Matt Levine: evaluation

Transcript context

…They’re all informed investors, right? Grandmas in this country are not buying ICOs so much. Let them lose their money to each other, or not? I have an aesthetic objection to ICO frauds. If you’re the division of enforcement at the SEC, very high on your list is protecting uninformed retail investors from fraud. Also, pretty high on your list is protecting dumb retail investors from egregious frauds that make you look bad. You don’t really want to be the country where people are committing fraud, running pump-and-dump groups, talking about it, having articles written about it, and high-fiving each other. It doesn’t seem to encourage confidence in the markets. The other thing, as the SEC division of enforcement, you might consider is larger, more systemic things than retail fraud. I’ve gone back and forth on this. I think that the grandmas losing their pensions to boiler room operators in Florida is a very clear harm. There’s a lot of interest among regulators in the people lying to their customers about large structured credit trades because those are bigger trades, and you can get bigger penalties because you’re defrauding a bank. You have to weigh the bigness of the potential harm and the overall size of the transaction with how morally and aesthetically abhorrent the transactions are. The person defrauding the grandma in the boiler room is very clearly doing something wrong. There’s a lot of gray-area behavior in institutional bond markets that has gotten a lot of focus because it is gray area, so it’s more interesting to bring a case if you’re a prosecutor or an enforcer. And it’s institutional, so it’s a sexier thing to deal with than retail fraud in Florida. In some ways, it’s less bang for your buck because you are tweaking the rules in a market that is essentially among informed investors who can take care of themselves. Like you, I’m mostly an efficient markets guy, but when I look at initial public offerings I’m very baffled because investment banks take such a huge cut. If you needed to argue, “Well, they need the cut because they talk up the security, and in the absence of their efforts, no one would be interested, and it’s worth it,” maybe that argument works. But it seems somewhat to stand in tension with an efficient markets hypothesis, which suggests the thing will find its appropriate level without any particular investor having to talk it up. Furthermore, attempts to get around the current mainstream system of IPOs have not always been successful. Auctions have been tried. Israel has tried other methods. Spotify is giving it a go. We’ll get further data, but they’re not obviously doing better. How do you reconcile IPOs in their current form continuing, the investment banks taking such a huge cut, and some version of efficient markets hypothesis actually making sense? Do you see what I’m asking?…

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