Monday, August 4, 2008

Chris Cox-Obfuscator

"Last week, in close consultation with the Treasury and the Fed, the SEC issued an order to further the objective of existing commission rules that restrict naked short selling. It applies to precisely those financial firms that the Fed has designated as eligible for access to its liquidity facilities--and for which the taxpayer could be on the hook. The order carefully protects legitimate short selling in these securities. Our agency's rules have long been supportive of short selling. ... Illegitimate naked short selling is different. In the context of a potential 'distort and short' campaign aimed at an otherwise sound financial institution, this kind of manipulative activity can have drastic consequences. Eliminating the prospect of naked short selling will help assure investors that it is safe for them to participate, and that when the market declines it is not because of unseen manipulators and "distort and short" artists. ... The SEC is committed to maintaining orderly securities markets. It neither can nor should direct the market's fluctuations, up or down", my emphasis, Chris Cox (CC) at the WSJ, 24 July 2008.

"The SEC is focusing on four rumors that circulated about Wall Street firm Lehman Brothers Holdings Inc. in recent weeks, as the commission's investigation into potential market manipulation heats up. ... Top Lehman executives believe traders who profit when a stock falls, known as short sellers, have been spreading allegedly false rumors about their stock in an attempt to drive it down. ... Market-manipulation cases are difficult to prove. ... Authorities must prove that traders knew the information was false and spread it with the intention of profiting from its dissemination", Kara Scannell and Susanne Craig at the WSJ, 28 July, 2008.

"Asked for an example of false market rumors bringing down a firm, Harvard financial historian Niall Ferguson thought for a moment. 'You might look at France in the 18th century,' he suggested. ... Ironies abound. For one thing, rumors about Bear Stearns losses appear to have been true, confirmed by the federal regulators who oversaw the forced sale of the firm. For another, the list of the largest financial firms being protected from naked short selling by hedge funds ... includes several being investigated for potential manipulation of Bear Stearns and Lehman shares. Still another, Fannie Mae and Freddie Mac are among those being protected, even though forensic-accounting short sellers (naked or not) were right over the years to warn that the federal housing insurers were putting taxpayers at real risk. A final irony: In the credit crisis, the one class of financial-services firm that has not collapsed or begged for a bailout is the hedge-fund industry. James Chanos ... last week wrote Mr. Cox that 'artificial restrictions on short sales undermine the integrity of prices in our markets because they remove liquidity and, more importantly healthy skepticism from the market-place. ' There is a long history of selling short the short-selling messengers of bad news that turned out to be accurate", my emphasis, L. Gordon Crovitz at the WSJ, 28 July 2008.

How does CC distinguish legitimate from illegitimate short sales? Why is naked short selling illegitimate? What is CC talking about? Is an Einhorn or Ackman short illegitimate by virtue of who made it? Are shorts only illegitimate when made on shares of companies managed by CC's friend? Or companies CC seeks a future position with? CC supports short selling? Do Einhorn, Ackman or Chanos agree? How would CC know if the "victim" of a "distort and short" campaign is "sound"? Did CC think Bear Stearns was sound in March? The SEC's actions against short sellers convince me it is manipulating the markets. Imagine, the Treasury, SEC and Fed, the three biggest market manipulators are warring on short sellers. They all reside on the other side of the looking glass.

This SEC investigation is a joke. If the Lehman executives "knew" of these rumors, they also should have known LEH-NYSE was underpriced. Did they buy LEH stock recently?

Chanos is correct. Cox is aware of what Chanos writes. That's precisely why the SEC is warring against short sellers.

No comments: