Monday, May 4, 2009
(Cont'd from above)...

Jim (cont'd):   


Jim:      Sen. Kaufman, welcome to Mad Money...

Sen.:     Thank you for having me.

Jim:     Could you please explain to our viewers the importance of at least making the short sellers to be no more powerful than they were for 70 years before the SEC in 2007 decided to give the short sellers, what I consider to be the upper hand.

Sen.:     Well, I think there are a lot of reasons. First and most important is that the market has gone down a lot and I think that part of the reason is that people have lost the feeling that they are getting a fair deal when they go into the market. I think that the most important thing that we have to do now is get people back. Obviously the economy is a major, major problem. We have got to turn that around. But we have got to have people feel that they are going to fair share if they get back in the market, and that the market is on the level. And clearly, every indication is that things went on, in terms of short selling, both in Bear Stearns and Lehman Brothers and at others, where abusive short sellers drove the price down and legitimate people in the market got mauled by them. And I think the Securities and Exchange Commission, I wrote to Mary Shapiro back on March 3rd, she said that during her hearing for here nomination that she wanted to do something about the uptick rule. I wrote on March 3rd and said okay we have had the uptick rule for 70 years, and we ought to put it back in again. And really they finally got around to saying, well we have got these 5 proposals and the common. We really have to do something about the uptick rule to send a message, first thing it is the right thing to do, but send a message to everyone that they have confidence in the market. And then we have the other abuse of short selling in terms of folks not having the stock when they actually do the short sells.

Jim:     Sir, it is my understanding, I was up at my Harvard Law School at my 25 year reunion giving the key note speech. I spoke with enough professors up there and people in the business to know that we have already lost this issue. That basically they are going to put a watered down version of the uptick rule back because the other interests, the more powerful interests, the short sellers, and the people who claim that there should be power between the shorts and long, have won. And that the SEC was captured by an academic debate that says that you and I dead wrong and know nothing. How can that be?

Sen.:     Well, I do not know. And I am not willing to give up on Mary Shapiro yet. I mean there were a lot of bad decisions made in 2007. Bernie Madoff, the capital ratio decisions, the racing ratings, where the SEC just did not do the right thing and they know that they didn’t. They made the same mistake on the uptick rule. But I think that Mary Shapiro is committed to doing this thing, and I think they are going to move forward. That is why we have got a bipartisan group of Senators who have written to her and asked to do the uptick rule. And also to stop the abuse of short selling in terms of uncovered naked short selling. So I am still a believer. And we will see what happens. But that is why I put the law in. In fact if they do exactly what you said, which I do not think that they will do, then we will have to move forward with the law. But I hope that we do not have to do that.

Jim:     Alright, my understanding from the academics and I read all of the testimony from 2007, a lot of it was academic related… one of my old bosses at Goldman Sachs was a great professor, his name was Fisher Black, and he wrote… he is Black Shoals model, he is probably the foremost options teacher, and foremost options knowledge man of the last century and he wrote… “markets look a lot more efficient from the banks of the Charles, then from the banks of the Hudson”… are we going to be defeated by a group of ivory tower academics who the late, great Fisher Black tell us they do not know what they are doing?

Sen.:     I sure hope not, I really, really hope that that is not where it goes. I do not think that that is where it is going to go. I think that they really want to do the right thing. But remember, that decision was not just based on academics. They took a period during 2005 to test short selling. I mean 2005 was a roaring bull market, how are you going to find out about abusive short selling if you take 2005. It seems to me that somebody would have gone back and take a look at 2007, and 2008 and see what actually happens when the market was going down.

Jim:     I totally agree. Now, one of the things that they use as evidence and as a reason as to why we do not need the uptick rule, is a slippery slope argument that I learned in first year law school, which is something that has to be blunted. And that is that there are already so many exceptions, including the ETF exception which I think is used, particularly the double and triple shorts, to get around federal margin rules. What do you think about the idea that there have been so many exceptions that we do not need a rule back?

Sen.:     I think there may be some exceptions but we have to have a rule. I just don’t think this argument that we do not have the technology or that the market has changed, anything like that. We can make this thing happen. We just have to have a will. Most of these folks are arguing out of both sides of their mouth. They are saying that we do not need it but then we could not have it. That as you learned in your first year of law school is not really the kind of arguments people make who are serious about what they are talking about. They are willing to throw any mud against the wall and see if any of it will stick.

Jim:     One of the things that I have found Sen. Kaufman is that there is a believe among certain large institutions that any amount of trading is good. And that the large hedge funds and the exchanges favor as much trading as possible even if it is to the determent of both the capital formation in this country and the retail investor. How can they get away with that sir?

Sen.:     I have no idea, and by the way I have heard from lots of large institutions that say right on. And all of the markets on the naked short selling wrote to the SEC and said that they are in favor of getting rid of the naked short selling too. So I just think, and I hate to say this Jim, but I just get the indication that this is a group that just does not want to admit that they made a mistake. Not Mary Schapiro, but the other SEC commissioners. That is the stuff that worries me. Is I think that they just do not want to admit that they made a mistake, and they made so many mistakes that if they start admitting mistakes they feel like that there is no where to stop. So I think that that is what the problem is. And if that is the problem I hope that Mary Schapiro can work her way around it.

Jim:     Yes, she is fresh. She has the ability to do that. Sen. Kaufman you are a breath of fresh air. Please come back on the our show. You get this debate. Thank you so much.

Sen.:     Thank you.

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