On November 18, 2008 I gave a presentation to the local chapter of the American Association of Individual Investors (AAII) at the Multnomah Athletic Club here in Portland, Oregon regarding the overall state of the financial markets. The talk focused on how we arrived where we are and what to look for going forward. Also included were what I believe to be the six most important regulatory reforms– all of which could be implemented immediately– that would collectively turn around the economy.
These could all be passed and implemented in one week, the only missing ingredient being desire. It is somewhat astonishing how the current solution is focused on providing trillions of taxpayer dollars to various failed institutions when, if the objective is increased market confidence, these measures can be implemented with little or no cost. They are:
1) Requirement that hedge and private equity firms register with the SEC and disclose their top 25 holdings, top 25 sources of funding and key accounting policies on a quarterly basis.
2) Expanded oversight of bond rating agencies and requirement that Warren Buffett and other investors who do significant business with these rating agencies divest themselves of equity positions in the same rating agencies. Buffett is currently Moody’s largest shareholder.
3) Provide the SEC with oversight of public pensions, now the nation’s largest investment pools. They currently have no jurisdiction or oversight over such funds, which is simply astonishing given their growth and related impact on the market.
4) Expanded oversight of proxy firms and development of new competitors in this crucial area. Currently one firm, Institutional Shareholder Services (ISS), has a monopoly over the market. ISS is owned by Risk Metrics, a company that recently went public, whose primary owners are unregulated hedge funds. It is unthinkable that unregulated hedge funds would hold the levers over the most important entity with respect to corporate governance, the entity that votes key corporate resolutions for many leading fund managers regarding mergers, executive compensation, etc.
5) Stock option accounting must be standardized and based upon values captured when such options are exercised rather than using arcane math formulas and related assumptions. This is simple but has been bitterly fought against by the technology industry, most notably John Chambers of Cisco Systems. Microsoft has provided the leadership when it terminated its stock option program in 2003, it now provides restricted stock that vests 20 percent each year and whose cost is fully accounted for.
6) Reform the tax code to prohibit net operating losses (nol’s) from being aggregated and used to purchase profitable companies and avoid taxation. Such losses should be amortized over 15 years, as is the case when profitable companies purchase other companies with operating losses. Such amortization was created when a loophole was closed in the 1980′s due to a public outcry, the closure was led by then Republican Senate Finance Chairman Bob Packwood of Oregon. Packwood and others never conceived that the loophole would be worked in reverse to escape the reform, that is someone aggregating losses and rolling in profitable companies. Closing this loophole will slow down mergers that make no economic sense and preserve millions of jobs that would otherwise be lost for no sound economic reason other than a few managers leveraging growth in their stock options for short term gain.
Summary: These are all administrative rules that can be changed next week. Again, the only missing ingredient is desire. Please pass this along to any policy makers who might be interested. A VIDEO with excerpts from the talk to the AAII can also be accessed on YouTube by selecting the picture link above, or by searching for “Parish Speaking.”