no member of the executive branch, no judge, came out to address the crowd. It made it quite clear that no one in the government represented us.

I wasn't planning to mention this but it seems like a good closing:

If you decide to run for Senate against Arlen Specter, I'll send you a check. Don't get excited. I'm nobody. I'm only good for a few hundred dollars in political contributions. But I live in the conservative suburbs. I'll go door to door. I'll try to inspire political action in our church. I'll write letters. And I'll vote for you.

Rich Fritzson
Paoli, Pa.

MANNE IS STILL SINGING THE SAME TUNE

To: The Rittenhouse Review
From: A Boston Attorney
Date: March 17, 2003

Your readers may not be aware that Henry G. Manne has been making his argument about insider trading in more or less the same form since 1966. [Ed.: See "We're The Wall Street Journal! We'll Print Anything!", The Rittenhouse Review, March 17, 2003.) The argument, while radical, has a certain plausibility, and accordingly has provoked a great deal of productive thinking and writing on the subject of market efficiency. However, the consensus view is that insider trading does indeed harm stock market efficiency. The only serious disagreement among most authorities is whether it hurts a little or a lot.

Robert Clark, a professor of corporate law at Harvard Law School who is now dean of that institution, addressed Manne's arguments in detail in his 1987 treatise on corporate law. With respect to Manne's claim that insider trading provides incentives for managers, Clark remarks, "It is simply implausible to believe that explicit executive compensation schemes are inadequate to induce managers to work vigorously for corporations." I doubt our experience with executive compensation over the last 15 years has changed Dean Clark's opinion on that subject.

(Also, Frank Easterbrook, a professor of corporate law at the University of Chicago, appointed by former president Ronald Reagan to a federal court of appeals, in 1981 observed that where managers engage in inside trading, they actually have perverse incentives to engage in risky ventures: If a risky bet pays off the manager can capture the gain by insider trading and if it doesn't the shareholders bear the cost. Clark refers to this as the "heads-I-win-tails-you-lose nature of insider trading.")

Clark further notes, "Insider trading allows managers to profit from their bad management….By using advance knowledge that the company's fortunes have taken a turn for the worse, they can sell their shares and avoid participating with other shareholders in the disaster."

This is the allegation currently directed at Sam Waksal of ImClone Systems Inc. and his friend, Martha Stewart. While I have no knowledge of the details of that particular case, Clark is plainly correct that there is no social benefit from permitting someone in that situation to profit from their advance knowledge of bad news.

Clark agrees with Manne's claim that insider trading helps to correct prices -- indeed, any trade on an open market has that effect. But Clark goes on to cite the landmark 1984 paper by Ronald Gilson and Reiner Kraakman, arguing there are far more efficient ways of ensuring that a company's stock price reflects material information about the company, such as requiring that the company's officers publicly disclose such information. That is in fact what the federal securities laws require.

(Gilson and Kraakman are themselves noted authorities on corporate law. The former is now at Stanford Law School and the latter is at Harvard Law, but I believe they wrote "The Mechanisms Of Market Efficiency" when they were both on the faculty of Yale University Law School.)

In short, a great deal has been learned in the last 30-odd years from thoughtful consideration of Manne's once-provocative suggestion. Unfortunately, if unsurprisingly, none of that is conveyed in Manne's essay for The Wall Street Journal.

Signed,
An Attorney (Name withheld by request.)
Boston