VIEWPOINTS : Does the Stock Market Need an Overhaul? : Wall Street Experts Point Out Flaws After Wild Week

L ast week, Wall Street went haywire. The stock market swung wildly, setting records for losses, gains and trading volume. Times staff writer Keith Bradsher interviewed a number of experts for their assessment of what, if anything, is wrong with the way the stock market works and what should be done about it. Excerpts from the interviews follow.

Gregg A. Jarrell, former chief economist for the Securities and Exchange Commission and now senior vice president and director of research at Alcar Group, a Skokie, Ill.-based financial analysis firm.

“I think it’s going to be very difficult to escape the conclusion that there’s an awful lot of this volatility that can be directly attributed to portfolio insurance and other kinds of program trading. Free-market economists, including myself, had argued, ‘Leave the market alone, it’s self-correcting.’ Anything that causes the market to go up or down, where anyone can guarantee almost that it’s going to go the other way the next day, that’s a money tree, and that will be arbitraged out of existence, just give the market a little time.

“I believe that in the long run; in the medium run, that will also be true for this particular kind of new age that we’re in. But when you get a 500-point swing in one day, and then you get a 300-point correction in the next two days, well, it’s like in the medium term, we’re all dead. I think it’s time for the regulators to think seriously.

“But I don’t want the SEC to go out there all by themselves and figure out what to do. People in the industry and people in academia ought to just stop saying, ‘What problem?’ and admit it, and try to come up with something that’s sensible. Because if they don’t, people with law degrees are going to take the regulatory ball and run with it, and that’s not cool. . . .

“Regulators don’t get paid to take risks, they’d much rather choke off all innovation if it keeps them from looking real stupid on any given day, and they looked real stupid (in the past week). The SEC’s going to come back strong. Not even the Republicans are going to stand in their way because this made the Republicans look stupid, too. You lose about 600 points off the Dow and there goes (Vice President) George Bush’s shot at the presidency. It’s ‘Katie bar the door’ in terms of regulatory response.”

John Brooks, a New Yorker magazine staff writer and author of half a dozen books on the stock market, including “The Go Go Years” and “The Takeover Game.”

“The machines have taken over and they operate--they’re supposed to be totally rational but they operate in a more irrational way than people do. . . . It’s the first stock market crash of the computer age and it’s totally different. The terms are all different. And I must say that I think it will take a little while to understand it. . . .

“The thing is that the workers aren’t even angry now, because it’s indirect. If it affects them at all, it will affect them through their pensions or funds that they hold indirectly. The little investor doesn’t exist anymore. There aren’t little investors in the market or at least there aren’t enough to have any significant effect on it. So it’s all different from 1929 and even 1969.

“In most cases, the corporation--not the (pension) fund--is responsible for meeting the pension promises and so the workers, presumably, barring the bankruptcy of the corporation, the workers will not be damned. Responsibility lies with the corporation. . . . It’s quite possible, yes, that some corporations will find that they have been far too free in taking money out of the pension fund.”

Muriel F. Siebert, chairwoman and president of Muriel Siebert & Co., a Manhattan brokerage, and former New York state superintendent of banks.

“The general stock market does not need an overhaul. I think some of the new financial products that have come out in the last two or three years need to be studied or perhaps regulated or perhaps eliminated. I’m referring to program trading primarily. I think that if you look at the reason that we have a market, it is to raise capital, it is to be a conduit to raise capital for corporations so that they can do research, expand, hire people, produce products. And we have had the best capital-raising system in the entire world. Other countries have been very, very jealous of us over the years. . . .

“(Program trading) has created a volatility which distorts the intrinsic value of stocks or the perception of the intrinsic value of stocks. . . . How can we as a country encourage people to buy a share of America when you saw that IBM in two days went from $150 to $100? This is a company that is not going out of business. This is IBM.”

Robert Lekachman, professor of economics at City University in New York City and member of the Times Board of Economists.

“I think one thing that would be sensible would be to make all stocks purchasable entirely for cash. In other words, people can now buy on up to 50% margin and this is an element of instability. It would be a good idea to make all purchases cash.

“Another thing, certainly, that should be done is to try to eliminate some of the conflicts of interest which now bug the market. Banks which have been forbidden since the 1930s to market securities directly do it covertly by setting up subsidiaries and so on. This ought to be stopped because it simply adds to banking instability. Other than that, I would certainly tighten up the merger and acquisitions game, which may be temporarily halted while the market sorts itself out anyhow. But in the longer run, I’d make it harder rather than easier for the various takeover artists to operate. . . .

“The financial instruments (in futures markets) have gotten so esoteric and are so little understood by anyone but their designers, and sometimes I wonder whether their designers understand them. . . . It’s gotten so complicated that no one but a specialist really understands what’s going on. And once it gets to that situation, complexity is the enemy of any kind of stability in the market.”

Jerry L. Jordan, senior vice president and chief economist at First Interstate Bank and a member of the President’s Council of Economic Advisers in 1981-82.

“I don’t think that there was any problem associated with Glass-Steagall (the 1933 law barring banks from the securities industry) or with margins. In fact, some relaxation of Glass-Steagall and an increase in the number of financial institutions that can participate in markets would add diversification.

“But there does appear to be a problem with program trading, where you have unlimited movement that can be triggered without individuals making it a conscious, deliberate decision that they want to sell. In the bond market, or in the futures market, there is a thing called a limit move. There’s a maximum amount for the day. There is no such thing in the equity market and it maybe that, in view of program trading, some sort of institutional reform would be necessary. . . .

