SEC Division. In essence, the regulated always own the regulators. Here is an interview with James Chanos, who says in part:
Jim Chanos: One of things we like to say is that in virtually all cases of major financial market fraud over the past 20 years, the only people who really brought forth the fraud into the light were either internal whistleblowers, the press, and/or short-sellers. It was not the normal guardians of the marketplace – regulators, law enforcement, external auditors or people like that — that did it. It was people who had an incentive to come forward either for personal reasons or for profit to point out what was going on at the Enrons and the Sunbeams and Worldcoms. Short-sellers played an important role in the marketplace not only in terms of capping, sometimes, irrational exuberance in terms of prices, but also in ferreting out wrongdoing.
Just so. I've been saying this for a few years here... And then...
We’ve had the stunning admission by the Justice Department in the past month that they put into their calculus as to whether or not to prosecute crimes in the financial arena as to the systemic effect of that. My head is still reeling from that admission.
Just so again. Chanos can be an innocent in his belief in the system...
As we now know, what they didn’t ask for was forgiveness for their misdeeds or perhaps forbearance on capital until they could get their house in order or to work with the regulators on what was obviously a massive credit crunch coming. No, what they asked for was two things. They asked for the accounting rules to be liberalized on their hard-to-value assets and for short-sellers to be cracked down on. That was their focus, and, by the way, both happened. There were short-selling bans shortly thereafter and the accounting profession, at the urging of Washington, changed, liberalized, the rules on hard-to-value assets in March of ’09. They got what they wanted, and this tells you something.
I remember this well. I was set to triple my money with Rydex double short funds. Anyone could tell there was a bubble in the financials, so I bet right. But the SEC changed the rules to benefit the banks and burn the investors. Chanos was right too. As the Short King, he was burned too.
But Chanos can be dead wrong, for example:
JC: The SEC has long held, for example, that short-selling plays an important role because of not only price discovery but also the fraud detection aspect, and they’ve always been pretty vocal about that. But the SEC is outgunned. The markets have grown much, much greater than their budget’s ability to police the markets. They also, you have to remember, have no criminal prosecution powers. That’s the Justice Department, and fraud, by definition is a crime. So you have the 10b-5 rules under the SEC, which are civil, but in fact, in much of this I lay much of the problems about fraud that we have at the feet of the Justice Department, not the SEC, because again, you need to prosecute, and that’s just not happening.
This is the "if they only had more money for enforcement, then they would become angels." If they had enough money to examine every single transaction, that would not have changed anything. Christopher Cox would still have burned the consumers. The problem is not lack of enforcement, the problem is personal corruption and corruption always trumps enforcement. The fact is, in spite of the SEC knowing well the efficacy of short-sellings it was SEC Chairman Christopher Cox who outlawed short-selling:
This is like all the people who now claim regret for lying us into the Iraq debacle. They have enjoyed incalacuable benefits for doing what they know was wrong at the time, and want to keep all that, plus enjoy some sort of pass on their actions. So as SEC Chairman Chris Cox knew what he was doing was wrong, but he did it anyway. And now wants us to give him a pass.
I would be every bit as evil if I were given his power. Indeed, what was I, a putative Christian, doing investing in financial stocks?! If Cox wants a pass, why does he not admit have an SEC is wrong?
But back to Chanos, who is usually right, and this is very good.
But because they were doing it in too-big-to-fail institutions, they got to keep playing. In a weird way it is the antithesis of the free market. The free market would have taken these people out a long time ago. But, in fact, the subsidized market that we have, where the taxpayer stands behind all these bad decisions and the bad accounting, continues to exacerbate the income inequality issues.
Exactly! Next comes the coup de grace:
Exactly. The state brings chaos to the markets. We are only safe with free markets. You show me where I am wrong.
Feel free to forward this by email to three of your friends.
Jim Chanos: One of things we like to say is that in virtually all cases of major financial market fraud over the past 20 years, the only people who really brought forth the fraud into the light were either internal whistleblowers, the press, and/or short-sellers. It was not the normal guardians of the marketplace – regulators, law enforcement, external auditors or people like that — that did it. It was people who had an incentive to come forward either for personal reasons or for profit to point out what was going on at the Enrons and the Sunbeams and Worldcoms. Short-sellers played an important role in the marketplace not only in terms of capping, sometimes, irrational exuberance in terms of prices, but also in ferreting out wrongdoing.
