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Cross posted on Huffington Post
Sometimes the ways of Washington, DC are truly baffling.
In the U.S. Senate this morning a hedge fund manager gave testimony to the Committee on Health, Education, Labor and Pensions on a set of higher education companies.
The only problem is that the witness, financier Steven Eisman of FrontPoint Partners, stands to profit not from the success of higher education but from stock price declines of a specific group of companies in that sector. Eisman is a short-seller.
Most Americans would think investors lose money when stock prices go down. But a specific type of investor known as a short-seller makes money when stock prices go down, not up. Ain't America great? The companies go through the grinder, cut employees and investment while some guy on Wall Street gets rich.
The Securities and Exchange Commission explains short-selling this way:
A short sale is generally the sale of a stock you do not own (or that you will borrow for delivery). Short sellers believe the price of the stock will fall, or are seeking to hedge against potential price volatility in securities that they own. If the price of the stock drops, short sellers buy the stock at the lower price and make a profit.
This is exactly what Steven Esiman is doing right now, according to reports. While he is free to invest how he sees fit, the U.S. Senate HELP Committee shouldn't set the stage to help him cheer declining stock prices. Neither should any other part of the U.S government.
Eisman is best known from his role in author Michael Lewis' book The Big Short: Inside the Doomsday Machine for short-selling practices that helped crash the mortgage securities market. Bets against subprime mortgages helped FrontPoint double its hedge fund to $1.5 billion by the end of 2007. Eisman made his billions off of the crashed dreams of millions of homeowners. When he spotted housing trends he didn't blow the whistle -- he figured out how to get rich when it crashed.
Now Eisman is setting his sights on companies in the higher education sector -- often technical training schools like Devry or ITT Technical. This isn't just speculation about Eisman short selling higher education stocks. He has said it himself. During a May 26, 2010 speech at a hedge fund conference in Manhattan, Eisman promoted increased federal regulation of higher education as a means to assure that stock prices of higher education companies would fall by as much as 60 percent.
Get that? Steven Eisman wants the regulation of higher education to get rich -- not because it will be good for students or the schools. And now this hedge fund manager is leveraging a U.S. Senate hearing to take more short-selling profits.
A short-seller investor will always have a conflict of interest when speaking about a set of companies and that is why it is inappropriate to invite Eisman as an expert witness. He will typically always want to portray those companies in a bad light in order to generate news that would drive down their stock prices. His financial conflict of interest biases his testimony beyond redemption.
Could the committee possibly expect unbiased testimony? No. Eisman has staked a fortune on government action against higher education companies.
Worse than the conflict is that the entire Senate hearing plays into Eisman's strategy of creating a giant circus about higher education companies. The bigger the circus, the lower the stock price and the more money Eisman makes. The U.S. Senate shouldn't have a leading role in a Wall Street investor's "gambling" strategy -- especially a short-seller.
The threat a short seller represents to companies isn't false. The ginned-up threat of regulation or the suggestion of legislation has already been driving down the stock prices of these companies.
After all that has happened with the financial crisis and the role that short-sellers played in dragging big companies down into the muck you'd hope the U.S. Senate wouldn't play this role. But it is going on today.
It is an imperfect analogy but inviting Steven Eisman to a HELP Committee hearing on a sector he is short selling is like asking an arsonist whether a building will burn down. He'll say, "Yes" but that is because he plans to burn it down.
It is critical that the American people can trust that Wall Street hedge fund speculators and stock short sellers won't manipulate their elected representatives. They've caused enough damage to our economy already. No more Steven Eismans.
I released the following statement today on the appearance of hedge fund manager Steve Eisman, portfolio manager at FrontPoint Financial Services Fund, a Morgan Stanley subsidiary, at the Senate Committee on Health, Education, Labor and Pensions hearing, Emerging Risk? An Overview of the Federal Investment in For-Profit Education.
"In their hearing today, the Senate HELP Committee is ostensibly looking at higher education but the appearance by Steven Eisman makes the whole event look like a scam by Wall Street hedge funds and stock short sellers who place financial gain above all things including higher education.
“Inviting Eisman to a HELP Committee hearing on a sector he is short-selling is like asking an arsonist whether a building will burn down. He’ll say, “Yes” but that is because he plans to burn it down.
“Unless the Committee plans to grill Eisman on his stock shorting against higher education stocks, the invitation of this hedge fund manager is inappropriate because the hearing will influence the stock prices of companies that he is currently short-selling.
