Andrew Ross Sorkin sneaks a philosophical conundrum into his column this week in The New York Times: What is truth? Actually, his real subject is rumors and their sibling relation to shorting and its relation to staggering Wall Street firms. Sorkin's description of the various ways traders can spread rumor and scuttlebutt is interesting -- as is his passing comments about what's saved by telecom providers and what's not. His underlying point is valid: Our vast, layered communications infrastructure can serve as one giant rumor amplifier (on the other hand, given how large, global and complex the markets are compared to decades ago, the effect over time may be about the same). Where I get off the boat, however, is his notion that somebody in the regulatory world should start sending out subpoenas to clamp down on this destabilizing phenomenon.
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Sorkin's subpoena notion, which is widely shared (see Burrough, Bryan), rests on several assumptions. First, that there's a "truth" out there about Bear Stearns Cos. or Lehman Brothers Inc. that can be captured at a point in time and compared to falsehoods zipping around the market. Arguing that Bear is about to go down turned out to be quite true, whether it was "true" at that moment or not. Second, there's the question of intent. Sorkin himself admits that Lehman basher David Einhorn was both "right and wrong," suggesting that at the very least he was not an outright fibber. As in the Spitzer analyst jihad, intent would presumably reside in interpreting e-mails, IMs, text messages or recorded phone conversations. It would be surprising (but not impossible, which explains why law firms are warning traders to shut up) to discover some dimwit saying, ala Jim Cramer, "I'm making this up so spread it like it's a rumor and destroy Bear." The normal thing is for a dissembler to say, "Hey, I heard a rumor, and I thought you'd want to know." The question here is, does market manipulation involve passing along a fragment you suspect may be a rumor, or in serving as the progenitor of lies? Third, of course, is the notion, beloved of the media and Hollywood, that events can come down to a plot hatched by Manny, Moe and Jack for global domination. This makes the market appear as dumb as dirt but provides a satisfying clarity in a world of ambiguity.
Now back to the real world. What would happen, pray tell, if regulators took the big net and started hauling in vast tides of messages for sorting? First, "evidence" would be found and quickly leaked to the media, and the public would get to vote. Guilty! Then the case, many years later, would wend its gruesome way to court (or settlement) and probably get tossed.
I heard a rumor, by the way, that Dick Grasso got to keep his money, which, in terms of executive comp issues, settles absolutely nothing. Good try, Eliot.
Still, why haven't subpoenas gone flying? Well, that takes us from the thickets of market epistemology into the boggy muck of regulatory politics. Chasing rumors is a fool's game -- though great for Spitzerian headlines. But who gets famous defending the likes of Lehman or Bear? Attacking shorts is like threatening shareholders, which is a governance no-no, and raising questions about the market, which in Bushian Washington, is an ideological no-no. And there are bigger issues on the big mahogany table, like how quickly can Treasury marry off the Securities and Exchange Commission to the Federal Reserve. Indeed, the issue of market rumors casts a flickering light on Monday's agreement by the SEC to share information with the Fed. So here's the thing: The SEC is going to share with the Fed the very inside data that convinced it that Bear was solid a few days before the March run? That's comforting. Slam dunk!
The fact is, the complexities of nailing down reality in the markets is the thread that runs through much of the current crisis, from squirrely indexes to rumor-driven shorting to a regulatory systems that has had difficulties capturing, processing and correctly interpreting rapidly changing market data, much of which has no relation to what's commonly known as "truth." Rumors are just the beginning. The easy stuff. - Robert Teitelman
For more on the subject, see The Deal newsweekly's Media Maneuvers
