Financial Crisis Report's Glaring Omission

NEW YORK (TheStreet) - So it seems that there was no shooter in the Grassy Knoll.

The Financial Crisis Inquiry Commission, our generation's Warren Commission, today drove a stake through the heart of one of the Big Lies of the 2008 financial calamity. It pretty much reaffirmed what was obvious from the gitgo, which is that the banks, abetted by deregulation, robotic credit rating agencies, panicky government officials and snoozing regulators, caused the financial crisis. The banks and their abettors were to blame, not the speculators who correctly forecast that the bankers were digging their own graves.

The FCIC report is an important contribution to the history of the financial crisis, by, among other things, standing up for mark-to-market accounting. "Not valuing assets based on market prices could mean that firms were not recording losses required by the accounting rules and therefore were overstating earnings and capital," says the report.

There was no real surprise about this -- or about pretty much anything else in the report, I guess -- but it needs to be said, lest we suffer a repetition of an ancient Urban Legend. No, Ruby did not know Oswald, Area 51 is a myth -- and no, short sellers, including the mythical species of trader known as the "naked short seller," were not responsible for the collapse of Bear Stearns and Lehman Brothers.

You really have to hunt through the report to find that what the commission had to say about short-selling. It's not mentioned in the panel's conclusions. It's not dealt with in the dissents.

It's on pages 326 and 327: "(Lehman CEO Dick) Fuld would later describe Lehman's main problem as one of market confidence, and he suggested that the company's image was damaged by investors taking 'naked short' positions (short selling Lehman's securities without first borrowing them), hoping Lehman would fail, and potentially even helping it fail by eroding confidence. 'Bear went down on rumors and a liquidity crisis of confidence,' Fuld told the FCIC. 'Immediately thereafter, the rumors and the naked short sellers came after us.' The company pressed the SEC to clamp down on the naked short selling." Which they did, in panicky fashion.

But what about all those "rumors" and "naked short sellers who "came after" them? Surely the FCIC, in all of its months of testimony and gazillion pages of supporting testimony and documentation, could have found one single itty-bitty one? Evidently not.

" The SEC's Division of Risk, Strategy and Financial Innovation shared with the FCIC a study it did concerning short selling," the report went on. "As Chairman Mary Schapiro explained to the Commission, 'We do not have information at this time that manipulative short selling was the cause of the collapse of Bear and Lehman or of the difficulties faced by other investment banks during the fall of 2008.' The SEC to date has not brought short selling charges related to the failure of these investment banks."

A footnote reveals that Schapiro made this previously unpublicized statement in response to a written question following her testimony on Jan. 14, 2010. You can find her written, public testimony here . You will note that in her written testimony she dwells at length on the SEC's effort to curb both "naked" and ordinary short-selling -- none of which is given even a drop of ink in the voluminous FCIC report.

Given the immense ruckus that surrounded short-selling of financial stocks in 2008, at one point SEC chairman Chris Cox ordered up a panicky, ill-conceived ban on shorting of all of them. You might have expected more than the FCIC's brief and dismissive reference to short-selling. That's especially since shorting was one of the areas that was explicitly to be addressed in the FCIC's mandate .

But that's just the quibble. And, just as the sun rises in the east and sets in the west, you can bet that it won't have any effect on the efforts of apologists for the banks to rewrite the history of the worst financial calamity since 1929. Indeed, all that blame-the-shorts crap is still out there on Websites, and has been the subject of a well-publicized effort to shift blame from the banks encouraged by Wall Street apologists like the U.S. Chamber of Commerce, and funded by Overstock.com CEO Patrick Byrne, who has a paid staff to promulgate this lie to credulous journalists like Matt Taibbi .

Don't expect the FCIC report to change the minds of the hard-core believers, who are still flooding regulatory agencies and Congress with periodic mass-emailings. After all, it's almost five decades since the assassination of President Kennedy, and a sizable proportion of the American people still thinks Oswald was not the sole gunman.

The difference is that believing there was more than one gunman in Dallas is essentially a harmless speculation, while the short seller urban legends have been a serious drain on regulatory resources. They are also politically potent, which might explain why Mary Schapiro was less than candid in her public testimony.

The bottom line is that we're back to the basics, the standard narrative, the single-bullet theory of the assassination of the U.S. economy. Does it make a difference? Will it spur Congress to strengthen the feeble steps it has already taken to oversee the banks? Forget about it. Just read the dissents, which seek to push the burden of the crisis into the ether of broad economic forces and government policies. No conspiracymongering there, but the message is the same: Don't blame the banks. Blame "them." The sad part is that so many people are willing to believe it.

Gary Weiss has covered Wall Street wrongdoing for almost a quarter century. His coverage of stock fraud at BusinessWeek won many awards, and included a cover story, �The Mob on Wall Street,� which exposed mob infiltration of brokerages. He uncovered the Salomon Brothers bond-trading scandal, and wrote extensively on the dangers posed by hedge funds, Internet fraud and out-of-control leverage. He was a contributing editor at Conde Nast Porfolio, writing about the people most intimately involved in the financial crisis, from Timothy Geithner to Bernard Madoff. His book "Born to Steal" (Warner Books: 2003), described the Mafia's takeover of brokerage houses in the 1990s. "Wall Street Versus America" (Portfolio: 2006) was an account of investor rip-offs. He blogs at garyweiss.blogspot.com.

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