About 40 years ago, as a reporter, I found myself covering crime in some East Texas backwater. While I was frantically trying to find a bite to eat I stumbled across a used car dealer with a lot filled with clunkers and budding lemons. I couldn't resist and, putting on my Southern accent, I went into the dealership and I asked the first salesman who ran to me and said that the place seemed to have a foreboding name.
He laughed and said why not, caveat emptor means buyer beware. I told him that didn't inspire a lot of confidence. He said something I always found odd until speaking to SEC Chairman Gary Gensler this morning: were not in the confidence business.
You know what? Neither are the great financial engineers of our time and it isn't enough just to say caveat emptor, that's not the American deal, that's not how we work, not since 1934 when we established a set of rules about securities that do inspire confidence. Ever since FDR established the Securities & Exchange Act we went from a caveat emptor basis to one where we have regulation that help investors when simple disclosure doesn't help.
Right now there is a lot of pushback to regulation. We have promoters of crypto anything that claim they are doing the lord's work trying to protect your money from rampant inflation. We have app innovators who can give you commission free trading without really explaining how there is not such thing as a free lunch because the company's bread and butter is payment for your order flow. We have SPAC managers who can make up any projections they want to and as long as they aren't claiming out and out fraud, anything goes. We even have Chinese companies with stocks that, when sold here, are meaningless abstractions that don't have any of the protections a typical security affords.
Against this array of what we call financial engineering stands the SEC under Gary Gensler, perhaps the most sophisticated SEC Chairman of our era. He knows that caveat emptor isn't the law of the land and, more important, he knows that as much as disclosure, like sunlight, may be the greatest disinfectant....to quote the distinguished jurist Louis Brandeis, it isn't enough when there are people who may not be playing in a way that needs rule-making not stickering.
Gensler, for example, doesn't favor endless financial engineering and innovation, as you get with crypto, if you don't know what assets supports the key crypto money funds called stable coins. He doesn't seem to think it is enough to have the best app if it encourages over trading and is free in name only because of costs he thinks are too hidden to the public. Heck when I listen to him I think that DraftKings (DKNG) offers you a better deal because you can't lose more than you put up because they won't give you credit.
Maybe margin rates should come with some real disclaimers that tell you how much you could lose and suggestions that you don't go there. Maybe all the Chinese deals that don't have American style disclosure should be banned. Wouldn't have cost you so much money and maybe SPACs wouldn't have lost you so much money with their absurdly rosy projections, something that's not allowed with traditional underwritings.
As I have said many times, Gary Gensler has a full plate and a lot of eating cut out for him. But he knows that we must not sacrifice integrity or your nest egg on the altar of mindless innovation that takes us back to the days where caveat emptor inspired no confidence whatsoever.
