The S&P 500 index is plunging 3% Monday following widespread news reports that the $700B government bailout for Wall Street has been agreed to and will be passed today by Congress. Proponents of the bailout had warned of a stock market crash if Congress failed to enact the socialist rescue plan. Credit spreads are wider and markets continue to be seized up, prompting the Fed to double the size of its liquidity injections to $300B. This is a sign from both equity and debt markets that there is little faith that the bailout will solve the financial crisis.

In my opinion, there has been no greater CNBC commentary on the Wall Street bailout than this one by Peter Boockvar, equity strategist for Miller Tabak. His main points: This is a bailout of several failed bailouts. The top banks would have $400B of lending capacity with no taxpayer funds (more than half the federal bailout) if they would simply stop paying dividends to shareholders. We should let the economic cycle run its course. Government intervention slows down the necessary process of deleveraging that needs to take place.

Amazingly, markets on Friday are shrugging off the bailout disarray. The equity market is down just 1%, a normal day, as the solons of DC bicker. No Armageddon in sight. (If markets do drop, this will be more to do with the ban on short-selling as anything else. The ban has sapped liquidity and will prevent short covering should it be needed.) Meanwhile Washington Mutual failed and the market was able to deal with the problem without a taxpayer bailout. Bankrupt Lehman’s employees are being snapped up by Barclays and Nomura without government funds. Watch the politicians rush to enact the bailout anyway, in order to prove their relevance.

The Wall Street Journal editorial page’s Stephen Moore supports the trillion dollar bailout of investment banks. Stephen is the alleged champion of free markets and was formerly with Club For Growth and was a federal budget policy director at the Cato Institute. His reasoning? Taxpayers must be made to subsidize an industry to avoid a “meltdown.” Wrong! The meltdown, caused by the deflation of a Fed-created bubble, cannot be avoided. The bailout is merely transferring the costs to taxpayers.

I hope it has not escaped Stephan Kinsella’s notice that Bruce Ivins, the government scientist allegedly responsible for the 2001 anthrax killings, was apparently motivated by “intellectual property” laws to create and deploy weapons of mass destruction. (Source: LA Times)

[Ivins] stood to gain financially from massive federal spending in the fear-filled aftermath of those killings, the Los Angeles Times has learned. Ivins is listed as a co-inventor on two patents for a genetically engineered anthrax vaccine, federal records show. Separately, Ivins also is listed as a co-inventor on an application to patent an additive for various biodefense vaccines. Ivins, 62, died Tuesday in an apparent suicide in Maryland. Federal authorities had informed his lawyer that criminal charges related to the mailings would be filed. As a co-inventor of a new anthrax vaccine, Ivins was among those in line to collect patent royalties if the product had come to market, according to an executive familiar with the matter.

This week, the Wall Street Journal’s Holman Jenkins returned to his hobby horse of propping up housing prices by having the federal government pay for the destruction of houses. ($ article)

“So far, Washington has put its political capital into trying to refinance salvageable homes for unsalvageable homeowners, when a relevant policy would consist of judiciously buying unsalvageable houses and demolishing them. Fannie and Freddie’s strength is housing market software: They could be put to work devising a least-cost, maximum-bang strategy for demolishing unoccupied homes to preserve as much value as possible for the homeowners and mortgage creditors who remain.”

I invite readers of this blog to propose other examples in which the US government could provide a service to some portion of the market it has wrecked with excess credit creation, subsidies or other counterproductive interventions. For example, why not tax the public and use the money to demolish ethanol plants, thereby improving the supply/demand balance for the subsidized but ailing ethanol producers? Or how about a Rescue Fund to pay above market prices for – and then destroy – used Big 3 cars and vehicles coming off-lease? This would relieve oversupply and prop up the aftermarket/residual values for the unwanted products of American automakers, helping them to avoid imminent bankruptcy.

Maybe Jenkins’ Republican and crony capitalist friends should propose a cabinet level National Supply Destruction Agency that would judiciously demolish what it considers to be unsalvageable products throughout the economy?

Mr. Jenkins concludes his article with a proposal to fix Freddie Mac and Fannie Mae:

“Of course, right now their [Fannie/Freddie's] overriding imperative is to avoid recognizing losses rather than rushing toward them — which is why Fannie and Freddie should be nationalized (and later privatized).”