“I suspect we’ll get a rash of Ph.D. dissertations coming out of this as to what happened and why it happened and what could be done about it. But for some time, there’s been a concern that futures trading in the bond market, as well as in foreign country markets, was dominating the cash market, rather than the futures market providing a way of hedging the risk inherent in the cash market. And so if those roles have been reversed, then some sort of reform or limitation on the movement might be in order.”

Alan R. Bromberg, professor of securities law at Southern Methodist University in Dallas and author of a five-volume treatise on securities and commodities fraud.

“Panic overhauling and panic regulation can be as serious as panic selling, and I’d hate to see us move too quickly on it. In addition to looking at the market itself, I think we need a better measure of the role that a lot of non-market factors have had in making the market nervous--Congress, taxes, deficits, foreign policy, military operations, all those things. But this much does seem clear to me. If we’re going to change the regulation of the market, we need to coordinate regulation of the stock market with the financial futures market. That probably means putting the SEC and the (Commodity Futures Trading Commission) together. Of course, they’ve been moving in very significant interpenetration with each other. . . .

“We could have trading limits and position limits, price change limits or shorter hours, some other things that might slow down the pace of trading, the kind of avalanche or snowball we’ve had in the last few trading days. . . . But I still don’t think a case has been made yet for a (thorough) overhaul of the regulatory system or markets.”

A. A. Sommer Jr., a Washington lawyer and a former member of the Securities and Exchange Commission.

“More than a modification in regulations, what we need is an understanding of how the market functions, given the fact that we have all of the new kinds of instruments that are available. You have new techniques such as portfolio insurance. You have the internationalization of markets so that the markets affect each other to an extent that they never have before. You have the tremendous changes in the technology which makes the instantaneous communication of information on orders, such things as program trading, possible where they weren’t previously. So I think before anyone thinks about a reform in the regulation of the markets, I think the first essential is to understand what the markets are, how they interrelate, how the new instruments relate to traditional measures such as the price of stocks and the price of bonds. . . .

“It may come out of (the stock market fall) that there will have to be some sort of change in the regulatory system. If that were done, I would hope that would be accompanied by greater collaboration among the major markets of the world to try to make sure that the regulatory schemes more closely approximate each other, particularly when they are operated in times of crisis such as we’ve had recently. But the plain fact is, the simple fact is that markets are going to go up and down, probably because of the new products, new techniques, technology and all that. You’re going to have more volatile markets no matter what you do, no matter how you try to re-regulate them. The volatility, I think, is built into the system and I don’t know of any way that you can eliminate it.”

James M. Benham, chairman of Benham Management International, a mutual fund management group in Palo Alto.

“The problems that I think exist in our system emanate primarily from Washington, where there is a lack of reality . . . in the way they’ve approached the tough questions. They’re sweeping them under the rug, under the hopes that they can be addressed maybe some time in 1989. And the market, I think, knows that and that’s one of the reasons the market went down. Because politicians have been gaming, and indeed, playing charades with the American public. Enough professionals worldwide have discovered that the game is a game and a lie, and reality has been reflected in the marketplace. People in Washington have not yet faced the reality. So I think that the (market) mechanism is a good mechanism. I know there’s volatility, but volatility in a free market is all right to me. I think the free market is the thing to be preserved and I don’t think we need government to overhaul it just because of it went down, it didn’t please them. . . . Most of the problems that the market reflects are not the fault of the market. They’re the fault of the factors that the market considers when it comes to determining price. . . .

“I don’t think that the addition of large players ruins the game. And just because something is volatile doesn’t mean that it’s bad. Maybe the patient’s temperature goes up and down; it doesn’t mean that we have to throw away the thermometer.”

James E. Heard, deputy director of the Investor Responsibility Research Center, a nonprofit business policy research organization in Washington.

“It strikes me that the markets have done a very good job . . . in sorting things out. The worst thing that anybody could suggest, in my opinion, would be to close the markets. . . . If you close them, you then have to anticipate what the impact is going to be on the foreign markets and certainly these developments underscored a global nature of security trading today. You also need to anticipate what is going to happen when you reopen the markets. You think you have a panic and chaos when you close them, watch out for when you try to reopen them. So I’m not persuaded that anything very drastic needs to be done in overhauling the stock market.

”. . . this kind of selloff is natural. I think what was different this time was that it just happened so fast. And that may be a reflection of the role technology now plays in the markets--computers and telecommunications, in particular. And maybe we should expect that very quick and volatile movement in the markets will become a permanent feature. Not that we should have a 500-point down day every week, but that we shouldn’t expect that it would never happen again either. . . .

“I think there may be some small investors who have just come into the market in the last couple of years who will be very wary for some time. On the other hand, I think, there are quite a few small investors who were acting in a rational manner in the past couple of days. Not running to sell their shares, but rather deciding to wait to see how things shake out, and there were even some in the market buying.”

Barbara S. Thomas, former member of the Securities and Exchange Commission and now a senior vice president with Bankers Trust.

“Overhaul entails redoing the whole system, and I don’t think the whole system needs to be redone. I think it has worked reasonably well for a long time. That’s not to say it couldn’t use a few fixes here and there. With respect to program trading, that to me is the one place where we might try to review what has been happening and make some changes. Because from everything I can tell, program trading has exacerbated the effects of the downturn of the market, or maybe was even part of the cause. . . .

“In the old days, before internalization, before the days of the incredible swiftness with which information could pass from one market to another, markets were isolated and trading within the markets was basically designed to deal with local conditions, with local stocks in local geographic markets being held by local stock holders. Now you have companies which have their operations around the world, which are listed on various stock exchanges, and whose share holders are in various places. So that when something happens in one market, its effects are felt in many markets, (and) that is geographic markets as well as stock markets.”