Posts filed under “Short Selling”
The following editorial on SHORT SELLING
was originally published in the New York Times on October 18, 1930. It is so relevant to the current environment, that I have decided to reproduce it here. What makes this so significant is that none of the issues have changed — and the US Government seems to be increasingly heading down a path of "The ends justifies the means" form of intervention.
Other than the names involved, one can hardly discern that this was written 3/4 of a century ago . . .
With trade depression continuing in spite of recent assurances that it would surely end with arrival of Autumn, and with the stock market also falling below the prices reached in last Summer’s drastic downward readjustment, it was not perhaps surprising that search for something peculiar and abnormal in the way of cause should have begun. The average man does not apply severe logic in his reasoning on such matters. It was at least a convenient supposition that business must be hesitating because of the bad stock market, and Wall Street itself had been reporting, every day, that "bear selling" had emphasized the market’s unsettlement. Hence the demand from irritated watchers of the situation that the evil influence of such stock market operations be ended by suspension or outright prohibition of "short sales."
Such action is undoubtedly possible. Mr. Untermeyer correctly states that the Stock Exchange itself "has it within its power to prevent or restrict short selling." Yet even so hostile a critic as he has heretofore been of Stock Exchange machinery is careful to add that whether such action would be advisable "is quite another thing." The stock Exchange authorities have given public warning that the speculative seller of stocks whose purposes were shown by deliberate circulation of disturbing rumors would be severely disciplined. But they too have declared through their president that since "normal short selling is an essential part of a free market for securities," prohibition of such sales "might result in the destruction of the market," and would therefore, in any case "too high a price to pay for the elimination of the few who abuse this legitimate practice."President Hoover lately talked the matter over with the Stock Exchange authorities; but the White House version of the interview was careful to point out that the Government had no idea of interfering with policies of the Stock Exchange.
Why this unanimity of attitude against the prevention of "short selling"? The answer of any one familiar with markets probably would be that, so long as stock market valuations can be influenced on the side of rising prices by speculative buying conducted with borrowed money, equilibrium is impossible except through permitting sales conducted through deliveries made with borrowed stock. Either practice is open to abuse, which it is the duty of the Exchange authorities to restrain. The abuse of "bidding up the market" by speculation based on broker’s loans is not often recognized by the public, though its evil results ought to be reasonably evident to any one who remembers 1929. Yet it is plainly impossible to abolish "buying on margin" unless by reducing all transactions to a basis of cash purchases — which would preclude an immense part of legitimate investment business. This being true, it ought to be evident that prohibition of "short sales" would expose the market to the extreme and dangerous maladjustment which so one-side d a proviso would inevitably create. Our "rashes" would be vastly more ruinous; our recoveries with the necessary "bear repurchases" eliminated, far less emphatic. The market would have become a trap for the unwary, with no automatic safeguard.
This is not the first occasion on which "suppression of bear sales" has been vehemently urged. After the panic of 1907, under circumstances closely resembling those which now exist, demands for such action forced Governor HUGHES to appoint an impartial committee to investigate the question. This committee contained not one member of the Stock exchange; it was made up of such eminent economists, journalists, and practical business men as Mr. Horace White, Judge Samuel H. Ordway, Mr. Edward D. Page and its professor John B. Clark of Columbia.
In its unanimous report of 1909 the committee found that the greatest evil of the stock market was "pyramiding" of speculation for the rise on the basis of previous paper profits, now used as "margin" for still larger ventures.
Of "bear operations" it had this to say:
We have been strongly urged to advise the prohibition or limitation of short sales, not only on the theory that it is wrong to agree to sell what one does not possess, but that such sales reduce the market price of the securities involved. We do not think that it is wrong to agree to sell something that one does not now possess but expects to obtain later. Contracts and agreements to sell, and deliver in the future, property which one does not possess at the time of the contract are common in all kinds of business. The man who has "sold short" must some day buy in order to return the stock which he has borrowed to make the short sales. Short sellers endeavor to select times when prices seem high in order to sell, and times when prices seem low in order to buy, their action in both cases serving to lessen advances and diminish declines of price.
New York Times, October 18, 1930, Saturday
Editorial, Page 12, 857 words
Last night, we discussed the absurdity of banning all short sales. The details of the SEC action have been released (see below). The specifics are a "temporary halt in short selling in 799 financial institutions" until October 2nd.
I have been trying to contextualize this, and I keep coming back to what seemed like a wild theory yesterday that seems a whole lot less wild today. During the day, I had an interesting phone conversation with Joe Besecker of Emerald Asset Management. (We used to do schtick together on Power Lunch, and made for an amusing financial comedy team).
