The Wall Street Journal tells us Monday that the Securities and Exchange Commission is (a) ready to extend the shorting jihad to more stocks over a longer period and (b) that it's settled on four Lehman Brothers Inc. rumors to chase. This is good news, if only as blog fodder. The most interesting thing about (a) is the theme, which the Journal was actually breathing life into Monday morning, that the shorting ban was responsible for the market surge. I would respectfully disagree. The truth is I killed a chicken last week after chanting the name of every financial services company I could think of, and that goosed the markets. Now that the SEC is about to expand its list, I'm going to need new chickens.
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Seriously, this is one of the downsides to an obsession with shorting and rumors: a descent into fantasy, which may be appropriate in a political season but is a little surreal. Why did the market take off? Investors may have thought they overplayed the gloom over Freddie Mac and Fannie Mae, particularly after Congress began focusing on Hank Paulson's bailout plan. Maybe it was the softening of oil prices. Maybe it was the delightful weather or perhaps it was a harder look at some of the financial stocks themselves. Whatever, now that the SEC believes it can influence stock prices and get away with it, how will we get the agency out of the markets? After all, control of the markets is the philosopher's stone of Washington, the secret to all secrets, and clearly the hocus-pocus formula involves, well, naked shorting, which could easily be turned into a family values sort of issue to boot. This will provide great temptation in the future, a kind of moral hazard for regulators.
As for (b), I must say I'm looking forward to the results of the investigation. Whatever the SEC turns up -- and they're guaranteed to nail a trader, or two or four (one to a rumor, presumably, unless there's someone out there who was particularly busy) -- they will have engaged in a kind of anthropological analysis of financial communications patterns, not unlike kinship patterns from a South Sea island. We will see, in short, who's yakking to whom, and using what media. (This will involve, almost certainly, journalists, which will trigger the usual hand-wringing.) We will follow the trail, if the dogged investigators chase long enough, to the Ur rumor-mongerer, the individual with the creativity to come up with dirt that no one had ever heard before. On the way, we will discover endless banalities, bad jokes, vulgarisms, gossip. We will realize (shock, awe) how truly weird the world of traders can get. It's going to be great. The problem, of course, as it was with Margaret Mead investigating sexual mores in Samoa, is interpretation. What does it all mean? The SEC will say one thing. The courts may or may not get to weigh in on their own.
And so this is where we're at as August shimmers ahead of us: dead chickens, secret formulas, a rumor investigation, a ban on naked people shorting. Signs and symbols. If we only had someone who could read them correctly. Maybe not Margaret Mead or Christopher Cox. - Robert Teitelman
