Monday, September 15, 2008

Selling Naked

So Lehman Brothers is going under. Not yet Chapter 7, but can that be far behind? The thing that bothers me most about the news is that it is now characterized as a failure triggered by the collapsing mortgage market. But the ugly truth is that it wasn’t an abstraction like a collapsing market that created the failure of Lehman. It was Lehman executives. They created the conditions that led to the market collapse, not the reverse. Extreme greed characterized Lehman executives and senior staff. Maybe we should create a new Olympic sport called Extreme Greed. Out-of-work Lehman executives could be first in line to compete.
I guess everyone knows about “short selling”. That’s where you (if you’re a trader on the inside) are allowed to sell things you don’t own. It’s sort of like me deciding that the real estate market in your neighborhood was dropping or going to drop, so I would sell your house, on the assumption that the market would drop. Then, when it actually dropped, I’d buy it back at the reduced price and you and I would pocket the difference. Mostly, in traditional short selling, I would have to ask to borrow your house before I could sell it. But then the geniuses on Wall Street came up with a new idea to make money out of thin air. They call it ‘naked short selling.” That’s where I don’t even have to ask you before I sell your house. I just sell it, wait til the market plummets, buy it back, then I pocket the difference. I guess technically I don’t actually sell your house. I just sell A House in your neighborhood, address unknown, with a sort of promise to produce a house if need be. Now I would think the SEC would frown on such naked selling. But no, they moved to temporarily protect certain specific banks in the mortgage business from such crap dealings. The Republican head of the SEC thinks such dealings are totally A-OK.
Then there’s the expectation that, when you buy something like stocks, you do so with something approximating a full disclosure of the financial worth of the thing you intend to buy. Two things are supposed to guarantee such full information. One is the rating agencies. The second is the audit firms that produce audit reports on the businesses and financial instruments. Well, guess what, it turns out that the companies being rated hire and pay the fees of the rating agencies. So, if they don’t like the ratings being produced, they simply hire another rating agency. Same thing with the audits. If they don’t like an audit finding, they can simply replace the auditor. Conflict of interest? DUH!. Yet, nobody is willing to address these obvious conflicts or the inevitable results of such conflicts—like a collapsing financial system.
Republicans oversaw the collapse of the entire economy in 1929. Republicans oversaw the collapse of the entire S&L industry (remember George H.W. Bush?). Now Republicans are overseeing the collapse of the entire US mortgage market and the financial system that both created that collapse and now suffer from its own greed-induced failures.
Now, John McCain promises to turn over our Social Security system to the kind of people who managed and produced the financial system collapse. With a straight face, John McCain asks us to trust him and trust these same financial geniuses to “save” the Social Security system.
“There’s a sucker born every minute,” and John McCain is asking for their votes.
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