This would merely set them up in the private sector with “non-explicit” federal guarantees, further moral hazard, and re-nationalization some time in the future. Why not bulldoze them, Mr. Jenkins?

Buried at the end of a page C2 Wall Street Journal story on efforts to revive the US mortgage finance market: “Congress is considering new legislation aimed at making it easier for homeowners to refinance by offering government insurance on certain qualified loans. While good for homeowners, the rescue effort could establish an incentive for borrowers to miss payments to qualify for the program.” [Mortgage-Securities Revival Proves Elusive, June 23, 2008, C2]

Why is it that this is not mentioned in the headline of the story?

The US House of Representatives will hold hearings on energy markets trying to determine who is causing oil prices to rise. The anti-market investigation will blame hedge funds and investment banks for manipulating the markets to make oil go to record levels.

Oil is too global a commodity for speculators to determine its price. We know, for instance, that oil prices are high not only in spot markets but in futures markets, not only on the Nymex but in the UK (Brent), Dubai, Malaysia, and numerous smaller, less liquid markets not accessible to speculators. Are we to believe that the conspirators somehow entered all these markets at once?

The argument for speculation also ignores the fact that numerous other commodities are soaring in price, namely gold, silver, platinum, palladium, copper, iron ore, tin, corn, rice, etc, etc. Did the oil conspirators cause all that, too? The commodities that do not trade on futures exchanges (making them less susceptible to speculation) have risen slightly more than exchange traded commodities, indicating that fundamentals are driving prices higher.

The House show trial is surely designed to bamboozle the general public. The one entity that engages in activities directly linked to the scarcity of oil vis a vis dollars, the Federal Reserve, appears to be exempt from government scrutiny.

Holman W. Jenkins, Jr., the Wall Street Journal’s most “free market” columnist reiterated his radical solution to the housing/mortgage market crash: “Using tax dollars to buy and demolish foreclosed, unoccupied or half-built houses in selected markets.”

According to Jenkins, central planners have figured out the best strategies of taxing the people and using the proceeds to prop up sliding home prices: “Knocking down surplus homes would be the most efficient and equitable way to spend taxpayer dollars. It can proceed experimentally. It can be turned off quickly when the need evaporates.”

As we embark down the path of sweeping regulatory reform of the US financial system, it useful to review the results of the previous reform. Supposedly, accounting standards were overhauled and clarified under the Sarbanes-Oxley Act of 2002 to prevent companies from using accounting trickery to obscure their published financial results.

In recent days, a number of financial blogs have been agonizing over a letter from the SEC to certain public companies on SFAS 157, a new accounting rule for valuing asset backed securities such as those backed by collapsing mortgages. The SEC letter is supposed to clear up confusion over the rule, but it so poorly written and convoluted that companies are having difficulty interpreting it. Some are reading it in totally conflicting ways.

Read it yourself and see if you can make any sense of it.

Frustrated observers have taken to mocking the signature on the letter by a “Senior Assistant Chief Accountant,” which does little to clarify the letter’s authority.

People like the author of this letter are to be given enhanced new regulatory powers in the next wave of reform in order to prevent “the next Bear Stearns,” which previous attempts at regulatory reform have failed to even diagnose properly.

There has been talk that another hedge fund within a US investment bank is on the verge of imploding. Ordinarily, short sellers would be signaling the market where the trouble is. But after the run on Bear Stearns, regulators at the Securities and Exchange Commission opened an investigation into possible “stock manipulation.” This adds a new element of risk to selling short the shares of any financial stocks. The SEC does not want these shares to plunge.

Silly season is back. As occurred several years ago with the mad rush to pass the disastrous Sarbanes-Oxley Act in the wake of the Enron collapse, Washington is preparing to use the imploding housing market as an excuse to ratchet up securities regulations. The trigger for a new round of rulemaking was the Fed’s decision, as part of the Bear Stearns bailout, to allow investment banks to borrow directly from the discount window for overnight funding. Non-banks will now be able to get term funding from the Fed, pledging non liquid mortgage securities as collateral and getting US Treasuries in return. This has led both Democratic and Republican policymakers to agitate for increased regulation of investment banks, making it equivalent to that of commercial banks.

