K
Kickin' Ass and Takin' Names
Guest
News flash: The American economy is a hyperreality engineered by
Ph.D.s working hand-in-hand with colluding media multinationals,
political officials and some of the biggest names in business -- and
the banks that invest in them. In other news, greed is still good.
Of course, the idea that Wall Street is corrupt is as old as Wall
Street itself. After all, the immortal "Greed is good" aphorism was
muttered by a white-collar criminal in the 1987 movie named after Wall
Street, which was directed by a guy, Oliver Stone, who made his name
in postmodern cinema and political agitation. In fact, a film of the
same name came out in 1929, the year of the stock market crash. And so
the narrative replicates.
Speaking of replicants, Oliver Stone is a man who tackled not only
labyrinthine presidential conspiracies in the 1991 film JFK but also
the numb pathos of 9/11 in last year's World Trade Center. Indeed,
Wall Street indirectly tackled the junk bond and insider trading
economic screw-jobs that riddled the '80s like so many overpriced,
overly puffy hairdos. Stone envisioned the film as Crime and
Punishment on Wall Street, which was only partially fitting for the
time because there was a ton of crime and very little punishment.
And the more things have changed, the more they have stayed the same.
Indeed, only the nomenclature has been altered. Instead of junk bonds
and insider trading, we have hedge funds and private equity takeovers.
And instead of Gordon Gekko and Wall Street, we have Fox News mogul
Rupert Murdoch and, soon, the Wall Street Journal.
In the 1980s, guys like Michael Milken and Ivan Boesky -- who
anticipated the "Greed is good" phrase with a 1986 commencement speech
at Berkeley in which he stated, "Greed is all right. ... I think greed
is healthy" -- were riding high on schemes that failed. Both served as
inspirations for Stone's Wall Street scumbag Gordon Gekko, but both
got off with a few years in prison and a few hundred million dollars
lost. Milken shaved a 10-year sentence down to two, and in 2007, still
had a net worth of about $2 billion. Roll the happy ending.
But the hyperreality does not end there, and by hyperreality I mean
simply a reality that exists outside the one you live in, whoever you
are. It can come in many forms. Film is one such simulation, network
and cable news is another, and our two-party political machine, as Ron
Suskind explains in the quote at the top of this article, is a finer-
tuned one still. But they all collide and collude in the social space
of Wall Street and its various markets, on the internet and on the
trading floors of the New York Stock Exchange and onward.
Take Milken's favored high-yield junk bonds, for example, which are
basically bonds that are rated below investment grade by ratings
organizations like Standard and Poor's or Moody's and therefore
subject to not only a much higher risk of default or other cash-
sucking crashes but also higher paydays if you can make them work. To
do that, you need a little help from your friends and unsuspecting
investors, which is why Boesky and Milken went to jail for suckering
friends and strangers into dense schemes that went nowhere.
And if that whole scam sounds familiar, that is because, as is always
the case with hyperreality, it is happening again. Yet this time, it
is happening in an information age in which 97 percent of stock
transactions are conducted electronically. And this time it is not
because of junk bonds, but because of hedge funds, mortgage-backed
securities, subprime loans and a bizarro virtual scheme known as naked
shorting, which has been around as long as -- and played a role in --
the 1929 crash, and according to some, could trigger the next one any
day now.
"We've divorced the system from paper," explained Overstock.com CEO
and hedge fund activist Patrick Byrne to me by phone, "and since then
it's become easier to divorce it from reality. But the problem is that
so much has been drained out of the system using these tools that the
money is not there. If this gets exposed, the money is not there. It's
been turned into Ferraris and mansions in the Hamptons. It can't be
paid back. The system is going to vapor lock."
Nailing subprime's number
The recent implosion of the subprime housing market -- in which people
with little or no significant savings of their own are offered huge
loans for little or no money down for houses often but not always
located in fast-track developments -- shares similarities with the
junk bond burnout of the 1980s.
