Shareholders

Shareholders. I once called them the suckers of the capital market. I must admit, it's even worse. Shareholders are a nail in a banker's coffin, be they (the bankers) greedy and guilty of the current financial crisis or be they victim of prices 'the market' supposedly sets.

I explain the last remark: Banks need money to lend. After loss write-offs as a result of the real estate crisis, there is so much less money in the bank, but worse, their complete balance sheet is in disorder. The regulators (the bankers' nightmare book keepers) simply state: what do you have as collateral and they use a very important yardstick to measure this collateral, and it is called market value. Once there was a ruling (in FASB-look-up-the rulings-number-yourself) that stated that banks have to report their possessions in terms of market value. So whenever market prices for listed securities drop, it immediately shows in these banks' reports (the same phenomenon -but reversed- shows when market prices rise). This drop is reflected in the amount of (equity and equity-alike) capital that banks' reports show. Simple enough: market price down -> equity down.... And equity (broadly defined) is the lever the bank uses to calculate how much can be lended to outside parties. In short market prices determine how much a bank may lend.

And who decides on market prices... Yes, the shareholder. We take a side step here and look at pension funds. The same FASB rule goes for them: lower market price -> lower coverage for outstanding pension obligations. In the Netherlands this means that a pension fund, suffering from lower market prices sees their surplus of assets above (future) pension obligations sink below certain margins (105% or less) and consequently they may have to sell off part of their (low market value portfolio) in order to make amends or ask sponsor firms to pay larger premiums.

Again, who decides on market prices... Same answer as above: the shareholder (in its combined form well known as 'the market'...).

Back to these suckers. What do they do in times of crisis, which we now experience: They overbid each other, meaning a Dow Jones Industrial Average (or DJIA) has risen the past few months (it has, look it up) or -to stretch our time frame here- they underbid each other resulting in a lower DJIA, meaning lower market prices (they were really low last March).

I say the following: the market is too sophisticated to be left to these suckers aka as shareholders.

What do they know? Practically nothing in times when institutional investors leave the market and only the real suckers determine market prices: the John Does of the market I mean. Panicky as they always are they flee in herd behaviour and -in times of crisis- sell (meaning lower prices afterwards) or they buy in self fullfilling prophecy times (meaning higher prices afterwards). In the mean time the institutional investors did not move an inch. They did not buy or sell but sit on their portfolios and leave the sucker to their market.

BUT, banks are not happy, nor are pension funds. They lose lending potential (banks), they must engage in rescue plans (pension funds)....

It all has to do with Quantity again, yes friends here we go again. In my view a price must not be counted as a set price when only minimalistic parties engage in securities trading. I mean of course the end-of-the-trading-day price. What happens in between is the sucker's (mis)fortune and nobody else's.

Suppose we set the limit at 10%, meaning that prices will only be seen as such when 10% (or more) of a stock's number of shares are traded on a given day. Only in these situations a price is to be regarded as a MARKET's price. I bet you: most securities prices will not change during a full year of trading. Banks and pension funds can breath again and nobody is worse off.