High profile free marketeers are seemingly unable to refute this logic, reminiscent of Sarbox. In a CNBC interview, Cato Institute chairman Bill Niskanen stated that more regulation may well be necessary to prevent the investment banks from unfairly gaming the system. He welcomed a new regulatory push by House Financial Services Committee chairman Barney Frank (D-MA), amid cackles of glee from the interviewers. Wall Street Journal editorialist Holman Jenkins has called for demolishing homes “with taxpayer money if necessary” in order to support real estate prices. Finally, economist Bruce Bartlett is calling for the repeal of $117 billion in tax rebates, instead giving that money to government-sponsored housing agencies (Fannie Mae and Freddie Mac) to prop up the mortgage market. Are we all Keynesians, now?

In this old blog post, I jokingly suggested that Eliot Spitzer be threatened with indictment in order to force him to resign due to his serial abuses of power. Well, this is ultimately what it took. And despite the irony that this is the same tactic Spitzer used on others (and as much as I think Spitzer got what he deserved), Spitzer’s demise is just another example of prosecutorial abuse. Several libertartians have made this observation on the LRC site. Interestingly, their views are echoed on the Left by Alan Dershowitz in the March 13 Wall Street Journal (The Entrapment of Eliot):

Even if Mr. Spitzer’s derelictions were serendipitously discovered as a result of routine, computerized examination of bank transactions, the dangers inherent in selective use of overbroad criminal statutes remain. Money laundering, structuring and related financial crimes are designed to ferret out organized crime, drug dealing, terrorism and large-scale financial manipulation. They were not enacted to give the federal government the power to inquire into the sexual or financial activities of men who move money in order to hide payments to prostitutes.

Once federal authorities concluded that the “suspicious financial transactions” attributed to Mr. Spitzer did not fit into any of the paradigms for which the statutes were enacted, they should have closed the investigation. It’s simply none of the federal government’s business that a man may have been moving his own money around in order to keep his wife in the dark about his private sexual peccadilloes.”

If they wanted to, the Feds could have busted this prostitution ring quickly and easily with little fanfare. Instead, they wiretapped 5000 phone calls and read 6000 private emails to find salacious details about Spitzer that they could leak to the press. Sickening.

The sham of socially responsible investing (SRI) is exposed in a recent New York Times column by Joe Nocera. This incisive article concludes that SRI “oversimplifies the world, and in so doing distorts reality.”

SRI silliness is highlighted by its preference for BP over ExxonMobil. For years, BP has been SRI-favored for endorsing the theory of global warming. “But in 2005, a BP refinery in Texas had a major explosion, killing 15 workers and injuring more than 100 others. And last year, the company spilled oil in the North Slope of Alaska. The world woke up to the fact that BP had a pretty shoddy safety and maintenance record,” writes Nocera. Exxon Mobil, a company detested by the greens for publicly doubting the global warming theory, has been banned from SRI portfolios (since 1990) despite having a terrific worker safety record, and no serious oil spills since 1989. SRI investors foolishly missed out on fantastic investment returns in what would become the most profitable company in the world.

The standards for social responsibility are another blotch on SRI. Two dozen researchers at Boston-based KLD Research & Analytics, decide what stocks to include or exclude from most SRI indexes, including the well-known Domini 400. Nocera discovered that KLD researchers “almost never go abroad to do on-site inspections, but rely on media reports, blogs, interactions with activist organizations and conversations with the company itself.” In other words, their decisions to define a company as evil are laughably arbitrary. When Nike was judged socially evil for working conditions, “Nike was using the same factories as Reebok and other shoe manufacturers, including Timberland, a darling of the socially responsible crowd. While Reebok and Timberland stayed, only Nike was ousted from the KLD index,” notes Nocera. When Nocera confronted KLD about this, it explained that “‘there is an extra burden for the market leader.’ In other words, Nike was being punished because it had beaten its competitors in the marketplace, not because its practices were any worse than anyone else in the industry.” Though working conditions are still tough, Nike is now included in the SRI index on the basis of some favorable news clippings KLD found.

For more SRI follies, see this Free Market article.

