Sunday, July 18, 2010

The Best Recent Finance Book You Haven't Read...

...and probably haven't even heard about would be Rick Sauer's Selling America Short, with the somewhat opaque subtitle "the SEC and Market Contrarians in the Age of Absurdity." I spotted it on a half-price shelf in Barnes & Noble (less than three months after publication) and bought it largely because I knew Rick very slightly 30 years ago and was curious what had become of him.

Aside from the anodyne title, I can see why it sank like a stone. For an author and subject so central to our late nightmare it's a book almost utterly devoid of marketing hype (e.g., "How you can profit from Rick's three lessons!"). For a book with "SEC" on the cover, it is offers almost nothing on the hot-button suspects: no more than incidental references to Bernie Madoff, Chris Cox, or the guy who watched x-rated videos all day long on his government computer. There's an abstraction/summary of the most recent months of turmoil, but it's predictable stuff and it comes with almost nothing by way of proposals for reform.

What you've got here instead is a memoir of Rick' career first as an SEC lawyer/regulator; then for a short time in private practice, and finally as an active player in a "hedge fund" (actually four guys in a shingled office down by the Berkeley Marina). The writing is fluent and informed, but the style is mostly understated, ironic, wry and self-deflationary--exactly what you do not want for a blockbuster.

So, why bother? The answer is that this is about the best and most convincing account I've seen anywhere of life tweendecks in the glamorous world of high finance. By his own account at least, Rick seems to have performed with honor and competence in all his roles, but he never became anything like a mover and a shaker. And that is precisely what makes him so interesting.

Far and away the best parts are the early chapters about the SEC. So far as I can tell, Rick at the SEC was not one of those infamous time-servers who rebuffed all the allegations about Bernie Madoff. What he seems to have been was a reasonably bright, reasonably hard-working lawyer/bureaucrat who knew the difference between right and wrong but who wasn't about to risk his neck in cases of high political visibility or sensitivity--at least not on the taxpayer dime. And this focuses attention on the hellacious part: Rick provides evidence that this stuff is hard--lots of tedious, day-after-day paper-shuffling, with no real certainty that any of it will go anywhere, and a soup├žon of danger from the possibility that you might, even if unintentionally, find yourself crosswise with the politicals in the agency or up on capital hill.

Rick offers particularly diverting accounts of a couple of cases that make this point in spades, with the added fillip that they are international--not at all a rarity in a globalized world, but enough to kick the difficulties and the aggro into a whole new dimension.

Rick left the practice after a mid-length career as a regulator, for a new avatar as a bigfoot defender. Oddly, this part of the book is perhaps the least interesting, and I suspect the reason is that it wasn't that-all interesting to the author itself. To hear Rick tell it, defending white collar fraud (at least of this kind) is not rocket science; you have to sit tight and make sure your client doesn't blurt out a full confession in front of the camera. Ironically, the hard part may be actually getting the clients: if the work is this easy, no wonder there are a lot of competitors.

But then somewhat to his own surprise he finds himself morphing out of law practice into a new role as an active participant in the world of hands-on investing; a chapter we might like to call "Life Among the Naked Shorts." Rick never explicitly summarizes just what it was that made the naked-short life so plausible and so dangerous, but I think we can extract a picture. Try this:

BigCo is selling for $100 a share. A short-seller (let's call him "Rick") undertakes to sell a share of BigCo for $100, but he doesn't own what he's selling. Instead, he borrows and sells a share, with the intention of buying another share to cover his position later. Why would anyone enter into such a lamebrained fandango? The reason is that Rick is betting that the price will fall.

But put it in a larger context. Rick bets that BigCo will fall because he believes that BigCo will fall, which is to say that he knows something sufficiently awful about the fundamentals of BigCo that it will drive the price down one the investors catch up.

So far so good. The complication is that Rick (hypothetical) also has an incentive to drive the the price down, if not by fair means, then by foul.

But look at it from the standpoint of the beleaguered company and consider this generalization: as far as the CEO of BigCo is concerned, there never was an honest short. Anyone who is shorting BigCo is a termite eating the heart out of capitalism. Short investors, as Randy Newman did not say, got no reason to live.

This is a poisonous brew. More precisely a poisonous brew in one of the more gaseous outcrops in the financial universe. In short (hem) planet short-sell is populated by some of the crabbiest, most vindictive, most impolite--okay most uncouth--species of market watcher you'd ever want to encounter.

This is the realm that (the non-hypothetical) Rick--to all appearances, a pretty decent guy-- wandered into when he left law practice. I should state for the record that I (along with Rick) entertain a disposition that is largely pro-short. No doubt there are crooks and malefactors in this business but for the most part I think shorts offer a wholesome therapy to the market, purging it of some of its worst impulses, and helping to heave close onto the shores of rationality.

The question remains, of course, why anyone, however much of a true believer, would wander into this landscape of noxious exhalations? One reason, I suppose, is "to make big bucks," but that is hardly sufficient. Some people have gotten rich from short-selling but it is hazardous work under the best of circumstances: recall the canard that "the market can stay stupid for a lot longer than you can stay solvent." There are other ways to make money that are perhapsno more onerous but not quite so laced out with nastiness and vindictiveness.

Why, specifically did Rick do it? His memoir is mostly unencumbered by anything like serious introspection. On the evidence, my own best guess is that here is a guy that just enjoys being in the midst of nasty and rancorous financial dustups where the recriminations fly back and forth like so many rotten mackerel, and where the chances of a truly happy result for all lie somewhere between "highly unlikely" and "not on your life." Did I mention that he says--boasts--that he lives right next door to the Hayward Fault?

So as his high school guidance counselor, I might have sought to explore with him a less bruising career path. As a reader, I can easily console myself with the insight that it is, after all, a very good story.

Afterthought: Every time I hype this book to somebody, the conversation somehow morphs into a discussion of Michael Lewis' The Big Short. That's a good book too, but entirely different. A closer comparison might be Robert Sloan's Don't Blame the Shorts, and catch that cute bunny thing in the upper right-hand corner.

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