Monday, March 23, 2009

The rocky shoals of regulation and reputation

It's time to set the record straight about short selling. The media doesn't get it. Congress, certainly, doesn't get it. And the hedge fund industry is at risk of getting it right where it hurts, if short-sighted regulation is the result of misplaced concern about short selling. A recent column on Bloomberg blames naked short selling for the collapse of Lehman Brothers. The column begins with this shrill statement, "the biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts." Fraud, dark arts, and collusion are among the charges levied against hedge funds in the piece.

An effective counter-argument can be found on, but just because a debate on short selling exists, doesn't mean that people are hearing both sides.  The critics are much more vocal and their claims play on the concerns people have about everything Wall Street.  Experts say that people need to hear something between three and five times before they believe it.  Believe me, people have heard that short selling is bad, dangerous, even un-American lots of times.  They are writing their congressmen. Congressmen (and there are not many bankers and securities lawyers in the House), in turn, are turning up the populist rhetoric against the industry.  

What's at stake here is license to operate.  When I worked for Texaco, license to operate was the primary PR concern of the company.  The energy industry understands that reputation is central to winning contracts with foreign governments, executing acquisitions and preventing over-regulation.

Ensuring that short selling does not come under unreasonable regulation should be taken as seriously as the energy sector takes regulation on offshore drilling ,CO2 emissions, double-hulled tankers and other aspects central to its operation and profit.  

Right now, the hedge fund industry is running a proverbial oil tanker onto a reef and they don't even know it.

What can be done?  Here are some tactics:
Get independent third party experts, like academics or former regulators, to set the record straight. 
Sponsor and promote independent research that documents the effects of short selling on the market.
Get involved in the debate online.  The blogs listed (see right hand column) on this site all feature intelligent comment and debate among readers.
Become more vocal in the media.
Educate key lawmakers.
The blog on listed above suggest creating an official panel (like the 9-11 Commission) to investigate (and hopefully vindicate) short selling.

No comments: