“Stock Pickers Suckered” is the title of a very interesting article in the latest Economist. What it shows is how easily top CEOs are able to bamboozle supposedly tried and true equity analysts. The study published in the Academy of Management Journal in its February 2010 issue is best characterized by its title – “A Matter of Appearances: How Corporate Leaders Manage the Impressions of Financial Analysts about the Conduct of their Boards”. The study minces no words – CEOs who engage in token Board re-dressings are payed off with appreciably higher ratings from duped stock analysts – with a 36% likelihood that the firm will see an upgrade in its stock valuation while there will be a 45% drop in the chance of a downgrade.
Given the already poor reputation that financial analysts have in doing their work [see how well professional analysts do in picking stocks against monkeys throwing darts at a listing of stocks – Professor Burton Malkiels’ famous Random Walk Down Wall Street theory], this would put in deeper jeopardy the cherished notion of Conservative Political observers like George Will, Charles Kruthammer and gang who regularly pledge allegiance to the fiction that financial and markets in general are wondrously efficient. These proclamations of loyalty continue to be uttered despite the Financial Meltdown when it became obvious that financial markets have become: 1)hidden and non transparent [huge, shadow $69 trillion derivative markets] ; 2)subject to insiders manipulations [much like the Stock Pickers Suckered]; and 3) badly manipulated by defusing and eliminating hard won Depression-triggered financial regulations.
Regulators as Guilty of Making Financial Markets Inefficient
In fact the latest Conservative fashion is to blame the failure of efficient markets on regulators who fail to regulate. This party will not argue that the Financial Bautocracy has managed to effectively disarm a host of hard-won financial regulations and regulators on own account transactions, bank and investment house leverage ratios, effective separation of buy versus sell side interests in the same investment organization, and basic financial transaction transparency and record keeping standards. The Financial community set themselves up to fail with due deliberation for the substantial gains they stood to make and the Federal bailout insurance against the risks they were taking on.
And there is no doubt on the reasons why. The top tier, “Too Big Too Fail” Financial organizations dispatch legions of lobbyists and experts. These financial troopers easily best the Financial regulators with numbers, level of compensation and specifically rewarded goals. But the important point is that regulators are there because Financial Institutions have passed on/palmed off the costs and rigors of self regulation to governments. There is only a fiction of Fiduciary Trust among the “Too Big Too Fail” investment arms. And financial institutions have pointedly avoided self regulation, a commonly funded financial risk insurance program, and even minuscule efforts towards rescuing their failing colleague institutions [think Bear Stearns and Lehman Brothers during the height of the financial crisis and despite the pox on all the financial community if nothing was done].
So I for one will start to believe in George Will and Charles Krauthammer and their “efficient financial markets” as soon as they start to a)support a much stronger fiduciary “Hippocratic Oath” similar to the Medical and other professions which re-dedicates financial brokers as well as advisors to do no harm and effectively self-regulates against offenders; b)advocates a self-risk insurance fund for “Too Big to Fail” financial institutions that demands larger payments by member institutions based on their known investment risk profiles and their past history of financial risk management [the very criteria by which they charge their own customers]; and c)advocate reforms to the huge shadow and non-transparent financial markets not just in derivatives but popping up in commodities and other composite financial instruments being traded in the margins without adequate controls and market collapse risk insurance.
So be from Missouri when George, Charles and other Conservative advocates of efficient markets start proselytizing and waxing eloquent on how good and efficient markets would be only if governments would just get out of the business of regulating them. Tell them to stop fobbing off costs of financial and other corporates failure to self-regulate and recognize that governments have had to step in only when “super efficient” markets have failed super-spectacularly.