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Fingering naked short sellers

          Bears, bears everywhere, and not a toxic stock (read: security derived from US sub-prime home loan) to pick.  As London’s former employees of Lehman Brothers wander, dazed and unbelieving through the streets and as central bankers across the globe try heroically to stanch the hemorrhaging with cash infusions into stumbling economies, one thing finally becomes clear: there’s no such thing as being “decoupled” from the US economy.  Yet.  Just wait. After the breakup of the Soviet Union it was a uni-polar world, with all the power and money concentrated in the US. Over time, though there were a few Asian tigers whose economies forged ahead apace, and the EU fostered such development around its borders that the world appeared a little bit multi-polar. “Decoupling” from the US economy was apace, it seemed.

          Meanwhile Russia, as soon as it was done licking its wounds and had reined in the oligarchs it had created by privatizing everything, invented a sort of “state capitalism” in which it had a modicum of democracy. The private sector wasn’t all that private, however, as the Kremlin had an unnerving habit of brandishing its power with its state – no private!, no, wait, it’s only sort of private, but… – energy entity, Gazprom to achieve its geopolitical aims. The Kremlin, more than any Asian Tiger or up-and-coming Club Med member thought it was ‘decoupled’ from the US. Sheesh. Being brand-new to capitalism is perhaps what drove Moscow’s diplomatic decision – or more precisely, failed to influence the decision –  to tussle with Georgia.  The Bear, still woozy from its long sleep, acted on old information. 

          The way economists tend to describe this is that emerging markets (like Russia’s) are subject to more political risk than developed ones. Multinational financial muckety-mucks see Russia’s marked as risky, but profitable if the Kremlin likes you. And the Kremlin likes you if you keep your filthy money out of its strategic interests like Gazprom, anything nuclear and anything even remotely related to free speech. Ironically, the current mess in US banking along with the current mess in the Caucasus probably indicates that while Russia has been moving, two steps forward, one step back, toward a free market, the US has been moving toward “state capitalism”.  With the $700 billion bailout of private industry the Fed is about to make, I really can’t see the US neo-con pot calling the Putin (I mean Medvedev! Really I do!) kettle black. And, by the way, I can’t help wondering what $700 billion would have done for US schools and health care, can you? Don’t get me started on that. Big government, indeed.

          The Federal Reserve and the Treasury are nationalizing the economy faster than you can say Hugo Chavez. And why? Because of the policies the US government, that’s why. At one point they required commercial and mortgage banks to lend to high-risk borrowers who sought home ownership. Banks that failed to comply were fined and denied approval of requested mergers and branch expansions. Then the feds offered an implicit guarantee of Freddie Mae and Fannie Mac, which allowed the speculators to speculate with not only abandon, but reckless abandon, and therein lay the heart of the housing boom. Remember that? And then there was a sort of voo-doo decree by the Financial Accounting Standards Board (no, nobody really knows what it is nor what it does. All you really need to know is that it talks in jargon and carries a big stick) of regulations that forced banks to report those loans which they couldn’t sell as “zero”, even if the loan-ee was still paying. Gawd and I and you and my dog not only don’t understand why they decreed, but we really, really don’t want to. Just accept that my sources are pretty well informed on the matter (CSM, 17 Sep, page 9), and that the result contributed to the housing finance mayhem. If not acutally caused, then at least aided and abetted by government intervention. Darn it!

          Can I re-iterate this for a moment? Okay, thanks, I will: the US government mandated that banks lend to high-risk borrowers. This is not to say that there weren’t predatory lenders out there, but those were the “give ‘em an inch, they’ll take a mile” sorts. The ones that government intervention is supposed to thwart.  And in the meanwhile, the CEOs of the bailed-out finance companies who walk away with their multi-million dollar severance packets or golden parachutes or at least the gazillions they made as CEOs walk not dazed and uncomprehending through London’s streets, but straight to the emerging markets where they’ll invest the funds which they “earned” and the American taxpayers are now going to replace. Do you care if they invest their filthy lucre in sovereign wealth funds in Russia or Asia? Those funds have given governments ownership in what used to be private businesses (Abu Dhabi owns 90% of the Chrysler Building and aims to be a primary shareholder of GE, so I hear.), while more and more nations go about privatizing concerns which used to be government owned and run, like postal services, energy suppliers and road systems. The Economist reported recently that a chief strategist at Lehman Brothers pointed to the Russian market as a good investment opportunity. That strategist will be using, in effect, taxpayer money. Can you say “State Capitalism”?  Only it’s a state capitalism in which the elected officials have no say in how the money, collected from the taxpayer, is spent.

          Oh, and “Naked short selling” is actually just a literary come-on. It’s a practice I read about whilst trolling international policy mags. It refers to betting on a company’s impending failure to make money. Just like ‘short selling’ only you don’t need to spend any actual money to do it. Listen to the “This American Life” podcast for an entertaining description of the practice here: http://www.thisamericanlife.org/Radio_Episode.aspx?episode=363 for details. SEC chairman Cox lamely pinned the blame on naked short selling of 18 different securities for the failure of AIG, Lehman Bros, Morgan Stanley and the rest, but as far as I can tell, naked short selling had very little to do with the implosion we’re about to pay for. His fingering of the naked short sellers was as cheap as mine is.

 

P.S. anyone who can identify the switcheroo committed herein gets a special prize. Put it in the comments box.

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