My 2 cents on the SEC talk on altering the short selling rules:

Short sellers (SS) didn’t get people to buy homes with no money down, SS didn’t convince people to buy homes with teaser rates, SS didn’t convince people to lie about their income on their mortgage applications, SS didn’t tell banks/brokers to lever up to such huge levels, SS didn’t tell Greenspan to cut rates to 1% and leave it there, SS didn’t invent FNM and FRE, SS didn’t tell the OTS, OCC, FDIC, Fed, SEC, FFIEC, FTC, FHFA and all the state regulators to twiddle their thumbs all day, SS didn’t tell the rating agencies to rate AAA on anything that moved, SS didn’t tell banks to lend to commercial real estate investors on a property where the rent didn’t cover the mortgage payment, SS didn’t tell the average consumer to spend more money than they make and borrow difference.

Short selling is a legitimate form of speculation that fully enhances market liquidity and price discovery.

Category: Short Selling

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

113 Responses to “Boockvar on short selling”

  1. Shnaps says:

    I am short the SEC.

  2. HCF says:

    It’s funny how they always talk “uptick” rules for short-selling, but yet we’ve never heard of serious discussions of a “downtick” rule for buying stocks.

    I guess Cassandra is never destined to be belived…

    HCF

  3. roc says:

    OK. OK….

    Let’s try and make this a constuctive discussion by talking only about NAKED short selling and the uptick rule. Explain to us why the rules for naked short selling should not be tightened. If you are trading in something you don’t have a tangible interest in – isn’t that a derivative?

  4. dead hobo says:

    PB,

    Time for a Jabba the Hutt style “HO HO HO’.

    Time to make your money while you can. I’m cash now. Go for the bear raid somewhere and drag the rest of the market down with you. I need to buy low.

    Also, the pictures appear to be working now. That’s better.

  5. Mannwich says:

    Like I said in the previous thread, this one is merely the next pre-determined “announcement” on the list they trot out every time to the market wobbles. Any guesses on what’s next after this one?

  6. franklin411 says:

    The Short Seller’s argument against rules that protect Americans, like the Uptick Rule, is that such rules are ineffective.

    Well, Mr. Short Seller, if the Uptick Rule is meaningless, then why are so many Short Sellers vehemently opposed to restoring it? If the Uptick Rule won’t have any effect then give us babies our bottles. What’s the harm?

    Perhaps the Shorts are scared of the Uptick Rule because they know that it will improve the stability of this market and make it difficult to rape the American economy.

    ~~~

    BR: I don’t know many short sellers that give a rats ass about the uptick rule . . .

    The bigger issue is making ALL shorting illegal

  7. franklin411 says:

    PS–In what logical world can someone borrow something I own and sell it to someone else without my consent? In most of the civilized world, we call that “grand larceny.” On Wall Street, we call it a “profitable enterprise.”

  8. Mannwich says:

    I couldn’t care less about the uptick rule but most experienced short-sellers will tell you there are easy wasy around it. More window-dressing nonsense from the feds. Nothing to see here. Move along please.

    Until they actually work to address the underlying issues that got us here, we are nowhere.

  9. dwkunkel says:

    I’m with HCF.

    Combine an uptick rule for shorting along with a downtick rule for buying. Let’s take all the fun out of trading.

  10. Outlier says:

    @ 11:05 Can’t tell if that comment is facetious or not, but hey here it is.

    Shorts dislike the uptick rule because it’s annoying but not effective.

    Imagine you are a date with a lady, you want to kiss her and she clearly wants to kiss you. But her chaperone says hey you can kiss her, but you know what, before you do that you need to do a couple push ups. Well you still will kiss, no doubt, but it’s annoying…

  11. ReductiMat says:

    Hey guys, give them time. I’m sure the WMD’s are in there somewhere…

  12. Outlier says:

    and since we are talking about shorts I guess “going down” is probably more applicable than “kiss”

  13. leftback says:

    It doesn’t matter what they do. Changing the rules just drives the players away.
    Eliminating short selling disrupts price discovery and removes price supports.

    The last time they banned short selling the market had a monster short covering rally !!
    - and then tanked. Water always finds its own level.

  14. HCF says:

    @ franklin411:
    They absolutely should restore the uptick rule, if for nothing else to show that it is ineffectual when you have penny wide spreads. Furthermore, naked short selling rules should be vigorously enforced as that is something codified as illegal.

    With that said, I am absolutely 100% pro-short selling. It’s an effective tool to keep things from getting out of control on the upside AND the downside (I’m guessing many of the purchases of C at $1 were short sellers covering their position).

    The hard reality is that you cannot short a fundamentally sound company to zero, regardless of uptick rules and naked short selling. If you tried to short sell Microsoft and ride it to zero, you’d get your head beaten in because the company is not over-leveraged, has A LOT of cash, and has a real business with real cash flows… Stocks that get driven to zero largely get there because of SELLERS getting out, not short sellers.

    And speaking of raping the American economy, you’re trying to tell us that the banking, home building, and mortgage industries are the victims and not the rapists?

    HCF

  15. HCF says:

    @franklin411:
    >In what logical world can someone borrow something I own and sell it to someone else without my consent?

    Read your brokerage agreement… You HAVE consented to the borrowing of your stock for short selling.

    Would you prefer to have an illiquid market for your portfolio so that you can mark your 401k to model?

    HCF

  16. Mannwich says:

    Well put, HCF. It seems that old franklin411 is picking up the mantle for otto, who has strangely vanished.

  17. Expat says:

    The next step is the Special Uptick/Resale Rule. Stocks will be allowed to uptick only. No sales may be made of a stock unless that stock has been acquired as a result of a compensation package. Addendum 38 will state that any stock which fails to trade for more than one day shall automatically increase in value by 2% at the next opening.

    Gosh! Where can I sign up?

