Who would have thought that the blogosphere would light up like a Christmas tree over a normally arcane debate about rumors and short selling? Really. Pro, con, insults, compliments -- even some thank-you notes. But at the risk of repeating the same old stuff, I'll weigh in one more time. First, on the relation between opinion and rumors. Rumors, unless they are created out of whole cloth, are one variety of opinion, a sort of wayward cousin no one wants to take responsibility for. And in fact, one default defense by anyone interrogated about passing a rumor is, "Oh, that's just my opinion that institutions are, say, pulling their money out of Fannie Mae." The trouble is -- and it's a profoundly practical one -- is that separating fact, rumor and opinion in the markets is nearly impossible. Regulators should have better things to do, like making sure lenders have better capital positions. Chasing the Ur source of a rumor would require more investigators than Wall Street has blabbermouths.
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Second, consider the current fears gripping the market: that Fannie Mae and Freddie Mac could collapse, forcing the government to seize them. Are there false rumors out there? Undoubtedly -- perhaps even stirred up by short sellers. But does anyone really doubt that the shorts don't have a fundamental case, based on a fundamental fear, that, at the very least, is not crazy? True, it may be overstated or it may be fed by falsehoods. But the markets are huge stews of accurate and inaccurate information; and the game is to separate out the lies from the truths, either short-term or long-term. The most salient point here is that no one complains about positive rumors, certainly not the writers of thank-you notes.
Third, journalists cannot escape being tainted by rumors. Look at the stories in Friday's papers about Fannie, Freddie and Lehman Brothers Inc. They're replete with meta-coverage of rumors. If rumors are the story, then the media is going to be a carrier. Is that terrible? No, because rumors -- true, false, right, wrong -- really define the market at any moment, particularly right now. Rumor, spin, opinion, fact, falsehood are difficult to separate out at as they surface. Should the media simply fall silent, not always knowing a false rumor from that strange concept -- but one relevant to the markets -- a "true" rumor? Of course not -- though in times like this we should adhere closely to what we believe are facts, as we try to do here.
To sum up: The markets are not sandboxes for kids to play in. Regulators should be concerned by overt market manipulation, but chasing down the source of rumors is like trying to stamp out bluffing in a poker game. Arguably, in speculative (as opposed to investment) markets, it is the very game itself. Maybe that's the problem. - Robert Teitelman
