Monday, April 13, 2009
The New McCarthyists
“I have here in my hand a list…”
Senator Joseph McCarthy, Wheeling, West Virginia, February 9, 1950.
If Joe McCarthy was now alive and representing the great state of Wisconsin, we have no doubt what class of Americans he would be angrily denouncing.
Hint: it would not be Communists.
“I have here in my hand a list of short-sellers,” McCarthy would probably be saying in speeches around the country, waving an imaginary list of imaginary miscreants for the cameras; “Names that were made known to the SEC as being behind the demise of the financial industry and who nevertheless are still working…”
For those readers too young to recall Joe McCarthy and his particular legacy—McCarthyism—the Senator from Wisconsin was a hard drinker and friend of the Kennedys (he was godfather to Robert F. Kennedy’s firstborn; try to get your mind around that the next time you get all weepy about “Bobby”) who surged to prominence during the paranoid post-World War II years when Communism, not climate change, was the threat.
McCarthy made his name largely on the basis of flimsy speeches accusing the State Department of harboring Communists without ever making an accusation that stuck.
And the notion that Joe McCarthy would be leading the anti-short-selling campaign came to us while reading just such a flimsy accusation in Barron’s, of all places.
In the current issue, a Barron’s reader and letter-writer repeats the oft-stated and never-substantiated claim that “shorting caused the demise of financial companies that were intentionally targeted by short players.”
I was hoping the letter-writer was going to name one—just one—financial company that was so targeted, as well as the short-sellers who did the alleged targeting, so that we could rid the face of the earth of this supposed evil.
But he did not.
The fact is nobody has.
And the reason nobody has, and I suspect nobody ever will, is that no such names exist. They are as imaginary as the State Department Communists of Joe McCarthy’s alcoholic dreams.
Investment banks and financial giants failed for a simple reason, and it had nothing to do with short-selling.
They failed because their CEOs responded to Wall Street’s demand for smooth, mindless 15% annual earnings growth by jumping on the subprime bandwagon and stuffing their balance sheets with toxic levels of those poisoned assets.
It happened at Wachovia, it happened at AIG, it happened at Freddie Mac, it happened at Lehman, it happened at Fannie Mae.
Warren Buffett—no slouch when it comes to reading balance sheets—was so distrustful of Fannie and Freddie management’s artificially targeting 15% earnings growth to satisfy Wall Street that he sold all his stock in those two companies in 2000.
Thus at least one investor manager was able to avoid most of the carnage for which the New McCarthyists now demand retribution.
If the pitchfork-carriers running through Capitol Hill truly want a villain, they ought to simply look in the mirror. After all, the CEOs of companies like Fannie Mae and Freddie Mac weren’t doing stupid stuff to please short-sellers.
They were doing stupid stuff to please money managers on Wall Street and politicians like Chris Dodd, “The Senator from AIG,” on Capitol Hill.
Human nature being what it is, however, the New McCarthyists aren’t letting mere facts stop them from demanding retribution from the only people on Wall Street who tried to warn them not to believe the numbers: short-sellers.
“Dumb lending and dumb borrowing,” is how Warren Buffett described the cause of the housing bubble and the financial collapse.
To that, we would add, “dumb investing.”
I Am Not Making This Up
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Posted by Jeff Matthews at 7:29 AM