Insider nirvana

Given that we can’t get any bi-partisan cooperation on really *important* issues like health care, budgets, foreign policy, global warming, and so on, it might seem a little surprising to see Democrats and Republicans reaching across the aisle to  support a financial reform bill, but that, apparently exactly what has happened.  In “Killing the 500-shareholder rule“, CNN reports that this new bill would loosen a financial reporting requirement affecting privately-held companies:

Senators Pat Toomey (R-Pa.) and Tom Carper (D-Del.) today introduced legislation that would effectively eliminate a rule that many have cited as the reason Facebook may go public next year.  It’s called the 500-shareholder rule, and basically means that a private company must publicly disclose financial data once it has at least 500 shareholders.

The new law would raise that shareholder limit to 2000, and would exempt employees from that count.  So why, dear friends, would our legislators be interested in fixing this problem, and why would the rest of us care?

Simple.  It’s all about transparency, which is the key to efficient markets.  Information is the grease that lubricates our markets.  In each and every market, buyers and sellers make a market when they agree on a price for a transaction.  When lots of similar transactions occur, and lots of people can see the prices at which these transactions occur, a market is said to be efficient, and prices move in correlation to actual changes in information.  When information about transactions is scarce, either because there are few transactions or because the information isn’t public, prices can vary considerably because buyers and sellers are forced to negotiate prices based on very poor information.

The stock market has always been the poster child for efficient markets.  Prior to the “information age”, it was hard to find a better example of homogeneous transactions (any share of GE common stock can be traded for any other share of GE common stock) and publicized values (beginning with the infamous stock tickers from a hundred years ago).  These factors, plus the liquidity afforded to these markets by their volume, created a magnificent capital allocation machine.

But imagine a world without the information we get from the stock market.  If you want to buy a share of Amazon stock, you’ve got no idea whatsoever how much you should be paying.  You can’t see what this share cost last year, last month, or last week.  You can’t tell how many shares have traded hands over any given period.  You are forced to rely 100% on asking price and your own financial analysis skills, fed by whatever financial information you can scrape up.  How might that affect prices?  More importantly, who benefits in a scenario like this?

If you answered, “whomever has the information” then pat yourself on the back.  They’re the big winners when information is scarce.  If you know the real value of an asset and you see it trading either above that price or below that price, you can make money on that discrepancy.

This isn’t the first time we’ve seen people who benefit from information opacity fight to keep the curtains drawn.  Realtors, car dealers, even employers have all benefited from having a little more information at their disposal than the folks on the other side of the desk.  In each of these cases, greater access to information has helped consumers level the field, and the old guard kicked and screamed the whole way.

It’s also interesting to note that in all these cases, the party that’s traditionally held the scarce information has been the party in power, and that’s the case here, too.  This bill wouldn’t have been introduced, and most certainly wouldn’t have been introduced jointly without powerful support from financial lobbyists.  Those of you in the “less regulation is always good” camp should pay attention here, because this is a little taste of what we’re going to get with less regulation.

In another article (“LinkedIn, others show why transparency is needed“), James Temple reminds us that several high-profile companies  have recently demonstrated a willingness to use suspiciously rose-colored accounting glasses while operating as private companies, only to have to fess up when public filing requirements forced greater disclosure.  In other words, if you think it’s hard to tell what assets are really worth today (see big banks), just ponder for a minute what happens to those values when companies can just make up any ‘ol numbers they want.

Again, when inside information is the only kind of information there is, then the only people we’d expect to benefit from a transaction are the insiders.

Occupy that.


About Fracking Time

Hydraulic Fracturing, or Fracking, is big news these days.  Here in Ohio, the Governor’s office is trying to convince folks that a shale deposit in Eastern Ohio promises gas (and jobs) for years to come.  Environmentalists all over the place believe that Fracking is nothing but trouble.

This post isn’t about them.

This post is about fracking operations in England that are believed to have caused some minor earthquakes.  These quakes, which occurred in April and May of this year, ranged from 1.9 to 2.8 on the Richter scale.  The Richter scale, by the way, is a logarithmic scale, which means that a 3.0 quake is ten times more powerful than a 2.0 quake.  Quakes of this magnitude are barely (if at all) noticed without instruments.

The folks near these fracking operations are concerned at the thought that fracking is causing instability beneath them.  I can definitely understand this concern, and it seems like a little more research might be in order before we do too much messing around with rock formations that keep us out of the sea and hold our water supplies.

In a rare glass-half-full moment, though, I’ll suggest that at some point in the not-too-distant future, I wouldn’t be a bit surprised to see us employ technology like this to relieve stress in some of the world’s most dangerous faults.  Done correctly, this seems like it might have the potential to turn “the big one” into a series of little ones — not a bad trade-off, I’d think.

Now, if we need more research just to be able to conduct fracking operations safely to begin with, we surely need more research before we start messing with fault lines, and I understand that there are different sorts of fault lines, and so on — I get all that.  But still, this seems like a perfect opportunity to snatch victory from the jaws of defeat.  Let’s hope scientists figure out how to repurpose this technology into something that can start saving lives.