Uptick rule to be reinstated

SEC chair Mary Schapiro had trailed this in a recent speech, but it's now definitely on the cards the FT reports. Cue much criticism from Wall Street no doubt, and accusations of regulators not knowing what they are doing. And actually there's a great line in the FT report that does not inspire confidence -

Fans of the rule - including Federal Reserve chairman Ben Bernanke and billionaire investor Warren Buffett - say its return is the easiest way to prevent bear raids on particular companies. The thinking seems to be that while there might not be any empirical evidence proving it provides any particular benefit, it does not do any harm either.

On this point, another hat-tip to Zedman who sent me some interesting research into the impact of shorting bans carried out by Credit Suisse (he also has a post about the uptick rule). They concluded that there may have been an impact, but it was dwarfed by other factors.

According to our analysis, the ban on short selling in Europe has increased bid-ask spreads on both restricted stocks and non-restricted stocks. The ban on short-selling has also removed the ability to hedge execution by going long/short an appropriate portfolio of stocks that would involve shorting the financial sector. The ban has effectively pulled the plug on a number of trading techniques incorporating this, resulting in lower intraday volumes.

This may be a sign that the ban has managed to curb part of the aggressive selling in Europe financials. However, the impact of the regulatory change has probably been dwarfed by the continuous negative news flow and sentiment on the financial sector since the ban – as demonstrated by the continued fall of the major indices following the initial jump caused by the ban.

Personally, I'm not convinced that such interventions achieve anything practical, though I'm not really decided either way as yet.

Finally, just as a reminder here's the door that Turner left ajar in his review of regulation:

Should decisions on for instance short selling recognise the dangers of market irrationality as well as market abuse?

Bits and bobs

1. CTW is calling for the clawback of ML bonuses

2. There's an RSA paper PDF encouring long-term investing. It's a bit of a rant, and some inaccruate/outdated generalisations in there (about UK pension funds' home bias in equities for example). But hey, who am I to criticise.

3. The news that Aon is cutting contributions to its DC scheme is, I reckon, a rather worrying development. It's a pay cut plain and simple. TUC response here.

On the money

Nice bit by Dave Osler on turncoat politicos, something I've blogged about a bit before. This bit is bang on target for most of us actually:

In psychological terms, when they denounce these forces, they are really denouncing their earlier self.

A lot of my critical posts about the Left are basically an argument with that ill-informed ranting 20-something I used to be. STill, at least now I have a son to take it out on...

Mixing our metaphors

This is a bit half thought-out, but one of the things I've been thinking about lately is how the financial crisis must be affecting people's understanding of individuals and organisations. What has happened must have altered the basic models people use for understanding both, to put it mildly. Pre-crisis, many in the financial sector seemed almost literally 'out of touch'. This is based on the idea that many metaphors for hierarchy and importance are based on height. Somehow the bankers were 'above' us, or we were 'below' them, because (I think) our basic conceptual model of importance is actually spatial, because our metaphors are rooted in physical experience.

Now, however, the masters of the universe have been proven to be less than impressive. So how do we respond mentally? Our conceptual model can surely no longer be based on them being above us, they are on the same level, within reach. Unfortunately I'm sure this must make a difference to people's willingness to physically attack them, but that's another story.

Another good way of thinking about how people models have changed - echoing Warren Buffet's line about people swimming naked - is the idea that bankers have been unmasked, or revealed as just as ordinary as the rest of us. The curtain has been pulled back. Again mentally this puts them on the same level - their previous elevation was based on false construction. And I think this must do some serious damage to the standing of those in the financial world, because for a while people will tend to assume that this applies across the board.

By coincidence whilst I was thinking about this I came across a great passage early into The Great Crash which puts across exactly the same idea:

In the autumn of 1929 the mightiest Americans were, for a brief time, revealed as human beings. Like most humans, most of the time, they did some very foolish things. On the whole, the greater the earlier reputation for omniscience, the more serene the previous idiocy, the greater the foolishness now exposed. Things that in other times were concealed by a heavy facade of dignity now stood exposed, for the panic suddenly, almost obscenely, snatched this facade away.

One to think about some more...

Accountable capitalism

There's an interesting new paper from The New Capitalists authors David Pitt Watson etc under the IPPR imprint. It's called Towards an Accountable Capitalism.

Unions & exec pay

There are a couple of interesting bits in the FT today about executive pay and both of them involve unions. First up, the TUC is suggesting that employees should have involvement in remuneration policy.

"What would be so radical about seeing workforce representation involved in remuneration committees of major companies to try to inject at least some sense of perspective with how the rewards at the top relate to the pay structures across the organisation?"

So says my old boss Brendan Barber.

I can already imagine the irritation this will without question have caused a couple of fund management people I had to deal with in the past who weren't exactly union-friendly, and for that alone I think this is a worthwhile proposal.... ;-) But more broadly, if any institutions do think this is a fundamentally bad idea they must be able to demonstrate a) why it would be worse than the current system where shareholder oversight has not proved effective and b) that their own track record on pay is a good one.

And point b) brings me on to the other story, which is actually based on this research. No surprise really, but US mutual funds are actually pretty weedy when it comes to voting against exec comp, or for resolutions seeking to rein it in.

And here I go on my soapbok again - I think we'd find a similar story in the UK (in fact I'm sure of it based on the data I've been able to find) but we aren't even able to produce a comparable report because fund managers aren't compelled to disclose their voting records, and as such many don't make any data public. This is a simple reform that Labour can enact, as it took a reserve power in the Companies Act that could be used to mandate disclosure. Surely the public interest argument in favour is much stronger now, so why not go ahead?

Some random Sunday evening thoughts

1. I think there's a danger of learning entirely the wrong lessons about remuneration from the financial crisis. The bottom line IMO is that incentives have not worked. I don't think most people believe that bankers mindlessly did the wrong thing because that was how they would benefit personally. The problem is that they believed in what they were doing, and as such didn't know what they were doing. Therefore seeking to resolve this problem by redesigning incentive schemes I think is missing the fundamental point.

There's an implication in here somewhere that 'good performance' at a senior level is both measurable and identifiable in advance. I'm not at all confident about the former (because of the inability of individuals to control organisations - so what exactly are you going to measure?) and I have doubts about the latter. But even supposing that you can come out with some medium- to long-term targets, why not just contractually oblige bankers to hit them as part of the job, rather than pay them more to do what they should be doing? If you still want to try and link to organisational performance at least that way if they do really badly you can sack them, rather than just paying them less. At present exec pay seems to work simply to pay out a lot more when the whole market is doing well and slacken off during market dips.

2. I've noticed a tendency most often (but not exclusively) amongst Righties, to dismiss the G20 protestors and similar as 'emotional'. Whatever you might think about last week's protests, as a pejorative term I think 'emotional' is pretty weak. It implies that there is a distinction between those reacting emotionally, and those with cool heads responding rationally. But there's a pretty convincing argument that we need our emotions in order to make decisions and are part of being rational. Therefore to label those you don't agree with as 'emotional' to me suggests a belief in the split between mind and body.

3. Post-shareholder-centric governance. It's on the way I tell ya. Look at the G20 blurb on remuneration, shareholders are relegated to being just another stakeholder:

firms to publicly disclose clear, comprehensive, and timely information about compensation. Stakeholders, including shareholders, should be adequately informed on a timely basis on compensation policies to exercise effective monitoring.