The big financial stories this week are perfectly related. In order to smooth AIG’s reported earnings, Hank Greenberg entered into a questionable swap with Warren Buffet. It kept his stock up then, but now that investors have figured it out, his stock has gone from $70 to $50 and he has joined the unemployed. He should have let his stock trade wildly.
Fifteen NYSE Specialists were indicted this week for trading ahead of customers. Because of rules dating back to 1975 (the trade-through rule) Specialists have a virtual monopoly in the trading of listed stocks, but only if they abide by Rule 104: “No specialist shall effect on the Exchange purchases or sales of any security … unless such dealings are reasonably necessary to permit such specialist to maintain a fair and orderly market.” In other words, smooth out the trading of shares. But who wants their markets orderly? I like them wet and wild, thank you. It shakes out the weak of heart. Smoothing has its costs. In effect, according to the SEC enforcement division, Specialists have a license to steal.
Rather than spend money to retool when times were good, Ford (joining GM) skated with ugly, underpowered cars that only rental car companies bought. Now earnings have disappeared and the stock has halved in the last year. Smoothing caught up with Detroit; they should have taken their lumps years ago.
Americans are sturdy; why emulate European stability? We stand with whiny kids in 45-minute lines to ride on two-minute rollercoasters. We like volatility—give it to us.
Ever wonder why, when a company misses its earnings target by a mere penny (like eBay in January), its stock drops like a rock? Because investors know there’s no more ammo left to smooth with. If they couldn’t smooth that last penny, it’s all over.
So many in charge think they need to shield us from ups and downs. Alan Greenspan cuts rates and floods the market with dollars in order to stave off a recession and get the dollar lower to appease manufacturers. We got few new jobs, but, instead, an overheated housing market so these new workers are renters.
A quick, deeper recession might have been useful for changes, like forcing bloated airlines into the hands of new management. Instead they bleed to death, drip-drip-drip. Manufacturers lose out to cheap imports and instead of finding some new business to get into, hire lobbyists to put 27% duties on Chinese products.
Americans are sturdy; why emulate European stability? We stand with whiny kids in 45-minute lines to ride on two-minute rollercoasters. We like volatility—give it to us.
Yet we’re a society of safety nets to smooth our lives. Corporate pensions save for our retirements, the PBGC insures their solvency and Social Security backs them both up. Thank goodness Ken Lay isn’t Japanese or Enron would still be alive.
Recessions clean up past business mistakes. Crises force legislators to cast politically difficult votes. Low stocks remove access to capital from questionable companies. All good. At the end of the day, smoothing is for wusses.
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