SNOWDEN REVEALS HIDDEN RISKS IN U.S.STOCKS / MONEY NEWS

Snowden Reveals Hidden Risks in US Stocks

Wednesday, 10 Jul 2013 07:50 AM

By Patrick Watson

The sheer magnitude of PRISM and the other National Security Agency (NSA) spy programs Edward Snowden revealed is breathtaking. The threats to privacy and civil rights are serious, but they are not the only threats. The economic consequences may ultimately be much worse.
Last week in Secret NSA Deals Cast Doubt On All U.S. Stocks, I explained how U.S. companies are exposing shareholders to undisclosed risks when they cooperate with the NSA. I believe some executives would be guilty of securities fraud if not for secret immunity letters.
Let me say this again because it is important. Executives at publicly traded companies are lying to shareholders and probably their own boards of directors.

 

They are exposing your investments to real, material, hard-dollar losses and not telling you.
The government that allegedly protects you, Mr. Small Investor, knows all this and actually encourages more of it.
Who lies? Ah, there's the problem. We don't know. Some people high in the government know. The CEOs themselves and a few of their tech people know. You and I don't get to know. We just provide the money.
Since we don't know which CEOs are government-approved liars, the prudent course is to assume all CEOs are government-approved liars. We can no longer give anyone the benefit of the doubt.
If you are a money manager with a fiduciary responsibility to your investors, you are hereby on notice. A CEO may sign those Securities and Exchange Commission filings where you get corporate information with his fingers crossed. Your clients pay you to know the facts and make good decisions. You're losing that ability.

For example, consider a certain U.S. telecommunications giant with worldwide operations. It connects American businesses with customers everywhere. Fast-growing emerging markets like Brazil are very important to its future growth.
Thanks to data-sharing agreements with various phone providers in Brazil, this company has deep access to local phone calls. One day someone from NSA calls up the CEO and asks to tap into that stream. He says OK, tells his engineers to do it and moves on.
A few years later, Edward Snowden informs Brazilian media that U.S. intelligence is capturing these data. They tell the Brazilian public. It is not happy. Nor are its politicians, who are already on edge for entirely unrelated reasons.
What would you say are this company's prospects for future business in Brazil? Your choices are "slim" and "none." They won't be the only ones hurt. If the U.S. government won't identify which American company cheated its Brazilian partners, Brazil will just blame all of them. The company can kiss those growth plans good-bye.

This isn't a fantasy. It is happening right now. The legality of cooperating with the NSA within the United States is irrelevant. Immunity letters in the United States do not protect the company from liability elsewhere.

Now maybe the U.S. telecom industry will work out a solution with Brazil. Even in the best case, it will be an expensive and lengthy distraction from the business of making money for shareholders. You can also bet Brazil is not the only country in which U.S. firms are lending their connectivity to the NSA.

Any U.S. company with global expansion plans better re-evaluate. The welcome mat you were expecting may be gone before you get there.
Shouldn't shareholders get to know when their company's CEO takes these risks? Shouldn't the directors who hire the CEO have a say in the matter? Yes, they should. We now know that they don't.
The trust that forms the bedrock under U.S. financial markets is crumbling. If we cannot believe CEOs when they swear to tell the truth, if companies can hide material risks, if boards cannot know what the executives they hire are actually doing, any pretense of "fair markets" is gone.

When nothing is private, people and businesses soon cease to trust each other. Without trust, modern financial markets cannot function properly.
If U.S. disclosure standards are no better than those in the third world, then every domestic stock is overvalued. Our "rule of law" premium is gone.
This means a change for stock valuations — and it won't be bullish.

 

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