Insurance Fraud, Short-Selling and Why You Can’t Trust Stock Analysts
8AM, July 17, 1989: I’m driving on Route 2 outside Concord Massachusetts, lights flashing and horn honking, fighting rush hour traffic. My son is nearly being born in the back of the car. We reach Emerson Hospital; nurses rush my wife to the ER; I park the car and run back.
Birth time: about one minute after reaching the hospital. Delivery: by the good nurses, a minute before the obstetrician on duty arrives to bless what’s now history.
Two weeks later, the bill arrives. It includes several thousand dollars for the obstretrician. I call to complain. “What do you care,” the office says, “it’s all covered by your insurance.”
9:20AM May 12, 2007: I’m flying from Amsterdam Schiphol back home, reading Joseph Nocera in the Herald Tribune, Why Short-sellers Should Have Their Say. Think of short-selling as the “opposite” of buying stocks—betting that a stock will go down, rather than up.
Since precisely 50% of stock trades involve selling, you’d think Wall Street would put roughly the same emphasis on when to sell as on when to buy. Of course, you’d be wrong. There are few short-sellers, and they are often reviled, harrassed, even sued.
Reasons often given for the dearth of short-sellers are that losses from short-selling are potentially unlimited (true), that short-selling goes against the long-term natural rise of the market (true so far), and that human psychology is basically optimistic (debatable). But those are weak explanations.
The real reason is—wait for it—money. Wall Street gains more when you buy and trade than when you sell. This is one reason securities analysts overwhelmingly issue positive, not negative, ratings. But there’s more.
Companies don’t like negative ratings. To be more precise, CEOs and senior managers of companies with compensation tied to stock performance don’t like negative ratings. Many leaders call the analysts’ parent company to complain, even issue veiled threats to switch to other providers of financial services. Even sue.
And voila, the analysts either withdraw the negative rating or just stop covering the company.
The analyst will blame management for telling him to emphasize positive reviews. Thus he justifies his lapse in professionalism: the devil made me do it.
The poorly rated company blames the analyst for “unfair” analysis (meaning it hurts the CEO in the wallet). Easier to blame the analyst than to take responsibilty for the shortcomings identified.
Management of the analyst firm also caves in, blaming the blackmail tactics of the rated company.
Fingers point everywhere but back. Blame instead of responsibility And blame feeds the rot.
Our social “solutions” propagate the problem. We opt for an expensive regulatory program like Sarbanes-Oxley, to protect everyone from their presumed innate selfish tendencies. Our approach resembles airport security—“somebody will always cheat: let’s constrict everyone’s freedom, in order to stop the few.” But securities markets are not airports.
Far from stopping a culture of blame-throwing, this approach enables it by assuming bad motives.
Instead, we should selectively prosecute the hell out of individuals who behave badly. Prosecute analysts who won’t honor their role, CEOs who blackmail bankers, and bankers who cave in, and who lack the guts to call the cops.
A vibrant community of short-sellers would have seen Enron coming. A few people could have spotted the lies, and made a lot of money by publicizing the rot—saving a lot of lifes’ savings and careers. An MBA class at Cornell did just that—analyzed the numbers and recommended shorting Enron well before it imploded. No one was listening.
Business has no right complaining about government intervention if it can’t bring to bear the pressure of capitalism upon itself. Greed and lies aren’t the stuff of business—they’re the death of business, as long as they stay in dark rooms.
July, 1998, Madison, New Jersey: I go to a collision damage repair shop.
“I’ve got a dent in the back door of my car, can you punch it out? It doesn’t have to be perfect."
“Nah, we’d have to replace the whole door.”
“No you wouldn’t—the gas station will do it for me for a hundred bucks, I figure you guys could just do a better job. It’s a simple job to punch it out, I’d do it myself if I had the tools.”
“Buddy—god alone couldn’t fix that door, we’ll replace it or do nothing at all.”
Translation: “what do you care, your insurance company is paying. And we’re not about to ruin a good scam by being customer-focused.”
We don’t have to put up with this crap. Call your better business bureau. Call your state regulatory agency. Call your insurance company. Write a letter to the editor. Rat these people out.
With the market in nosebleed territory, you might want to short a few stocks yourself. If your broker doesn’t know how, then help create trust and integrity in the market while you make money—by getting a new broker.
The most negative stock ranking I’ve ever seen on a stock is a "Weak Hold". I almost lost control of my bladder!! I love the argument against short selling that goes "if you buy a stock and it goes to zero you lose only your investment in that stock, whereas if you sell short and the stock goes to infinity you lose everything". Personally, I’d love to sell short but it requires paying attention and my attention span is much too short.
Nice post, Charlie.
Shorting stocks can make a lot of sense, but Phil is right that it requires paying (constant) attention. Many a short seller who is right about a stock being overvalued has gone bankrupt waiting for the market to come around to his point of view.
Better to short an index or an exchange-traded fund that tracks a sector you think is overvalued than individual stocks, unless the latter happens to be your day job.
Next to tax fraud, insurance fraud is the most widely participated-in scam around. Though not far ahead of the diploma mills. For some reason seemingly average people of every stripe play right along with the con man in this too.
One shining light, though, insurance fraud is, generally, fought very effectively by the insurance companies.
Well put Charlie. Who profited from the 1929 crash? Short sellers. That is why a few rules were put in place to give them a slight disadvantage (uptick rule). However, as of this year (2007) it has been undone (along with trading curbs). They (SEC, NASD) downplayed the whole situation. I think everything has a reason. Makes you wonder what is in store for the future. I tried to short several stocks this morning and my broker didn’t have the shares available. Makes you wonder who/when shares are available who is shorting and it what amount. Most brokers were clearing houses gone internet (TDAmeritrade); which means the members on the exchanges see all pending orders…..interesting? You must be careful if you play in the environment were people have taken their lives.
I agree with Jack Payne, insurance fraud is alive and healty. No matter the socioeconomic, race or ethnicity groups the vast majority see "insurance" as a way to profit.