The Spoiled Brats of Wall Street

The lead story on nyt.com this afternoon was “Stocks Slide as Investors Fret Over Europe and Regulation. Funny thing, though: I haven’t seen much in the way of new, market-moving news about Europe’s troubles in the past couple of days. What I have seen – and what there’s plenty of in the article – is news that the US Senate is getting close to a vote on financial reform, and that the German government last night banned naked short-selling (the practice of allowing “investors” to sell securities that they don’t own with the plan of buying it back later after its price has declined. It used to be that in order to do that, you had to “borrow” – rent, really – the securities from someone who actually owned them. Recently, it’s been all the rage to simply sell them without bothering to actually borrow them. That’s the “naked” part). Naked short-selling is wildly profitable to Wall St. trading houses, which make money on the trading volume – so removing the inconvenient requirement that short-selling only be limited to securities that actually exists has a huge multiplying effect on volume, and therefore profits.

I’ve been noticing lately that whenever there’s news that Congress or regulators are about to make meaningful reforms, the markets seem to develop a sudden case of the vapors. To my eye, it’s difficult not to suspect that the Masters of the Universe are using the tools they have at their disposal to send a message; screw with our ability to make casino-like profits, and we’ll break your financial legs. This is not particularly hard to do, by the way – in turbulent times it’s neither difficult nor particularly unprofitable to trigger a rout. In fact, using tactics like naked short-selling, and knowing that you’ll make money on the trading-frenzy that volatility triggers, it can actually be quite profitable to churn the waters.

This is the modern-day equivalent of the market manipulation that made people like Jay Gould and Joseph P. Kennedy fabulously wealthy. In the structure of today’s financial industry, the tactics they used wouldn’t fly, but the goals are different: instead of a few lone wolves looking to make a killing, you have legions of traders looking to protect their ability to leech off of the world’s insatiable need to chase investment returns.

It’s rare to find smoking guns in the financial markets, but this is about as close to one as I’ve seen in a long time.