SHORT AND DISTORT.(Brief Article)

For J. P. Morgan Chase, the trouble started on Monday, July 22nd, when a Senate subcommittee raised questions about the role that the bank, along with other institutions, played in helping Enron set up a "maze of financial transactions that . . . makes Rube Goldberg look like a slacker." Investors, keenly aware of what helping Enron had done for Arthur Andersen, began dumping J. P. Morgan stock. Things got worse the next day, when rumors--of criminal prosecution, huge fines, a bad bet on gold--started to circulate in the market. The stickiest of them maintained that the bank had suffered giant losses in its derivatives business and that the Federal Reserve had held an emergency meeting to address the potential fallout. Never mind that these vague scenarios lacked sense (and, as it turned out, substance). They rippled across trading floors and surfaced on the Web, giving rise to the broader rumor that J. P. Morgan Chase was facing a liquidity crunch--that it might not have enough money on hand to meet its obligations. This is not a good thing for a bank. By Wednesday morning, the company's stock had fallen to its lowest price in six years. The rumor mill was grinding J. P. Morgan Chase into very fine pieces.

Rumors, of course, have been grist for the Wall Street mill since the first shares were traded beneath the buttonwood tree, but they have been especially nettlesome since the Enron story broke. Gordon Allport, in his classic work "The Psychology of Rumor," noted that they tend to flourish when there's a dearth of news and also when there's a glut--when the truth is most elusive. That about describes the market these days: there's a ton of news, but we all suspect that there's something--probably something very bad--that we don't know yet.

The most insidious Wall Street rumor is one that is deliberately planted in order to move a stock. Starting such a rumor is technically illegal, but people on the Street engage in this low-grade information warfare all the time, especially when investors are skittish. "In this market, the path of least resistance is downward," an analyst at a major mutual fund said last week. "So it's not that difficult for some yobbo at a hedge fund to sell a stock short, tell someone on a trading desk that he's heard that the company's about to blow up, and then sit back and watch the news work its way through the market."

Once a stock starts moving, more rumors spring up to explain why. One day two weeks ago, the conglomerate Tyco saw its stock--which had been shaky for days--begin plummeting at the opening bell. "I called around to our salespeople trying to find out what was happening," the analyst said. "Some of them were hearing that Tyco was going to declare bankruptcy. Now, this was an absurd rumor, but calling around about it helps keep the rumor going, because the guy sitting next to the salesperson hears something about bankruptcy, ...