In Defense of Traders, Raiders, and Arbs

In November, the Securities and Exchange Commission rocked Wall Street by announcing that Ivan Boesky, king of the takeover speculators, had agreed to pay a record $100 million in fines to settle charges that he conducted illegal securities deals. Predictably, Boesky's fall shook investors' faith in the market, but this wasn't the worst consequence of the affair. What made this event a true scandal is the power the SEC exercised to bring Boesky to heel.

The SEC sees itself as a referee ensuring that all public investors, large and small, play on a level field. Much of Wall Street, however, recognizes this goal as impossible and views the SEC as a poorly disciplined watchdog. And in the wake of the Boesky affair, traders aren't sure whom it may bite next. "It's like the wild, wild West out there," one told Business Week. "It's scary."

Their concern is well-founded. For one thing, insider trading, the "crime" with which the SEC charged Boesky, lacks clear definition, partly because the SEC keeps broadening that definition.

The criminalization of insider trading defies rational explanation. If using "inside" information-knowledge not available to the general investing public-is a crime, then who are its victims? The people who sold stock to Boesky at a price probably higher than they would have got if he'd not been in the market? The SEC has forgotten that market speculation implies risk, and it has stubbornly ignored the real benefits of insider trading.

Economist and lawyer Henry Manne, dean of the George Mason University Law School, has argued that insider trading pushes stock prices in the correct direction. When insiders affect prices by their transactions, the stock more accurately reflects recent events and industry changes. Insiders thus provide a service for the rest of the market, which is then free to act as an efficient capitalizer of timely business information.

In those cases where insider trading might result in harm, it can (and should) be controlled by private contractual relationships, Manne says, rather than by vague blanket laws imposed from Washington. Banks can reach agreements with their clients; companies can stipulate to their employees limitations on the use of certain information. Private self-enforcement may not be perfect, but it would be a substantial improvement over the current conspiracy atmosphere where informants compete with disaffected investors to implicate speculators in the eyes of the sec.

There is another chilling aspect of the Boesky affair. The SEC went after "Ivan the Terrible" for an important reason: He was the biggest fish on Wall Street, and netting him sent a clear message to other arbitragers the SEC wanted to intimidate. If the SEC could get Boesky, by implication it could get anyone. That, combined with the fuzziness of insider-trading laws, poses a real danger to everybody who wishes to conduct business in the open market.

And unfortunately, the long arm of the SEC doesn't end at insider trading. In recent months, other commission investigations have steadily limited the number of market institutions the government finds acceptable.

Junk bonds are an example of this. These high-risk, high-yield securities have been a major funding tool for much of Wall Street's merger and acquisition activity, and in fact were first developed to circumvent SEC constraints on such transactions. Their popularity has provided ample evidence that investors are willing to buy junk bonds, but that hasn't stopped the SEC from targeting them for extinction.

In this case also, one wonders what the regulators' motives are. Whom are they protecting? Entrenched management? Perhaps. The case of Sir James Goldsmith and Goodyear Tire & Rubber Co. furnishes insight into the government's anti-entrepreneurial mentality.

At about the same time the SEC nabbed Boesky, the Anglo-French financier Goldsmith came under scrutiny by a House of Representatives subcommittee, which took it upon itself to investigate U.S. merger activity.

Goldsmith had launched a bid for Goodyear and included in it the recommendation that the company focus on its core business in order to bolster the bloated corporation's performance. This earned him the vilification of unions, Goodyear management, and Rep. John Seiberling (D-Ohio), whose grandfather founded Goodyear.

"My question is, who the hell are you?" Seiberling demanded of Sir James. This came from a man who had evidently decided that he could benefit more by spending other people's money than by creating wealth, as his grandfather had.

Despite Seiberling's rantings and those of others like him, Sir James was just what Goodyear needed. The company is stronger now, because to fend off Sir James's bid, it adopted a restructuring plan that focuses on its key tire operations and cuts spending. These moves should bring Goodyear closer to the entrepreneurial company it once was.

The lesson here should be clear to everyone, government regulators and members of Congress alike: the problems of American industry demand more entrepreneurship, not more regulation. Stirring slogans, pat simplifications, and snooping by Congress and the SEC can't replace restructuring and streamlining in response to market pressures.

My question is, who the hell is John Seiberling?

Glen Feighery is a business reporter in Tennessee.

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