outrage reached its pinnacle with the asciano

If you haven't read it:


http://www.theaustralian.news.com.au/business/story/0,28124,25695753-14743,00.html

Institution-whipped regulators fail investors

Terry McCrann | June 27, 2009
Article from: The Australian

BOTH ASIC and the ASX comprehensively failed retail investors all the way through the sharemarket's long slide last year.

And they have failed them, arguably even more badly, again as the sharemarket has bounced.

The core reason -- obviously unstated -- that they've done so should leave a nasty taste in the mouth.

They have been unwilling to upset the big institutional investors and their -- and indeed, listed company -- practices.

What makes it worse is that both institutions -- our purported corporate cop, the Australian Securities & Investments Commission; and our stockmarket, the Australian Securities Exchange -- are institutionally incapable of even appreciating their failure.

Incapable, only up to a point. The ASX knows exactly who butters its bread, so to speak.

The ASX is so utterly corrupted intellectually, the core conflict of interest so pervasive and so irresolvable, that it should be stripped of all regulatory functions.

The central problem on the way down was short selling and the way it intersected with the fear and loathing that dominated trading through last year and the opening months of this year.

Now you can believe that "short selling" is a legitimate part of market activity and that, in the jargon of both the players and the regulatory institutions, it adds liquidity and promotes price discovery.

Or you can believe, like me, that it is a fundamentally flawed concept that not simply enables, but actually promotes, market manipulation.

Incidentally, it's in quotation marks because we have now banned the only real form of short selling -- naked short selling.

Either way, both the ASX and ASIC comprehensively failed to deal with the corrosive interplay between short selling and rumourtrage last year.

They should have banned it: both real short selling and the "short selling" variety, or moved to regulate it.

Instead they contented themselves with issuing press releases and calling for submissions -- and then essentially watched from the sidelines as the carnage unfolded, day after day, week after week until suddenly in September they awoke from their regulatory slumber.

First, on a Friday ASIC banned naked short selling, and then on the Sunday it prohibited "covered" short selling as well.

In a speech last month ASIC chairman Tony D'Aloisio provided an interesting insight into the regulator's thinking -- and asserted that ASIC's judgment was correct.

In March-April last year, ASIC resisted pressure to ban short selling, he said. The "balance (sic) between price discovery and efficiency outweighed possible systemic issues", he said.

"Hence we resisted imposing the ban. We left it to the market," he said. "We did say, however," he added, "that a short-selling disclosure regime was needed."

Six months later, D'Aloisio said, ASIC concluded that the combination of lack of confidence, rumourtrage and the state of international markets "put the odds too much in favour of the short sellers" and a circuit breaker was needed. Hence the ban. The best you can say about this is that it indicates extremely muddled thinking.

How can you possibly claim in the same paragraph that short-selling was delivering "price discovery and efficiency" and yet, a short-selling disclosure regime "was needed"?

How can inadequate disclosure leave it to the market?

And what happened between March and September, as ASIC and ASX watched and twiddled their thumbs? The instos might have been broadly able to look after themselves, but what about retail investors?

In stating that by September "the odds" had gone "too much in favour" of short sellers, what on earth was D'Aloisio thinking?

Has he ever pondered why he hasn't thought in the same terms about (normal) long buying?

If short selling is such a perfectly normal, indeed desirable market practice -- that promotes "price discovery and efficiency" -- why could there ever be "a problem"?

The D'Aloisio end of May speech was also interesting for the dog that didn't bark.

Our ASIC chairman had not a word to say about the way listed companies have orchestrated a massive multi-billion-dollar shift of value from retail investors to institutional ones.

As the market has recovered -- indeed even preceding the improved sentiment for risk -- companies have embarked on a massive recapitalisation of their balance sheet.

With very few exceptions like Rio Tinto -- and in its case, because it has to, thanks to the London not the Australian stock exchange -- they have not done so by the only fair and equitable process: a pro-rata rights issue, preferably renounceable.

They have done so with institutional placements at huge -- necessary -- discounts to market, followed by completely inadequate and crazily different SPPs -- share purchase plans to retail shareholders. In every case they have produced a massive shift of -- very real -- value from those retail shareholders to the institutions that have pushed their snouts deep into the placement trough.

Neither the head of ASIC nor ASX chairman David Gonski has had a word to say about this outrageous behaviour, even if it might have been justified -- up to a point -- by the need for companies to raise big lumps of equity quickly and with certainty.

As Bryan Frith has detailed, the outrage reached its pinnacle with the Asciano capital raising.

Where the selective placement to institutions is double the pro-rata (but non-renounceable) rights issue, albeit with one "retail" investor given a special deal to maintain his equity at the placement discount price.

Yes, in February, in an eerie replay of its approach to short selling last year, ASIC sought "comment" on "proposals to facilitate equity capital raising and participation by retail investors" and five months later it finally moved to -- partly -- close the stable door. Last week it changed the rules so companies could have pro-rata rights issues without a prospectus.

I doubt there are too many horses left -- just about every company in the top 50 has already screwed its retail investors with selective, heavily discounted placements to institutions. I guess you have to help them recoup some of their losses of last year and have them varyingly rub salt in the retail investor wound by mostly following through with discriminatory, outrageously rortable, and insultingly inadequate retail SPPs.

It's -- relatively -- easy to deal with the ASX. Strip it of all regulatory functions and let it get on with what it wants to do -- make money through cost intercourse with the institutions. But what do you do about an incorrigibly institutionally inept ASIC?


SJB: VOTE NO TO BOTH!