Thursday, 18 September 2008 05:00

I know how to end this mess, and prevent it from happening again

To all legislators, regulators and market participants. I hear that many are confused as to how to move forward in preventing the malaise that is gripping the US financial markets. I, for one, suggest that less resources be spent in trying to attack short sellers and more resourced be spent in bolstering the strenght and transparency of our financial services companies.

For instance, the SEC is lobbying to have hedge funds reveal their short positions, yet the SEC has yet to even suggest that financial service companies reveal their portfolios. There would be a whole lot less to short, and much less incentive to short what was available if full CORPORATE transparency was the tune of the day. That means no cryptic reporting that requires someone of my expertise to decipher. That means no, and I mean absolutely no, off balance sheet vehicles (which in my opinion, is one of the prinary causes of all of this nonsense).

To this day no one really knows what the composition, quality, amount or leverage employed by the only two remaining investment banks or practically any of the big money center banks are, now do we? In the absence of certainty, we have panic. The short sellers are justified in shorting, for if they weren't justified then the "innocent" companies would simply lay their entire portfolio bare for all to see, and consequently enjoy an aggressive and well deserved stock rally. Not one literally engineered by government rules and re-regulations, but one born from capitalistic pursuits and economic profit.

Rant and rave now offline. Now it's the humorous author Michael Lewis' turn. From Bloomberg :

There are, however, two culprits whose crimes are easy to
grasp. I offer them up to Ms. Burke, so she can get to work on
her feelings about them.

1) Christopher Cox. He's the chairman of the Securities and
Exchange Commission, and so has the job of regulating these
companies that helped make it possible for every poor American to
get a mortgage and are now, as a result, falling apart.

That, in itself, is no reason to blame him. He inherited a
broken operation: the SEC has been morally bankrupt for some time
now. The people who work for the place -- especially the ones who
call the shots -- have for years had a disconcerting habit of
leaving their low-paying government jobs regulating Wall Street
firms for high-paying ones at those same Wall Street firms.

Systemic Corruption

They are meant to guard against systemic corruption when
they are themselves systematically corrupt. It's hard for people
who are paid $85,000 a year to police people who are paid $15
million.

Happily, you can still blame Cox for something. He went as
far out of his way as he could to enable the brokerage firms by
harassing the small group of informed financial people who have
been trying to tell the truth to the markets: the short sellers.
They bet against the stock price of a company and so have always
had a bad reputation with the public. But in this case, they are
the closest thing we have to heroes.

A man named David Einhorn is a case study. He runs a hedge
fund called Greenlight Capital, which sells short some stocks and
buys others. That is, he doesn't just bet against companies but
for them, too.

Blaming Shorts

Still, for some time now, he's been standing up in front of
large audiences, announcing that he was short Lehman Brothers
stock, and then explaining in great detail its dubious accounting
practices. The SEC responded by demanding to see his firm's e-
mail, hinting darkly that he was part of some conspiracy to drive
Lehman Brothers out of business, and generally making him feel
that he'd pay a price for telling the truth.

Christopher Cox is probably a nice man who has no real idea
what just happened. But for the way he treated people with the
nerve to speak the truth to power you should feel free to blame
him anyway.

Last modified on Thursday, 18 September 2008 05:00