A New York Times article “From a Rapt Audience, a Call to Cool the Hype” reveals that numerous scientists are calling on Al Gore to stop making “exaggerated and erroneous” scientific predictions about global warming catastrophe. It turns out that Gore’s scientific “consensus” about human-caused global warming conveniently excludes the many scientists who are publishing peer-reviewed studies contradicting Gore’s thesis. “A report last June by the National Academies seemed to contradict Mr. Gore’s portrayal of recent temperatures as the highest in the past millennium,” notes the Times. “Instead, the report said, current highs appeared unrivaled since only 1600, the tail end of a temperature rise known as the medieval warm period.”

The NYT article provides an interesting contrast to a recent article by NYT business columnist Joe Nocera savaging ExxonMobil for not climbing on the global warming bandwagon. In “Exxon Mobil Just Wants To Be Loved (Feb. 10),” Nocera writes: “Exxon Mobil has become the enemy because it has been slow to concede that global warming is a real phenomenon caused largely by human beings burning fossil fuels. Exxon Mobil opposed (and still opposes) the Kyoto accord. It has contributed money to Washington research groups that have cast doubt on the severity of global warming and on the need for taking drastic measures to reverse its effects. It has generally opposed mandatory caps on greenhouse gases.”

The global warming hysteria is not about science but about politics and the campaign to impose price controls and/or taxes on private sector energy use. There is massive media pressure for Big Business to endorse these “drastic measures,” if only to avoid becoming what Nocera calls “the world’s whipping boy.” Nocera actually argues it would be in ExxonMobil’s best interest to endorse energy regulation. But as George Reisman asks in a related Mises.org article, what would have happened if ExxonMobil had embraced Al Gore’s global warming crusade when he began it in 1977? Would the company have done right by its shareholders in 1977 by turning its back on petroleum and basing its business strategy on solar/wind power? It seems obvious that this company would have stood no chance of becoming the largest (market cap: $360 billion) and most profitable ($36 billion) business in the world thirty years later. Global warming alarmism is neither sound science nor sound economics.

The New York Stock Exchange said it will not impose the Sarbanes-Oxley Act on European firms if it merges with European exchange Euronext. This is a rejoinder to defenders of the onerous accounting law who claimed that it helps markets work better. The market itself has witnessed the unmitigated disaster of Sarbox, especially the dreaded Section 404. If Sarbox were so great, the NYSE Group would be more than happy to tell its European customers to comply with it voluntarily.

Blackstone Group’s CEO Stephen Schwarzman called Sarbox a terrible thing for the U.S. economy, despite the fact that his private equity firm benefits from the Act by encouraging public companies to go private. It is a shame that Bush did not pick Schwarzman for Treasury Secretary instead of the environmental extremist Henry Paulson of Goldman Sachs.

The National Association of Securities Dealers (NASD), a market regulator, has dropped civil charges against former technology investment banker Frank Quattrone. The NASD had accused him of improperly awarding shares in initial public offerings. It appears that all of the charges leveled against Quattrone were baseless and that he was being scapegoated for the collapse of the internet bubble.

Previously, the SEC overturned Quattrone’s lifetime ban from the securities industry. Also, a federal appeals court overturned his 2004 conviction for obstruction of justice, finding that the prosecution failed to show intent to obstruct an investigation. Although Quattrone was never charged with an underlying crime, the government claimed he was criminally guilty of “obstructing” its efforts to discover one.

