Page 2 of 2 Bush team turns to the dark side
By Julian Delasantellis
in power is a fine thing to have, except when there's money lying around on the
table. Whether caused by bear short raids or not, the sharp declines in the
share prices of US financial companies were putting tremendous pressure on the
Bush administration and Federal Reserve.
The Fed had gone way out on a limb after speculators essentially ran Bear
Stearns out of town in March, and no one wanted to go through that again, not
with the presumed next target in the speculator's sniper scopes, Lehman
Brothers, certainly not with the much larger Fannie and Freddie. After Treasury
Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke weighed in
with their support package designed to convince the markets that the two were
still sound, SEC chairman Cox made
his contribution; much in the spirit of The Godfather's Don Corleone, he
made the shorts an offer they could not refuse.
Following his announcement on July 15, it is now illegal for a limited but
extendable period to naked short sell Fannie and Freddie, along with another 17
of the nation's largest investment and commercial banks such as JP Morgan
Chase, Bank of America, Goldman Sachs, even such foreign houses such as
Deutsche Bank and Allianz of Germany, Daiwa of Japan, and UBS and Credit Suisse
of Switzerland. Cox also announced that he was firing off hearty salvos of
subpoenas to those whose naked short selling he suspects brought down Bear
Stearns.
For the iconoclastic entrepreneurial finance mavericks of Wall Street,
government intervention in their business operations was always something to be
loathed and decried, like a mother making a little boy put on his coat or
tricycle training wheels. "No no no," they cried out. "We can't. How dare you
make us obey the same type of laws that other businesses regularly have to
follow, such as those that insure fair dealing with consumers, and lack of
discrimination when dealing with racial and/or ethnic minorities. That will
make us inefficient, and we'll never be able to compete!" But it seems to be a
different story when the government regulations involved are not a burden that
the banks must bear, but a burden the rest of the society must carry for the
benefit of the banks.
An integral part of the now standard gazillion-dollar pay envelopes executives
of these companies take home is derived from formulas that, at their core, have
the companies' stock appreciation as the core input. By removing the threat of
bear raids lightening those envelopes, the only question as to the executives'
upcoming salaries is now evocative of this exchange from the 1990 movie Pretty
Woman, wherein a Mr Hollister (Larry Miller), a salesman at an
exclusive, Beverly Hills women's clothing shop, asks how much money billionaire
Edward Lewis (Richard Gere) intends to spend in his store.
Hollister: "Just how obscene an amount of cash are we talking about
here? Profane or really offensive?" Lewis: "Really offensive." Hollister:
"I love this guy."
But it was not as if "never" was heard a discouraging word by chairman Cox
regarding his new initiative. Executives from banks and financial institutions
not among the chosen 19 complained that, with a legal fortress now erected
around the share prices of the big fish, the attention of the ravenous shorts
would invariably turn to the smaller guppies in the pond. These too were
desirous of that now-blessed warm security blanket of protection of their pay
packages from the shorts.
Also, in the only real type of dispute that the US government really cares
about these days, that of old money versus new money, executives at
market-making and hedge-fund firms (these would be new money) howled that,
since naked short selling was such a central part of their trading operations,
they should be exempted from the new regulations. Like a corrupt medieval pope
selling indulgences so sinners could enter Heaven, Cox quickly agreed.
Some observers pointed out that, what with most American financial institutions
scheduled to report their quarterly profit (very unlikely) and loss data in the
next few weeks, Cox's move was, if anything, a sort of financial markets
prophylactic; it's intent was to make potential shorts question what use would
be bear raids on these wounded and staggering market titans if all the riches
accruing from the procedure went to keeping Bubba the psycho serial killer away
from you in the shower room at the Marion, Illinois Federal Penitentiary.
Market supremacists always downplay the potential effects of government actions
and regulations, saying that the market is always smarter than government, that
it will invariably see through and past the intervention to the actual
conditions existing prior to the implementation of the government actions.
After last week, this point of view has some explaining to do.