  18. AmenRa says:

    Short sellers do their homework on a company. They don’t fall for the companies BS. Now, I’ll admit some SS are out to crush a stock but the majority are those who did their homework.

    If you want to have circuit breakers then they have to work in BOTH directions. Period.

  19. HCF says:

    @ leftback:
    > It doesn’t matter what they do. Changing the rules just drives the players away.

    Exactly! We showed up to play a soccer match and at halftime, after being down by 2 goals, the government changed it to an American football game.

    It’ll naturally make a lot of people pick up their ball and go home…

    HCF

  20. AmenRa says:

    Many traders don’t read the 10-K, 10-Q, Annual Report, or footnotes. Short sellers do.

  21. Transor Z says:

    Short-selling is un-American. It’s pessimistic, by golly. The much better solution is to bury your hedging in incomprehensible derivatives.

    @HCF: And speaking of raping the American economy, you’re trying to tell us that the banking, home building, and mortgage industries are the victims and not the rapists?

    Maybe we can compress that into three little letters for certain people’s benefit: CDO

  22. HCF says:

    Also, important to note, that if you short sell and are wrong, YOU GET YOUR FREAKING HEAD BEAT IN.

    You make a bet with your own money, long or short, and you are entitled to whatever rewards or punishment that comes your way, imho. It’s sure a helluva lot better than the litany of companies who are making bets for their management, employees, and shareholders WITH OUR TAX MONEY!!!

    HCF

  23. plantseeds says:

    franklin411 said-
    “PS–In what logical world can someone borrow something I own and sell it to someone else without my consent?”

    When one signs a margin agreement they are typically also signing a hypothecation and re-hypothecation agreement with respective broker/dealer, so in that regard one gives consent. Clearing firms are supposed to reconcile and inventory positions available for short however we’re finding out that may not always be the case…stay tuned.

  24. In what world are prices only expected to be uni-directional (i.e., up only)?

    If prices can move up and down, why can’t traders try to profit on that motion?

  25. williams says:

    Just really a question. Say I own a 100 shares of a stock. The market price is neither high enough or low enough to prompt me to call my broker and sell. But some one, a short-seller, can borrow the stock and sell it. The money they get from this sell is not “real” money though, is it? They can’t go out and blow it or buy some other stock with it can they?

    Now the person who bought the shares (these 100 shorted shares) did put in real money and get real shares. They could even request and receive the stock certificates if they chose to. Yes?

    How does this aid in “market liquidity and price discovery”? It is all a “virtual” transaction isn’t it? And any “price discovery or liquidity” is also “virtual”.

  26. Mannwich says:

    Because it’s “un-American” Barry. Get with the program. I would argue that it’s “un-American” to lie, obfuscate, and steal but then again, based on what we’ve seen, maybe I’m wrong about that.

    Your next book should be entitled, “Predator Nation”.

  27. sunny45 says:

    Short selling is anti dote to ‘irrational exuberance’, ‘Enron’ style accounting and dishonest analysts in the pockets of investment banking!

  28. arcticpup says:

    Barry I’m all for the prices to move up and down and for traders to profit on either motion… but I wish those traders don’t forget to paid their income tax.

  29. AmenRa says:

    I want the truth! You can’t handle the truth!

    The truth is that short sellers can halt the fall in prices as they buy it back to take profit. As they buy it back other short sellers pick up on this and do the same. This leads up to a short squeeze. Which is “good” for the market. If no one is there to take a profit as the prices fall then the ask keeps getting lower until someone is willing to buy.

  30. Todd says:

    @ AmenRa So, in effect your saying short sellers have a direct effect on the 2nd dirivitive? ;)

  31. if ‘Naked’ Short Selling & FTDs were, ever, fully explained to the ‘cained peep, the ‘font of the eternal bid’ would dry up inside of one month..

    said, font: 401(k)’s and their kin, 529s, et al., MutFunds of most stripe..

    the argument about ‘upticks’ and old-fashioned SS is, another, hideous diversion from inspecting the structural Rot pervasive in our current ‘Markets’..

  32. wunsacon says:

    >> > It doesn’t matter what they do. Changing the rules just drives the players away.

    This is tangential but: How so? To what other game in town? The “players” aren’t going anywhere. This industry offers the highest profit potential. And if somehow the industry were to become less profitable (perhaps go back to its share of national income during the 80′s — when Gordon Gecko was already a Wall Street hero), that would be a good thing. There’s already enough “price discovery” and liquidity. It’s not going away just because some Wall Streeters leave the industry. Wall Streeters couldn’t even force more disclosure out of the banks when it mattered. So, there’s more upside to improving “price discovery” via changes in Washington than via changes on Wall Street.

    For the record, I think short-selling serves an important purpose: to keep crappy stocks from rising so high that insiders sell while the public keeps buying. As for the uptick rule, I don’t know whether it matters. Franklin makes a good argument though when he says “since the rule doesn’t matter, why fight against the rule?” Frankly, I don’t know enough about trader/investor psychology to respond to that.

  33. constantnormal says:

    One would think that the experience of the Karachi (Pakistan) Exchange would have been sufficient, but some people cannot learn from the example of others, they have to stick their hand into the active garbage disposal and try to free the obstruction themselves.

    In digging around to find the above link, I came across this in a WSJ (Deal Journal) blog, and it’s too good not to re-post it for your appreciation and amusement:

    12:57 am September 20, 2008
    williambanzai7 wrote:
    From The Soundtrack : Ghostbusters (1984)

    SHORT Busters…

    If there’s somethin’ strange on your balance sheet
    Who ya gonna call (shorttbusters)
    If it’s somethin’ weird an it don’t look good
    Who ya gonna call (shortbusters)

    (Lehman) I ain’t afraid a no shorts
    (AIG) I ain’t afraid a no shorts
    If you’re seein’ CDO’s ruinin’ your networth
    Who can you call (shortbusters)
    An’ invisible trade dragging down your spreads
    Oh who ya gonna call (shortbusters)
    (Merrill) I ain’t afraid a no shorts
    (Bear) I ain’t afraid a no shorts
    Who ya gonna call (shortbusters)
    Morgan Stanley: If you’re all alone pick up the phone
    An call (shortbusters)

    (Paulsen) I ain’t afraid a no short
    I hear it likes Goldman
    (Goldman) I ain’t afraid a no shorts
    Who you gonna call (short busters)
    Mm…if you’ve had a dose
    Of a naked short baby
    You better call short busters
    (SEC Cox) Bustin’ makes me feel good
    (Bernanke) I ain’t afraid a no shorts

  34. DL says:

    Steve Forbes says that with restoration of the uptick rule, together with elimination of MTM, Dow 14K will be here in no time.