Now, prosecutors are considering whether to try Quattrone criminally a third time (!) in order to punish him for spinning IPOs. This is the practice of allocating shares in risky new companies to preferred clients. Laws against spinning were stiffened after the Internet bubble collapsed, and the government appears adamant about punishing Quattrone for not predicting what kinds of legal actions would become illegal at a future date.Frank Quattrone Gets Last NASD Allegation Dropped
June 1 (Bloomberg) — Frank Quattrone, the former Credit Suisse Group technology banker, said the NASD dropped its case accusing him of improperly awarding shares in initial public offerings during the Internet boom.
The victory means Quattrone has prevailed in all three cases brought by NASD after the securities industry regulator dismissed the allegations yesterday, Quattrone said today in a statement. Federal prosecutors are deciding whether to try him for a third time after an appeals court in March threw out his conviction on obstruction-of-justice charges.
“We’ve seen an extraordinary collapse of the government’s case against Frank Quattrone,” said Robert Mintz, a former federal prosecutor and now a partner at McCarter & English in Newark, New Jersey. “You have to believe the government is now wringing its hands, trying to decide whether or not to retry him for a third time under these circumstances.”
The end of the NASD cases eliminates the remaining legal barrier for a return to the securities industry by Quattrone, who was paid $120 million in 2000 as the top banker promoting Internet stocks. Quattrone, who took companies including Amazon.com Inc. public, was accused of playing favorites when awarding shares of the hottest IPOs, and then encouraging employees to discard documents linked to the deals.
…
Key Witnesses
NASD said that because many key witnesses have left the securities business since the allegations were first filed in 2004, it no longer has the power to compel their testimony. It “would make no sense to move ahead with this case under current circumstances,” NASD hearing officer David M. FitzGerald wrote in his order granting the dismissal.
NASD spokeswoman Nancy Condon said the regulator had no comment.
…
SEC Overrules NASD
Two months ago, in one of the NASD cases, the U.S. Securities and Exchange Commission threw out Quattrone’s lifetime ban from the securities industry. It said NASD had violated its own rules in imposing the penalty after Quattrone declined to testify in a hearing about the matter.
Quattrone’s lawyers are negotiating with federal prosecutors in a bid to head off a third criminal trial. The conviction that was overturned in March came after his first trial ended in a hung jury.
Heather Tasker, a spokeswoman for U.S. Attorney Michael Garcia in Manhattan, said there has been “no change in the status of the case.” She declined to comment on when prosecutors will disclose their plans.
“This is an important victory for Quattrone, but he’s not out of the woods yet,” said Tim Coleman, co-chair of Dewey Ballantine’s white collar crime and government investigations practice. “This may increase the pressure on the government to fight for a conviction to avoid the perception that Quattrone is getting off scot-free,” said Coleman, who recently left the U.S. Attorney General’s office.

The Securities and Exchange Commission is supposed to be about protecting the individual investor. This New York Times story shows how the S.E.C. is obstructing attempts to obtain company accounting information contained in agency files. A private research firm called SEC Insight is resorting to a Freedom of Information Act lawsuit to get the S.E.C. to comply with the law and release its files. By blocking outsiders from accessing the files, the agency is making it harder for investors to discover accounting fraud.

Testifying on May 3 before the financial services committee of the House of Representatives, S.E.C. Chairman Chris Cox said: “When it comes to giving investors the protection they need, information is the single most powerful tool we have. It’s what separates investing from roulette.”

Yet since August 2004, the commission has failed to provide documents relating to 1,700 of SEC Insight’s requests under the Freedom of Information Act. Under the law, such requests are supposed to be answered in 20 days, but in most cases the S.E.C. says it is still looking for documents more than a year after SEC Insight requested them.

Protectionists rejoiced in rejecting a foreign investment by a Dubai company. Now the United Arab Emirates, Kuwait and Qatar are giving the protectionists what they wanted. The central banks of these countries are starting to diversify their reserves out of US dollars and into euros. With foreign investors owning 50% of all US Treasuries, I wonder how the protectionists plan to finance the massive national debt as well as the trade deficit while at the same time discouraging foreigners from investing in US dollar assets.

April 4 (Bloomberg) — The United Arab Emirates, Kuwait and
Qatar said their central banks are using currency reserves to buy
euros, stirring up the foreign-exchange market and bolstering a
rally in the 12-nation currency.
The Persian Gulf nations, whose oil profits lifted reserves
28 percent in the past 12 months to $35.8 billion, added to
speculation that central banks increasingly view the euro as an
alternative to the dollar. The three countries own less than 1
percent of global currency reserves.
“We sold euros last year when the currency was high, and
could buy again,” Qatar’s Central Bank Governor Sheikh Abdullah
bin Khaled al-Attiyah, told reporters in Abu Dhabi. The emirate’s
policy is to hold as much as 40 percent of its reserves in euros,
and as much as 90 percent in dollars, he said, and declined to
give further details.
Currency reserves worldwide rose 12 percent over the past
year to $4.25 trillion. International investors own 52 percent of
all Treasuries at the end of January, and a study done for the
Federal Reserve last September showed such holdings kept yields
on 10-year notes down by about 1.5 percentage points. Members of
OPEC held a record $77.6 billion of U.S. government debt at the
end of January, Treasury department data show.
“What they do matters,” said Jeffrey Young, head of
currency research in New York at Citigroup Inc. “Their rapid
reserve accumulation has been a large support for the dollar, so
if they have less of a propensity to hold dollars then it will be
important.”

