On the Brink Cramer: SEC Played a Big Role [in AIG's demise] 09/16/08 - 10:04 AM EDT
Christopher Cox and his crowd of academics and theoreticians did more to destroy the confidence of this market with their adherence to free-market destruction of stocks than any of the managements of the companies themselves.
I know that is a strong statement, but you have to understand that the rules against naked shorting and shorting without upticks were about having firebreaks in the system. Consider these rules a swath of chopped-down trees meant to slow a fire so firefighters have a real chance to put out a monster conflagration. Let's take AIG(AIG Quote - Cramer on AIG - Stock Picks). Here's a company that has lots of liabilities but also lots of assets. While its liabilities are liquid -- meaning it has to pay them off quickly if there is an event that triggers payment -- its assets, such as its great life insurance and aircraft leasing businesses, are illiquid. AIG couldn't just turn around and sell them.
Still, new management came in at AIG and decided to work on a plan, meant to be revealed at the end of September, that would detail asset disposals that could make the company a more solid credit with an ability to make good on their policies on financial instruments. It would also be able to access capital in the markets once those illiquid assets were disposed of.
Unfortunately, what AIG didn't know, and the SEC didn't either, is that AIG the stock is different -- and worse -- than AIG the company. The stock could not be insulated with a firebreak from short-sellers who knew that if you broke the stock's back, you broke the company's back.
To me, this was all pretty obvious. I was a short-seller, and I know that when a stock gets hit, people fret about the company regardless of whether the company is in good shape or not. There was a time that AIG had an immense amount of capital and it bought its stock back hand over fist in the $60s, and so it was somewhat able to defend itself from short-sellers. Even then, though, there were strict limits to when and how much companies could buy of their stocks. There are no such limits as to when short-sellers can operate.
So, without an ability to slow the short-sellers down by forcing them to wait for buyers to come in and pay up, and with no ability to demand that short-sellers or their brokers borrow stock first to short directly or to sell puts to the customers, shorts were able to take AIG down from the $20s to $4 in a week's time.
To be sure, there were plenty of problems with AIG -- including, presumably, the insurance they may have offered on the solvency of Lehman(LEH Quote - Cramer on LEH - Stock Picks) and on their debt that they would be expected to pay off.
What matters, though, is how easily hedge funds were able to take this company down through endless selling.
The academics at the SEC had no idea how important their rules were when they put in the bottom on July 15, and they had no idea how catastrophic it would be when they pulled them.
I don't know a soul in the business, save short-sellers, who have participated in these raids who doesn't agree with this dynamic. Yet Cox has steadfastly refused to go back and reinstitute the rules and bring the playing field back to where it was before I retired in 2000 -- to a time when I remember how difficult it would be to create these forest fires given the breaks.
The speed is and was too great to put out the fires, so Lehman went and then AIG looks like it is going. One look at the puts -- which can only be bought in the sizes they are being bought with naked short-selling among the brokers who sell them -- tells you the short-sellers' next moves. That is why I flagged Citigroup(C Quote - Cramer on C - Stock Picks) to you last week. It was so obvious they were about to maul it. When we look back at the destruction of the financials, we should remember the instrumental role the SEC played in creating the chaos in doing nothing to stop it, and, like every other government official in this drama, received no criticism or no skepticism.
I just wish for once that the government would have real people be called in -- real people like me -- to explain to them how it works and how easy it was to take down Lehman or AIG through the stock market. It was child's play, and the SEC didn't even know that.
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