  35. batmando says:

    @ franklin411 at 11:08 am
    When my neighbor borrows a tool, it is understood that he will return it in the same condition as when borrowed OR if it’s stolen, he loses it (or SELLS it), he will replace it with another of as good or better quality.

  36. AmenRa says:

    @Todd

    We have a winner!

  37. to be clear: “Short selling is a legitimate form of speculation that fully enhances market liquidity and price discovery.”–PB, from post

    to that categorical, there is no legitimate argument.

  38. HCF says:

    @ williams:
    > How does this aid in “market liquidity and price discovery”? It is all a “virtual” transaction isn’t it? And any “price discovery or liquidity” is also “virtual”.

    Short-selling aids in market liquidity because it’s a two part process, just like normal buying and selling. You just reverse the order by selling first then buying back later. Unless the price is zero or infinity you inevitably have to do both buying and selling to close the transaction.

    > The market price is neither high enough or low enough to prompt me to call my broker and sell.

    You actually implicitly hit the nail on the head. YOU are not willing to buy or sell, but if someone buys the stock that I am willing to short sell, then a market price has been established… That is the essence of price discovery. If you want $100 for your asset and the buyer wants to pay $50 and neither of you will budge, then that is illiquidity.

    HCF

  39. Stuart says:

    Fully agree with short selling as a legitimate form of speculation, every bit as those who speculate going long. The problem is with NAKED short selling, which is akin to counterfeiting. It needs to be banned outright. It is too easily susceptible to abuse by the larger players and the MM for the sake of market efficiency. No uptick rule is needed if all one does is ban all naked short selling, period.

  40. techy says:

    IMO short seller can kill fiancials quickly by destroying confidence.

    if stocks go up everyone profits….but if it goes down it breaks the confidence in economy.

    Uptick rule is a good idea, if it can be implemented….shorts can push a stock down, they can still make the bet.

    if the uptick rule is implemented, wont this make puts expensive and calls cheap??

  41. techy says:

    sorry above should be: shorts CANNOT push a stock down

  42. Chuck Ponzi says:

    Again,

    It seems that Mark E Hoffer is the only person on this thread that gets what the hell is being talked about.

    Jeebus criminy, the stupidity of this board has been exceeded here and now. It’s like everyone just reads an article by a journalist that knows nothing about anything and now thinks they know everything about everything.

    The issue is around FTD FAILURE TO DELIVER. It can also be known as STOCK COUNTERFEITING. It think if we said that we wanted to stop STOCK COUNTERFEITING, everyone would be on board. but that’s what NAKED SHORT SELLING is, which is fundamentally different from normal short selling which is perfectly legal and acceptable.

    I recommend everyone to start calling it “STOCK COUNTERFEITING” and see what kind of response you get then.

    STOCK COUNTERFEITING

    STOCK COUNTERFEITING

    STOCK COUNTERFEITING

    STOCK COUNTERFEITING.

  43. Chuck Ponzi says:

    BTW,

    PETER BOOCKVAR

    I generally read your articles, but this has got to be one of the most misinformed posts of all time. Are just just ignorant or stupid, or are you trying to cover up for COUNTERFEITERS?

    Hedgefunds have this market tilted in their favor. Any broker that fails to deliver within 3 days should be strung out and have a perp walk. If you don’t have it, don’t sell it.

    Chuck

  44. gloppie says:

    Wall Street is a fucking circus, the government is a bunch of clowns, anybody who is rich enough to speculate with whatever wealth they have should be left to their own demise when they loose. You don’t get bailed out of your casino losses, why should anyone get bailed out of bets on assets, no matter what they are?
    There is absolutely no social progress coming out of greed.
    Competition is good for the individual and bad for the community. Once this fact is institutionalized in socially acceptable rules we will ALL be better off, not just the few.

  45. Stuart says:

    Hey Chuck, hmmmm….. seems I even mentioned counterfeiting in my post. Perhaps you need to read them more closely yourself.

  46. HCF says:

    @ Stuart:
    > The problem is with NAKED short selling, which is akin to counterfeiting. It needs to be banned outright.

    It IS banned outright! It’s an enforcement issue, not one of lacking the right laws…

    HCF

  47. Speaking of short selling, the VIX really crashed through 40 today with some conviction

  48. franklin411 says:

    @Barry,
    You can profit off of down moves…you just have to pay the piper.

    If I want to go long to profit on an up move, I have to invest capital by buying shares. There’s an opportunity cost there–my capital is tied up.

    In the normal world, if I want to go short to profit on a down move, I have to invest capital by buying inventory and then selling it into what I think is a market that has mispriced the goods. There’s an opportunity cost there–my capital is tied up.

    In the world of Wall Street, if I want to go short to profit on a down move, I invest none of my own capital. I steal someone else’s property and sell it on the open market. Someone else paid the opportunity cost to make that inventory exist, not me. I only hope that I can replace the inventory before someone (margin clerk most likely) discovers the theft so I can avoid jail time (heavy losses).

    Look, they’re my shares. It’s my capital invested. If you want to borrow them, that’s fine: Come ask for my permission. We’ll work out a fair rental rate so you can profit off of my capital. That’s how the real world works.

