Shareholders Have Rights, Too

In 1792, the nation combated its first financial crisis on record. According to financial historians, the Panic of 1972 stemmed from a scheme to drive down the stock of the Bank of New York(BK) in order to grab control of Bank of New York and launch a rival bank. The crisis led the nation's first Secretary of the Treasury, Alexander Hamilton, to intercede in the financial markets.

As it so happens, Hamilton had founded Bank of New York in 1784, creating parallels to Secretary Henry Paulson and Goldman Sachs(GS) in the current financial crisis.

The Financial Panic of 1792 resulted in two actions: The New York legislature enacted a ban on short-selling, and 24 stockbrokers met under a Buttonwood tree outside of 64 Wall St. and signed the Buttonwood Agreement on May 17, 1792. That agreement established minimum commission rates and was the origin of the New York Stock Exchange, now owned by NYSE Euronext(NYX).

Along the way, unrestricted short-selling was re-allowed, and in 1929, the by then well-established NYSE faced another major crisis. Despite lessons learned from 1792, once again financial panic set in, and the stock market crashed. This time, the results were the Glass-Steagall Act of 1933 (eventually supplanted by the Graham-Leach-Bliley Act of 1999) and SEC Rule 10a-1(a)(1), know as the uptick rule, in 1938. The uptick rule was suspended in July 2007.

Once again, we've suffered financial panic, manipulation of share prices and a market crash in 2008 and 2009. You could even argue that Bank of New York was, once again, a target of the financial panic, as was Paulson's Goldman Sachs. Certainly many other institutions were targets of the short sale manipulation, and at least two -- Bear Stearns and Lehman Brothers -- were driven out of business.

You could argue that these companies were destined to go belly-up. But a stronger argument can be made that the lack of the uptick rule facilitated the use of other financial techniques, depicted in the chart below, that hastened or finalized those companies' demise.

Removal of the Uptick Rule The Epicenter of many problems LakeView Asset Management