Stories like this or this always leave a bad taste, however much those involved protest their innocence.
That's another advantage of deposit-funded corporations, which wouldn't have shares which can be bought and sold on the stock exchange. They'd be like building societies (or LLPs, partnerships or unit trusts), you make your deposit, you are allocated your share of profits or losses each year (or month or quarter) and you withdraw your deposit plus accumulated profits when you need the money, or you would rather deposit with a different company which you think will give you a better return.
The point about insider trading is that you buy if you expect good news, i.e. the announcement of future profits, and you sell as soon as the news becomes official or public knowledge and the price has jumped. "Buy on a rumour, sell on a fact".
With DFC's, there'd be no point cashing in if future profits are expected to be higher, you'd sit tight and hope for a share of it. OK, you would still have an advantage if you knew the rumours before everyone else because you could add to your deposit before the news become official or public knowledge. But you wouldn't get your share of those profits until they are actually made and it would leave a longer paper trail.
Similarly, if you have insider knowledge of potential bad news (like the insurance company finding a loop hole that means they don't have to pay out on a factory which burned down), you would be tempted to cash in. But the company would have to make a provision for the future losses as soon as it knows and knock a percentage off everybody's deposit. So if senior managers withdrew their deposits before they make the provision and announce the bad news, that would be straightforward false accounting and fraud and much easier to prove than 'insider trading'.
And there would be no incentive to spread false negative rumours (to give you a buying opportunity) and then refute them (to give you a sell opportunity). Or vice versa. The amount of your deposit is entirely unaffected by rumours either way, the amount you can withdraw is only affected by what has actually happened in the past.
Friday, 13 November 2020
Insider trading and deposit-funded corporations
My latest blogpost: Insider trading and deposit-funded corporationsTweet this! Posted by Mark Wadsworth at 17:46
Labels: deposit funded corporations, Fraud, Speculation
Subscribe to:
Post Comments (Atom)
8 comments:
Can you talk a bit more about exactly how this would work?
Depositors could withdraw their deposits at any time? The company would have to sell assets to fund this?
How would a write-down work? Would deposits be revalued to the new book value?
Making a deposit would be like the company issuing new shares, except they wouldn't be tradable. Presumably you would only be able to make a deposit if they company was in deposit-accepting mode, otherwise they could potentially get more deposits than they could use.
JJ "Depositors could withdraw their deposits at any time?"
Yes. Depends what each company's policy is.
"The company would have to sell assets to fund this?"
If the company has no spare cash to repay deposits and can't borrow, then it just puts a stop on withdrawals. It's the same with some unit trusts, or it's like shares being suspended. The company and its depositors then have to decide what to do. Sell a few assets, sell everything?
"How would a write-down work? Would deposits be revalued to the new book value?"
If company makes a profit, every accounts gets 'interest' of a couple of per cent. If it makes losses, the reverse happens, they knock off a couple of per cent. That's no different to your shares going up or down in value.
A company could also decide to always put part of its profits into a special non-distributable reserve (instead of paying it out) and if it makes losses, it knocks them off that instead (purely psychological, makes no difference in real terms).
"Making a deposit would be like the company issuing new shares, except they wouldn't be tradable."
Sort of, yes.
"Presumably you would only be able to make a deposit if they company was in deposit-accepting mode, otherwise they could potentially get more deposits than they could use."
Yes, if a company is 'too' successful and has loads of spare cash, it has little incentive to take new deposits. Each company can have its own policy on what happens then. Just stop taking deposits. Or take deposits at a premium, so you pay in £105 and get credit for £100.
Things like ,eg, network contacts, good will and,
expected future value
are subjective. Without an activity of sales in a secondary market there is not an ongoing contemporaneous valuation of company value.
D, good will and expected future value are clearly "unearned income" because they haven't been earned yet! Basing an economic or financial system on hoped for future as yet unearned income sounds like shit to me.
When the UK building societies turned into plc's in the 1990s, did the UK become wealthier? When land prices go up (because of subsidies or interest rate cuts) does a nation become wealthier?
Clue: no, it became/becomes poorer.
The expectation of future income is
a particular and defining characertistic of modern
Capatilism. Start up commpanies , and IPOs
As an aside if Psizer sold new shares it is not a secondary market transavtion.
"Without an activity of sales in a secondary market there is not an ongoing contemporaneous valuation of company value."
That company "value" has nothing to do with the actual value of the company, as defined by its possessions and trading goodwill, i.e what an unlisted company would sell for. It merely reflects the total value of the shares, which, we all know can be based on absolutely nothing, as every bubble since the South Sea Bubble has shown.
Din "The expectation of future income" has been a 'defining characteristic' of capitalism since the dawn of time. No farmer, fisherman or blacksmith would bother unless they knew that the income was likely to exceed the effort.
"if Pfizer sold new shares it is not a secondary market transaction." I am perfectly well aware of that, my includes filling in SH01 forms.
What drove things forward was the invention of limited liability for investors, which would of course continue with a DFC, just like a building society depositor has limited liability.
The 'shares' bit was just smuggled in by people who wanted to make a quick buck on the back of nothing.
B, thanks for back up.
Looks like the second of those examples is pure crony corporatism. Maybe the government bailed him out so as he could make the profit. In other words a back door back hander.
Post a Comment