    @ Batmundo, the argument about a borrowed tool fails. Trust me–if you break into your neighbor’s garage and “borrow” his tools without his consent (and get caught)…you better hope your neighbor is the forgiving type because it’s Sing-Sing for you otherwise!

    I don’t have a margin account =)

  49. Stuart says:

    Right. Not just lip service but ban it outright and with teeth. Ultra-cynic it’ll ever happen unfortunately.

  50. AmenRa says:

    So are market makers engaged in STOCK COUNTERFEITING? They need naked short selling for liquidity.

  51. HCF says:

    The trend lately has been…

    Up days on government intervention (stimulus, free money for insolvent companies, bailouts)
    Down days when no new government interventions are announced…

    Sounds like a recipe for a real sustainable Bull run, eh? =)

    HCF

  52. Chuck Ponzi says:

    AmenRa,

    No, short selling is for liquidity.

    NAKED SHORT SELLING is STOCK COUNTERFEITING.

    They are fundamentally different concepts, which besides having the words “short selling” in them have no relationship to one another.

    Market makers should back their sales with purchases within the 3 day limit and should be subject to kiting-specific audits to prevent STOCK COUNTERFEITING!

  53. Bob_in_MA says:

    Remember last time they restricted short selling in September. Worked like a charm….

  54. Stuart says:

    I do not trust the market makers with good reason. I have lost all confidence in the integrity of their culture further evidenced today by this. Naked = counterfeiting and needs to stop.

    WASHINGTON, April 7 (Reuters) – The U.S. Treasury Department is planning to delay the release of any completed bank stress test results until after the first-quarter earnings season to avoid complicating stock market reaction, a source familiar with Treasury’s discussions said on Tuesday.

    The Treasury is still talking about how results of the regulatory stress tests on the 19 largest U.S. banks will be released, and may disclose them as summary results that are not institution-specific, the source said.

    The government is testing how the largest banks would fare under more adverse economic conditions than are expected in an attempt to assess the firms’ capital needs. The tests are due to be completed by the end of April, but Treasury has said they may be finished before then.

    The source, speaking anonymously because the Treasury has not made a final decision on what to disclose, said officials do not want any test results released before the earnings season wraps up for most U.S. banks on April 24.

    Treasury did not immediately respond to a request for comment.

    U.S. regulators have reached the closing phase of the stress tests, with many of the top banks having already turned in their internal versions of the test to officials. Bank of America Corp (BAC.N) Chief Executive Kenneth Lewis said last Thursday that his bank has already completed its test.

    Bank regulators are at the stage of reconciling their own versions of the results with the banks’ internal assessments.

    Officials realize it may be hard to keep the results under wraps, and they are looking for ways the banks could disclose some details without unduly disturbing the markets. They are also looking at providing some summary information about how the banks fared.

    “There will be definitely be some information that will be provided at the end of it, but exactly what that will be, and when it will be provided, will come forth later,” Comptroller of the Currency John Dugan, who supervises some of the nation’s largest banks, said last week.

    The stress tests at the biggest banks are part of a wide-ranging effort to restore stability to a sector hit by huge mortgage-related losses.

    The tests are designed to determine the depth of banks’ capital holes if conditions deteriorate further. After the tests are completed, the banks will have six months to either raise private capital to compensate, or accept government funds.

    But officials are worried about how the market will react to the stress test results if there is not a clear recovery path for a bank that is deemed to have a large capital need.

    The last thing Treasury wants to do is set off a panic, the source said.

  55. franklin411 says:

    @Bob
    We didn’t have an SEC in September. The SEC was on hiatus from 1/2001-1/2009.

  56. Transor Z says:

    @Chuck:
    I can’t argue with those ALL CAPS. You’ve got me bedazzled by the sheer force of your will — WILLING yourself into dominance. my one teeny tiny submissive (all lower caps) suggestion is that you read the fucking articles from today’s ap wire and washington post that precipitated pb’s post before goin’ all nutty, like. please don’t hurt me mr. ponzi man.

    Ever heard of the “Federal Register”? You might want to look into this particular entry, because it deals with the SEC’s adoption of Rule 10b-21, which makes illegal “naked” short selling:

    http://www.sec.gov/rules/final/2008/34-58774fr.pdf

    Short selling involves a sale of a security that the seller does not own or that is consummated by the delivery of a security borrowed by or on behalf of the seller.5 In a ‘‘naked’’ short sale, a seller does not borrow or arrange to borrow securities in time to make delivery to the buyer within the standard three-day settlement period. As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a ‘‘fail’’ or ‘‘fail to deliver’’).

    I didn’t make that up or put it in all caps, but it still might help you understand the point that HCF and others have been repeating here: it is already illegal to engage in naked short selling, which is characterized by a failure to deliver securities to the buyer when delivery is due.

    NOW. If you were to go further and read the articles relevant to today’s discussion, you would find that the SEC is contemplating much broader action against short-selling than just the FTD problem.

  57. Chuck Ponzi says:

    Stuart,

    You’re right. You and a couple others are the only ones who got it.

    It just infuriates me that both Peter AND the blog owner Barry don’t understand the fundamental difference between short selling and STOCK COUNTERFEITING. Maybe if someone said it enough times they might actually look it up and find out what it is.

    BTW, I have nothing personally against short selling; I do it and will do it again. In only have a problem with tilting the board in favor of criminals and not enforcing laws. Counterfeiting is theft; and many are being harmed by this theft.

    Chuck

  58. Stuart says:

    Anyone who watched the video that has gone around on FTD and the DTCC, within it was overstock as an example, realizes the DTCC is not going to act on this.

  59. Chuck Ponzi says:

    Transor Z,

    Forgive me for offending you. It was not my intent.

    Those who understand the SEC’s lack of enforcement action against blatant naked short selling need not be offended by my rant.