Indeed, the subprime loans that carved America's cash cow for the last
few years were rated just as poorly as Milken's junk bonds and ended
up pretty much the same way: with the scattering of investors and
players from a hailstorm of collapsed debts, besmirched reputations
and impending government oversight. While Milken's house of cards was
built on leveraged buyouts (LBOs), where an acquirer issued a bond to
pay for an acquisition that he would pay back with funds yet to be
earned, the engine that made subprime's train roll off the tracks are
collateralized debt obligations (CDOs), which are intricately
structured and packaged strategies pooled together to decrease the
risk generated by the fact that they are usually home equity, car and
credit loans so poorly rated that they promise only collapse for those
who get them and seized assets for those who offer them.
Like I said, same scam, different name.
But this time the outlook is worse. For one, the subprime housing
implosion has been a disaster for the market as a whole. Consider the
case of Bear Stearns: Their hilarious hedge holes -- the CDO-heavy
High-Grade Structured Credit Strategies Enhanced Leverage Fund and its
sister, High-Grade Structured Credit Fund -- cratered in early June,
going from about $10 billion to a few hundred million in assets within
a matter of months, even though the hedge fund itself had been barely
up and running for more than 10 months.
But here's the thing about hedge funds that makes them so lucrative:
You can play both sides against the middle -- the middle class, come
to think of it -- and still win. Huge. So it was no surprise when the
Wall Street investment titan decided to bail out its own hedge fund,
to which it had committed only around $35 million, with over $3
billion and counting. As Bear Stearns Chief Financial Officer Sam
Molinaro explained in a conference call, "There continues to be
significant value in it."
For those who work there, maybe. Meanwhile, those who invested in Bear
Stearns' hedge funds are out of money, and those crushed beneath their
so-called high-grade structures are out of their homes and cars, which
are in turn seized and put back into the asset pool. Not a bad
business if you can get it.
And while Molinaro's estimation of Bear Stearns hedge fund may sound
rosy, the hemorrhaging of the housing market is anything but. Open up
any newspaper to the business section and look for any headlines
involving plummeting home sales or declining property values, and
you'll taste the bitter pills, because Bear Stearns is by no means
alone. Swiss wealth management powerhouse UBS shuttered its Dillon
Read Capital Management hedge fund after losing over $120 million
invested in the subprime Kool-Aid. Then there was Amaranth Advisors,
which pulled off the biggest hedge fund collapse in history when it
blew almost $6 billion of its $9 billion in assets in a mere week
after a highly leveraged bet, although it threw its chips down on the
price of natural gas
That's not the housing market, you say? Good point. In fact, the point
altogether. As we shall see, hedge funds spread their bets across the
entire economic table, and they are armed with that most virtual of
investment strategies. It is called the naked short.
Getting naked with shorts
For those who don't know how hedge funds work, consider the casino
table favorite known as craps. And for those who make their living or
leisure playing it, forgive this short introduction.
Craps is a game that's been with us, to get hyperreal about it, since
the Crusades, which itself was a series of highly risky but also
highly lucrative takeovers. It is played on a table littered with
numbers and any number of betting strategies, but rolls are governed
by what is called the point, which is decided by the first roll of the
session known as the come-out and is usually 4, 5, 6, 8, 9 or 10.
These are the numbers the dice have the greatest chance of repeating
on subsequent rolls, although the one they can hit the most is 7,
given all the possible combinations. For this reason, if you roll a 7
when the point is any of the aforementioned numbers, the session is
ended and the casino takes all the money off the table, pockets it and
then hands the dice off to the next roller. Sucker.
If you want to join a craps game, you have to put your money down on
the Pass Line, which is governed by the point. If the point is 8, and
the roller hits it again, everyone wins and all the bets on the table
are paid out. In other words, when you play craps, you are usually
betting that you will hit another number besides 7 and make a ton of
dough before you eventually do in fact hit it. That is called Pass
Line play.
But there is another way to play craps, and that is to play the Don't
Pass Line, which is basically a bet on 7. So there you are, throwing
down your money and hoping that everyone at the table rolls a 7 while
they're hoping to roll anything but. If they lose, you win. Not very
popular, but since you're betting with the house, and the house always
win, not a bad betting strategy.
But there's an even better one and that's playing both lines at the
same time, which was frowned upon the last time I did it in Vegas, but
was nevertheless legal. By playing the Pass and Don't Pass Line off of
each other, you let your place bets make all your money for you, and
let the line bets offset each other. If you live long enough in the
game, you can make buckets of cash in advance of the end that always
comes.
