 | ||
 | Lobbyist ban limits Obama's options | |
| White House: Greed will help | |
| John Holdren and Jane Lubchenco | |
| Congress approval way up | |
| The GOP and Steele: How big the tent? | |
| Whither J-School | |
| Bill's New Friend | |
| Pakistan and the Drones | |
| NJ Gov Poll: Christie +9 | |
| Douthat to NYT |
| Hot Shot Geithner Needs Help | |
| Obama is Right to Pile His Plate High | |
| Grading Obama's Economic Policy | |
| Left of Center-Right | |
| Paved With Magnificent Intentions |
March 12, 2009
Profit, Patriotism and Bear Raiders
By David Paul KuhnWarren Buffet has repeatedly compared this financial crisis to World War II. Franklin Roosevelt used to analogize the Great Depression to wartime. But if an economic crisis swallows a nation like war, then how should we receive "bear raiders" who are taking advantage of the current rules and market chaos to pummel businesses and worsen the crisis?
Society has long scorned war profiteers. Harry Truman made his name investigating corruption and waste among military contractors.
In the morally grey world of Wall Street the issue is less a matter of profiting off the decline than those instigating the decline for a profit.
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It's certainly okay to make a buck in war. Take automobile companies in World War II. But in wartime, society generally concedes profit cannot trump patriotism. An economic crisis may not be that different.
Consider the act of short-selling during a particularly bad bear market. Short sellers aim to profit from the fall of a publicly traded company. A trader makes money by the companies decline. It's a pessimistic bet, mostly practiced by professional investors.
In normal times, manageable bears or bulls, short sellers may legitimately view a stock as overvalued. Shorts can sober overpriced securities. Shorts can make assets more liquid, easier to sell and purchase. They serve as insurance against gambling on the upturn. And certainly, speculation must allow for both ups and downs.
But a host of major Wall Street banks, from Citigroup Inc. to Morgan Stanley, argue that short-selling has not simply made money in this economic crisis but contributed to it by driving down stocks to destroy companies. Some short-sellers therefore are exacerbating the same company's decline they have gambled on.
"The shorts certainly seem to accentuate any kind of weakness" in a company, said Bob Pavlik, chief market strategist of New York 's Banyan Partners LLC. "The shorts have been acting if not like an organized group, a sort of wolf pack."
The shorting problem is only multiplied when hedge funds act as a "wolf pack" and collectively attack a company already in critical condition.
Past collapses have witnessed similar concerns. But even as bear markets go, these are not normal times. By Barron's count the stock market has lost $2.6 trillion in the past 10 weeks alone. That's nearly equal to the 2008 GDP of the United Kingdom. We have the worst unemployment rate in a quarter of a century, 8.1 percent. The world's seventh largest economy, California, has come near to complete financial collapse. Millions of Americans life savings have been decimated. In Buffet's words, it's "an economic Pearl Harbor."
Short-selling did not cause this economic crisis. But some short-sellers contribution to the crisis has evoked moral issues.
"Imagine you are a salvaging company. You make money off salving refuge on buildings that collapse," said Waheed Hussain, an assistant professor of business ethics at University of Pennsylvania 's Wharton School. "It's one thing to make money off a bridge collapsing. It's another thing to send extra trucks over the bridge to get it to collapse."
The government concluded during the Great Depression that short-selling exacerbated the market collapse. A so-called uptick rule was implemented in 1938 to regulate bearish traders to only shorting a stock on the uptick--when the price has increased. The Securities and Exchange Commission canceled the rule in 2007.
The impact of the uptick rule is debated. But no less than Wall Street giant Charles Schwab wrote in December that the uptick rule, "slowed the short selling process making it more expensive and limiting the ability of short sellers to manipulate stocks lower by piling on, driving the share price quickly down and quickly profiting from the downdraft they created." And as Schwab put it, "without this vital control mechanism, short-sellers have been having a field day."
SEC chairwoman Mary Schapiro said in January that she would look into short selling and reinstating the uptick rule. Earlier this week, the chairman of the House Financial Services Committee, Barney Frank, triggered buzz on Wall Street when he said, "I am hopeful the uptick rule will be restored within a month. Mary is moving towards the uptick rule."
Some Wall Street veterans are asking what's taking so long? Pavlik believes, like Schwab, the uptick rule would have "slowed the decline."
After all, this economic war's enemy is not only the decline itself but also a delay, impotence or inefficiency in combating the causes of the decline. Though so is governmental overreach, Wall Street analysts argue.
Shortly after the market first crashed in September, the SEC enacted a temporary ban "to prohibit short selling in financial companies" and to protect market "integrity." It noted, "unbridled short selling is contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation."
The SEC ban though may have confused the market. The economic crisis had spread far beyond the financial sector. The ban likely fueled volatility. It was expected to expire from its inception and may have artificially boosted the financial sector. Sufficed to say, the ban is controversial. The return of the uptick rule is more tolerable to Wall Street.
Then there is the moral debate, never popular among traders. Ethical questions of "the common good" are "engaged" when Americans bet against the market and aggravate the crisis, Hussain said.
"We rightly limit moral free space sometimes in a crisis through law," Thomas Donaldson said, also a business ethics professor at Wharton. "There's never a justification for limiting basic freedoms, i.e., to a fair trial, or to free speech, but the right to short sell doesn't make the cut."
Donaldson conclusion, the "financial exigency argument is strong."
But traders flinch at discussions of new circuit breakers on the market. They say their job is to make money. And indeed some traders are now placing "doomsday puts," betting options on a Dow Jones below 5,000 points. Last week though analysts suggested that short-selling helped drive the Dow to its lowest close in 12 years, crossing the line between profiting off the nation's decline and helping to inflame it.
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