“Eisman is known from his role in author Michael Lewis’ book The Big Short: Inside the Doomsday Machine for short-selling practices that helped crash the mortgage securities market. Bets against subprime mortgages helped FrontPoint double its hedge fund to $1.5 billion by the end of 2007. Eisman made his billions off of the crashed dreams of millions of homeowners.
“Now, Eisman has trained his stock-speculating guns on the higher education sector; and he is using today’s Senate hearing to do one thing: win regulations against companies in order to decrease their stock value. Could the committee possibly expect unbiased testimony? No. Eisman has staked a fortune on government action against higher education companies. Eisman wants the hearings to hurt those companies so he can make more money.
“This isn’t just speculation about Eisman. He has said it himself. During a May 26, 2010 speech at a hedge fund conference in Manhattan, Eisman promoted increased federal regulation of higher education as a means to assure that stock prices of for-profit higher education would fall by as much as 60 percent. And now this hedge fund manager is leveraging a Congressional hearing to take more short-selling profits.
“To assure the fairness and objectivity of these hearings, Congress should ask Eisman, on the record and under oath, to disclose any short sell bets that FrontPoint Partners or any funds connected to FrontPoint or Eisman has made regarding higher education companies.
“Congress should not be manipulated by Wall Street hedge fund speculators and stock short sellers. They’ve caused enough damage to our economy already.”
This is encouraging. But, it's also a sign that George W. Bush's SEC chair Christopher Cox should've done more to bring these schemes to light before the global financial crisis. Accountable America's Tom Matzzie:
The SEC's action against Goldman Sachs is a good step in the right direction but more is needed urgently. More than any other Wall Street bank, Goldman Sachs gamed the system to the bank's benefit and to the detriment of the public, taxpayers, investors and the U.S. economy. What Goldman Sachs did was no different than a baseball player placing bets against his own team. In addition to civil action, there should be criminal investigations.
One thing that is also becoming clear is that the SEC under former Chairman Christopher Cox was asleep at the switch. This fraud happened 20 months before Cox left his post as SEC Chair. It is clear that Cox hobbled the SEC when it was most needed to protect the public. We need financial reform to setup structures and rules that make it impossible for a regulator to hobble investor protections. But we also need public accountability for Christopher Cox and other regulators who failed to do their job. The Financial Crisis Inquiry Commission should immediately subpoena Cox to appear at their next hearing. Cox should answer as to why he didn't stop these frauds before they spun out of control and wrecked the U.S. economy. If there was any impropriety by Cox that should not be swept under the rug--it must be exposed.
While this action by the SEC is encouraging, the pace and volume of civil and criminal actions related to the financial crisis is woefully inadequate. During the S&L crisis, a series of strike forces based in 27 cities were staffed with 1,000 FBI agents, analysts and dozens of federal prosecutors. The result was no less than 1,852 S&L officials were prosecuted and 1,072 were jailed. More than 500 of these were top officers. Where are those task forces today? Where are those prosecutors? Where are those investigations? The SEC, the Department of Justice and other agencies need to do more and do it now.
The Financial Crisis Inquiry Commission (FCIC) can hold Christopher Cox accountable. They can seek subpoena powers and make him testify before the committee. It's time for the FCIC to act.
Today, Accountable America's Tom Matzzie called for more hearings and called on the FCIC to subpoena former SEC head Christopher Cox. Matzzie:
It is good to see the Financial Crisis Inquiry Commission finally call more witnesses including whistleblowers and Alan Greenspan. It is clear that Greenspan’s blind faith in deregulated rules was a factor causing the entire financial crisis. Greenspan admitted today that as early as 1998 the Federal Reserve was aware of brewing problems—yet Greenspan failed to act repeatedly.
Former SEC Chair Christopher Cox was Greenspan’s twin in the lead up to the crisis. Future hearings should focus on Cox. Mounting evidence implicates Cox’ failures particularly around Lehman Brothers. Cox hobbled the SEC just like Greenspan kept the Federal Reserve from taking action. The SEC under Cox was supervising Lehman in 2007 and 2008 when things spun out of control. The Commission needs to get to the bottom of this. Subpoena Chris Cox if he won’t appear.
Financial Reform should take note of the failures of regulators like Cox and Greenspan and write unmerciful rules to protect consumers. We need a tough cop on the beat.
Today’s hearings are not enough. There must be more hearings, more transparency into the investigations, subpoenas and, yes, criminal referrals. It is time for the Commission to get serious and if certain commissioners are obstructing the work they should be held publicly accountable. No more games—only action.
It's time for the FCIC to hold more hearings, issue subpoenas, get to the bottom of what happened and hold people accountable.