    Isn’t anyone else offended that a contributor to this blog and the blog owner have confused legal short selling with illegal naked short selling? I was just hoping that my ALL CAPS rant would cause people to actually read my post (which it appears people actually did this time). Previously on this blog, I have differentiated (in small letters) the difference between short selling and naked short selling. It got nowhere; and obviously Peter hasn’t a clue of the difference between the two because he appears to be against the new actions.

    By the way, I don’t really see the value of the uptick rule. It does not really do anything about FTDs, in my opinion. Maybe I’m wrong on that count and the SEC understands the issue better (I’d hope so), but the the uptick rule is only treating the condition, and not the disease. FTDs are the disease. If it’s not, why not just stop all of it and see if the patient gets better?

    As a final note, I don’t really have a vested opinion about the direction of the market; I can make money either way, but there is something fundamentally corrupt about an organization that has the capacity and will to stop theft in plain sight and does nothing about it. The SEC,in my opinion, needs some competition.

    PS I was sincere that I wasn’t intending to offend little ol’ Transor Z. I hope you have healed from the wounds I inflicted on your eyes.

    Chuck

  60. Outlier says:

    WTF are you rambling on about Mr. Ponzi? I don’t recall anyone on this site (owner, guest poster or commenter) ever supporting naked short selling.

  61. Chuck Ponzi says:

    Outlier,

    The actions announced today are intended to curb NAKED SHORT SELLING, not short selling. Read the PDF above.

    Peter stated:
    Short selling is a legitimate form of speculation that fully enhances market liquidity and price discovery.

    Agreed, but his rant above that has nothing to do with the announcement; again which is intended to curbe ILLEGAL activity.

    Barry stated:
    If prices can move up and down, why can’t traders try to profit on that motion?

    Agreed, but in light of the announcement, you need to differentiate between legitimate short selling and ILLEGAL naked short selling.

  62. DeDude says:

    Just tax it and it will disappear. Or make it a law that a rental fee of 1% per week is given to the actual owner of a stock (not the broker). If you think there is too much of something then stash the incentives against it. Just like cigarette taxes. Same thing with $ million bonuses –tax’em.

  63. Transor Z says:

    @Chuck: Don’t worry about what these little ol’ eyes have seen. They’ve seen far worse than your rant, believe me. :)

    Seriously, dude, read. . . the. . . articles. Capisce? The SEC is talking about adopting NEW rules, not enforcing existing rules.

    New rules = making stuff that is currently legal, illegal.

  64. Apparently its swimmingly okay to place a bet on the liklihood that a company will repay its debt (you don’t have to “own” the company’s bonds to buy a derivative contract on the liklihood they are repaid, or for that matter, to sell an insurance contract that they will be– and then you don’t even have to have the wherewithal to make good the insurance contract on the bond’s repayment–ask AIG) but it is not okay to place a bet on the liklihood that a company is full of lying thiefs that will ultimately destroy it, and its stock price, unless you actually own a piece of the company?

    While at the same time, it is perfectly legal to buy a put option that only pays off if the price of the stock craters.

    From whence, I wonder, comes the moral outrage? I don’t see a moral issue here around whether or not a particular type of gambling, er, “investing” is favored over another particular type.

    I do see a moral issue in how the government appears willing to do anything to ensure the “market” prices behave as it prefers, thereby destroying any notion of “market”. It is a fraud to claim “x” is the market price of a security, when the government has manipulated the market so much that there isn’t one. Sorta like the PPIP, the FASB, and our insolvent banks.

    Alas, and as always, whatever the government intends with its manipulations of the market will be the exact opposite of what obtains. So, if the government clamps down on shorting stocks to prevent a run on the market, a run on the market is precisely what will happen.

  65. franklin411 says:

    @Transor,
    Re the uptick rule portion of it: The uptick rule is the status quo. It has kept America out of depression for nearly 80 years. The “new rule” was the elimination of the uptick rule with virtually no public debate or discussion. Since that rule was eliminated, the US has plunged into the depths of a depression. Those who advocated overthrowing the old regime had their chance. They failed.

    The people who should be justifying themselves are the ones who want to obstruct restoring the uptick rule.

  66. Mannwich says:

    Thank you, Curmudgeon, for bringing some sanity to this thread.

  67. Mannwich says:

    @franklin411: “It has kept America out of depression for nearly 80 years.”

    ???? Really? WTF are you talking about, pray tell?

  68. Chuck Ponzi says:

    Transor Z. Thanks. Have read it… can’t say it will make any difference; perhaps it will make legitimate short selling more cumbersome or inconvenient. But, the SEC is not a government agency and as such does not define criminal activity. I agree, the issue should not be new rules, it should be enforcement of existing issues. Uptick, downtick… it will not solve the FTD problem, in my opinion. In that case, I don’t really care about new rules; it’s not fixing the problem. First step to solving any problem is realizing that you have one.

    In additon; it seems my lack of ability to properly communicate has once again thwarted my desire to expand someone’s understanding (Curmudgeon, there is a moral issue here; it’s called theft and according to my moral code, that’s wrong). I’ll have to brush up on my writing skills to properly convey the outrage and disdain for criminal activity that (it appears) some don’t even think is criminal or even immoral.

    Can’t win them all.

  69. Chuck Ponzi says:

    Curmudgeon. I have a rhetorical question. If something is illegal.. wouldn’t breaking that law be immoral?

    I know, I know my undergrad required me to go through the mental exercise of “if your family is starving, is it okay to steal a loaf of bread” and “if your child is dying is it okay to break into a pharmacy to save their life” and other such moral dilemas, but to me naked shorting does not constitute one of these scenarios.

    If you’ve got something you say you have, just deliver it in 3 days and prove to everyone that you do…

    Or, if it’s not immoral to do so, why not make it legal to naked short sell?

    Point is… if it’s not a moral issue, why is it illegal? Laws are a codification of morals, right? That was a rhetorical.

  70. Mannwich Says:

    April 8th, 2009 at 2:27 pm
    @franklin411: “It has kept America out of depression for nearly 80 years.”

