The Senate Hearing: A Mixed Bag
As expected, the Senate Judiciary Committee hearing today on hedge funds turned out to be a mixed bag: One part troubling description of a possible coverup at the Securities and Exchange Commission, and one part ritual short-bashing dog-and-pony show.
The troubling part was the testimony of ex-SEC lawyer Gary Aguirre. Obviously the SEC has a lot of explaining to do about its handling of an insider trading investigation involving (maybe) Morgan Stanley CEO John Mack. Those allegations are troubling, and if they're true, heads should roll.
The dog-and-pony show component featured the usual cast of characters that one finds in such things -- the whining CEO, the "outraged" lawyer, and of course, clueless senators.
Utah Republican Orrin Hatch, for example, babbled incoherently about short-sellers "registering" stock on the Berlin exchange. (That was apparently a reference to Berlin exchange listings being manipulated by naked shorters -- something that the NASD investigated and, as was discussed at a state regulatory conference, found to be "hysteria.") My hunch is that a particular Internet-retailing, Sith Lord-ranting Utahan was delighted by the spectacle of his senator making a fool of himself.
As I indicated in a previous item in this blog, congressional hearings that cater to blame-shifting, short-bashing corporate types are nothing new.
Amid all the serious allegations and short-bashing, one little snippet of testimony stood out. It came from Jonathan Boersma, Director, Standards of Practice, at something called the CFA Centre for Financial Market Integrity. The subject was an issue -- a genuine issue, unlike naked shorting -- that Congress and regulators have completely avoided: the growing, troubling field of company-paid research.
Boersma testified forthrightly that "Client-sponsored or even issuer-paid research (whereby a company with little or no research coverage hires a firm to write a report on their company) is certainly not independent."
That is certainly true. Yet, as I pointed out in Wall Street Versus America, such research is routinely touted as "independent" by its purveyors, and foisted on investors as such.
Paid research is an area that Congress might want to investigate, once it satisfies its appetite for "naked shorting" baloney. I'd say it OD'd on that today.
UPDATE: Rounding out a day that positively reeked of baloney, the Depository Trust Clearing Corp. issued a press release concerning a central focus of the anti-shorting nuts -- "fails to deliver." Seems that the widely quoted $6 billion in "fails to deliver" is actually $3 billion, because that figure includes both failure to deliver and to receive. ("Fails to Deliver" are commonly mistranslated by anti-shorting loons as equivalent to "naked shorting," which they ain't, as the DTCC has pointed out a bunch of times.)
Nice of DTCC to clarify. But what I wonder is this: what took 'em so long? To me, this is a prime example of how the Street establishment feeds the conspiracy theorists, who thrive on seemingly conflicting data as they advance their flat-earth theories.
Something as basic as double-counting -- always an issue when quantifying trading -- should have been caught by the DTCC long ago.
© 2006 Gary Weiss. All rights reserved.
Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.