War on the Shorts
By - September 19, 2008

Regulators, law enforcement and major pension funds declared war on short-sellers Thursday as they try to put a stop to the panic gripping Wall Street. New York Attorney General Andrew Cuomo said he would use the state's Martin Act to pursue criminal fraud charges against short-sellers found to be manipulating shares in major financial institutions. His office opened a broad investigation of trading in shares of those companies, which have been badly beaten in the last 10 days. "The markets need to be stabilized," Cuomo said. "One way is to root out short sellers who spread false information." Meanwhile, New York's comptroller's office, joining a growing number of major pension funds, said Thursday it wouldn't lend out shares of Morgan Stanley, Goldman or 17 other financial stocks from its retirement fund's securities lending program. … The Securities and Exchange Commission is preparing a fresh wave of subpoenas to try to ferret out rumor-mongering, conspiracy or manipulation in financial stocks. Late Wednesday it also said it would try to force hedge funds and investment managers with greater than $100 million under management to disclose their daily short positions. Naturally, the fund industry isn't too keen on that. James Chanos, founder of short-selling oriented Kynikos Associates and head of a fund-lobbying group, said any rule requiring the disclosure of short positions "is akin to the government suddenly requiring Coca-Cola (nyse: KO – news – people ) to disclose their secret formula for free to all their competitors." The SEC subpoenaed 50 hedge funds earlier this summer to probe trading in shares of Lehman and Bear Stearns in March, when Bear Stearns was forced into a merger with JPMorgan Chase (nyse: JPM – news – people ) to avoid collapse. Lehman ultimately fared worse. It filed bankruptcy early Monday after a week-long assault. Short-sellers have been demonized in the current market turmoil, though it's safe to say the companies that have faltered made many missteps of their own. Short-sellers targeted Lehman Brothers, for example, accusing it of overvaluing its mortgage holdings and other accounting issues. – Forbes

Dominant Social Theme: Short selling is irresponsible! (In some cases, at some times.)

Free-Market Analysis: In a free market, participants would be free to buy or sell securities as they wished. Patently, as we have learned once again in the past weeks and months, the securities marketplace is not "free" and in fact is basically a kind of colony of the American Federal Reserve and Western central banks in general. How have we learned (or relearned) this? By watching what is going on.

We have already mentioned in these pages, that one of the more important business editors of the 20th century did not cover Wall Street much because the "Street's" doings ultimately were of little consequence. The important action lay with the industrial sector that "got things done" and "made things."

We weren't so sure then, and we're less sure now. (Actually, we thought it was an evasion.) And now, for a relatively small sector of the economy, Wall Street is sure attracting attention. Rightfully so in our opinion. Wall Street, in our opinion, is actually the fulcrum of the hinge, the industry that opens and closes the door, to a degree, to the world's creative futurity.

It probably shouldn't be this way, but there it is. One has to look past the wind-bagging to see what is really going on. What has been revealed with the rapidity of the recent buyouts and the amounts of money that have appeared out of nowhere, hundreds of billions in fact, is that Wall Street is actually a most significant factor in the world economy.

Let's put that in perspective. The American CIA (which apparently tracks such things) has estimated the 2007 world gross product to be around $65 trillion. Now recently Lehman Brothers, which attracted a great deal of attention of the Federal Reserve and other powerful market players declared bankruptcy and is being sold off in pieces. Barclay's is reportedly purchasing major parts of the business for some $4 billion and there are a few other pieces of the business to be sold off as well. But let's value Lehman at $10 billion. Heck, $20 billion. What that means is that a business worth maybe $20 billion (give or take) occupied the attention of the most powerful men on the planet for days, even weeks, because its unraveling threatened the stability of a $65 trillion economic system. That's leverage!

How has it come to this? – that deal-making entities can threaten to send the entire planet into a tailspin? Two words: central banking.

And what we have seen now definitively is that these large Street (and City) agglomerations of financial capital represent the dealing capacity not of free agents but of central banking itself. This isn't talked about very much, isn't even whispered mostly, but just as the commercial banks in the US do the Fed's bidding, so Wall Street dances very much to its tune as well.

Always the idea is to maintain that Western economies are "free" and that the "market" is paramount. But when push comes to shove, the face of that market is revealed. It is a market where some firms have acquired leverage such that they can ruin the world's finances, where central banking regulators can throw hundreds of billions of dollars into the marketplace overnight – from a standing start. A market where short-selling tolerated so long as it pulled down junior mining stocks and thus depressed the price of gold, but is to be criminalized when it threatens Wall Street's banking players (see following article).

After Thoughts

We expected that additional financial operations would be criminalized if the "crisis" became powerful enough. In fact it is all so medieval. Soon we expect traders we know to be branded with a big scarlet "S" for speculator and sent running down the street for their lives.

Yet we're not even sure that independent speculation is driving down the stocks of the big indy Street firms that are left standing, if uncertainly. Maybe it's just average investors finally waking up to the real value of highly leveraged banking dealers. And if speculation is driving down these firms, then we have to wonder what's wrong with that? Obviously, they are in a weakened state, not from speculation but from their own actions. But they will not be allowed to fail. Instead they will be merged with larger banks and indy short-sellers and hedge funds will soon be forced to show the market their private books.

Again and again, if we are willing to look, we see the current crisis, manufactured and massaged, as a blunt weapon that is aimed at those players that the monetary elite has not yet managed to corral. Whether or not they will ever manage to do so is another article for another day. (We vote no.) But the damage that is tolerated to engender this surreptitious, continuous takeover is truly phenomenal.