Lessons from accounting fraud (Lehman debacle)

Barry Ritholtz of The Big Picture Blog wrote a great article today. He explains once again that we don't seem to, learn much from history (Enron, WorldCom). People are greedy. They will do almost anything, including accounting fraud, to make money. This is how it has always been and it always will be. See the full article here, Accounting Fraud, Short Sellers & the SEC.

The bankruptcy report on Lehman is both revealing and damning. Once again, the investing public learns — after the fact — the basic truisms of modern markets:

• Major accounting firms are worthless to investors. They were either unable or unwilling to detect fraud amounting to 50 billion dollars. The incompetents at Ernst & Young deserve the same fiery death as Arthur Anderson; Whether they are hired guns or paid whores, they — like the rating agencies — are worthless to investors.

• The Shortsellers turn out to be the good guys. Consider the absurdity fraud of “protecting” the bankster frauds — from the truth, as revealed by Einhorn et. al.

• The ban on short selling is an indictment of the inability of the SEC to understand WTF is going on, and a reward to the criminal corporate management teams.
  

This is where it gets interesting. The SEC is limiting short selling (see here, and here), seen as a "devil" practice by some, in its efforts to "strengthen" the financial markets. What people don't seem to understand is that without short sellers we have no way to expose the truly fraudulent companies and rid our economy of excess fat. Short sellers don't be on a company to go bankrupt if it has truly efficient and profitable operations. They short because of some weakness in a companies fundamentals. Driving the bad companies out of business moves capital towards the stronger, more efficient businesses that can better utilize resources for society.

Basically....without short selling we don't have efficient markets and without efficient markets society will not operate to its true potential.