Investment banking stocks are crashing and regulators are all in a huff. They are aggressively harassing short-sellers.
SEC Chairman Chris Cox previously announced a ban on naked short selling, even though regulations already existed that banned that specific type of short sale. On Thursday, Cox proposed requiring hedge funds to post daily the short positions they have in stocks.
New York State Attorney General Andrew Cuomo, tried to one-up Cox, and has started a "wide-ranging investigation" of his own into short selling and has called for the SEC to put a " freeze on short selling of financial stocks on a temporary basis."
Republican presidential candidate John McCain, who apparently isn't satisfied with calling for war against Iran, Russia and China, wants to see battle also joined against short sellers. In fact on Thursday, he called for the firing of the wonderfully incompetent and ineffective SEC chairman Christopher Cox.
So what gives? Are short-sellers the evil monsters of Wall Street?
No there are not and, as Walter Block might say, they are, in fact, heroes.
To understand what is going on, one must realize that the structure of the now collapsing financial industry was built upon the money pumping ways of Alan Greenspan and the early Ben Bernanke. It was easy for the macho, testosterone fueled big swinging dick investment bankers of Wall Street to borrow the money that Greenspan and Bernake printed at the below normal market rates.
Since the Fed operates on the short term end of the interest rate spectrum, that's where investment bankers borrowed their billions. Borrow at the low short-term rates and lend long on mortgages and the like at higher rates, and earn the spread. That was the Fed enabled game. The more billions you borrowed, the more you earned. And the Fed certainly accommodated the Wall Street players. Even early this year, three month annualized M2 money growth was moving along at double digit rates. Indeed, in March, three month annualized money growth was 12.5% Then something peculiar happened a few months ago. Either Ben Bernanke became a closet Austrian economist (The only ones who really understand business cycle theory, and who would call for a complete end to money supply manipulation) or he really didn't understand mainstream economic monetary theory well enough to realize he was dramatically slowing the money supply. (Note: I'm not betting he is a closet Austrian. My bet is he is incompetent and bumbled his way into slowing money growth.) As of last Thursday, three month annualized M2 money growth was only 1.5%.
Now Wall Street investment bankers need fresh new money all the time, to keep the long term assets they bought with short term money, financed. With less new money being created, it was a case of musical monetary chairs. There were more investment bankers needing "financing chairs", then actual financing out there. Lehman was the first to find itself short of funds.With hedge funds being run by very aggressive, very savvy traders, it did not take them long to realize that there was a shortage of money to finance the current financial structure. Always seeking profit from whatever the financial situation, the hedgies poured over financial statements to see who was the most vulnerable investment bank. Who leveraged the most? and Who would never be able to find the money to support the previous financial structure? were the questions they asked. The name Bear Stearns popped up. And thus the hedgies shorted whatever Bear Stearns stock they could find. Once loaded up, they, of course, told the world what a financial wreck Bear Stearns was--and thus became labeled rumor mongers, In fact, they were speaking truth to Wall Street, not rumors.
Once Bear Stearns was wiped out, they moved on to identify and load up short positions in others who played in the Federal Reserve induced high leverage game. Next came Freddie Mac and Fannie Mae, then Lehman Brothers and then AIG. So what was the role of the short-selling hedge funds?
They scoured the balance sheets to discover who was overly leveraged--so we wouldn't have to. They leaked to the financial press who was in trouble--so we could get the news with our morning paper and they speeded up the financial crisis so that it occurred in just weeks instead of months or years. As a result of their aggressive due diligence, they pointed out a mis-match and shortage of funds that would otherwise have taken months, if not years to become clear and unwound. The economic mess would have dragged on and on. They are, indeed, heroes. And as if in an Ayn Rand novel, they will be harassed and investigated by the evil keepers of the ugly, manipulative, inflation created, status quo.
Christopher Cox, Andrew Cuomo and John McCain will pander to the unthinking masses, satisfy their status quo sponsors on Wall Street, and harass, interrogate, regulate and attempt to destroy the true heroes of this financial drama.
But the drama doesn't end here. There may be a kind of Benedict Arnold in cahoots with the hedge funds.
Very little on Wall Street is exactly as it seems. It is so even with our hedge fund heroes, since I suspect that Treasury Secretary Paulson may have played some type of role in the early short-selling escapades. While our hedge fund/short selling operators may have been involved in a noble cause, the role of Treasury Secretary Paulson may have been to use these short-sellers as his tool to wipe-out competitors, so that the Fed money printing game will be the exclusive domain of Paulson's old firm Goldman Sachs. It is noteworthy than Paulson's lapdog, Ben Bernanke, may have accelerated the money printing presses again at this time, just when it appears that Goldman Sachs may be the only major independent investment bank left standing--and just before the hedgies started to take a good hard look to see why Goldman shouldn't end up in the same trash bin as its competitors.
