Recently we've been treated to what is known in journalism as "man bites dog" moments. There have been two, both related to that most despised of creatures, the short seller. In recent weeks, short sellers who wagered against the housing boom have been heralded as heroes, feted with a literary ticket tape parade in the form of Michael Lewis's best-seller The Big Short. And then -- wouldn't you know it? -- the second man-bites-dog moment cancelled out the first one.
The Great Goldman Sachs (GS) Fiasco -- a Securities and Exchange Commission lawsuit that took everybody by surprise -- has returned shorts to their accustomed role as the Hannibal Lecters of Wall Street. The SEC claims that Goldman schemed with short-seller John Paulson to rook investors in some toxic-waste mortgage derivatives. Paulson hasn't been charged, and Goldman maintains that it is as innocent as a newborn mouse romping in the hay. On Saturday, Goldman emails emerged from Capitol Hill showing the bank was romping in greenbacks by joining in the "big short" of mortgage securities.
Make no mistake: This is the worst blow to short selling in memory, much worse than the last short-selling fiasco, when Anthony Elgindy was nabbed for bribing FBI agents a few years ago. What makes this all a crying shame is that, gawdawful as it surely is, the Goldman scandal doesn't negate--not even by one corpuscle--the positive role shorting has played in recent years as a check on Wall Street abuses, including those committed by the big banks.
One of those short-targeted big banks was Lehman Brothers, whose fall has been widely and falsely attributed to shorting. Only a few days ago, while Goldman hogged the headlines, the House Financial Services Committee held a hearing on the Lehman collapse starring Dick Fuld, the disgraced former CEO. Fuld squirmed and evaded, his credibility shredded by the Lehman bankruptcy examiner, who contradicted his claim that he didn't know about Lehman's Repo 105 book-cooking scheme.It was a fitting epilogue to Fuld's famous display of chutzpah on Capitol Hill in October 2008, when he blamed his firm's demise on the discredited bugaboo of "naked short sellers." Last week, when asked to describe why Lehman collapsed, he was at a loss for words. He hemmed and hawed, and couldn't bring himself to raise that phony excuse, which has been shown up as hokum by academic researchers.
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