In testimony before Congress yesterday, Richard Fuld, the former CEO of Lehman Brothers, said that (criminal) naked short selling precipitated the demise of Bear Stearns and Lehman, and nearly toppled Goldman Sachs and Morgan Stanley.
Given that not only Fuld, but also the CEOs of Goldman Sachs, Morgan Stanley, JP Morgan and a good number of traders on Wall Street – along with John McCain, Hillary Clinton, the Chairman of the SEC, the Secretary of the Treasury, and countless others in Washington — have all now implicated naked short selling in the hobbling of the American financial system, you would think that the mainstream media could produce just one investigative report – just one story taking a serious look at this criminal activity and its recent effect on our markets.
Instead, we get the usual platitudes from the likes of Joe Nocera at The New York Times. He writes:
“Mr. Fuld, in typical C.E.O. fashion, claimed to take ‘full responsibility’ for his actions — but spent the entire time blaming others for Lehman’s downfall. Early in his testimony, he even blamed [emphasis mine] ‘naked short-sellers’ who passed along “false rumors” that started a run on his bank.”
By Nocera’s standards of anti-investigative journalism, a serious issue is settled not with data or evidence, but with one word – “even.” Could naked short selling have triggered the bank run that has Chernobyled our financial system? Can’t be, writes Nocera, because Lehman’s CEO “even” said it can be.
Nocera continues: “As both The New York Times and The Wall Street Journal pointed out in lengthy stories on Monday, Mr. Fuld had assets on his books that were wildly overvalued.”
So, apparently, Lehman could not have been a victim.
A woman who once shoplifted is raped in an alley. Was she raped? No, because she was a shoplifter and she “even blamed” the rapist.
Keep in mind that Nocera once encouraged an assembly of his media colleagues not to investigate naked short selling. “Life’s too short,” he told a panel audience at the annual conference of the Society of American Business Editors and Writers. “I don’t want to do it.”
Well, somebody should do it – and fast – because the SEC is going to lift its ban on short selling tomorrow, and there are no signs that it’s going to force hedge funds to borrow real shares before selling them.
So it will once again be open season for naked short selling – and market destruction. Countless more companies will fall prey to an easily preventable crime. And more CEOs will “even” point fingers at the criminals while Joe Nocera and the Media Mob stand idly by.
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If any journalists are interested, here is Fuld’s testimony:
“The second issue I want to discuss is naked short selling, which I believe contributed to both the collapse of Bear Stearns and Lehman Brothers. Short selling by itself can be employed as a legitimate hedge against risk. Naked short selling, on the other hand, is an invitation to market manipulation. Naked short selling is the practice of selling shares short without first borrowing or arranging to borrow those shares in time to make delivery to the buyer within the settlement period – in essence, selling something you do not own and might not ultimately deliver to the buyer.
Naked short selling, followed by false rumors, dealt a critical, if not fatal blow to Bear Stearns. Many knowledgeable participants in our financial markets are convinced that naked short sellers spread rumors and false information regarding the liquidity of Bear Stearns, and simultaneously pulled business or encouraged others to pull business from Bear Stearns, creating an atmosphere of fear which then led to a self-fulfilling prophecy of a run on the bank. The naked shorts and rumor mongers succeeded in bringing down Bear Stearns. And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers. In our case, false rumors were so rampant for so long that major institutions issued public statements denying the rumors.
Following the Bear Stearns run on the bank, we and many others called on regulators to immediately clamp down on naked short selling. The SEC issued a temporary order that went into effect on July 21 prohibiting “naked” short selling of certain financial firms, including Lehman, Merrill Lynch, Fannie Mae and Freddie Mac. This measure stabilized the share prices of Lehman Brothers and the other firms. However, this restriction was temporary, and on August 13 it expired after 17 trading days. History has already shown how wrong and ill-advised it is to allow naked short selling.
Many of the firms that have recently collapsed or have been forced into emergency mergers, takeovers, or government bailouts – Bear Stearns, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, AIG – did so during the gaps of time in which there was no meaningful regulation of naked short selling. On September 15, when the market opened after the collapse of Lehman, naked shorts appeared to turn their attention to Morgan Stanley and Goldman Sachs. In the three days between the announcement of Lehman Brothers’ bankruptcy and the SEC instituting an emergency ban on short selling,
Goldman Sachs’ and Morgan Stanley’s share prices fell 30% and 39% respectively.
None of this was a coincidence.
After seeing this stock price reaction in the week following Lehman Brothers’ bankruptcy, the SEC, like the Federal Reserve, took immediate action to stabilize the system. On September 18, following the decision of the Financial Services Authority in the United Kingdom a day earlier, the SEC instituted an emergency ban and other restrictions on short selling financial institutions. In taking these steps, Chairman Cox explained: “Given the importance of confidence in our financial markets as a whole, we have become concerned about the sudden and unexplained declines in the prices of securities. Such price declines can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence without a fundamental underlying basis. The crisis of confidence can impair the liquidity and ultimate viability of an issuer, with potentially broad market consequences.” These new restrictions are set to expire no later than October 17. Permanent regulation of naked short selling is needed to prevent a similar demise for the firms that survived with the government’s help.”