Levine on Wall Street: Idle Chatter

Would you rather get your idle chatter from a Twitter feed read by a computer or a multidealer chat room read by a regulator?

Computers will read Twitter to tell other computers how to trade

Here is a story about Social Market Analytics, a company that is working with the New York Stock Exchange and I guess Twitter to read tweets and interpret them into signals about how people feel about stocks. It then explains those feelings to various clients who want to trade on them but can't interpret them themselves, because (1) they are computers, (2) they are employed at sell-side firms that block Twitter, or (3) they have better things to do than follow "about 400,000 Twitter accounts that are deemed relevant to the market" as indicators of investor sentiment. So that sounds like a good idea. Will it work? I don't know, but you know who also doesn't know? Ilya Zheludev, "a doctoral student in the financial computing department at University College London, who has studied whether Twitter can lead the market," and is skeptical. He has your all-purpose market wisdom of the day: "It's somewhere in between being able to print money and having nothing at all." Indeed.

Enough idle/fraudy chitchat

As banks keep getting in trouble for dumb things traders say in electronic communications, the obvious approach is to crack down on electronic communications, though the better approach would be to crack down on dumbness. Now various banks are rethinking their use of multidealer chat rooms, after those rooms seem to have been used to manipulate foreign exchange benchmarks. Amazingly, "One focus of reviews at J.P. Morgan and other firms is whether chat rooms encourage idle chatter or, worse, improper sharing of information that could lead to regulatory action and embarrassing public disclosures of chat transcripts." Life encourages idle chatter! Online chat rooms just preserve it for eternity. If I were a regulator, I would contemplate going the other way: Require all dealers to use a multidealer chat platform, and then make a regulatory staffer monitor it in real time. That has to be better than sifting through transcripts years later.

Carl Icahn is having a moment

Icahn's latest victory is at Transocean, which agreed, on his prompting, to propose a dividend of $3 a share and to re-nominate one and nominate another Icahn director to its board of directors. The recent Icahn playbook has not been especially subtle -- buy stock, agitate for cash payouts to shareholders, tweet a bit -- but it's been working pretty well. This may be less because of Icahn's persuasive powers -- which are not to be underestimated -- than because he's captured the mood of the moment, with companies finding it easy to borrow but hard to put money to use and investors searching for yield in weird places, like Apple stock. Also, he is on the Twitter, which probably makes him cool.

Good corporate governance is bad banking

Icahn is part of an investing mainstream that uses the term "good governance" to mean "policies that make it easier for shareholders, rather than CEOs or boards, to control corporations." This is sensible enough, since shareholders "own" the corporation, but it breaks down a bit for banks. If you're a bank 90-plus percent of your money belongs to creditors, so policies that favor shareholders might be misplaced. That's what this paper by Deniz Anginer and Asli Demirguc-Kunt of the World Bank and Harry Huizinga and Kebin Ma of Tilburg University sort-of finds: "our main finding is that 'good' corporate governance -- or corporate governance that makes the bank act in the interest of bank shareholders -- engenders lower bank capitalisation." Shareholders like leverage, regulators and creditors are less fond of it, and the authors find that stereotypical shareholder-friendly policies such as "proper" board sizes ("about 10 members" -- Transocean, at Icahn's insistence, is cutting its board from 14 to 11 members), limited anti-takeover provisions, and separation of board chairman and CEO roles all lead to higher leverage. That last one is a bit odd: Remember when everyone wanted Jamie Dimon to lose his job as chairman of JPMorgan, because they thought he was a bit of a menace in his dual job? JPMorgan's shareholders disagreed.

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