Industry Group's Protection Of Investors Seen as Secondary

[NNN0LHI]

http://www.washingtonpost.com/wp-dyn/articles/A6773-2003Sep13.html

NEW YORK -- The New York Stock Exchange is the designated first line of defense for investors, charged by federal authorities with ensuring that its Wall Street members do not violate the rules of fair trading. But it was New York State Attorney General Eliot L. Spitzer who forced the issue of analysts' conflicts, long known within the Wall Street community, into the public with his probe.

It was only after the Spitzer investigation that an NYSE panel found former Salomon Smith Barney stock analyst Jack B. Grubman guilty of violating its rules for, among other things, misleading investors by writing rosy research reports on dubious companies. It banned him for life from the securities industry.

Investor groups and academics have long questioned whether an industry organization like the NYSE can aggressively police its members. Now the controversy over NYSE Chairman Dick Grasso's pay package, which included a $139.5 million deferred compensation payout this month, and his comments that he sees his job as two-thirds businessman and one-third regulator, has put the exchange's regulatory record under the microscope.

It has led to calls from some investor groups and even some members of the NYSE for Grasso's resignation. Critics have also suggested that it is time to rethink the exchange's regulatory role.

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[NashVegas]

1. Protecting Investors

Marjorie Kelly makes a delightful argument in her book, The Divine Right of Capital.

According to Kelly, something like 99% of all stock purchases are for previously issued stock, the other 1% from freshly-issued stock for actual capital raising.

The 99% is not an investment in the company, it's an investment in the stock itself, used to prop up the previous stockholder's investment and the brokerage.

When you buy a used Explorer, you aren't investing in Ford, not one dime of the money you spend goes to Ford Motor company. It does not go to help Ford increase its factory output or profitability. And we don't expect the Explorer to inflate in value, we know it will deflate. All we ask is that it continue to run in such a manner that we aren't forced to invest an unreasonable additional amount to keep it running.

Unless you're buying newly issued stock, the market really is little more than a ponzi scheme. And it's the greatest ponzi scheme in the world.

[NNN0LHI]

2. Wow. I never even thought about that before. Thanks for that info n/t

[punpirate]

3. And, here's the other jab...

... in the solar plexus--even if the stock you're buying is a new issue, the moment you purchase it, its value is dependent upon the vagaries of the market. It doesn't retain any special value because it was a new issue for raising capital. Your purchase of that stock may temporarily improve its position, because by your purchase you are signalling to other investors that it's desired by someone. That's the best one can hope for. From that point on, you're at the mercy of what others think of the profitability of the stock.

Cheers.

[pw]

4. You're fogetting about dividends

Owning shares entitles you to some of the payout.

The Ford Explorer example is also a little screwy, because knowing that the car can be resold at a reasonable price increases the price someone is willing to pay for it new, hence lading to more money for the maker. It's never so simple...

[NashVegas]

5. Yes and No

The dividend from the Explorer is that it provides transportation, a service with calcuable value (just ask a taxi driver).

OTOH, a high stock price means lower interest rates for corporations taking out loans, so that is a benefit. BUT .. that's money they could otherwise raise (one would suppose) by issuing new stock. Problem is, that devalues the stock already in circulation. Stock splits tend to happen when a corp is fully confident the initial deflation of value will be a short term thing.