Hedge funds are pretty much the same thing. They play both sides of
the market, going long on stocks they feel will pay off in the end,
and going short on those they don't. Except for one glaring
difference, according to Overstock.com CEO and hedge fund activist
Patrick Byrne.
"Craps is a good analogy," he told me via email. Except that hedge
funders "are also the croupier and own the casino management and the
gaming regulators."
Byrne isn't the only activist convinced of the analogy. Engineer,
investor advocate and InvestigatetheSEC.com webmaster David Patch took
it much further in an email exchange. "Hedge funds are more and more
becoming a craps game," he assented via email, "but the problem is
more than just those sitting at the tables become the losers. The
industry pools their bets in such concentrated levels that the funds
begin to drive the markets to levels beyond the values that would
normally be dictated by the fundamentals."
But according to Robert J. Shapiro, Clinton undersecretary of commerce
for economic affairs and senior fellow at the Democratic Leadership
Council's Progressive Policy Institute, it's not the hedge funds or
more particularly their both-sides-against-the-middle strategies that
are the problem per se. "The ability to hedge investments encourages
investment," he told me by phone. "You get more of it because you can
hedge it. It reduces the likelihood that financial institutions are
going to find themselves in trouble if the markets go against them, if
they guess wrong."
What brings Shapiro, Byrne, Patch and a growing legion of investors,
scholars and politicians together is the hyperreal practice known as
naked shorting. Recall craps and the Don't Pass Line: In it, you are
betting on failure, or as the stock market would term it, devaluation.
Well, Wall Street has a Don't Pass Line of its own, and it's called
shorting. Just as the Don't Pass player is waiting for a 7 roll and
the house to clean you out, short investors are literally banking on
the collapse of some stocks. As Shapiro explained it, it's a perfectly
legal -- if not, as in craps, uncool -- way of preying on those
companies living on borrowed time.
"Short sells are fine because just as you buy a share on the belief
that the stock is going up, you short a company on the belief that the
price is going down," Shapiro said. "In both cases, you inject
information into the market. Short sales are a way of injecting
negative information into the market. There's nothing wrong with them;
they've been around for a long, long time."
Forget for a moment that we are talking about injecting information,
rather than actual money, into the market. Information, as anyone born
in the era of the personal computer or Internet understands all too
well, is easily manipulated. But if Shapiro's first proposition rings
a bit hollow, at least the second one is true. In fact, as Shapiro
clarified, it was massive if unregulated short sales, known as naked
shorts, that gave the infamous 1929 crash (which in turn spawned the
Great Depression, its long, long legs).
"There were a lot of unregulated short sales in the stock market
crash; that's true," Shapiro confirmed. "And regulating short sales
were part of the initial regulation from the SEC in 1936."
Byrne is a bit more colorful on the subject. "I do think it played a
role. Hedge funds were called pools back then. Rich guys got together,
pooled their capital and manipulated the stock market. And, in fact,
newspapers covered the pools like they would cover sports teams; it
was public entertainment. It wasn't too dissimilar from the way the
New York Times is trying to make rock stars out of hedge funders
today."
In other words, naked shorts are a final confirmation that
hyperreality has been with us as long as the Bible. They are virtual
transactions, ones that never actually occur.
"In short sales," Shapiro explained, "you don't own the share you
sell; instead you borrow it. Then you replace it when you cover the
short. If you're right and the price has gone down, you replace it at
a lower price, and the difference between what you sold it for and
what price you replaced it at is your profit. The problem with a naked
short is that you don't borrow the share you sell. You sell it without
ever borrowing it. In effect, you invent a share."
If this is beginning to sound like a game of Monopoly built on fake
money, that's because it is. By injecting so many invented shares into
the market using naked shorting, hedge funds have not only created an
economy in which they can manipulate the stocks of companies smaller
than Microsoft and Wal-Mart, but they have also created a market in
which there are more shares than actual stocks. And that's about as
hyperreal as an economy can get.
