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Dear Senator McCain,
I've long believed you to be a man of intelligence and principle, a standout in an otherwise broken political system. That ended yesterday when you used SEC Chairman Christopher Cox, a reformer, as a political punch line.
"The chairman of the SEC serves at the appointment of the president and has betrayed the public's trust," you said at a rally in Iowa. "If I were president today, I would fire him."
At issue, you say, is Cox's removal of the uptick rule, which was put in place after the Great Depression to prevent a continuous stream of short sales. Instead, traders would wait for an "uptick" in price before placing a new short sale.
Cox argues that the rule is meaningless now that millions of shares trade hands each second. He's right. Reinstating the uptick rule might, at best, keep a spiraling stock from losing a point or two in a given day.
But it wouldn't have kept Lehman Brothers from going bust. There were no Sith Lords behind Merrill Lynch's sale to Bank of America. No amount of upticking could have kept these firms ticking any longer.
I want to believe that you know this, but your remarks suggest otherwise. "The primary regulator of Wall Street, the Securities and Exchange Commission, kept in place trading rules that let speculators and hedge funds turn our markets into a casino. They allowed naked short selling -- which simply means that you can sell stock without ever owning it." [Emphasis added.]
No, sir, it doesn't. Short sellers aren't owners, they're borrowers. They sell borrowed shares, pocket the proceeds, and buy back what they borrowed to "cover" the sale. Naked short selling is different; it's when short sellers sell shares that don't exist.
Perhaps your issue is that Cox was slow to put in place rules aimed at curbing naked shorting. Or maybe you think that he didn't take decisive enough action as Fannie Mae (NYSE: FNM ) and Freddie Mac (NYSE: FRE ) showed signs of collapse. If so, fine, but your remarks indict the entire system, not just Mr. Cox.
And shouldn't you be making a stronger case, sir? It was Cox, after all, who went before Congress to suggest that brokers be required to cover every short sale with a known, and available, borrowed position before approving a transaction. Goodbye, naked shorting.
Cox also is a reformer, as you claim to be. He's behind the SEC's push for an interactive financial reporting system based on a data description language called XBRL. The result: Improved access to financial data for common Fools. Dozens of companies have signed on to publish statements to the now-in-development IDEA database, including Microsoft (Nasdaq: MSFT ) , IBM, and NYSE Euronext (NYSE: NYX ) .
"My opponent sees an economic crisis as a political opportunity instead of a time to lead," you said yesterday. Today, I expect that you'll claim victory. You'll say that the administration and regulators are following your lead by temporarily banning short selling of financial giants such as Goldman Sachs (NYSE: GS ) and AIG and by creating a system for absorbing the bad debts of ailing banks like Wachovia (NYSE: WB ) and Washington Mutual (NYSE: WM ) . Maybe you're right; maybe they did. And maybe this seemingly endless string of bailouts will adequately reprice risk and, at the same time, aid taxpayers.
Still, there's irony in your words. Your finger-pointing indictment of Chairman Cox is exactly what you've denounced: a political ploy. Did you really believe no one would notice? You're better than this, sir.
I look forward to your response.
Foolish best wishes,
Tim Beyers, Fool contributor and Motley Fool Rule Breakers analyst