The SEC’s crusade against shorts is a joke

Short selling as a concept seems to have gotten stirred up in the idea of “naked” short selling and other rampant forms of betting without the capital to back it up. If you do that with a loan shark, and you lose, they break your legs and leave horse heads in your bed. If you do it with any form of Wall Street shinaigans, the Tax Payer buys you out.

The problem is not selling short, but people being able to bet and win without risking losses. No one should be able to sell short, buy long, insure, lend or anything else unless they actually have the capital to cover their losses.

The ban can only influence prices very short term. And it profits the insiders who know it is coming. This is a joke and distraction.

Seems like the game plan is incompetent oversight that leads to a call for more “regulation”. As we can see with the “bailout”, this will be just another strategy to milk the system.

Reality check — The decades long credit bubble has burst. With consumption and borrowing we just paid for China’s modernization.

…and we are bailing financial institutions with no national alegiance.

The ban and its extension is dumber than Cox’s XBRL crusade (a solution in search of problem). It is still not as dumb as his unwaivering support for the current implementation of the fair value rules.

McCain is right. He has to go.

“Short sellers only make that unavoidable drop happen faster, but they didn’t cause the drop.”

I’m inclined to agree with the above statement. AIG, WAMU, who’s next? didn’t fail because of short selling… They got caught holding the “hot potato” in this latest round of creative destruction.

Now, the government – Exec and Congress – are proposing that we taxpayers take a turn at holding this “hot potato”. But if ‘markets’ refuse to buy this worthless paper why should we? We aren’t being sold short, we’re being sold out!

One thing Friedrich Von Hayek did not bother to consider was this: BANKRUPTCY [moral and/or economic] is THE OTHER ROAD TO SERFDOM.

Karen, ban all selling of stocks???? Freeze the market for 10 years???? Where do you get these ideas? Peoples 401k’s and retirement assets are at stake here and with no investments people would outlive their savings in a hurry. What would this accomplish other than taking the US back to the stone age? As far as Buffet goes I have a strong feeling he wouldnt support a freeze on any market in the world let alone US equities.

Posted By Joe Chicago, IL: October 2, 2008 2:19 pm

Answer :

If we do not stop all selling of stocks the stock market in two years the Dow Jones Average will be at 2,000 S&P 500 at 50 and NASDAQ will be at 100. This freeze will be just to keep people’s money in their 401k plans.

Personally I got most of my money out of the stock market last year and have them in local banks with CD rates of 4 to 5 percent. I would suggest everyone take their money out of the major banks like Chase, Bank of America, Citi Group, Wells Fargo, MetLife and Sun Trust and put the money in local banks to do two things keep your local economy going and bankrupt the majors so the bail out plan will not benefit those who got us into this mess.

The majors are black mailing Congress to pass the bail out and are not loaning but the local banks are. So I say we vote with our bank accounts.

The ban is working; even more Wall Street ‘non-banks’ would have been crushed to nothing by the shorts if not for the ban. The ban has dampened volatility and preventing the shorts from targeting a lot of companies for destruction.

Extend the no-short rule to ALL stocks at least until the financial crisis is over.

If you want to sell a stock, first make sure that you actually own it. Sounds simple, right ? Why should anyone be able to sell something that they don’t own ?

They should not have ever put a ban on short selling; it does nothing to help the markets. Short selling is necessary to purge the market of overvalued stock.

The government should leave the market alone and let it fix itself. Every time they interfere they cause even bigger problems!

Jay from CT

Just a thought….. If you had an MBA in as you call it “investment finance” then why would you be worried about your retirement portfolio?

The problem summed up in two words.

CASINO CAPITALISM

All this patching of a severely broken investment system will do very little if not nothing to fix the problem. Thinking long term smart investors are being replaced with pure speculation (gambling).

Other countries have labeled us “CASINO CAPITALISM” and the glove fits perfectly. We have traded sound judgement with role the dice and hope for the best strategies i.e. “the quick buck” . Until the whole system is revamped to something closer to investing we are doomed and no amount of patching or bailing out is going to really fix the problem.