"It's essentially counterfeiting," Byrne added. "You're creating
counterfeit shares in the system. It works like this. In a normal
stock transaction, you give me money and I give you stock. And not
paper stock anymore. It turns out that there is a loophole in the
system: When I come to give you the stock that you bought, if I don't
actually have any stock, I can give what is effectively an IOU. Now
you never know about this unless you know the right question to ask
your broker, but it's possible that all you really have in your
account is an IOU from your brokerage account from a different broker
working with a hedge fund."
It is precisely this imbalance between real and invented shares that
Byrne and others argue is primed to explode the subprime collapse into
a full-blown economic depression.
"There are a lot of us who think we are living on the edge of 1929,"
Byrne continued. "When you consider what's happened with mortgage-
backed securities, you get the feeling these might be the first
rumblings. There may be more IOUs in the system than there is
liquidity, in which case the entire thing is going to vapor lock as
soon as it is exposed. One of the healthiest indications of the
vibrancy of an economy is capital formation. Seven years ago, America
was responsible for 57 percent of IPO capital raised around the world.
Now it's down to 16 percent. A national disaster."
Greed is God
So what is the remedy for this historical collusion among money,
markets and the managed realities of naked shorting and hedge fund
buyouts? A political solution may be on the way, according to Shapiro.
"The SEC has just very recently finally agreed that this is a very
serious problem that is destroying some companies and undermining the
integrity of the markets," he explained. "They came out with
regulations in 2005, which we criticized for having huge loopholes.
But this year, the SEC finally said their attempts to address the
problem have failed, so they are seriously tightening the regulations.
Now we'll see if they enforce them."
But history, as always, likely will teach a different lesson. Consider
two events in that regard. The first happened after -- and because of
-- the 1929 Crash: The Glass Steagall Act of 1933 mandated the
separation of bank types according to their business, after the Senate-
led Pecora Commission investigation of the crash found that collusion
between commercial and investment banks played a major role in it.
That act stood for 66 years, until none other than Bill Clinton
repealed it in 1999, and here we are again.
Here's the other lesson: According to a recent Financial Times story,
"Barack Obama received more donations from employees of investment
banks and hedge funds than from any other sector, with Lehman
Brothers, Goldman Sachs and JP Morgan Chase among his biggest sources
of support." While Obama has already promised to increase regulation
on hedge funds and the tax burden on private equity groups (or today's
"pools," as Byrne explained them), if he becomes president, one can
imagine he'll be singing quite a different tune if he becomes the
first black man in history to run the White House.
Throw in the fact that Rupert Murdoch is set to take over the Wall
Street Journal, the paper of record for these subjects and scams, and
you have more of the same reality programming.
Murdoch's holdings would probably give the Pecora Commission fits: Not
only does he own Fox News and now the Wall Street Journal, to go along
with the New York Post, MySpace, DirecTV, HarperCollins, the Sunday
Times, TV Guide, the Weekly Standard, 20th Century Fox ... Stop me if
you've had enough, but he's also slated to unveil Fox Business Network
on Oct. 15, which no doubt will team up with all of his other assets
to turn Murdoch into something else besides a propaganda arm of the
Bush administration or, in fact, the puppeteer who pulls its strings.
And for those of you who think that may be too broad a generalization,
consider this: As the Huffington Post explained, "By taking advantage
of a provision in the law that allows expanding companies like Mr.
Murdoch's to defer taxes to future years, the News Corp. paid no
federal taxes in two of the last four years, and in the other two, it
paid only a fraction of what it otherwise would have owed. During that
time, Securities and Exchange Commission records show that the News
Corp.'s domestic pretax profits topped $9.4 billion."
Can you say free ride?
For those who argue that Murdoch and hedge funds are miles apart,
consider this: He knows how to hedge just fine, thanks. After all, it
was none other than current Republican presidential candidate Rudolph
Guiliani who in 1996 threatened to run Fox News commercial-free on a
city-run access channel if Time Warner Cable didn't end its 11-month
battle to keep Murdoch out of New York households. It's also important
to note, especially if you are Murdoch, that it was Guiliani who
implemented RICO statutes to nail Michael Milken with 98 counts of
racketeering and fraud. But Murdoch is an old hand at hedging: He's so
far funneled $40,000 into Hillary Clinton's campaign. Whoever loses,
he wins.