The U.A.E., whose reserves rose almost 30 percent last year,
may agree to buy more of the 12-nation currency at the central
bank’s May meeting, said Sultan bin Nasser al-Suwaidi, the bank
governor, at the meeting of Gulf Arab central bank Governors.
The U.A.E. central bank issued a statement yesterday after
holding its April board meeting that made no reference to
diversifying its reserves. Al-Suwaidi had said ahead of the
monthly meeting that there was a 50 percent chance the bank would
decide to buy euros.
The U.A.E., the fourth-largest member of the Organization of
Petroleum Exporting Countries, may sell dollars, boosting its
holdings of euros to 10 percent of total reserves from 2 percent
now, al-Suwaidi said in an interview in Dubai on March 29. The
country has reserves equivalent to $23.4 billion.
Oman holds 30 percent of its reserves in euros and sterling,
and 70 percent in dollars, Hamoud Al Zadjali, president of the
Central Bank of Oman, said.

U.S. Bonds

Members of OPEC, of which Kuwait is the fifth biggest,
account for 3.5 percent of U.S. bonds held by governments,
central banks and international agencies, more than Taiwan,
Germany and Canada. Overseas investment helps reinforce the
dollar’s value, holding down U.S. borrowing costs and supporting
consumer spending.
The U.S. government has financed its budget deficit for four
years by relying on non-U.S. investors. They own about 52 percent
of the $4.2 trillion of Treasury securities, up from 35 percent
in 2002. A study done for the Fed last September said foreign
demand lowered 10-year Treasury yields by about 1.5 percentage
points.
“If U.S. interest rates are rising we have to be careful
about our duration and maturity of the bonds,” Sheikh Khalifa
bin Salman al-Khalifa, Chairman of the Bahrain Monetary Agency,
told reporters in Abu Dhabi. The Gulf state invests “primarily”
in U.S. securities, he said.

60 Minutes recently profiled what it called a conspiracy of hedge funds and stock research analysts to drive down the stock price of a Canadian drug company called Biovail. Joe Nocera of the New York Times did an admirable job of debunking this story and clarifying how markets actually work, versus the impression that markets are corruptly manipulated by “secretive,” “unregulated” hedge funds. The alleged participants in this conspiracy are SAC Capital Advisors, an $8 billion hedge fund, and Gradient Analytics, the independent research firm that specializes in accounting research.

60 Minutes is implicitly saying that you should be able to analyze and discover accounting irregularities at a company, but you should not be able to profit from that discovery by informing the news media, shareholders, and the broader market. If you wish to make a profit by shorting the shares (selling borrowed shares) of badly managed companies, you are a greedy stock manipulator and the government should punish you.

Many journalists, politicians, and regulators fear short selling. They fail to see that short selling plays a critical role in offsetting irrational exuberance, checking the accuracy of financial statements, and rooting out fraud. In addition, they don’t understand that stocks and the overall market are actually strengthened when the shares sold short must eventually be “covered,” or bought back. The practice of buying back shares at a lower level is a vital market mechanism for digesting negative information in an orderly manner. Short sellers enable stock prices to quickly adjust to levels that better reflect intrinsic values, thereby preventing crashes and panic selling.

