Consider re-regulation
The volatile but engaged Jim Cramer talks about the bear raid on Merrill Lynch, which fell 11% after the 400 point rally the other day (a similar raid just took place on HBOS PLC in London):
Can you believe this Merrill Lynch raid? Shorts are knocking this one over with a feather. They are crushing it, using several time-honored rumors, including massive writedowns coming and a massive dilution coming.
It is time to consider regulation or re-regulation of certain behaviors. The end of the uptick rule has made it easier for the sabre toothed hedge funds to mount such bear raids on stocks like Merrill Lynch. (Indeed, the hedge funds themselves, shrewd, soulless, and red in tooth and claw, need an effective and internationally coordinated framework of standards.) And the end of the Glass Steagall Act in 1999 arguably made today’s shenanigans in the mixing or insurance, commercial banking, and investment banking, much easier. Along with national defense, the preventing of systemic financial panics seems to us an important and critical role for the central government. We certainly know what happens when that central mission is ignored.
Alas, both a Democrat and Republican administration appear sometimes to have forgotten. Adam Smith, patron saint of capitalism’s invisible hand, which produces the greatest wealth for the greatest number: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.” The hedge funds and their fellow travelers cannot be trusted to be self-regulating or to serve stability or the public interest — indeed, the opposite is easily true.
Moreover, with $45 trillion in unregulated credit default swaps outstanding, imposing a thoughtful and considered regulatory scheme on such a large, opaque market, as well as the issuers and buyers is of the utmost urgency. In the wake of the various meltdowns of the past decade or so, from runs on various LDC currencies and markets, through LTCM, Russia, Enron, the subprime market, and spectacles like Northern Light and Bear, the need for increased standards, monitoring, international coordination, and enforcement is greater than it has ever been,
In our view the place to start is with increasing meaningful disclosure up and down the financial supply chain. We do not need more poorly thought out and foolishly burdensome structures like SarbOx, but it is surely true, from the rating agencies through the hedge funds, through the murky, hard to quantify world of counterparty risk, the lack of transparency and oversight today has resulted in markets in which part of the risk profile is not just the players themselves, but the degree of unknowability about risk that the poorly engineered oversight system itself produces.