Like I said, nice business if you can get it.
http://www.alternet.org/module/printversion/56443
Ph.D.s working hand-in-hand with colluding media multinationals,
political officials and some of the biggest names in business -- and
the banks that invest in them. In other news, greed is still good.
Of course, the idea that Wall Street is corrupt is as old as Wall
Street itself. After all, the immortal "Greed is good" aphorism was
muttered by a white-collar criminal in the 1987 movie named after Wall
Street, which was directed by a guy, Oliver Stone, who made his name
in postmodern cinema and political agitation. In fact, a film of the
same name came out in 1929, the year of the stock market crash. And so
the narrative replicates.
Speaking of replicants, Oliver Stone is a man who tackled not only
labyrinthine presidential conspiracies in the 1991 film JFK but also
the numb pathos of 9/11 in last year's World Trade Center. Indeed,
Wall Street indirectly tackled the junk bond and insider trading
economic screw-jobs that riddled the '80s like so many overpriced,
overly puffy hairdos. Stone envisioned the film as Crime and
Punishment on Wall Street, which was only partially fitting for the
time because there was a ton of crime and very little punishment.
And the more things have changed, the more they have stayed the same.
Indeed, only the nomenclature has been altered. Instead of junk bonds
and insider trading, we have hedge funds and private equity takeovers.
And instead of Gordon Gekko and Wall Street, we have Fox News mogul
Rupert Murdoch and, soon, the Wall Street Journal.
In the 1980s, guys like Michael Milken and Ivan Boesky -- who
anticipated the "Greed is good" phrase with a 1986 commencement speech
at Berkeley in which he stated, "Greed is all right. ... I think greed
is healthy" -- were riding high on schemes that failed. Both served as
inspirations for Stone's Wall Street scumbag Gordon Gekko, but both
got off with a few years in prison and a few hundred million dollars
lost. Milken shaved a 10-year sentence down to two, and in 2007, still
had a net worth of about $2 billion. Roll the happy ending.
But the hyperreality does not end there, and by hyperreality I mean
simply a reality that exists outside the one you live in, whoever you
are. It can come in many forms. Film is one such simulation, network
and cable news is another, and our two-party political machine, as Ron
Suskind explains in the quote at the top of this article, is a finer-
tuned one still. But they all collide and collude in the social space
of Wall Street and its various markets, on the internet and on the
trading floors of the New York Stock Exchange and onward.
Take Milken's favored high-yield junk bonds, for example, which are
basically bonds that are rated below investment grade by ratings
organizations like Standard and Poor's or Moody's and therefore
subject to not only a much higher risk of default or other cash-
sucking crashes but also higher paydays if you can make them work. To
do that, you need a little help from your friends and unsuspecting
investors, which is why Boesky and Milken went to jail for suckering
friends and strangers into dense schemes that went nowhere.
And if that whole scam sounds familiar, that is because, as is always
the case with hyperreality, it is happening again. Yet this time, it
is happening in an information age in which 97 percent of stock
transactions are conducted electronically. And this time it is not
because of junk bonds, but because of hedge funds, mortgage-backed
securities, subprime loans and a bizarro virtual scheme known as naked
shorting, which has been around as long as -- and played a role in --
the 1929 crash, and according to some, could trigger the next one any
day now.
"We've divorced the system from paper," explained Overstock.com CEO
and hedge fund activist Patrick Byrne to me by phone, "and since then
it's become easier to divorce it from reality. But the problem is that
so much has been drained out of the system using these tools that the
money is not there. If this gets exposed, the money is not there. It's
been turned into Ferraris and mansions in the Hamptons. It can't be
paid back. The system is going to vapor lock."
Nailing subprime's number
The recent implosion of the subprime housing market -- in which people
with little or no significant savings of their own are offered huge
loans for little or no money down for houses often but not always
located in fast-track developments -- shares similarities with the
junk bond burnout of the 1980s.