It is very important to keep in mind what Robert Novak reported about, one, Hank Paulson: "Hank is for Hank." And it is also important to keep in mind, as the inevitable hearings and mud slinging begins, that hedge fund short sellers are as much heroes warning of dangerous balance sheets as was Paul Revere in his midnight ride and warnings.
To understand what is going on, one must realize that the structure of the now collapsing financial industry was built upon the money pumping ways of Alan Greenspan and the early Ben Bernanke. It was easy for the macho, testosterone fueled big swinging dick investment bankers of Wall Street to borrow the money that Greenspan and Bernake printed at the below normal market rates.
Since the Fed operates on the short term end of the interest rate spectrum, that's where investment bankers borrowed their billions. Borrow at the low short-term rates and lend long on mortgages and the like at higher rates, and earn the spread. That was the Fed enabled game. The more billions you borrowed, the more you earned. And the Fed certainly accommodated the Wall Street players. Even early this year, three month annualized M2 money growth was moving along at double digit rates. Indeed, in March, three month annualized money growth was 12.5% Then something peculiar happened a few months ago. Either Ben Bernanke became a closet Austrian economist (The only ones who really understand business cycle theory, and who would call for a complete end to money supply manipulation) or he really didn't understand mainstream economic monetary theory well enough to realize he was dramatically slowing the money supply. (Note: I'm not betting he is a closet Austrian. My bet is he is incompetent and bumbled his way into slowing money growth.) As of last Thursday, three month annualized M2 money growth was only 1.5%.
Now Wall Street investment bankers need fresh new money all the time, to keep the long term assets they bought with short term money, financed. With less new money being created, it was a case of musical monetary chairs. There were more investment bankers needing "financing chairs", then actual financing out there. Lehman was the first to find itself short of funds.With hedge funds being run by very aggressive, very savvy traders, it did not take them long to realize that there was a shortage of money to finance the current financial structure. Always seeking profit from whatever the financial situation, the hedgies poured over financial statements to see who was the most vulnerable investment bank. Who leveraged the most? and Who would never be able to find the money to support the previous financial structure? were the questions they asked. The name Bear Stearns popped up. And thus the hedgies shorted whatever Bear Stearns stock they could find. Once loaded up, they, of course, told the world what a financial wreck Bear Stearns was--and thus became labeled rumor mongers, In fact, they were speaking truth to Wall Street, not rumors.
Once Bear Stearns was wiped out, they moved on to identify and load up short positions in others who played in the Federal Reserve induced high leverage game. Next came Freddie Mac and Fannie Mae, then Lehman Brothers and then AIG. So what was the role of the short-selling hedge funds?
They scoured the balance sheets to discover who was overly leveraged--so we wouldn't have to. They leaked to the financial press who was in trouble--so we could get the news with our morning paper and they speeded up the financial crisis so that it occurred in just weeks instead of months or years. As a result of their aggressive due diligence, they pointed out a mis-match and shortage of funds that would otherwise have taken months, if not years to become clear and unwound. The economic mess would have dragged on and on. They are, indeed, heroes. And as if in an Ayn Rand novel, they will be harassed and investigated by the evil keepers of the ugly, manipulative, inflation created, status quo.
Christopher Cox, Andrew Cuomo and John McCain will pander to the unthinking masses, satisfy their status quo sponsors on Wall Street, and harass, interrogate, regulate and attempt to destroy the true heroes of this financial drama.
But the drama doesn't end here. There may be a kind of Benedict Arnold in cahoots with the hedge funds.
Very little on Wall Street is exactly as it seems. It is so even with our hedge fund heroes, since I suspect that Treasury Secretary Paulson may have played some type of role in the early short-selling escapades. While our hedge fund/short selling operators may have been involved in a noble cause, the role of Treasury Secretary Paulson may have been to use these short-sellers as his tool to wipe-out competitors, so that the Fed money printing game will be the exclusive domain of Paulson's old firm Goldman Sachs. It is noteworthy than Paulson's lapdog, Ben Bernanke, may have accelerated the money printing presses again at this time, just when it appears that Goldman Sachs may be the only major independent investment bank left standing--and just before the hedgies started to take a good hard look to see why Goldman shouldn't end up in the same trash bin as its competitors.
It is very important to keep in mind what Robert Novak reported about, one, Hank Paulson: "Hank is for Hank." And it is also important to keep in mind, as the inevitable hearings and mud slinging begins, that hedge fund short sellers are as much heroes warning of dangerous balance sheets as was Paul Revere in his midnight ride and warnings.
Robert Wenzel is an economic consultant and Editor & Publisher of EconomicPolicyJournal.com. He can be reached at rw@economicpolicyjournal.com.