    ???? Really? WTF are you talking about, pray tell?

    Thank-you, Mannwich…you said it before I had to.

    @franklin411, do some work on your causation analysis. Correlation and causation are hardly the same. And if it were the uptick rule that kept us out of depression for 80 years (even though the Depression didn’t truly end until 1940–a mere 69 years ago), then why the big deal w/ the New Deal?

  71. HCF says:

    @ franklin411:
    > The uptick rule is the status quo. It has kept America out of depression

    Do we need to need to go back to a discussion of correlation/causation/randomness? Perhaps the uptick rule had something to do with it, but no depression for 80 years may have had to do with fair asset values following depression, some good policies, destruction of Europe in WWII (no competition!), the inefficiency of communism (again, little competition), technological innovation, FDIC insurance, and maybe some good, dumb luck…

    HCF

  72. HCF says:

    Damnit Curmudgeon!

    We had similar thoughts at the same type, but you beat me to the punch! =)

    HCF

  73. Transor Z says:

    “But, the SEC is not a government agency and as such does not define criminal activity.”

    Geez, Chuck, SEC must not have gotten the memo:

    First and foremost, the SEC is a law enforcement agency.
    http://www.sec.gov/about/whatwedo.shtml

    @Curmudgeon: Awesome as always. Part of keeping the eye on the ball here is watching shorting activities in the bond market also…

  74. Mannwich says:

    @franklin411: If you read my previous comment on this issue. you’ll see that I don’t give a crap about the uptick rule. Just enforce what’s on the books and bring it back for all I care. I don’t have a dog in this fight. I merely think this is all yet another distraction away from the real root of these problems and they’re consumed with rearranging the deck chairs instead of fixing the biggest problems that we face. It’s all superficial b.s.

  75. Scrutinizer says:

    Why do you continue to avoid the point?? No rational person would say to ban legitimate short selling as a counter to abuse of margin. In fact, securities law requires that only shares that are margined be available for short selling activity since the broker has a “lien” on those shares purchased on borrowed capital.

    That’s LEGITIMATE short selling and as you state, it creates price discovery and a counter to excess and exuberance in a financial market.

    According to the stated purpose of short selling, margin calls reduce the amount of stock that should be available to be shorted.

    THUS, as overall use of margin positions decrease, so should the over all short interest until price discovery is achieved. So tell us Barry.. is that what we’re seeing?

    I fail to see how price discovery is satisfied when market makers and specialists can sell and loan out despite the lack of margin stock available for lending..

    So PLEASE, PLEASE, stop trying to twist the argument. Short selling is not the problem.. Naked Short Selling IS. And it’s undermining confidence in our financial system just as grievously as the Rating Agencies, sub-prime lending, and other forms of fraud we’re witnessing.

    Scrutinizer

  76. Chuck Ponzi says:

    …(Curmudgeon, there is a moral issue here; it’s called theft and according to my moral code, that’s wrong).

    I just don’t see where someone is stealing from someone else. I see gambling, yes, and one might have a moral issue with that, but theft? Even the so-called “naked” shorts are doing nothing but gambling that they won’t have to produce the stock they have shorted. If enough of them are caught out, the premium to cover a naked short can be extreme, as happened recently with Volkswagon shorts that were caught in a squeeze. Shareholders made lots of money in the process.

    And again, I reiterate, how is short selling, even naked short selling, substantively different than entering a contract to sell the stock at a later date on anticipation that its value will decline, which is what can be done legally with put options all day?

  77. Chuck Ponzi says:

    Transor Z.

    They are to securities laws what police are to criminal laws.

    the SEC is a SRO (Self Regulated Organization) and are not part of any government. Our government has abdicated enforcement, but the SEC cannot be a judge; and any contested enforcement action can must be presided on by the judicial system.

    they do not “Define” criminal activity… they do not pass laws, nor do they uphold them. That’s congress and the justice department. They are not a 4th branch.

    I stand by my statement. Both portions are correct. They are NOT a government agency and they do NOT define criminal activity.

    Chuck

  78. Chuck Ponzi says:

    Curmudgeon.

    Would it be okay for me to legally sell the Brooklyn bridge and then abscond with the money?

    If I sell you something and never deliver it to you, how is that not theft?

    Failing to deliver is legal conversion. That’s the legal definition. If I just tell you “later” and never actually give it to you, how is that not theft?

    If you don’t see a problem with that, I have got a bridge to sell you.

  79. franklin411 says:

    HCF and others:
    We have never had the cycle of stock speculation/naked shorting *triggering* failures of major financial institutions on a massive scale. The developments of the period from 2007 have been unprecedented in world history. Now, certainly the financials had fundamental issues, but anyone who denies that short selling caused these firms to suffer *catastrophic, uncontrolled* failures is being disingenuous at best.

    I’m not saying the uptick rule would have prevented that. I can’t prove it. What I am saying is that we’ve had this rule for 80 years and we haven’t had a depression since then (I never said it fixed the Great Depression, btw). Then this rule was changed in the dark of night by regulators whom everyone here would likely acknowledge were completely incompetent. We entered a depression at virtually the same time. I’m saying that those who want to keep the current regime bear the burden of proving that change is *not* needed. Otherwise, bring back the old regime.

  80. Scrutinizer says:

    Some facts Barry…

    Evidence of abuse by short-sellers:

    Margin debt is down 55% since 2007:

    http://suddendebt.blogspot.com/2009/04/margin-debt-again.html

    YET.. March, 2009 saw the largest increase in short interest in over 9 months!!!

    http://zerohedge.blogspot.com/2009/03/early-march-saw-largest-increase-in.html

    So please tell us again just how is short selling creating “price discovery”?

    This smells like fraud to me, if not outright counterfeiting of stock certificates.

    Scrutinizer

  81. SanFranHobo says:

    I heard if you write STOCK COUNTERFEITING in capitals over and over again, it will catch on.