Indeed, the subprime loans that carved America's cash cow for the last
few years were rated just as poorly as Milken's junk bonds and ended
up pretty much the same way: with the scattering of investors and
players from a hailstorm of collapsed debts, besmirched reputations
and impending government oversight. While Milken's house of cards was
built on leveraged buyouts (LBOs), where an acquirer issued a bond to
pay for an acquisition that he would pay back with funds yet to be
earned, the engine that made subprime's train roll off the tracks are
collateralized debt obligations (CDOs), which are intricately
structured and packaged strategies pooled together to decrease the
risk generated by the fact that they are usually home equity, car and
credit loans so poorly rated that they promise only collapse for those
who get them and seized assets for those who offer them.
Like I said, same scam, different name.
But this time the outlook is worse. For one, the subprime housing
implosion has been a disaster for the market as a whole. Consider the
case of Bear Stearns: Their hilarious hedge holes -- the CDO-heavy
High-Grade Structured Credit Strategies Enhanced Leverage Fund and its
sister, High-Grade Structured Credit Fund -- cratered in early June,
going from about $10 billion to a few hundred million in assets within
a matter of months, even though the hedge fund itself had been barely
up and running for more than 10 months.
But here's the thing about hedge funds that makes them so lucrative:
You can play both sides against the middle -- the middle class, come
to think of it -- and still win. Huge. So it was no surprise when the
Wall Street investment titan decided to bail out its own hedge fund,
to which it had committed only around $35 million, with over $3
billion and counting. As Bear Stearns Chief Financial Officer Sam
Molinaro explained in a conference call, "There continues to be
significant value in it."
For those who work there, maybe. Meanwhile, those who invested in Bear
Stearns' hedge funds are out of money, and those crushed beneath their
so-called high-grade structures are out of their homes and cars, which
are in turn seized and put back into the asset pool. Not a bad
business if you can get it.
And while Molinaro's estimation of Bear Stearns hedge fund may sound
rosy, the hemorrhaging of the housing market is anything but. Open up
any newspaper to the business section and look for any headlines
involving plummeting home sales or declining property values, and
you'll taste the bitter pills, because Bear Stearns is by no means
alone. Swiss wealth management powerhouse UBS shuttered its Dillon
Read Capital Management hedge fund after losing over $120 million
invested in the subprime Kool-Aid. Then there was Amaranth Advisors,
which pulled off the biggest hedge fund collapse in history when it
blew almost $6 billion of its $9 billion in assets in a mere week
after a highly leveraged bet, although it threw its chips down on the
price of natural gas
That's not the housing market, you say? Good point. In fact, the point
altogether. As we shall see, hedge funds spread their bets across the
entire economic table, and they are armed with that most virtual of
investment strategies. It is called the naked short.
Getting naked with shorts
For those who don't know how hedge funds work, consider the casino
table favorite known as craps. And for those who make their living or
leisure playing it, forgive this short introduction.
Craps is a game that's been with us, to get hyperreal about it, since
the Crusades, which itself was a series of highly risky but also
highly lucrative takeovers. It is played on a table littered with
numbers and any number of betting strategies, but rolls are governed
by what is called the point, which is decided by the first roll of the
session known as the come-out and is usually 4, 5, 6, 8, 9 or 10.
These are the numbers the dice have the greatest chance of repeating
on subsequent rolls, although the one they can hit the most is 7,
given all the possible combinations. For this reason, if you roll a 7
when the point is any of the aforementioned numbers, the session is
ended and the casino takes all the money off the table, pockets it and
then hands the dice off to the next roller. Sucker.
If you want to join a craps game, you have to put your money down on
the Pass Line, which is governed by the point. If the point is 8, and
the roller hits it again, everyone wins and all the bets on the table
are paid out. In other words, when you play craps, you are usually
betting that you will hit another number besides 7 and make a ton of
dough before you eventually do in fact hit it. That is called Pass
Line play.
But there is another way to play craps, and that is to play the Don't
Pass Line, which is basically a bet on 7. So there you are, throwing
down your money and hoping that everyone at the table rolls a 7 while
they're hoping to roll anything but. If they lose, you win. Not very
popular, but since you're betting with the house, and the house always
win, not a bad betting strategy.
But there's an even better one and that's playing both lines at the
same time, which was frowned upon the last time I did it in Vegas, but
was nevertheless legal. By playing the Pass and Don't Pass Line off of
each other, you let your place bets make all your money for you, and
let the line bets offset each other. If you live long enough in the
game, you can make buckets of cash in advance of the end that always
comes.