Bottom line, does not matter what tweaks the SEC does, U.S. gamblers are still addicted.

Extend all they want…but the day of reckoning ain’t gonna go away.

Imagine, for the sake of example, the following.

A circle of friends is playing the common deadpool – that is, betting who will die first. A stranger of a shady reputation comes along, and he is accepted into the game on a flimsy recomendation from one of the members. After two weeks the acquaintances on the roster begin to die unnatural deaths, and there is commotion in the circle.

Now the circle breaks in two. One party says that it is obvious to a fool the new member is to blame, yet even if he were expelled it would not settle the question, for the game itself bets on death, and where there are stakes, there are always people who will risk them at any price. The other party dubs the members of the first cowards and superstitious soft-bellies, and plays on. The stranger is kept in the company as a favor to his friend.

The question set before the reader: who is right?

I believe the temporary ban on Short selling was necessary and probably should be continued until liquidity is restored and the markets have reached equilibrium. In fact I’m not sure all the hoopla you read about short sellers providing a service to the market is really true. Obviously, stopping shortselling has not stopped banking stocks from falling, all its possibly done is halt the fall into the abyse. If it’s done that it’s served its purpose. Which brings up the point, is short selling really necessary and who does it really serve. I would say it is not because equities in a company will fall if the fundamentals of that company are bad, therefore the only people really served by short selling are the shortsellers who are the bloodsuckers in this market trading on the misfortunes of others. Those others by the way include those whose stocks are being borrowed, because they are returned stock which has been devalued by the very activity of those who have borrowed it.

to Alex from Newark, CA: “Why can’t the president issue an executive order that freezes values on foreclosed properties ONLY?”

You think the president is god or something, there isnt anyone or any organization on the planet that can stop falling home prices. You can’t force someone to buy a home for more than its market value in a free society. This is exaclty why the bailout wont work, it is the cause of socialistic market management philosophies and the reason that no bailout can succeed. Warren Buffets interview pointed to the idea that if the assets are bought at market value then the treasury will make out well but if they buy that artificially inflated prices it will be a bad deal for the tax payer.

Alex: would you choose to buy a distressed mortgage for more than the property is worth with your money ?

The government body created to prevent market manipulation takes the role of being the largest manipulator.

The net effects include larger spreads, higher volatility and reduced liquidity for the stocks covered by the ban; at the same time it deprives companies and the government of a favorite scapegoat.
Recently, in Pakistan, when the market dropped sharply people showed up at the exchange to set it on fire, literally. Is this where we’re heading?

the ban on short selling is apparently only for the well connected, wish I could call up the SEC and ask them to stop short selling. Its obviously elitist and for the powerbrokers but when it comes to protected a smaller company that actually produces something the SEC defends the value of short selling like it has for many years.

SO I guess if your a big bank with solid connections into washington you can have yourself added to the no short selling list ? How much does that cost ? Maybe a fishing trip to Canada for the right senator or maybe a some coke and hookers for the right staff member of a congressman ? or does it require real humility and you have to actually invite one of those boring senators to the beach house for the weekend ?

On a relevant note, other syntetic securities should also be regulated somehow. On their own, they don’t produce value neither to the underlying companies nor to the investing public. But they affect volatility and valuation. And in fact, it is a lot of those syntetics and derivatives that we end up bailing out now.

Years ago, the importance of financial markets was in that they provide investment capital to build industries and economy. How is short selling helping in financing a new company or raising money to provide working capital for existing one? It’s a purely speculative move and any short selling, especially naked shorts should be very closely re-examined. In my hey days, I was working as an equity trader on a trading desk of a mid-size trading company. I could definetely see how short selling was increasing the downward pressure when the stock was going down and increasing upward moment during the uptime. It was adding no value but a lot of volatility and neither the companies, nor the investors who actually invest into the companies, nor the holders of retirement accounts who also invest their money into the firms. The only participants who do benefit are the speculators. And it only makes sense to curb the activity that tends to add volatility when market is already under stressed.

