It all comes back to Jonathan Lebed.
Remember him? He's the New Jersey teenager who at the height of the tech bubble incurred the wrath of the Securities and Exchange Commission for promoting stocks from his bedroom over Internet chat rooms. After attempting to throw the book at him, the SEC eventually allowed the teen to keep about $500,000 of trading profits, as the regulator -- and by extension the media -- had difficulty articulating exactly what he did wrong. After all, by using the Web to boost the stocks he was buying, was Lebed any more guilty of "market manipulation" than scores of analysts, strategists, managers, traders and even CEOs who routinely talk up their stocks or trading positions?
Seven years and another burst bubble later, we still can't answer that question. The conflicts that are as inherent to Wall Street as injuries are to pro football continue to vex the media and the concept of "market manipulation" remains nearly impossible to define. We were reminded of this a few months ago, when Jim Cramer told YouTube viewers that based on personal experience, professional traders will often talk down a stock when they're short and hype it when they're long (we're shocked!) and that the SEC is basically too lame to figure it out. The media reacted as it often does when an ugly truth is told -- with indignity and horror.
That same reaction greeted Ben Stein's much picked-over column in The New York Times a few Sundays back. In case you were busy renegotiating your mortgage and missed it, Stein posited that Goldman, Sachs & Co. economist Jan Hatzius published an unduly bleak and bearish take on the subprime crisis for the sole purpose of supporting his firm's shorting of the housing sector. What's more, Stein wrote, Goldman was selling collateralized mortgage obligations to other investors even as its own traders bet against that market. Stein's conclusion: Goldman bears "some resemblance" to Merrill Lynch & Co. during the tech boom, with Hatzius in the role of Henry Blodget.
The blogosphere went nuts. Pundits ranging from The New York Times' Paul Krugman to The American Prospect's Dean Baker unsurprisingly attacked Stein's take on the economy. Others were outraged by his suggestion that an Analystgate-like conspiracy was taking place at Goldman. "It's not illegal -- in this country -- for Stein to make such allegations," wrote Portfolio.com's Felix Salmon. "But it is quite shocking, and depressing, that the Gray Lady would willingly allow herself to be used as a vehicle for this kind of yellow journalism -- and would place it on the front page of its business section, no less."
To be sure, part of the negative reaction stems from Stein's wandering, stream-of-conscious writing style, which befits a columnist who is better known for his turn as Ferris Bueller's economics teacher than for analytical rigor. The piece's outlandish call for an investigation of Henry Paulson also rankles. And Goldman's customers being sophisticated institutions and not Mom and Pop who bet their retirements on Merrill's Pets.com also made it easier to pooh-pooh Stein's claims.
But why is it so hard for the media to accept that Hatzius' views might be colored by the firm for which he works? As CNBC's Charles Gasparino, one of Stein's few defenders, put it, "Every Wall Street firm talks its book." After all, they exist to make money.
Clearly, that's not to say there is a vast conspiracy at Goldman and that Hatzius was explicitly ordered to go negative or forfeit a big, fat bonus. But that doesn't mean Hatzius isn't influenced at some level by Goldman's traders, or its traders aren't influenced by him. Indeed, it's hard to imagine how such influence -- a.k.a. conflict -- would not exist at Goldman or any other modern Wall Street firm. It's simply the nature of a beast that serves buyers, sellers and, increasingly, itself.
The media, however, can't seem to accept this. It assumes, or wishes, that the market and its participants are pure of heart and motive; that Wall Street is a game safe for all of us to play, especially post-Spitzer. Well, get real: No one in the market is pure. Not even a 15-year-old buying stocks from his bedroom.
This post first appeared on the blog at The Deal.