The Discussion Schapiro Sidestepped

SEC Chair Mary Schapiro

SEC Chairman Schapiro made a disappointing comment at last week’s open meeting (see the July 15 post):

Rather than passing judgment on the merits of securities lending, this release examines questions of whether the lenders of securities need information sooner about the content of upcoming shareholder meetings than they now generally receive it.

Translation:

Rather than even allow a discussion of whether lending of shares should be allowed, the SEC is exploring ways of facilitating the practice.

Fine. Let’s have The Discussion Schapiro Sidestepped here on our own forum.

Two decades ago, anyone who claimed our stock market had become a casino would have been dismissed as some sort of socialist. Not any more! After a decade of extreme volatility, two market panics, zero returns and widespread manipulation, it is patently obvious our stock markets serves Wall Street and not investors.

Securities lending is one of the quintessential attributes of a speculative market. Since you have to borrow shares before you can sell them short, securities lending is essential to short selling. Short selling has nothing to do with investing. Its purpose is to provide speculators another way to bet on the market—another way for Wall Street to earn trading commissions.

Short selling is defended on two grounds. First, it is argued that short selling helps markets correctly price securities. This is patently false because there is no such thing as a “correct price” for a stock in the first place. Two markets, regulated differently, may arrive at different prices for a given share of stock, but there is no basis for claiming one of those prices is more “correct” than the other.

The second argument in support of short selling is that it adds liquidity to a market. Because short selling facilitates trades that would otherwise not take place, this may be true. But who ever said our stock market has a liquidity problem? Daily trading volumes are staggering. The legitimate needs of investors would be fully served if trading volumes were one one-hundredth of what they are. Trading, like gambling, is a zero sum game (that is, before you subtract out Wall Street’s or the casino’s commissions or cut). Short selling adds liquidity? Maybe, but no thanks.

What short selling does do is make a mockery out of the notion that shareowners actually own the corporations they invest in. When shares have been loaned and sold short, who actually owns them, the party that loaned them out, or the party that purchased them from the short seller? No one wants to deal with that knotty little question. In theory, it is the latter who owns the shares. But in a world, where a broker might lend your securities without ever telling you, the broker doesn’t want to break the news that you can’t vote the shares. In practice, both parties—lender and buyer—are allowed to vote. This practice is so common it has a name: “overvoting”. In Schapiro’s stock market, one-man-one-vote is less important than short selling, and corporate elections are a charade.

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