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.”

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


dearieme said...

But McCarthy was right, at least in a general sense. Right by chance, I'll grant you - I gather that he never had evidence worth a hoot. But there had been rather a lot of Communists in the Democratic administrations - more so under Roosevelt than under Truman. The Venona decrypts are the most compelling evidence.

Jeff Matthews said...

So name 'em.

And while you're at it, name the financial companies driven out of business by short-sellers, and name the short-sellers who drove them out of business.

Still waiting.


Bamass said...

I can trump that easily enough: "I have here in my hand a list of executive bonus recipients at AIG..."

dearieme said...

According to Wikipedia:-
"The decrypts show that the U.S. and other nations were targeted in major espionage campaigns by the Soviet Union as early as 1942. Among those identified are Julius and Ethel Rosenberg; Alger Hiss; Harry Dexter White,[15] the second-highest official in the Treasury Department; Lauchlin Currie,[16] a personal aide to Franklin Roosevelt; and Maurice Halperin,[17] a section head in the Office of Strategic Services."

"According to authors John Earl Haynes and Harvey Klehr, the Venona transcripts identify approximately 349 Americans who they claim had a covert relationship with Soviet intelligence, though less than half of these have been matched to real-name identities.[19]"

Did you really not know that this stuff? As for shorting - how the hell should I know? My point is that your analogy is dud.

Jeff Matthews said...

"Dearieme": Good to know that you can read Wikipedia like everyone else.

The analogy is exact because McCarthy never named the 205 Communists that he had supposedly discovered working in the State Department against the US government.

In fact, if you read the rest of Wikipedia you'll find he didn't name one.


Michael Comeau said...

I find it insane that nobody wants to blame long investors that simply dumped their financial holdings too late on the way down, which was the real culprit in the decline!

Paco said...

There have been successful companies that have just executed and ignored the demands of "investors" of short term guidance and smoothed out operating performance (see GOOG and AAPL). Its the same mentality that wanted managers to produce 1%/month performance. How did that work out for the fund of funds and other investors of Madoff and others? God forbid they do DD and try and figure out how someone puts up 1% each month during the past 20 years let alone the last 10 let alone the last 5.