Thursday, March 26, 2009

Insider Trading

Some years ago, I saw this program on PBS about the dot com bubble. I had worked for a dot com start up, so I was fascinated by the notion of a bubble.

If memory serves, one of the people interviewed was the grandson of a "insider" from the 1920s. He explained how his grandfather (and his associates) would manipulate the stock prices of various companies. They would literally call or write one another the day before a major change - a change in management, or when they would be selling their shares. The insider would then be able to sell high, as opposed to what the everyday investor was forced to do (sell at the market price).

The most important note here is that this was legal. The ethics and morality can be debated. Insider trading was above board and perfectly legal prior to this piece of legislation (from my understanding). A select group of people made an awful lot of money, while many others lost millions.

I admit that I can sympathize with my libertarian or traditional small government Republican friends. I believe strongly in moderation - some governmental and regulatory reform can be a good thing. There have to be some checks on the expansion of government.

I'm not sure where the line should be for governmental oversight of financial institutions and the stock market. But I disagree strongly that some oversight and rules are harmful or unnecessary. Some rules and regulation can indeed be a good thing, and protect the small time investor from fraudulent behavior.

I'm reminded of an unofficial football game my husband's fraternity played in college (that's another story). They (the anti-fraternity fraternity my husband belonged too) were playing the soccer player fraternity and losing miserably. My husband suggested they try the "flying wedge" formation - which, not surprisingly worked (but is completely illegal by almost all football regulations). Without a referee (or someone who had studied illegal football moves) they got away with it.

What we want are the right kind of rules, the appropriate balance of regulation where people and companies are free to grow and do business in good faith. But at the same time, regulation should protect the majority of Americans from underhanded dealings and unclear playing rules.

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