Short-Selling Hedge Funds Started the Fire

Includes: DIA, LEH, QQQ, SPY
by: Judd Bagley

When a building burns, the first to respond are the firemen, who generally don't care how the fire got started. Their job is to address the most urgent need of minimizing and containing the damage occurring at that moment.

Next on the scene are the investigators. Their job is to determine the fire's origin, be it accidental or intentional, in order to hold the proper parties to account and prevent future fires.

Now, imagine you're just such an investigator, looking into the causes of a huge and truly devastating blaze at an apartment building. Along the way, you find conclusive evidence of willful neglect on the part of the building's management (and many residents), which had the effect of turning the complex into a veritable fire trap. You find the signs of a future catastrophe were abundant, but either ignored or covered-up.

As troubling as that would be, imagine your investigation further uncovers evidence that the actual match which served to ignite the fire was intentionally lit, almost certainly by somebody who expected to profit from the resulting blaze.

So who's responsible for the destruction? Those who made the building a disaster waiting to happen, or those who actually made the disaster happen?

It's a question of ultimate versus proximate causes.

Like this hypothetical fire, the current economic crisis also has both ultimate and proximate causes.

Everybody seems to agree that the ultimate cause is greed, which in turn led to some deeply irresponsible and unsustainable investing practices across the board, particularly within the US banking sector. In retrospect, the signs of an impending violent reversal were abundant, but largely ignored.

What's received much less attention is the matter of the proximate cause of the global economic meltdown. Who lit the match that set fire to our much-examined economic house of cards?

I believe that on September 29, 2008, the Wall Street Journal probably said it best: Lehman's Demise Triggered Cash Crunch Around Globe.

In other words, getting to the bottom of Lehman's (OTC:LEHMQ) demise is probably a good place to start looking for clues.

Like the broader economy, Lehman's failure also has proximate and ultimate causes.

This video, which I recently created, ignores Lehman's balance sheet and its long-term prospects, focusing instead on presenting evidence suggesting that the mid-September, 2008 sell-off which devastated Lehman's stock price -- directly resulting in the company's bankruptcy a few days later -- was a consequence of an enterprise designed to enrich a small handful of short-selling hedge funds.

As I demonstrate, in place of gasoline, the perpetrators used a deluge of price-depressing naked short positions as their accelerant, with much the same results.

Some may feel it's to early to begin assigning blame for the fire, since it's yet to be extinguished.

I disagree.

Congress is already debating an overhaul of our economy's "fire code," in order to keep this from happening again. Thus, laying blame where it belongs is more important now that ever. In the end, this video is my effort to raise awareness of who lit this fire to begin with.

Disclosure: No positions