And someone later mentioned that the short selling is risky for the players and as such it is the risk factor that should stop them at some point rather than regulations – I think we are trying to bail out a lot of different types of risk takers nowadays. The ones that somewhat mismanaged it.

The SEC is a joke and the stock market is in a shambles because it was an over inflated house of cards built on a confidence game the blew one unit of real assets into 20, 50, sometimes more.

Lack of confidence is only an issue when the target is actually solvent. When the target isn’t worth the price of stock, lack of confidence would be called names like “rational”, “realistic” and “prudent”.

For someone to sell short, there needs to be someone who is willing to bet on long. Ban or no ban, the other way to sell short is to just sell and move ones money into any other venue the seller believes will go long. What difference can it make to ban that particular version of lack of confidence?

Why can’t the president issue an executive order that freezes values on foreclosed properties ONLY? Wouldn’t this give us a bottom to valuing the mortgage backed securities and stop taking mark-to-market losses on securities and also stabilize prices in neighborhoods that have homes for sale that are NOT under forclosure? Thnx

A stock is down, only because the company lost money and thus should be down. No amount of short selling can bring down a healthy company.

There is a very easy way to counter short selling: buy back. If the company management or SEC believe that the stock price should have been higher, why don’t they buy it with their own money? If they are not willing to, or unable to, then the stock should continue to drop until someone finds value in the company.

Short sellers only make that unavoidable drop happen faster, but they didn’t cause the drop.

Hmmmm…. the ban on naked short selling was meant to stop or slow the declines in the stock market. During the ban, we have seen both the biggest point drop in history and the biggest point gain in history. On Monday, the House didn’t pass the bailout and we have a bad day in the markets and today, the Senate passes the bailout and we have a bad day in the markets.

Something is not adding up for me…. oh yeah, Socialism doesn’t and can’t ever calculate!

Karen, ban all selling of stocks???? Freeze the market for 10 years???? Where do you get these ideas? Peoples 401k’s and retirement assets are at stake here and with no investments people would outlive their savings in a hurry. What would this accomplish other than taking the US back to the stone age? As far as Buffet goes I have a strong feeling he wouldnt support a freeze on any market in the world let alone US equities.

Short selling should be banned on ALL stocks. One can sell all the stock that they wish, but they should have to own it to do so. I laugh every time you idiots defend short selling as something beneficial to the markets. I particularly enjoy when people say that shorting is necessary as a hedge. Hedge against what?…the stock actually going up in price?

Short selling amounts to nothing more than kicking a man (in this case company) while he is down. People are pissed at the short selling ban, because they were making incredible profits while company after company was imploding. How is the good for our economy or the markets? It just induces more hysteria and panic. So don’t tell me that short selling establishes a balance. The only thing it does is allow a bunch of people to profit from a company’s demise.

Bottom line, whether you want to buy or sell a stock, you should need to own it and put up 100% of the money. I say get rid or shorts, get rid of margin, get rid of leverage. Then and only then will the market return to being rational and somewhat predictable, instead of purely neurotic and emotional!

Adam from Mass,

Thank you, but I have an MBA in Investment Finance. Take a step back from your self-centered, narrow minded view of this catastrophe we call an economy and observe things from a more intellectual, strategic, purpose driven, macro sense. The entire stock market, its ups and downs, have become based entirely on speculation. And that, my friend, is not in line with the objective of stock trading in which the livelihoods of so many are invested. Rumor and gambling where a price might go should not drive a stocks value into the ground or the other way around. Shorts, futures, you name it are all fueling this incompetent method of investment.

The author offers no insight, just an unsupported opinion. I agree with other comments – we don’t know the impact because we can’t re-simulate the past week without a ban on short selling.

Short selling is speculation – stock markets were intended as a means of creating easy access to capital for companies, and a chance for investors to share in the returns of those companies via partial ownership when purchasing stock. Short selling adds speculation to the market – innovative financial tools, while created by bright minds, do not translate to an intelligently designed marketplace. An intelligently designed marketplace froma public policy perspective does not focus on the ability to provide large returns for investors, it should focus on managing/minimizing risk for participants in the market — the investors will have the option of deciding whether the potential returns are sufficient to merit their investment.

