It's A Deal

September 19, 2008

Now This Is Scary

OK, now I’m scared.

For the first time since this mind-numbing, unfathomable fiasco took root, I fear for our financial system. Yes, I’ll agree that it’s odd to make such a confession when the Dow is up 450 points (900 in two days), but hey, I’ve never been a conventionalist.

I don’t pretend for a minute to know all the intricacies of how the various markets are intertwined and at each other's mercy--frankly, no one should, because no one does--but when the government of the United States tells investors it can't make bets on financial stocks to go down, I know for certain that we have a big, big problem.

The game is rigged.

Now, some will say I’m naive, suggesting that the game has always been rigged, whether it be for the big institutional investors or company insiders and the like. But this government-imposed manipulation of the stock market is something altogether different. Unveiled as a move intended to rebuild investor confidence, no doubt with early success as evidenced by the stock-market rally, it will in fact do the opposite. It's fake.

“This decisive SEC action calls a time-out to aggressive short selling in financial institution stocks,” the government said. Funny choice of words; it had me thinking that the SEC is giving the market its own “time out.” ‘Go sit in the corner until you’re ready to stop selling off!’

Bear in mind that the time out will only last 10 days--unless it doesn’t work, in which case it can be extended “for the protection of investors.” Scary stuff.

The Feds did say that the order can’t be extended beyond 30 days in total duration, which I suppose is a good thing, but why the cap? Indeed, why not just ban stocks from falling? Yes, take a cue from elementary school playgrounds across our country these days--there are no losers, everybody wins!

This move simply smacks of panic. They got rid of the so-called uptick rule (if you wanted to short a stock it had to be done at a price higher than the previous trade) just last year. Why not start by re-implementing that, as opposed to a blanket punishment to investors who made a correct bet that many of the Wall Street banks had completely abandoned their risk-management processes, over-extended themselves and were likely to get nailed.

As his company’s stock was plunging this week, Morgan Stanley’s John Mack sent a memo to his employees saying, in part, that Morgan was doing everything it could to “stop this irresponsible action in the market." Rewind to last October, with the stock at a new high of $69 and change just as the company was about to unleash a torrent of write-downs. Where was the memo lamenting the irresponsible action back then?