Here’s One Story From The Crisis That Wasn’t In The Too Big To Fail Movie

John Mack

[credit provider=”Courtesy of Morgan Stanley” url=””]

This weekend we asked a couple of people on Wall Street what they thought about the HBO movie, Too Big To Fail.”I didn’t watch it because I heard it made Paulson out to be the hero,” said one who had worked at Merrill.

Another thought it was fine but told us, “here’s a story that wasn’t in the movie.”

Our friend went on to explain something that happened in September 2008, when stock in Morgan Stanley and Goldman Sachs, among other financials, was getting crushed by short sellers (as it should have been).

On September 19th, the SEC passed a temporary ban on short-selling in financial stocks.

Our friend explains why that happened.

“People had convertible arbitrage shorts that were killing Morgan Stanley…”

So CEO John Mack, he claims, came up with a solution.

“[Mack] called Chuck Schumer.” 

On the call, he made the case against short sellers.

“Then Cox passed the short sale-ban on financial stocks.”

He said that Mack’s call got the government to ban shorts.

We’re sceptical because it might just be a rumour that’s grown bigger after John Mack sent the infamous and universally slammed memo in 2008 that said, “short sellers are driving our stock down,” but it’s an interesting and totally plausible theory. (And we’ve emailed Morgan Stanley for a comment.)

He explains, “It stopped the run on Morgan Stanley and Goldman, but it killed a lot of hedge funds that were shorting the stock.”

It was a controversial ban. Hedge fund manager Jim Chanos said at the time, “Investors are best served when they can hear both the reasons to buy and the reasons to sell any given security… These emergency orders limit the free flow of information and ultimately will not work to help the United States maintain the freest, strongest and most liquid capital markets in the world.”

John McCain said, “If I were president today, I would fire him.”

The ban hurt hedge funds in particular because they were the primary source of the shorts. So for pay back, hedge funds began pulling their money out of Morgan Stanley.

“They pulled their money; they were pissed.”

Credit Suisse soon became the #1 prime broker.

The 2 minute version of the movie Too Big To Fail >