The 13,000 Dow

Sunday, April 22, 2007

The 13,000 Dow

It was another good week on Wall Street, with the Dow Jones industrial average closing Friday at another record high, within spitting distance of 13,000.

It's hard to explain this rally by looking at traditional factors. Profit growth for the most part is slowing, along with the economy, while the prospects of a Fed rate cut have faded, along with a housing rebound.

What's going on here are mergers and takeovers, which are running at a record pace. With private equity funds flush with cash and ready to pay premiums of up to 50 percent, every company is now a potential target. And now that corporate debt is in fashion again, some public companies have gotten in the deal-making spirit.

In the past few years, stocks have been the one asset class unaffected by a bubble psychology. But it looks like that is about to change.

Lord's Lament

What do you call someone who earned more than a quarter of a billion dollars over a decade by privatizing a government-chartered monopoly that made its money trafficking in government-guaranteed student loans -- and then turns around and complains how awful government is?

How about ingrate? Or hypocrite?

No doubt Al Lord thinks he deserves every penny that he's earned because of all the value he created for Sallie Mae shareholders since ousting the previous management and taking control of the company in 1997. He'd probably also have us believe that he wouldn't have done it if the prize were only $100 million -- or that there was nobody equally skilled who would have done it for $50 million. These are the standard rationalizations for excessive executive compensation.

But what was particularly galling was Lord's rant to The Post's Jeff Birnbaum that he had to arrange for the sale of Sallie Mae to private owners because it was simply intolerable to have his corporate handiwork subject to the whims of silly politicians and government red tape. Lord seems to have forgotten that there never would have been a company for him to rescue if those same silly politicians hadn't intervened in the private market to create a student loan program, and the government hadn't set up Sallie Mae to buy those loans from lenders so they could lend again.

Corporate Accountability

The Securities and Exchange Commission reportedly is exploring the idea of requiring shareholders who want to sue companies to submit their grievances to arbitration rather than to state court juries. The rationale is that arbitration will be more fair and efficient and better at weeding out those frivolous suits corporate executives are still complaining about, even after their number has begun to decline.

But before Democrats reflexively dismiss the idea as "closing the courthouse door" on defrauded shareholders, they may want to consider a grand bargain: compulsory arbitration in exchange for shareholder approval of executive compensation plans and a requirement that directors be elected by a majority of all shareholders.

Such a deal won't sit well, of course, with the Democrats' financial patrons in the plaintiffs bar. But it will call the bluff of Treasury Secretary Hank Paulson and his corporate pals who commissioned a blue-ribbon panel to study the declining competitiveness of U.S. financial markets. The panel backed both arbitration and the expansion of shareholder voting rights.

The logic of the deal is simple: Lawsuits and annual proxy voting are the two possible ways for shareholders to hold directors and executives more accountable. One or the other might be preferable, but surely it makes no sense to have neither.


© 2007 The Washington Post Company