July 17, 2008
On Wednesday night, Jon Stewart pointed out that President Bush saw fit to hold a news conference about the economy at exactly 10:20 a.m. on Tuesday, July 15. As luck would have it, this was the very minute when Federal Reserve Chairman, Ben Bernanke, was to begin his testimony before Congress about the state of the economy. Stewart deftly contrasted the “spin” message presented by Bush with the sworn testimony of the Federal Reserve Chairman. Bush was obviously out to blunt any negative impact Beranake’s testimony might have on the markets. The 180-degree difference between Bush’s spin and Bernanke’s reality was hilarious. Regardless, Bush’s plan didn’t work. The Dow Jones industrial average dropped 92 points (.84 percent) on Tuesday and the Standard and Poor’s 500 index (which includes many financial stocks) fared worse. Wednesday saw a dramatic shift in the markets due to a drop in the price of oil – the only thing that ever gives the stock market a boost these days.
July 15 was also the day when the Securities Exchange Commission enacted a new, emergency rule against “naked” short-selling of financial stocks. As Dane Hamilton reported for Reuters, the rule drew mixed reactions among hedge fund managers and traders. Hamilton described the SEC’s reasoning that:
… naked short selling, which is putting in a short stock order with no intention of actually borrowing it to drive down the price, may have contributed to this year’s collapse of Bear Stearns and sharp declines in other financial stocks this year.
As Mr. Hamilton explained: this new, temporary rule was enacted to protect 19 financial stocks, including battered mortgage guarantors Fannie Mae, Freddie Mac and a number of banks, against “a substantial threat of sudden and excessive” stock price movements. What other industry could count on the Federal Government to protect it from the predatory tactics of a handful of unscrupulous “short sellers”? Some of these traders make multiple short sales on a single share of stock. The net effect of this is that they are actually “counterfeiting” stocks to be sold short and bought back at a lower price, before anyone might realize the shares never existed.
Investors have been victimized by such tactics for decades. However, until now, the SEC has been of little or no help in regulating these tactics. In an article from the March 23, 2007 issue of USA Today, Matt Krantz reported on the boasts of MSNBC’s TV host, Jim Cramer, about how Cramer had used “short” sales to manipulate stock prices:
A lot of times when I was short (stocks) at my hedge fund … meaning I needed it (the stock) down …I would create a level of activity beforehand that would drive the futures … It’s a fun game, and it’s a lucrative game.
If you are wondering how the 19 financial companies covered by the July 15 emergency SEC rule, were able to obtain the kind of protection afforded by that measure, you may want to consider some of the observations made by Lisa Lerer in her July 17 article for Politico.com:
If you want to know how Fannie Mae and Freddie Mac have survived scandal and crisis, consider this: Over the past decade, they have spent nearly $200 million on lobbying and campaign contributions.
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When their stock prices took a dive last week, their government allies extended another helping hand with a plan for the Treasury Department, the Federal Reserve and, possibly, Congress to shore up the companies.
It’s nice to see the SEC doing something to protect investors from predatory trading practices. The only reason the SEC is protecting investors in this instance is because investors are the collateral beneficiaries of a rule written to protect 19 financial institutions. We just don’t see enough government action to stop the manipulation of the markets on a broader scale. Worse yet, when the President gets on TV to compete with the Federal Reserve Chairman’s testimony in order to paint a contrasting, more favorable picture of the economy – what do you call that? How about: manipulation of the markets?
Fed Up With The Fed
July 20, 2009
Last week’s news that Goldman Sachs reported $3.44 billion in earnings for the second quarter of 2009 provoked widespread outrage that was rather hard to avoid. Even Jon Stewart saw fit to provide his viewers with an informative audio-visual presentation concerning the role of Goldman Sachs in our society. Allan Sloan pointed out that in addition to the $10 billion Goldman received from the TARP program, (which it repaid) Goldman also received another $12.9 billion as a counterparty to AIG’s bad paper (which it hasn’t repaid). Beyond that, there was the matter of “the Federal Reserve Board moving with lightning speed last fall to allow Goldman to become a bank holding company”. Sloan lamented that despite this government largesse, Goldman is still fighting with the Treasury Department over how much it should pay taxpayers to buy back the stock purchase warrants it gave the government as part of the TARP deal. The Federal Reserve did more than put Goldman on the fast track for status as a bank holding company (which it denied to Lehman Brothers, resulting in that company’s bankruptcy). As Lisa Lerer reported for Politico, Senator Bernie Sanders questioned whether Goldman received even more assistance from the Federal Reserve. Because the Fed is not subject to transparency, we don’t know the answer to that question.
A commentator writing for the Seeking Alpha website under the pseudonym: Cynicus Economicus, expressed the opinion that people need to look more at the government and the Federal Reserve as being “at the root of the appearance of the bumper profits and bonuses at Goldman Sachs.” He went on to explain:
The opacity of the Federal Reserve has become a focus of populist indignation since the financial crisis hit the meltdown stage last fall. As I discussed on May 25, Republican Congressman Ron Paul of Texas introduced the Federal Reserve Transparency Act (HR 1207) which would give the Government Accountability Office the authority to audit the Federal Reserve as well as its member components, and require a report to Congress by the end of 2010. Meanwhile, President Obama has suggested expanding the Fed’s powers to make it the nation’s “systemic risk regulator” overseeing banks such as Goldman Sachs, deemed “too big to fail”. The suggestion of expanding the Fed’s authority in this way has only added to the cry for more oversight. On July 17, Willem Buiter wrote a piece for the Financial Times entitled: “What to do with the Fed”. He began with this observation:
Since the introduction of HR 1207, a public debate has ensued over this bill. This dispute was ratcheted up a notch when a number of economics professors signed a petition, urging Congress and the White House “to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.” An interesting analysis of this controversy appears at LewRockwell.com, in an article by economist Robert Higgs. Here’s how Higgs concluded his argument:
Close down the Federal Reserve? It’s not a new idea. Back on September 29, when the Emergency Economic Stabilization Act of 2008 was just a baby, Avery Goodman posted a piece at the Seeking Alpha website arguing for closure of the Fed. The article made a number of good points, although this was my favorite:
So the battle over the Fed continues. In the mean time, as The Washington Post reports, Fed Chairman Ben Bernanke takes his show on the road, making four appearances over the next six days. Tuesday and Wednesday will bring his semiannual testimony on monetary policy before House and Senate committees. Perhaps he will be accompanied by Goldman Sachs CEO, Lloyd Bankfiend, who could show everyone the nice “green shoots” growing in his IRA at taxpayer expense.