SEC poised to confront market hit by historic mania
From the mania engulfing GameStop Corp. and penny stocks to the explosive growth of SPACs, a nervous question is starting to make the rounds within American finance: Will the next sheriff of Wall Street be able to tame these wild markets?
Gary Gensler, President Joe Biden’s pick to lead the Securities and Exchange Commission, is poised to confront a run-up in share prices with few parallels in modern history. Perhaps more worrisome, the astronomical valuations are tied to companies like GameStop that aren’t expected to turn a profit for years, or, in the case of special-purpose acquisition companies, stocks with no actual business behind them.
The looming threat for Gensler, 63, is that the good times could end on his watch, triggering a crash that hits retail investors who’ve contributed to the boom particularly hard.
“We’re in a bubble, and bubbles burst,” said Jill Fisch, a professor at the University of Pennsylvania’s law school who focuses on market regulation. “For the SEC, that’s a tough thing because investors lose a lot of money. The question is how do you regulate when you know there’s a bubble?”
Speculative furor has been building in stocks for the better part of a year, fueled by the Fed’s easy-money policies and an army of first-time traders who’ve embraced commission-free brokerage apps such as Robinhood while stuck at home during the coronavirus pandemic. After bottoming last March, the S&P 500 has soared almost 70 percent, pushing measures of valuations based on profits and sales to the highest since the dot-com era.
The frenzy has gotten particularly wild last week, stirring anxieties in Washington. The SEC said it’s actively monitoring volatility in options and equity markets, and working with other regulators to assess the situation. Treasury Secretary Janet Yellen and Biden’s economic team are also keeping a close eye on the trading of companies whose stock prices have soared in recent days, according to White House Press Secretary Jen Psaki.
Gensler, who didn’t respond to a request for comment, is expected to take a much harder line at the SEC than market watchdogs did in the Trump era. He frequently sparred with finance executives when he imposed aggressive new rules on swaps trading while leading the Commodity Futures Trading Commission during the Obama administration. While the drawnout process of issuing new regulations is an often less-thanideal way to respond to fastmoving markets, there are several tools at his disposal.
They include using the bully pulpit to call out conduct the SEC doesn’t like and threatening enforcement actions. In the case of SPACs, which are also known as blank-check companies, Gensler could temper some of the euphoria by slow-walking new deals. And he might push brokers to do a better job in disclosing the dangers tied to stock options and margin accounts that retail investors have used to supersize their bets — or their losses.
Still, there are arguments to be made that Gensler should tread carefully. Equities — along with housing — are considered one of the few bright spots at a time when the U.S. economy is being ravaged by COVID-19. Plus, he wouldn’t want to announce any moves that trigger a selloff for stocks, thus causing losses for the mom-and-pop investors the SEC is focused on protecting.
One of the most powerful ways for any SEC chairman to discourage unwanted behavior is making speeches and issuing public statements.
Gensler’s predecessor, Jay Clayton, frequently spoke out about what he believed were widespread abuses involving cryptocurrencies, prompting market participants to pull back from some of their excesses. Clayton also triggered a brief slump for shares of SPACs in September when he announced that the SEC was scrutinizing the industry due to concerns that shareholders weren’t being told enough about how much money insiders could earn from the offerings.
Gensler could have a similar impact by saying the SEC is examining online posts for signs of collusion or stating that the agency’s enforcement division has launched investigations into whether traders are utilizing social media to manipulate markets — such as coordinating efforts to drive up certain stocks before dumping them.