About 40 years ago, as a journalist, I found myself covering crime in a remote corner of East Texas. As I was frantically trying to find a bite to eat, I stumbled across a used car dealership with a lot full of junkies and budding lemons. I couldn’t resist and, putting on my southern accent, walked into the dealership and asked the first salesman who ran up to me and told me the place had an ominous name.
He laughed and said why not, caveat emptor means buyer beware. I told him that didn’t inspire much confidence. He said something that I always found odd until I spoke to SEC Chairman Gary Gensler this morning: We weren’t in the business of trust.
You know what? Neither have the great financial engineers of our time and it is not enough to say caveat emptor this is not the American deal this is not how we work not since 1934 when we established a set of securities rules that inspire confidence. Since FDR established the Securities & Exchange Act, we’ve gone from a caveat emptor base to one where we have regulation that helps investors when simple disclosure isn’t enough.
Right now, there’s a lot of regulatory pushback. We have crypto proponents all claiming they are doing the lord’s job trying to protect your money from runaway inflation. We have app innovators who can offer you commission-free trading without really explaining why there is no free lunch because the daily bread of the business is paying for your order flow. We have PSPC managers who can make all the projections they want and as long as they don’t claim outright fraud, anything goes. We even have Chinese companies with stocks that, when sold here, are meaningless abstractions that enjoy none of the protections typical security offers.
Against this spectrum of what we call financial engineering stands the SEC headed by Gary Gensler, perhaps the most sophisticated SEC chairman of our time. He knows that caveat emptor is not the law of the land and, more importantly, he knows that while disclosure, like sunlight, can be the greatest disinfectant…to quote the eminent jurist Louis Brandeis, it’s not enough when there are people who maybe don’t play in a way that requires the setting of rules and not the sticker.
Gensler, for example, doesn’t promote endless financial engineering and innovation, like you do with crypto, if you don’t know what assets support major cryptocurrency funds called stablecoins. He doesn’t seem to think it’s enough to have the best app if it encourages excessive trading and is only free in name due to costs he thinks are too hidden from the public. Heck when I listen to it, I think DraftKings (DKNG) gives you a better deal because you can’t lose more than you put in because they won’t give you credit.
Perhaps margin rates should come with real warnings that tell you how much you could lose and suggestions that you don’t go for it. Perhaps all Chinese transactions that are not disclosed to the US should be banned. It wouldn’t have cost you so much money and maybe SPACs wouldn’t have cost you so much money with their absurdly pink projections, which is not allowed with traditional subscriptions.
As I’ve said many times, Gary Gensler has a full plate and plenty to eat for him. But he knows we shouldn’t sacrifice integrity or your nest egg on the altar of mindless innovation that takes us back to the days when the caveat emptor held no trust.
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