But Joe is a good money manager, a great stock picker, and a thoughtful guy. He raised an intriguing issue: None of the many hedgies he knew were pressing their bets recently. The bear raids on the banks and brokers were NOT a case of piling on by US based hedge funds. And from what he was seeing and hearing about in terms of order flow, the vast majority of the financial short selling the past week or so were being done overseas. It appears that the lion’s share of shorting was coming out of overseas bourses such as London and Dubai.It may not be a coincidence that the financial short selling ban is both here and in London.
Then there is another coincidence: The huge increase in shorting of the financials occurred on the anniversary of 9/11. And on top of that, the same institutions attacked on 9/11/01 were the ones suffering in recent days.
Joe asked the question: Is anyone investigating whether this is a case of financial terrorism? He wanted to know if someone was at least looking into this question (Joe is buds with Jim Cramer, and mentioned it to him, who then omitted to cite in his column that this was Joe’s theory, not his own).
Anyway, its an interesting theory, one that seemed kinda out there — until last night’s emergency action. Nothing else really explains the insanity of banning short sales — except for Joe Besecker’s questions. I can think of only 3 other possibilities that explain this insane action:
1) Extreme idiocy and incompetence — not unthinkable ftom the gang that couldn’t shoot straight in DC these days;
2) Following the impetuous Fannie/Freddie rescue, the timing of this certainly has political overtones. We will see if it gets extended a month from October 2nd to November 5th.
3) Some other factor, possibly financial terrorism.
I can think of no other explanations for the dismantling of the free operations of trading markets.
The grand irony of all this is that Naked Shorting has been very profitable for the big broker dealers, like Morgan And Goldman and Merrill and Lehman. They have looked the other way for years, and the SEC has been AWOL on this issue.
Short sales require a locate (shares to borrow) and then a subsequent delivery. It should take less than 3 days to deliver the borrowed shares, but instead, delivery is often delayed indefinitely. Failure to deliver leads to a margin charge, which can be as high as 9-15%.
If you want to know who to blame for the past 5 years of naked shorting, you only have two places to look: The Financial brokers themselves, and the nonfeasance of a feckless SEC.
SEC: Ban All Short Selling (September 18, 2008)
SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets
SEC Chairman Christopher Cox
FOR IMMEDIATE RELEASE 2008-211
Here is tonite’s theater of the absurd SEC headline:
SEC intends to temporarily ban short selling, but it’s not clear if the commission has approved the move. Cox is briefing congressional leaders. Separately, the government is seeking congressional authority to buy distressed assets.
This is nothing short of a total panic by people who have no clue what they are doing. And to think, I mocked Russia for being a nation run by market commies.
This is the ultimate bailout attempt, which will have repercussions far far beyond our imaginations:
1) We suffer a loss of Market Integrity; The US is now a Banana Republic
2) Blatant market manipulation: this is nothing more than an attempt to force markets higher;
3) 60 days prior to a presidential election? This is a none-too-subtle attempt to influence the elections — especially coming on top of the Fannie/Freddie bailout;
4) The coming pop will create a huge air pocket, ultimately leading to us crashing much lower;
5) Expect a huge increase in volatility — upwards first, then down;
We Are A Nation of Morons, led by complete Idiots, making us complicit in our own self destruction.
Interesting chart via Sentiment Trader: We see Hedgies are now as short as they were in 2004. > > I am not sure that hedgies are that short, but that’s merely a low confidence anecdotal info. I’ll ask Sentiment Trader where they get this data from.
Wow, this guy Christopher Ailman is utterly clueless. I don’t usually say things like this, but "Way to keep your eye on ball, genius!"
I don’t have much of a problem with the uptick rule — its pointless, and is easily worked around by hedge funds — but i can take it or leave. And, I agree that rules against naked short-selling — already illegal — should be enforced.
But if you think the current economic, credit and financial problems are caused by shorting, you are simply a smoking too much dope. (Don’t do drugs, or you will end up a brain-dead piece of lawn furniture).
Idiots . . .
One of the nation’s top pension funds taking aim at short sellers, with Christopher Ailman, CalSTRS CIO and CNBC’s Maria Bartiromo.
To review, it wasn’t the excess leverage, or the under-capitalization, or the lack of risk controls, or the bad investments in all of the real estate related paper, or the insolvency — it had nothing to do with the nonfeasance on the part of the Fed, and the SEC going AWOL — no, it was the short selling.
Financial punditry has reached new lows — and with Luskin and Ben Stein running around, that ain’t easy.
This blame game is short on logic
FT, August 21 2008 20:02