Hedge funds are pretty much the same thing. They play both sides of
the market, going long on stocks they feel will pay off in the end,
and going short on those they don't. Except for one glaring
difference, according to Overstock.com CEO and hedge fund activist
Patrick Byrne.
"Craps is a good analogy," he told me via email. Except that hedge
funders "are also the croupier and own the casino management and the
gaming regulators."
Byrne isn't the only activist convinced of the analogy. Engineer,
investor advocate and InvestigatetheSEC.com webmaster David Patch took
it much further in an email exchange. "Hedge funds are more and more
becoming a craps game," he assented via email, "but the problem is
more than just those sitting at the tables become the losers. The
industry pools their bets in such concentrated levels that the funds
begin to drive the markets to levels beyond the values that would
normally be dictated by the fundamentals."
But according to Robert J. Shapiro, Clinton undersecretary of commerce
for economic affairs and senior fellow at the Democratic Leadership
Council's Progressive Policy Institute, it's not the hedge funds or
more particularly their both-sides-against-the-middle strategies that
are the problem per se. "The ability to hedge investments encourages
investment," he told me by phone. "You get more of it because you can
hedge it. It reduces the likelihood that financial institutions are
going to find themselves in trouble if the markets go against them, if
they guess wrong."
What brings Shapiro, Byrne, Patch and a growing legion of investors,
scholars and politicians together is the hyperreal practice known as
naked shorting. Recall craps and the Don't Pass Line: In it, you are
betting on failure, or as the stock market would term it, devaluation.
Well, Wall Street has a Don't Pass Line of its own, and it's called
shorting. Just as the Don't Pass player is waiting for a 7 roll and
the house to clean you out, short investors are literally banking on
the collapse of some stocks. As Shapiro explained it, it's a perfectly
legal -- if not, as in craps, uncool -- way of preying on those
companies living on borrowed time.
"Short sells are fine because just as you buy a share on the belief
that the stock is going up, you short a company on the belief that the
price is going down," Shapiro said. "In both cases, you inject
information into the market. Short sales are a way of injecting
negative information into the market. There's nothing wrong with them;
they've been around for a long, long time."
Forget for a moment that we are talking about injecting information,
rather than actual money, into the market. Information, as anyone born
in the era of the personal computer or Internet understands all too
well, is easily manipulated. But if Shapiro's first proposition rings
a bit hollow, at least the second one is true. In fact, as Shapiro
clarified, it was massive if unregulated short sales, known as naked
shorts, that gave the infamous 1929 crash (which in turn spawned the
Great Depression, its long, long legs).
"There were a lot of unregulated short sales in the stock market
crash; that's true," Shapiro confirmed. "And regulating short sales
were part of the initial regulation from the SEC in 1936."
Byrne is a bit more colorful on the subject. "I do think it played a
role. Hedge funds were called pools back then. Rich guys got together,
pooled their capital and manipulated the stock market. And, in fact,
newspapers covered the pools like they would cover sports teams; it
was public entertainment. It wasn't too dissimilar from the way the
New York Times is trying to make rock stars out of hedge funders
today."
In other words, naked shorts are a final confirmation that
hyperreality has been with us as long as the Bible. They are virtual
transactions, ones that never actually occur.
"In short sales," Shapiro explained, "you don't own the share you
sell; instead you borrow it. Then you replace it when you cover the
short. If you're right and the price has gone down, you replace it at
a lower price, and the difference between what you sold it for and
what price you replaced it at is your profit. The problem with a naked
short is that you don't borrow the share you sell. You sell it without
ever borrowing it. In effect, you invent a share."
If this is beginning to sound like a game of Monopoly built on fake
money, that's because it is. By injecting so many invented shares into
the market using naked shorting, hedge funds have not only created an
economy in which they can manipulate the stocks of companies smaller
than Microsoft and Wal-Mart, but they have also created a market in
which there are more shares than actual stocks. And that's about as
hyperreal as an economy can get.