Just so. I've been saying this for a few years here... And then...
We’ve had the stunning admission by the Justice Department in the past month that they put into their calculus as to whether or not to prosecute crimes in the financial arena as to the systemic effect of that. My head is still reeling from that admission.
Just so again. Chanos can be an innocent in his belief in the system...
As we now know, what they didn’t ask for was forgiveness for their misdeeds or perhaps forbearance on capital until they could get their house in order or to work with the regulators on what was obviously a massive credit crunch coming. No, what they asked for was two things. They asked for the accounting rules to be liberalized on their hard-to-value assets and for short-sellers to be cracked down on. That was their focus, and, by the way, both happened. There were short-selling bans shortly thereafter and the accounting profession, at the urging of Washington, changed, liberalized, the rules on hard-to-value assets in March of ’09. They got what they wanted, and this tells you something.
I remember this well. I was set to triple my money with Rydex double short funds. Anyone could tell there was a bubble in the financials, so I bet right. But the SEC changed the rules to benefit the banks and burn the investors. Chanos was right too. As the Short King, he was burned too.
But Chanos can be dead wrong, for example:
JC: The SEC has long held, for example, that short-selling plays an important role because of not only price discovery but also the fraud detection aspect, and they’ve always been pretty vocal about that. But the SEC is outgunned. The markets have grown much, much greater than their budget’s ability to police the markets. They also, you have to remember, have no criminal prosecution powers. That’s the Justice Department, and fraud, by definition is a crime. So you have the 10b-5 rules under the SEC, which are civil, but in fact, in much of this I lay much of the problems about fraud that we have at the feet of the Justice Department, not the SEC, because again, you need to prosecute, and that’s just not happening.
This is the "if they only had more money for enforcement, then they would become angels." If they had enough money to examine every single transaction, that would not have changed anything. Christopher Cox would still have burned the consumers. The problem is not lack of enforcement, the problem is personal corruption and corruption always trumps enforcement. The fact is, in spite of the SEC knowing well the efficacy of short-sellings it was SEC Chairman Christopher Cox who outlawed short-selling:
At the end of his tenure as chairman of the Securities and Exchange Commission, Christopher Cox said the biggest mistake of his term was to implement a three-week ban on short-selling bank stocks at the height of the financial crisis in 2008.
This is like all the people who now claim regret for lying us into the Iraq debacle. They have enjoyed incalacuable benefits for doing what they know was wrong at the time, and want to keep all that, plus enjoy some sort of pass on their actions. So as SEC Chairman Chris Cox knew what he was doing was wrong, but he did it anyway. And now wants us to give him a pass.
I would be every bit as evil if I were given his power. Indeed, what was I, a putative Christian, doing investing in financial stocks?! If Cox wants a pass, why does he not admit have an SEC is wrong?
But back to Chanos, who is usually right, and this is very good.
But because they were doing it in too-big-to-fail institutions, they got to keep playing. In a weird way it is the antithesis of the free market. The free market would have taken these people out a long time ago. But, in fact, the subsidized market that we have, where the taxpayer stands behind all these bad decisions and the bad accounting, continues to exacerbate the income inequality issues.
Exactly! Next comes the coup de grace:
LP: How does too-big-to-fail create fraud, and would breaking up the big banks be helpful in addressing it?
JC: Well, as we now know from Lanny Breuer and Eric Holder, too-big-to-fail is also too-big-to-jail. We now have admissions by the federal government that, in fact, this behavior was not extensively examined or investigated because of systemic issues.
It raises an interesting point, doesn’t it? Because if now, as the senior member of a bank, or the board of a bank, I know that there are no criminal penalities for breaking the rules, don’t I have a fiduciary responsibility to my shareholders to actually play fast and loose? Because if I get caught, that’s just the cost of doing business? I know it’s a frightening thought, but if carried to its logical extreme—if truly people believe that because of their size, they can’t be prosecuted, it actually brings forth a new issue of moral hazard extreme: illegal behavior.
That’s why equality under the law is an important concept – one that is being violated now.
Exactly. The state brings chaos to the markets. We are only safe with free markets. You show me where I am wrong.
Feel free to forward this by email to three of your friends.
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