Nocera’s comments (“Selling Short the Virtues of Short Sellers,” April 1) are excerpted below:

Mainly, [60 Minutes' Leslie Stahl] seemed shocked that people on Wall Street actually wanted stocks to go down. “This is a story about a large company accusing another large company of trying to drive down its stock price to make money,” she began, in a tone that suggested that was the sort of thing only bad people did. As her story developed, she had a handful of Gradient whistle-blowers asserting that the firm’s analysts took notes about all the “dirt” SAC had dug up on Biovail, and then repeated that dirt, word for word, in its reports. She noted that at the time Gradient was issuing a report that is at the center of the case, most Wall Street analysts were positive on the company. (Imagine that!) She swallowed whole the implausible notion that Gradient’s reports were directly responsible for the drop in Biovail’s stock price — never mind the company’s earnings shortfalls and other problems…

The silliest idea embedded in both the Biovail lawsuit and the “60 Minutes” segment is that because an analyst, a short seller, a research firm, and even a reporter are talking with one another — and perhaps even collaborating — that they are somehow engaged in stock manipulation. This is what people do in markets all the time, on the long and short sides. When you have a big position in a stock, you want to persuade others to your point of view. You make your case in phone calls, or at conferences, or over drinks. You try to get reporters to write articles reflecting your views. If you can get others to agree with you, and either buy or sell because they are persuaded by your logic, that is good for both you and the market.

In some ways, the process is even more important for a short seller because his point of view is invariably a minority one. In early 2001, when the short seller James Chanos became convinced that there was something amiss at Enron, he didn’t keep that information to himself. He spoke to Bethany McLean, the Fortune reporter who then wrote her famous story, “Is Enron Overpriced?” And he presented his views about Enron at his annual Bears in Hibernation conference. One of those attending was Mark Roberts, a newsletter writer who then wrote a tough report on Enron. According to a witness in the Enron trial, that is the report that caused Jeffrey K. Skilling, the chief executive, to exclaim, “They’re on to us.”

Did Mr. Chanos have a short position in Enron? Of course he did. Was he hoping that as word spread, the stock would go down and he would make money? Sure he was. Was it a bad thing that Mr. Chanos was telling anyone who would listen that Enron was a house of cards? You tell me.

Under the Biovail standard, Mr. Chanos wrote in a recent e-mail message, “Enron could have sued me for talking to Bethany McLean and Mark Roberts for writing up my bear case on Enron.” He added, “If stock prices go down, are we suspending the free speech provisions of the U.S. Constitution for market skeptics and short sellers?” Actually, this appears to be already happening. From what I can tell, Mr. Chanos is the only short seller in the country still willing to talk to reporters on the record.

Will short information always be as prescient as the Chanos call on Enron? Of course not. Again, though, how often does the long side get something wrong? That’s the whole point about stocks — some people believe that they’re headed up, and others that they are going to fall. If you don’t have that debate, you don’t have a market…

I’m skeptical about the Biovail accusations. History suggests that most of the time, when a company lashes out at a short seller, it is because it really does have something to hide. Companies that beat back short sellers do so not by suing them but by running the business so well that the shorts are proved wrong. As Mark Cuban, the billionaire owner of the Dallas Mavericks basketball team, put it on his blog recently, good C.E.O.’s know that “a great operating company will make the shorts cover and push the stock higher.” And bad C.E.O.’s think, “if I can create a diversion, I know I can convince at least a few funds to hold on, and that gives me a chance to sell more stock.”

As I watched Ms. Stahl on Sunday, I kept thinking about AremisSoft. In the summer of 2001, AremisSoft, a software company, filed a lawsuit making many of the same accusations Biovail is making against Gradient and SAC. It accused the short-selling firm Rocker Partners, the journalist Herb Greenberg and a handful of Wall Street players of conspiring to drive down the company’s stock and “facilitate the profitable covering of short sales.”

A month after it filed the lawsuit, the company announced that it was being investigated by the Securities and Exchange Commission. In time, the company wound up settling serious fraud charges, and its former chief executive agreed to disgorge $200 million in “unlawful profits.” The shorts, and Mr. Greenberg, were vindicated.

Back when the battle was raging, AremisSoft’s biggest defender was Irwin L. Jacobs, the Minneapolis investor and former corporate raider, who had a large position in the stock. The other day I called Mr. Jacobs to ask about AremisSoft and those who were short the stock. His analysis was pretty simple. “The fact is that they were right,” he said. “Their homework was better than mine.” Mr. Jacobs added that he had subsequently called Rocker Partners and had apologized for his role in attacking the firm. “I looked like a fool when it was done,” he said.

Something to think about the next time you hear about a company suing its short-selling critics.