SEC Commissioner Gallagher On Market Risk, Stocks, And Savings Accounts

April 4, 2014

Securities And Exchange Commission Commissioner Daniel M. Gallagher has earned a reputation as a bad boy - industry pundits have come to view him as the Scalia of the SEC. That's a mixed bag of a reputation, combining an admiration for one's intellect with questions about a lack of collegiality and the addition of a certain coarseness to public debate. No matter where you stand on such a personality, there can be little doubt that the staid worlds of the Supreme Court and the SEC are often refreshed and shaken by the addition of a lightening rods such as Justice Scalia and Commissioner Gallagher.  Whether such catalysts ultimately strengthen or undermine those institutions is best left for history to decide.  As to the ongoing debate, I leave it to each of you to choose your side.

In the spirit of following Commissioner Gallagher's comments in the public forum, I offer his "Remarks Before the SEC / Academy of Finance Shadowing Program" (April 3, 2014). 

[L]et me take a moment to stress that it is not, nor should it be, the SEC's job to eliminate all risk from the securities markets.  If we tried to eliminate all investment risk, our securities markets wouldn't be as vibrant as they are today, and investors would suffer. 

I'll give you an example.  In 1985, the year Steve Jobs left what was then known as Apple Computer, Inc., the company's stock traded for about $2 per share.  That low price reflected the difficulties and uncertainties faced by the company at the time, and investors risked losing part or even all of their investment if the company faltered or failed.  In return for accepting that risk, that investor gained the opportunity - assuming he or she held onto the stock - to profit from Apple's eventual success.  Today, Apple stock is now worth about $540 per share, meaning that someone who invested $2,000 in Apple stock in 1985 would, taking into account the stock's splits, be sitting on a $540,000 investment today.

That's a very different outcome than if that investor had put their money away in a savings account.  Today's interest rates are at historic lows - around half a percentage point - so for the sake of argument let's multiply them by 10.  That $2,000 investment in a savings account paying 5% interest, compounded on a daily basis since 1985, would be about $4,000 today, or double the initial investment.  Not bad - but not too good compared to the Apple result of 270 times the initial investment.

Please don't get me wrong - traditional savings accounts and other low-risk or risk-free financial instruments and arrangements are crucial to our nation's financial infrastructure.  They simply can't offer the same possibilities of high returns that our equity and debt markets - with the risks they entail - offer to investors. . .

No, I'm not going to pick sides on the debate between investing and saving. Yes, I have my opinions but I don't feel the need to inject them into this article. As with the provocative questions now added to the end of many books for the purposes of providing book clubs and classrooms with topics for discussion, I will present a few of my own:
  • What is the SEC's mission in 2014?
  • Should the SEC attempt to eliminate some risk in the markets, and, if so, what risk would be so designated?
  • Are the current securities markets vibrant, and what do we mean by that term?
  • Are investors' and depositors'funds equally safe in the respective brokerage and banking accounts?

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