  82. HCF says:

    @ franklin411:

    I think we come at this from completely opposite sides of the argument… I think short-selling is good; you think it’s bad… However, I will definitely agree with you that they should just re-instate the uptick rule. Personally, I don’t think it will matter at all… I think it’s just a red herring or a punching bag for much more insidious, systemic issues. The only way to prove this is to just put it back into effect so policy makers can debate the REAL issues to fix our economy…

    HCF

  83. Chuck Ponzi says:

    San Fran Hobo… Sure hoping it will :)

  84. Transor Z says:

    Chuck, I hope you wear that golden sombrero proudly tonight because I am to you today what Pedro Martinez was to the Devil Rays lineup a decade ago.

    In the United States there is indeed a “fourth branch” of government in the form of federal agencies like SEC. Congress can authorize the creation of federal agencies, as it did in 1934 in creating the SEC, and give them a combination of executive (law enforcement), legislative (creating rules & regulations), and judicial (statutory, regulatory, rule interpretation) powers. Under a famous U.S. Supreme Court case called Chevron we get the Chevron rule, which requires courts to defer to reasonable federal agency interpretions of statutes in their areas of operation.

    NASDAQ and NYSE are SROs, not the SEC.

    Email Martha Stewart if you have any questions about the scope of the SEC’s powers.

  85. Mannwich says:

    @Transor: Pedro, Pedro, Pedro!!!! That guy was the best pitcher I’ve ever seen in his prime. I saw him totally embarrass the Yanks in ’99 at Yankee Stadium, with a one hitter with 17 K’s. K’d the last 7-8 batters, I believe.

  86. Transor Z says:

    @Mannwich: My little brother was there also. But as I recall, the one hit was a home run by the great Chili Davis.

  87. 1.5quadrillion says:

    Look Peter and All – the consumer side of mortgages DIDN”T CAUSE THIS economic meltdown.

    The Fed knew back in 2002 that the economy was cooked and that the only way to stave off a Depression was to radically increase the money supply.

    WHAT ALL AMERICANS CAN’T SEEM TO GET THROUGH THEIR HEADS IS THIS: the only way to increase the money supply in a fractional central banking system like ours is by issuing new loans. To keep the sinking economy afloat they had to increase LOANS. (Stop thinking that the Fed and Treasury PRINT money – THEY DON’T! They issue LOANS and create the cash out of thin air),

    The reason for all the hokey lending practices and ARM style loans sold at the broker level was that the FED sent out the word that money was cheap and in need of lending. YOU MUST LEND. (Sounds familiar, now, doesn’t it?)

    Problem is: how do you lend when everyone who should or can qualify for a loan already has (and also has an equity line To Boot?).

    So the economy was kept afloat by loaning money to ANYONE. By giving credit cards to EVERYONE…

    NOW the other thing Americans can’t seem to get through their heads is that MORTGAGE DEFAULTS are not the cause of this meltdown.

    The cause was and is the 1.5 QUADRILLION in derivatives that were created by Larry Summers and Tim Geithner (you know those guys don’t you?) for the BIG BANKS that were designed to as imaginary book value assets that would then allow them to suck money out of their competitors and swallow them up! (Can you say hostile take over?)

    There are over 200 trillion of these worthless derivatives on the books of the BIG BANKS (88 trillion at JP Morgan Chase alone) and these imaginary assets are the cause of all our problems.

    Here is an article by F. William Engdahl full of these facts.
    http://www.globalresearch.ca/index.php?context=va&aid=12953

    PLEASE READ THIS!

    There are 88 trillion is derivatives at JPMorganChase alone! The total in derivatives at the 5 Too-Bloated-and-Arrogant-to-Fail is 200 trillion!

    The media won’t tell the public that Geithner and Geithner’s old boss, Larry Summers,
    (now Obama’s fix-it team) purposely created this problem for profit by repealing Glass-Steagall and shoving the Commodity Futures Modernization Act of 2000 down our throats. They won’t tell the American People that they are considered slaves now to the Federal Reserve banking system and that they will FOREVER be paying for the monetization of the debt and the price of the failed investments insured through phony Credit Default Swaps! (That’s why the insurance companies are getting bailout and now TARP money – They insured the derivatives against loss and now have to pay off these claims. The claims are virtually endless. The humongous size and amounts of derivatives held by the avaricious paper merchants are out of reach of the PPIP 1.1 trillion dollar plan. Someone should write a musical farce along the lines of “Something Funny Happened on The Way to the Depression!”).

    There are worldwide derivatives in the amount of 1.5 quadrillion! WhyTF are you talking about consumer mortgages and questionable pragmatic loan standards?

    Please wake up all and stop watching TV.

  88. Mannwich says:

    @Transor: Good memory. So Chili ruined what would have been a no-no AND a shut out. Incredible game nonetheless. I remember it was like a soccer game atmosphere in there with all the Dominican fans and their flags rooting Pedro on. Best game I’ve ever seen at Yankee Stadium, by far. Was in the upper reaches of the upper deck, second to last row, I believe.

  89. SanFranHobo says:

    “I generally read your articles, but this has got to be one of the most misinformed posts of all time. Are just just ignorant or stupid, or are you trying to cover up for COUNTERFEITERS?”

    BTW, im pretty sure he isnt defending naked short selling but rather making the broader point that SS is being scapegoated as a potential cause for the market selloff when it didn’t contribute to the underlying reasons why the economy is contracting. Im not really sure ANYONE would side with naked short selling.

    Thats like saying someone shouldn’t be allowed to punch you in the tricep after he urinates in your septic tank as retribution for the $10 you owe him for sleeping with your pet elephant. I mean COME ON. Nobody thinks thats right!

    “I saw him totally embarrass the Yanks in ‘99 at Yankee Stadium, with a one hitter with 17 K’s. ”

    I saw that game. Actually, I think I was there.

