Letter 2 America for November 26, 2013

Dear America,

There is an "activist investor" named William Ackman who has undertaken a quest against a corporation called Herbalife.  Large chunks of Herbalife's stock are owned by other robber barons who like to think of themselves as activists too: Carl Icahn, George Soros and William Stiritz.  They all run hedge funds and other equity holding companies, and they like to think of themselves as Robin Hood types, but what they really are is the embodiment of what is wrong with capitalism today.  In the case of Ackman and Herbalife, Ackman is convinced that Herbalife is a Ponzi scheme, which it looks like to me.  But Ackman has taken it upon himself to quest after the exposure of the scheme, and the way in which he is doing it demonstrates that even when they purport to be doing good, they are really helping themselves to bigger and bigger shares of the net worth of society at large.  The form Mr. Ackman's quest has taken is a short sale of $1 billion worth of Herbalife's stock.  I have described short selling in the past as one of the most basic evils of the transmogrified financial system that was once a medium for the sharing of the use of capital, but is now a means of accruing obscene amounts of capital by manipulating the system.  In a short sale, the short seller sells stock he doesn't own, and he does so by borrowing that stock from many different owners through brokerage houses and investment banks that specialize in such loans of stock.  Thus, sometimes enormous volumes of selling occur when the sellers don't own the stock, thus placing downward pressure on the price of the stock as concerted selling almost always does.  But in the case of short selling, the sales are not real as the owners of the stock still own the shares; they have just lent them out.  Thus, short selling creates artificial downward pressure on a stock that the short seller wants to buy at a lower price so that he can give it back to the people who lent it to him and keep the difference between the short sale price and the price of the stock he buys to pay it back.  It is betting on what the short seller hopes will be a self-fulfilling prophecy.  And in this case, it is the ultimate irony that a possible Ponzi scheme is under attack by a short-seller, and thus, there's no good guy to root for.  They deserve each other, but the investors will be the losers, not these villains of the piece themselves.  It is the perfect simile for the corruption of modern capitalism: manipulators warring with manipulators and destroying the civilian population in the process.

What if Ackman succeeds in bringing Herbalife down.  He runs a "hedge fund," which is a syndicate of millionaire investors--you have to have a million dollars to invest in a hedge fund by law--and he is leading them in this battle probably unbeknownst to most of them because their money is just parked in Ackman's $11 billion fund, Pershing Square Capital Management, for someone else, Ackman, to manage.  That's more or less what Bernie Madoff did for a living.  Madoff also managed other people's money.  He also lied to them about it because in the end, it wasn't there anymore.  Ackman probably isn't a mammoth defrauder of many, but he isn't Saint Francis either, though he would like to convince everyone else, as he seems to have convinced himself, that he is doing God's work.  But if he wins in this quest, he will make a ton of money, not just for his investors but for himself as well.  The owners of hedge funds make their livings by taking a share of the profits from their "hedges," like this short sale.  They produce nothing although they want everyone to believe that they produce money instead of the reality, which is that they just take it from someone else's pocket and put it in those of their clients and themselves.  It will be a victory for someone who is little more than a river boat gambler, not the vindication of a principle of some kind that Ackman has made up in this case.  To put it concisely, this whole short sale strategy of Ackman's is nothing more than an effort to make something out of nothing: alchemy, it used to be called.  And there's nothing noble about it...not even Ackman's purported quest for truth and justice, though he is doing it the American way.  It's all so unseemly...and morally bankrupt.

So, the bottom line in this case isn't a sum total.  It is that there are only bad guys playing this financial game, and thus, some bad guy is going to win in the realm of American finance.  That seems to be the way it always goes.  The significance of this corruption is that it is as much a part of our current politics as is the Affordable Care Act.  The Dodd-Frank Act is being sabotaged by the Republicans in congress, who are obstructing the formulation of the regulations that are needed to implement The Act, especially the Volcker Rule, which is supposed to prevent banks like J.P. Morgan-Chase from investing money they hold for others and risking its loss at those depositors' expense, but that never seems to make the 6:30 news, or even the New York Times.  And no one has even broached the subject of capital market manipulation through short selling.  We continue to endow these tactics with respectability with the institutionalization of options trading on an official exchange out in Chicago and commodities trading by people who could never take delivery of what they are buying and selling, all of them skimming off the top of the wealth produced by working Americans, complaining all the while that hard working people should be glad to have the minimum wage they get and stop asking for more...but that's food for another thought.

My hope is that some time in the next decade or so we will see the ascendance of a politician who isn't afraid to point out that all these emperors who claim to be benevolent oligarchs really have no clothes on.  Of course, such a politician can only hope for one term, because the money that will be arrayed against him if he runs for reelection will by boundless, but it will be a start.

Your friend,

Mike