- The Washington Times - Monday, June 21, 2010

SELLING AMERICA SHORT: THE SEC AND MARKET CONTRARIANS IN THE AGE OF ABSURDITY
By Richard C. Sauer
Wiley, $27.95, 324 pages

“At the advanced age of 38,” Richard Sauer writes in the prologue to this vivid memoir/chronicle, “I joined the U.S. Securities and Exchange Commission as a lowly staff attorney. The year was 1990. I remained at the SEC for 13 years, confounding previous doubts about my employability, and even crawled up a few rungs on the bureaucratic ladder.

“Most of that time was spent chasing financial frauds, beginning, as one colleague put it, ‘before that was cool.’ Before, that is, Enron and WorldCom and other turn-of-the century financial scandals” and “long before the events of these last turbulent years led many to question whether the stock market is at bottom a huge confidence game that can collapse as abruptly as a carnival tent in a windstorm.”

During those 13 years as an SEC attorney and administrator, Mr. Sauer initiated and supervised fraud cases in numerous countries, returning hundreds of thousands of dollars to bilked American investors. Several of the book’s most entertaining chapters - especially “Belgium Waffles” and “Taking Out the Eurotrash” - cover this period.


Mr. Sauer obviously enjoyed those SEC years, but it’s also apparent that he views the regulatory apparatus as ultimately ineffective, largely because regulators are unfamiliar with what they’re regulating. In fact, Mr. Sauer writes, they’re often unable to see the evidence of wrongdoing even when made a gift of it.

“Sad to say, it is not realistic to hope we can greatly improve the effectiveness of our regulatory agencies,” he writes. “Talent runs out of the government like water through a colander, pulled out by the bigger dollars available outside, or pushed out by administrative folly. Mostly lawyers, they struggle to apply legal categories to arrangements whose purpose and effects they don’t understand. The SEC’s failure to catch Bernie Madoff until he confessed was not a fluke. So poorly do government agencies understand the entities they regulate, they can sometimes be confounded by even thinly disguised frauds.”

Moreover, writes Mr. Sauer, who upon leaving the SEC went on to become a partner in an international law firm and then an analyst in a Northern California hedge fund that folded during the crash, these problems were compounded by the blind eye elected officials turned to abuses in the financial industry as long as it functioned as a significant source of campaign contributions. Many of those same officials now regularly appear on televised hearings to express moral indignation over executive greed.

Mr. Sauer traces the basic cause of the collapse to politically driven encouragement of homeownership, which led to the creation of increasingly exotic financial instruments. “No job? No money down? No problem. Some companies defrauded mortgage applicants. Some were defrauded by mortgage applicants, all the way to the bank. Federal and state regulators looked on and shrugged. Congress, whose members received $370 million in campaign contributions from subprime lenders over a 10-year period, did nothing to halt the decline in lending standards.”

Mr. Sauer concludes his critique of the system’s deficiencies with a lament for Copper River, the short-selling hedge fund for which he was legal adviser and analyst, a scapegoated victim of the Lehman Brothers collapse and the ensuing panic in Washington in general and at Goldman Sachs in particular, “the fair-haired boy of investment banking, at least in the eyes of Hank Paulson and the other Goldman alumni running Treasury.”

Mr. Sauer is a fierce defender of short-sellers and contrarians, who were performing a central economic function by “sounding the alarm about bad lending practices, residential and commercial, long before anyone chose to listen.”

“Selling America Short” is a strongly written exploration of the world in which they move, and if Mr. Sauer’s book is included in university reading lists, as it should be, he may just find he’s become a guru for a whole new generation of contrarians.

John R. Coyne Jr., a former White House speechwriter, is co-author of “Strictly Right: William F. Buckley Jr. and the American Conservative Movement” (Wiley, 2007).