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In a front-page article entitled Congress Staffers Gain from Trading in Stocks, the Wall Street Journal reports that “72 aides on both sides of the aisle traded shares of companies that their bosses help oversee.” That finding was based on an “analysis of more than 3,000 disclosure forms covering trading activity by Capitol Hill staffers for 2008 and 2009.”

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In the world of competitive markets, if one does a bad job, the typical result is less resources, less power, and more oversight by interested parties. If a firm makes a bad product, there will be fewer profits, lost market share, and additional attention from Consumer Reports, plaintiffs’ lawyers, and regulators.

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As Congress moves toward likely passage of the colossal Dodd-Frank Wall Street Reform and Consumer Protection Act, it’s worth reflecting that many of the bill’s 2,315 pages have little to do with preventing another financial meltdown and leaves considerable collateral damage in its wake.

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Intel’s rebates are apparently given rise to a potentially whole new class of suits based on the notion recipients of the rebates at the center of the Commission’s antitrust action should have been disclosed.   The WSJ reports…

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Late in the Senate’s proceedings on the financial regulatory reform bill, the Senate adopted – with no hearings and minimal debate – a controversial provision proposed by Sen. Richard Durbin, Illinois Democrat, that imposes price controls on interchange fees for debit and prepaid cards. The amendment also allows merchants to override several rules of payment card networks that currently protect consumers from abusive practices by merchants. While big-box merchants and convenience stores are declaring this a victory against the financial services industry, if the amendment survives in conference committee, consumers and small banks will be the real losers.

Abstract

This Paper presents evidence boards of directors “bargain” with executives about the profits they expect to make from trades in firm stock. The evidence suggests executives whose trading freedom is increased using Rule 10b5-1 trading plans experienced reductions in other forms of pay to offset the potential gains from trading. There are two benefits from trading—portfolio optimization and informed trading profits—and this Paper allows us to isolate them. The data show boards pay executives in a way that reflects the profits they are expected to earn from informed trades. The legal issues about paying using illegal profits are explored. As a matter of policy, the data seriously undercut criticisms of the laissez-faire view of insider trading most closely associated with Henry Manne. At least with respect to classic insider trading (that is, a manager of a firm trading on the basis of information about the firm where she works), if boards are taking potential trading profits into consideration when setting pay, it is difficult to locate potential victims of this trading. Current shareholders should be happy with a deal that pays managers in part out of the hide of future shareholders, and the firm should internalize any costs arising from this payment scheme, since future shareholders should take this into account when deciding whether and what price to buy shares. While there still may be good reasons to prohibit some individuals from trading on material, non-public information, the case for classic insider trading is made much weaker by this data.

Let’s get one thing straight: At the end of the day, our recent financial woes were primarily caused by the mispricing of assets. A housing bubble (or, more accurately, a number of local housing bubbles) emerged as home prices grew much faster than home values. People were buying homes that they knew were on the pricey side because they figured they could always sell them to a “greater fool” who’d pay even more. Lenders financed these transactions because they knew they could sell their mortgages to federally-backed greater fools, Fannie Mae and Freddie Mac. Eventually, though, it became apparent that prices were out of line with values, the stream of greater fools dried up, and lots of folks found themselves in the unfortunate position of owing more on their homes than the homes are worth. Homeowners began defaulting on their mortgages, many of which had been sold off and packaged into securities that were purchased by financial institutions. Those defaults caused the mortgage-backed securities to fall in value, reducing the capital of the financial institutions that held them and causing insurers of those securities (e.g., sellers of credit default swaps) to have to pay large claims. It’s a somewhat complicated story, but at the end of the day there’s a clear culprit: real estate (and real estate-related) bubbles.

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This week the Senate is scheduled to hear debate over the latest financial regulation reform bill (also known as the Dodd Bill).  Part of the Dodd Bill incorporated aspects from a bill from Senator Schumer introduced last summer, against which I testified, called the “Shareholder’s Bill of Rights.”  In light of this week’s momentous events, I thought it might be a good time to post my draft of an “Investor’s Bill of Rights” that I have been thinking about.

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The Wall Street Journal is reporting that major institutional investors — CalPERS, CalSTRS, the Teacher Retirement System of Texas, etc. — have collectively adopted a set of recommended practices that is “rankling” private equity firms. Had I not discussed the article in my Antitrust class, I’d use it as the basis for an exam question. Here are the basics…

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