Market lessons from Matthew McConaughey movie ‘Gold’ Media mentions / Politics and Prose

Matthew McConaughey does it again by proving he can deliver the goods in his new movie, “Gold.” Like his incredible physical transformation in “Dallas Buyers Club,” for which he won the 2014 Best Actor Academy Award, he undergoes a visually monumental metamorphosis while definitively demonstrating he’s still at the top of his acting game. Go see it, and soon.

For those interested in financial and commodity markets, the film drills home the messages and lessons from both “The Big Short” and “Too Big to Fail:” Vigilant oversight with professional grade regulatory tools are needed to avoid potential problems.

“Gold” is inspired by true events, every bit as interesting as the tale told in the film. A small Canadian mining company (Bre-X Minerals Limited or Bre-X) that initially trades for a few pennies on the Alberta Stock Exchange (ASE) found what was reported as an incredible, “the world’s largest,” gold deposit—analysts estimated roughly 30 million ounces. The site’s potential, deep in the jungles of Borneo, Indonesia, was reported to be larger and larger. Lehman Brothers called it “the gold discovery of the century.” John Felderhof, on which McConaughey’s character is based, suggests 45 million ounces. The company share price, subsequently trading on the Toronto Stock Exchange (TSX) and then on NASDAQ, grew from around 30 cents a share to a high of $250 with a market capitalization of $6 billion.

The denouement in reality and “Gold” alike is woven of large, luxurious lives unravelled by details, deception, downright deceit, death and destruction.

Aside from enjoyable entertainment, a key lesson to be learned is that when things are going too well in markets, perhaps there’s potential for problems. Like the circumstances leading up to the Great Recession, as articulated by then US Treasury Secretary Hank Paulson in “Too Big To Fail,” over-the-counter (OTC) derivatives were not regulated because, “No one wanted it. We were making too much money.”

Likewise,”Gold” and the real Bre-X situation exemplify the need for prudent rules and regulations and well-funded oversight of markets—and in the case of mining, appropriate independent compliance regimens to ensure veracity and vigor.

For Canadians, regulation is sometimes confounded because they have 13 different provincial/territorial financial market regulators. I’ve argued a single entity would make oversight and enforcement easier—not to mention more efficient and effective. Despite the fact that my colleagues in key Canadian regulatory positions are excellent and are working to coordinate and harmonize various rules, Canada remains the only industrialized country without a single national securities regulator.

In the the real-life Bre-X story, despite the enforcement actions of various Canadian regulators, including the Ontario Securities Commissioner (OSC), in the end little other than years of litigation resulted from the regulatory filings. That said, for regulators and exchange SROs (self-regulatory organizations like the TSE and others in Canada, the US and around the world), there needs to be more transparency as to what a listed company is all about, including items like company political contributions that might not otherwise be disclosed—a matter being debated in the US. When a company is listed at an exchange and investors are risking money, regulatory and SRO due diligence are paramount.

For those who invest in physical gold, or those trading futures on metals at COMEX (the Commodity Exchange, a CME Group venue), robust rules and regulations were fortified as a result of the Wall Street Reform and Consumer Protection Act of 2010—otherwise known as Dodd-Frank. Ironically, President Trump has called for the repeal of Dodd-Frank. That would be a major mistake in my view as the new law importantly ensures previously unregulated OTC markets are now overseen by regulators.

It wasn’t the markets that had been regulated for decades prior to Dodd-Frank (like COMEX and the various stock exchanges in the US) that caused the Great Recession. Rather, the blame goes to the unregulated OTC markets and those at the largest financial institutions in the world that took ridiculously large, risky bets. Despite the nice jingle of the deregulation jargon, thoughtlessly deregulating financial markets is a surefire way to “Make America Tank Again.”

Finally, regulators, exchange SROs, and even market participants and observers need to constantly be looking around the corner at what might go wrong or could be done better. They also need to be nimble, quick and action-oriented, ensuring the avoidance of calamitous circumstances. For their part, investors simply must place priority on due diligence and the old adage, “If it sounds too good to be true, it probably is.”

“Gold” is a fantastic film, and McConaughey is typically magnificent. The inspired by true events plot is entertaining as well as informative, confirming what we know about both human behavior and the markets: attentive oversight and appropriate regulation are valuable tools to prevent disastrous consequences for shareholders.

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