Proving that, indeed, the government can make as much wealth as the private
sector can destroy, the new SEC rules have ignited a massive rally in the US
financial sector. From their lows last Tuesday (July 15) before the regulations
were announced to Monday's close, the BIX index is up 38%, but among the
blessed 19, the results are even more dramatic. The share price of Bank of
America is up 55% over that period; Fannie and Freddie have really hit the
jackpot, up 107 and 124%, respectively.
Where you think that things will progress from here depends much on your
perspective. If you think that the market sees all and knows all, you will
probably be expecting a fairly significant selloff when (or if?) the naked
short selling regulations are lifted - maybe a veritable Kentucky Derby-esque
cavalry charge of shorts bursting through the gate and depressing financial
stock prices whenever the bell to resume naked short selling rings. However, if
you believe that markets are susceptible to the same frenzied spirits and wild
manias that are the bane of the rest of human affairs (like if you are up to
speed on what is now called behavioral economics, where the most cutting-edge
research in financial economics is now being done), you might see the shorting
ban as a necessary temporary tool that could act to calm the ongoing panic in
the financial sector, a panic that might well be better controlled and
ameliorated once the mortgage rescue proposals of Representative Barney Frank
and Senator Christopher Dodd make a bit more progress in Congress. In much the
same way as Dr Johnson saying that nothing focuses the mind like the prospect
of a hanging, perhaps nothing will focus naked short traders' minds like the
prospect of the FBI at their doors.
I have to admit that, on many levels, I am highly conflicted regarding these
events. Regular readers here are probably well aware that I have absolutely no
objection to aggressive government regulatory intervention in the markets, but
I would much rather have seen the government take my advice to heed with
interventions that better promote the general welfare, such as reforming the
nation's currently dysfunctional markets for health insurance, rather than
interventions wholly designed to succor wealthy financial institution
stockholders and hedge fund investors.
On a personal level as well, these developments leave me torn. In the interests
of full disclosure, I should note that I have been very pleasurably shorting
the US financial sector for many months now (although my brokerage house does
not allow me to naked short, I know that if my portfolio had two or three more
zeroes at its end they might be more willing to discuss the issue.) I find this
a very effective strategy that shears away much of the beta, the market risk,
from my portfolio, leaving me to enjoy the alpha, the market outperformance, of
my specific well-chosen market leaders. (See
No such thing as a Sure Thing, Asia Times Online, October 2, 2007, for
a discussion of the investment concepts of alpha and beta.)
Needless to say, if you don't understand every word in the last paragraph, than
as the captions read in some American TV commercials, don't try this at home.
In the traditional government belief that something done well will be done even
better if you do a lot more of it, if it comes to be believed that the
anti-shorting regulations have been a success, will the government, all
governments, now more aggressively move against shorting, indeed, against all
forms of speculation? The simplistic assignment of blame for the oil price
spike by the US Democratic Party on oil speculators, where it has perhaps a bit
more actual validity, falls along these lines.
Will next there be a generalized crackdown against shorting and speculation?
There will always be ways to circumvent these types of initiatives, but what
offends me the most is the apparent belief inherent in the anti-shorting
movement that participants in the financial markets should, and by law must be
forced to, transform themselves into some manner of Stepford Traders (after the
1972 Ira Levin novel, The Stepford Wives, about a group of suburban
husbands, tired of their wives' dalliance with feminist independence, who
construct robotic duplicate brides always willing to please their mates in
every way). These would always be smiling, dressed up in striped old-school
ties and colorful blazers, always more than willing to mindlessly buy into
every Wall Street lame-brained cockamamie idea, be it subprime mortgages or
Overstock.com, that some overpaid CEO can dream up and then have the
callipygian osculators on his board of directors say is absolutely brilliant.
I enjoy the freedom to be the skeptic, and the freedom to put my money where my
raised eyebrow is. When everybody else is admiring the big strong horses
pulling the brightly colored floats in the parade, we, the shorts, are the
people wondering where are the guys with the shovels to clean up after the
mess.
I told my wife that the government is cracking down on short selling. "Don't
they have to make a reasonable accommodation for the height-challenged under
the Americans with Disabilities Act?"
Maybe not for that, but, because it's so rare, because it truly is an
endangered minority, perhaps the government should be protecting, not
persecuting, those who on a regular basis have the courage and wisdom to think
independently.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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