The blame game

On television, in newspapers, in front of congressional committees and subcommittees, the titans of Wall Street to a man – and they’re all men – tend to fix the blame for investment bank failures on rabid short-selling and rumor-mongering targeting their firms. Yet another installment of this story appeared yesterday in The Wall Street Journal’s excellent piece recounting the uncertain days of mid-September when it seemed any bank could be toppled, specifically Morgan Stanley.

During a conference call with investors, Morgan Stanley’s Chief Financial Officer was quoted as saying on September 16, “It’s very important to get some sanity back into the market. Things are frankly getting out of hand, and ridiculous rumors are being repeated.”

The line was adopted by all the top brass at Morgan and elsewhere, to the extent that CEO John Mack ultimately appealed to federal regulators to “rein in” the short-sellers, many of whom happened to be Morgan’s clients.

I’ve held my tongue for the most part over the past month, but this latest WSJ article is something of a last straw, especially considering that this line of argument has found surprisingly sympathetic ears within government and the business community. But the logic underpinning this "shorts/rumors narrative" is faulty in the extreme and assigns blame where it does not belong.

I want to say up front that I do not support rumor-mongering. Intentionally passing along false information is illegal and has been for decades – and it should be.

But step back from the immediate drama of this past September and think about what the Wall Streeters want us to believe. First of all, whether those who spread faulty information do so intentionally or not, think about the atmosphere that must prevail in order for rumor-mongering to translate into cascading short positions that drive down stock prices. Only in a financial environment where there is little or no transparency can rumors even matter. On this front, Wall Street itself is to blame for creating an atmosphere in which rumors could – and did – thrive.

Take, for example, Mr. Mack’s September 14 memo to his employees wherein he stated that the firm was “uniquely positioned to succeed in this challenging environment.” How could any CEO at a Wall Street bank so blithely make a statement such as this amid the financial headwinds then prevailing. But that’s really just the beginning of the matter. Consider to secretive, Enron-style special purpose vehicles and off-balance sheet structured investment vehicles in which the banks kept risky, toxic financial instruments hidden from the view of investors. Consider the less than forthright filings that never properly warned investors of the new accounting rules that would wipe out significant value on the bank balance sheets. Think of the multi-billion dollar write-downs that occurred just weeks after public declarations of financial health.

From my perspective, the rumor-mongering on the Street was not a product of some grand conspiracy of hedge funds, but a quite natural reaction to the smoke screens and lack of transparency emanating from the banks themselves. They really have no one to blame but themselves.

If you ever heard a Wall Street chief during the Street’s heyday speak of risk at a conference or roundtable, you’d swear he was referring to a lover in the cocksure manner of a Lothario. Risk was something to be wined and dined, seduced even. Naturally, he would cast himself in the role of knowing, world-wise lover, capable getting the little minx to shed her clothes and share her treasure.

The irony is that, as their institutions crumbled, these erstwhile über-capitalists of Wall Street, these prophets of Ayn Rand and Milton Friedman, suddenly transformed themselves into, gasp!, quite comfortable statist apparatchiks of a pinkish hue. It seems capitalism was fine so long as they were “winning,” but when gains turned to losses and their banks tipped toward insolvency, the chieftains of the Street begged for the intervention of federal regulators.

So much for the tender, loving embrace of Risk.