"It's essentially counterfeiting," Byrne added. "You're creating
counterfeit shares in the system. It works like this. In a normal
stock transaction, you give me money and I give you stock. And not
paper stock anymore. It turns out that there is a loophole in the
system: When I come to give you the stock that you bought, if I don't
actually have any stock, I can give what is effectively an IOU. Now
you never know about this unless you know the right question to ask
your broker, but it's possible that all you really have in your
account is an IOU from your brokerage account from a different broker
working with a hedge fund."
It is precisely this imbalance between real and invented shares that
Byrne and others argue is primed to explode the subprime collapse into
a full-blown economic depression.
"There are a lot of us who think we are living on the edge of 1929,"
Byrne continued. "When you consider what's happened with mortgage-
backed securities, you get the feeling these might be the first
rumblings. There may be more IOUs in the system than there is
liquidity, in which case the entire thing is going to vapor lock as
soon as it is exposed. One of the healthiest indications of the
vibrancy of an economy is capital formation. Seven years ago, America
was responsible for 57 percent of IPO capital raised around the world.
Now it's down to 16 percent. A national disaster."
Greed is God
So what is the remedy for this historical collusion among money,
markets and the managed realities of naked shorting and hedge fund
buyouts? A political solution may be on the way, according to Shapiro.
"The SEC has just very recently finally agreed that this is a very
serious problem that is destroying some companies and undermining the
integrity of the markets," he explained. "They came out with
regulations in 2005, which we criticized for having huge loopholes.
But this year, the SEC finally said their attempts to address the
problem have failed, so they are seriously tightening the regulations.
Now we'll see if they enforce them."
But history, as always, likely will teach a different lesson. Consider
two events in that regard. The first happened after -- and because of
-- the 1929 Crash: The Glass Steagall Act of 1933 mandated the
separation of bank types according to their business, after the Senate-
led Pecora Commission investigation of the crash found that collusion
between commercial and investment banks played a major role in it.
That act stood for 66 years, until none other than Bill Clinton
repealed it in 1999, and here we are again.
Here's the other lesson: According to a recent Financial Times story,
"Barack Obama received more donations from employees of investment
banks and hedge funds than from any other sector, with Lehman
Brothers, Goldman Sachs and JP Morgan Chase among his biggest sources
of support." While Obama has already promised to increase regulation
on hedge funds and the tax burden on private equity groups (or today's
"pools," as Byrne explained them), if he becomes president, one can
imagine he'll be singing quite a different tune if he becomes the
first black man in history to run the White House.
Throw in the fact that Rupert Murdoch is set to take over the Wall
Street Journal, the paper of record for these subjects and scams, and
you have more of the same reality programming.
Murdoch's holdings would probably give the Pecora Commission fits: Not
only does he own Fox News and now the Wall Street Journal, to go along
with the New York Post, MySpace, DirecTV, HarperCollins, the Sunday
Times, TV Guide, the Weekly Standard, 20th Century Fox ... Stop me if
you've had enough, but he's also slated to unveil Fox Business Network
on Oct. 15, which no doubt will team up with all of his other assets
to turn Murdoch into something else besides a propaganda arm of the
Bush administration or, in fact, the puppeteer who pulls its strings.
And for those of you who think that may be too broad a generalization,
consider this: As the Huffington Post explained, "By taking advantage
of a provision in the law that allows expanding companies like Mr.
Murdoch's to defer taxes to future years, the News Corp. paid no
federal taxes in two of the last four years, and in the other two, it
paid only a fraction of what it otherwise would have owed. During that
time, Securities and Exchange Commission records show that the News
Corp.'s domestic pretax profits topped $9.4 billion."
Can you say free ride?
For those who argue that Murdoch and hedge funds are miles apart,
consider this: He knows how to hedge just fine, thanks. After all, it
was none other than current Republican presidential candidate Rudolph
Guiliani who in 1996 threatened to run Fox News commercial-free on a
city-run access channel if Time Warner Cable didn't end its 11-month
battle to keep Murdoch out of New York households. It's also important
to note, especially if you are Murdoch, that it was Guiliani who
implemented RICO statutes to nail Michael Milken with 98 counts of
racketeering and fraud. But Murdoch is an old hand at hedging: He's so
far funneled $40,000 into Hillary Clinton's campaign. Whoever loses,
he wins.
Like I said, nice business if you can get it.
http://www.alternet.org/module/printversion/56443