money trail

Justin Wolfers on Freakonomics on Eliot Spitzer's integrity as Attorney General (Is Virtue What We Buy or What We Sell?), summarising work in 'forensic economics' by his colleague, Eric Zitzewitz:

Zitzewitz’s analysis focuses on analyzing the set of cases involving mutual fund market timing and late trading. Using available data, he develops some useful proxies of what he calls “the dilution of long-term fund shareholders from arbitrage trading.” Eric is too polite: this is a measure of how much money unsavory fund managers allowed to be diverted from our mutual fund savings. This all occurred because select friends of these managers were given the right to buy into the fund at this morning’s low price, rather than this afternoon’s higher price (even after the markets had risen).

In these cases, the evidence was uniformly strong, and by measuring this “dilution,” Zitzewitz can measure how egregious the misconduct by these firms was. All told, he compiles estimates of the harm — and public records on the restitution ordered — in 20 SEC-negotiated settlements. Of these, 16 involved the New York attorney general, and the resulting restitution typically amounted to about 80 percent of the harm — pretty close to full restitution. But in the 4 settlements in which Spitzer’s office was not involved, the SEC was willing to settle on a figure closer to 7 percent of the total harm.

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