Back in World War II there was a famous slogan: “Loose Lips Sink Ships!” People were being warned that talking about ports, the names of ships, the times of sailings put the lives of American military men at risk. It was, in fact, considered treason.

This week the SEC announced that they would begin to prosecute people who gossiped, rumored and talked about financial business, thereby putting big firms at risk, driving down their stock (or “up”) and causing disasters like Bear Stearns to happen.

This was an incredible admission by the SEC that our big investment banks and businesses can be brought down by mere talk. Runs on banks are nothing new and they are usually caused by mass hysteria, rumor and gossip. (Remember the famous movie “It’s a Wonderful Life” with Jimmy Stewart single-handedly stopping the bank run?) 

But these days gossip, rumor and even real news travel as fast as they happen, thanks to the Internet and cable news. Once upon a time, people in New England built their houses right down beside the road. This way, someone passing on horseback could tell them what was going on elsewhere. “Hey, didja hear? They shot Lincoln, two months ago in Washington!” But now news is instant and false news travels as fast as anything else and it can’t really be called back. Denial never gets the attention that the first gasp of talk offers.

Some people say the SEC has no right to try to silence gossip and rumor about the market. “Talk is the oxygen of Wall Street,” say they. “The SEC is trampling on free speech.” But the SEC is warning people; they are saying, “If you talk out of school and if you spread rumor, gossip and falsehoods, we are coming after you. We are going to get you!”

Personally, I think it will be very hard for the SEC to stop talk. People like to repeat what they know, what they heard, what everybody is talking about and they like spreading cautionary tales. Gossip around the water cooler is epidemic. Now, if you do this in e-mails and on your BlackBerrys, the SEC might actually have a leg on which to prosecute you.

The entire business of high finance, however, is a psychological game. It is a gamble. Markets go up and down. People become millionaires and others lose everything. The SEC’s move shows us that there is truly underlying trouble like we’ve never had before. In fact, I believe their warning shot across the bow of gossip, rumor and speculation is unprecedented in American history.

Once upon a time, newspapers put boys out on the street with papers bearing fresh headlines when there was news, and they yelled, “Extra! Extra! Read all about it.” Then there was radio.  That was considered a miracle. After 1945 there was television. Now there is the Internet. News is instant and bad news, gossip and rumor about failing banks and failing institutions is multiplied by talk. 

Gossip, of course, is a natural impulse. It always has been and it always will be. It’s my business and it can be useful and illuminating. But today, the SEC believes that, when we talk loosely about financial business and institutions, we are like people leaving a can of gasoline near the fire. 

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