Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Quattrone and Regulating Initial Public Offerings

It is not often that I disagree vehemently with a Financial Times
editorial, but that is what I found myself doing when I read
“Quarter for Quattrone: A reminder that regulating is
more efficient than prosecuting” Financial Times,
August 25, 2006. Analysing the lessons from the
prosecution’s failure to establish its charges against Frank
Quattrone, the star technology analyst of the dot com era, the
Financial Times writes:

In retrospect, and certainly in light of what happened this week, it would have
been far better if regulators had stepped in earlier to impose some discipline,
perhaps by insisting that companies show some record of profit before coming to
market. Prevention could be far more effective than prosecutions have
proved.

The big advantage of a capital market dominated financial system
over a bank dominated system is its ability to provide risk capital to
innovative enterprises that have not established any track record.
The Financial Times appears to be saying that we must stop the capital
market from performing this function. I am reminded of the old age
that a ship is safest when it is in the harbour but that is not where
it is intended to be. A capital market that does not allocate risk
capital will be much safer and much less scandal prone, but it will
not be a market worth having.

The Financial Times would have been on much stronger
ground if it had asked why the regulators chose the easy path
of focusing the Quattrone prosecution on his alleged role in destroying
potentially incriminating emails rather than on the substantive wrongs
that he is alleged to have committed in the IPO process.

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