When I was a kid my dad used to say that when politicians wanted to lie they spoke “with a marble in their mouth.” (I have yet to hear anyone else use this expression, but it’s stuck with me).
I couldn’t help but remember that today when John Paulson-the hedge fund manager who made billions last year-was in the New York Times saying that no hedge funds had failed in the current economic crisis ans hadn’t really causwd it and therefore shouldn’t be heavily regulated. After all, it’s the greedy bankers and insurers who caused this right?
Let’s check the facts. First, this crisis was accelerated by the failure of Lehman Brothers (that was the day the financial earth broadly stood still). Lehman brothers failed because their was a fall in confidence in it-which drove it’s stock price down and created a vicious cycle that ended in bankruptcy.
Now here’s the dirty little secret: when it failed, their were 38 million naked shorts on it that failed as trades. That means that essentially the entire market bet against it, trying to drive down it’s share price for profit-which of course reinforced it’s ultimate failure (Paul Kedrosky’s blog links to the facts).
So who made these trades? I’m pretty sure that it wasn’t an army of retail investors using eTrade. I’m betting that it was a bunch of hedge funds-which means that they’re now right at Ground Zero of the current debacle.
Of course, I can’t prove this-and that’s the magic. Hedge funds are surrounded by such a thin, slippery skein of regulation that there’s no way to tell. I love free markets but they only work when there’s an open flow of information-and that’s exactly what’s missing here.