Regulators Are Captured By the Regulated

It is a recurring theme in USA capitalism, that our system of regulators is always captured by the regulated. James Bovard has demonstrated this time and again.

Sometimes it is more subtle. The securities industry has the SEC and others that look out for fraud. And we have Fitch, Moody's and S&P. To sell investments to pensions and institutional buyers, there has to be a third party rating the investment. (USA was downgraded last week from AAA to AA+ by S&P.) Most of the stock market problems can be traced back in part to fraud on the part of the rating agencies, something well known and documented as it occurred. People like Warren Buffett rely heavily on the ratings agencies. He has been known to offer some pointed remarks their way, though.

Now we find Moody's, the rating service, one of three "qualified" by the government to rate securities for value and quality, has an insider stepping forward, naming names and specific instances of wrongdoing.

Wait wait, it gets better... guess who owns a powerful amount of Moody's? Warren Buffett.

So we have avuncular Warren Buffett, everyone's favorite investor, owning a rating agency, which heavily influences that market, being watched by an SEC that sees nothing, and shreds evidence when it gets it.

Too complicated for most people to follow, or more likely, they already understood it is all corrupt, so they do not waste their time inquiring.

There is an alternative to all of this. It is called free markets. The necessary and sufficient market regulation comes in the form of short sellers. They bet their own money that their own research proves something is amiss with a corporation. And then they borrow the stock of the corporation, and sell it. If the price goes up (the short seller is wrong) the short-seller loses money having to buy the stock at a higher price, to return it from whom her borrowed it. If the short seller is right, he makes money when he buys the stock at a lower price to return it from whom her borrowed it. We need no more regulation than that.

Legendary short-seller James Chanos knows crooks when he sees them. He is shortselling Warren Buffett's Moody's.

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