  90. “…Naked and abusive short selling are not new. Robert J. Shapiro, a former undersecretary of commerce for economic affairs, testified before the SEC’s rules committee in 2003 about the then-growing problem. He noted that one form of manipulative short selling that was widespread in the 1990s, called death-spiral financing, created “strong incentives for large-scale naked short sales focused on small and medium-size public companies.” His research found that a sample of 200 companies victimized by the technique posted a combined market loss of more than $105 billion…”
    http://www.nowpublic.com/world/part-4-naked-shorts-75-000-cracking-wall-street-cover-redux
    ~~
    “…I mean, really – please. The DTCC passes rules for its subsidiaries – the NSCC and the DTC; which it conveniently likes to pretend aren’t all one and the same big unit divided up for business reasons – SBU’s, if you like (Strategic Business Units). Those rules have to be approved by the SEC. They are rules for an SRO – and yet here, the DTCC pretends that they are something else again. Alright, I’ll bite. What are they – polite suggestions? Hints? “If you get a chance, try to deliver shares, ‘hmmm ‘kay, but only if you get around to it”?

    The DTCC is an SRO: “An entity, such as the NASD, responsible for regulating its members through the adoption and enforcement of rules and regulations governing the business conduct of its members”. Now, what part of that seems ambiguous? And how are the DTCC’s statements consistent with that? Seems like they want to be treated like an SRO when the lawyers are coming after them, but want to duck responsibility when it means taking their owner/bosses to task over larcenous behavior. So instead of addressing this paradox, they state they aren’t an enforcement agency. Uh huh.

    Yeah. We get that the PRIVATELY OWNED CORPORATION isn’t an enforcement agency – thanks for pointing that out. It is not part of the government. It is a private company. Until it gets sued – then it wants the full protection of being “quasi-governmental.” But I digress…”
    http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/EntryID/163/Default.aspx

  91. Chuck Ponzi says:

    Transor Z

    OK, you got me, you’re right, I was wrong on that point. The SEC is a branch of the legislative. I wear that golden sombrero proudly.

    On the other issues,though, I’m still on point.

    BTW, who is this Martha Stewart person? :)

  92. Pedro was amazing, though Chili Davis never got enough ‘play’..

    and, Jeff, even when he was mowing down Yankees~

  93. “If you don’t see a problem with that, I have got a bridge to sell you.”

    If you sell me a bridge that you don’t now own for delivery to me at a future date, thinking the price of bridges would come down, and then you don’t deliver, I have a remedy at law against you. If you wish to stay in the bridge market, you best find a bridge real quick, which is why the bridge owners that you bet against are apt to feel a little richer once the transaction is complete, as well will I.

  94. SanFranHobo says:

    “Look Peter and All – the consumer side of mortgages DIDN”T CAUSE THIS economic meltdown.

    The Fed knew back in 2002 that the economy was cooked and that the only way to stave off a Depression was to radically increase the money supply.

    WHAT ALL AMERICANS CAN’T SEEM TO GET THROUGH THEIR HEADS IS THIS: the only way to increase the money supply in a fractional central banking system like ours is by issuing new loans. To keep the sinking economy afloat they had to increase LOANS. (Stop thinking that the Fed and Treasury PRINT money – THEY DON’T! They issue LOANS and create the cash out of thin air),”

    This makes for wonderful reading and all but isnt really based on, you know, reality at all. Did the consumer have any role at all?

  95. Chuck Ponzi says:

    San Fran Hobo:

    Peter said he was commenting on the SEC’s new rules intended on curbing naked short selling.

    You’re saying he’s commenting on general naked short selling.

    I’m confused, should I believe Peter about what he said, or you about what he said he said?

  96. Chuck Ponzi says:

    Curmudgeon: “If you sell me a bridge that you don’t now own for delivery to me at a future date, ”

    AHA.

    But what if there is no future date? I’ll just tell you later. You give me money now and I’ll deliver that bridge later.

    BTW, I meant to say “illegally” not “legally” sell you a bridge. I should have just left out the word and let you figure it out if it’s legal or not.

  97. SanFranHobo says:

    “Peter said he was commenting on the SEC’s new rules intended on curbing naked short selling.

    You’re saying he’s commenting on general naked short selling.”
    _________________

    Yes, its pretty clear that the SEC stuff generated the post, that’s obvious. But his point says nothing about naked short selling, just short selling in general. Thats all Im saying.

  98. Transor Z says:

    The SEC is a branch of the legislative.

    Close enough. You’ve got the right country, which is a good start.

    On the other issues,though, I’m still on point.
    “Other than that, how was the play, Mrs. Lincoln?”

    BTW, who is this Martha Stewart person?
    A porn star who became a member of the U.S. congress (a branch of the legislative). I’m sure you can look her up in wikipedia.

  99. old boy, Drew, had it Right: “He who sells what isn’t his’n, Must buy it back or go to prison”–Daniel Drew

    had this nailed, too: “Anybody who plays the stock market not as an insider is like a man buying cows in the moonlight.”
    http://en.thinkexist.com/quotes/daniel_drew/

  100. 1.5quadrillion says:

    SanFranHobo – CONSUMER loans and MORTGAGE DEFAULTS had NOTHING to do with the meltdown.

    THE PROBLEM is and was the derivatives that were created (SECURITIZING the mortgages and LEVERAGING them) and using the worthless junk to bloat balance sheets so Big Banks could gobble up the weak.

    IF THESE MORTGAGES HADN’T BEEN LEVERAGED AND SECURITIZED they could have defaulted and the consumer could have gone through foreclosure and it would have been a hic-up in the economy.

    The repeal of Glass-Steagall and the passage of Commodity Futures Modernization Act of 2000 allowed banks to create these worthless leveraged bonds out of mortgages. THAT IS THE PROBLEM.

    Derivatives, not mortgages, are the problem. Turn off the brainwashing box and read the article in linked in my post!