I find it hard to believe that an article like this can get published – is an editor at large someone in a position of authority at CNN, I hope not, perhaps it’s just a free lance journalist who gets to write because he’s viewed as a “celebrity” like the Kramer guy who has a TV show.

Lets say I short a stock at $1.00 with a 10cent stop (exit with a stop buy order at $1.10).

The maximum I can make is 10 times my risk (e.g. if the stock goes to $0 then I make a $1 profit which is 10 times my risk of 10cent).

If I go long at $1.00 with a 10cent stop (exit sell order at $0.90). How high can the stock go? $50? If so, I make $49 or 490 times my initial risk of 10cents!! Going Long offers you much more potential for reward.

Always remember, someone who is SHORT is a soon to be BUYER…..

Even my mother talks about Shorting now at the dinner table bless her heart!! As Jim Rodgers mentions in his book, something along the lines that when his mother starts talking about it, it’s time to do the opposite. Maybe time to start going long….

I’m all for the SEC ban.
But in particular, what I’m in favor of is the ban on naked short selling.
With naked short selling, someone can short sell a stock without ever having owned or borrowed it.
Now, lets think about that for a minute. …If I woke up one morning and decided I wanted to make a bunch of money on some company, I could simply flood the market with a bunch of shares that don’t even really exist, and watch as the price of the stock plummets. Then, I pocket the difference, and I take that all the way to the bank (that is, if the bank is still around).
And I think that this is where Paul LaMonica is missing the point.
Sure- short selling is (and always has been) an intricate part of Wall Street, and short selling needs to continue. But I think what Mr. LaMonica gleaned over is that the SEC wanted to ban not just short selling on these stocks, but naked short selling.
Naked short selling should be a practice that is illegal all around.
While I am very much an Obama supporter, I will have to admit that in this instance McCain may be right.
Where on earth was the SEC chairman during this mess??
The SEC is tasked with being the “police” of the market, and when the police blow off their job to attend a birthday party, to spend several weeks in the Hamptons, and miss a crucial conference call about the takeover of Bear Stearns, well…
…Put another way- If thievery ran rampant in your neighborhood, and your neighbors began to find themselves getting robbed all the time, wouldn’t everyone begin to wonder where on earth the police are??
…Wouldn’t concerned citizens ultimately end up going to the people who control the police (i.e., Congress and the President) to complain about this unfairness??
I SAY CAN THE MAN!!

Paul: Agreed that this is a total joke. The trouble is: it’s not funny. Short selling is a vital part of the markets, whether or not the banks like it. IMHO, this is an effort by the SEC to make the banks appear rosier than they are (or, rather, would appear under previous market conditions). I vehemently oppose the current bailout legislation, as I don’t think it will work. Likewise, I oppose this bit of regulation because it stifles a legit investment tool and does nothing to alter market fundamentals for the positive.

The ban was not to stop declines, only to slow them to a more managable level. What proof does anyone offer that the ban did not succeed? What proof does anyone offer that the selling would have been at or below the levels experienced? The ban slowed the erosion, that’s all. That’s all it was supposed to do. It should be no surprise the ban was extened while Congress attempts to pass a bailout.

Jay from Milford CT
“Yes, short selling is a wall street gambling tool that has severe consequences to the average retirement investor.”

Jay I would bet you that you couldn’t even explain short selling to someone else let alone comment about it. See short selling is inherently more risky to the short seller then to the long seller. Don’t you think someone taking greater risk would at least have a clue about what they are doing? Shorts balance the market, add liquidity, and transfer risk away from the general market. Infact I would argue your retirement portfolio is at more risk now that short selling is banned. It is not a “gambling tool”

The short selling ban doesn’t really accomplish what it sets out to do. Synthetic short-selling can be accomplished by purchasing credit default swaps (CDS) (i.e. insurance on the desired underlying company that one beliefs to be overvalued) and thereby increasing the insurance premium price. This signal reaches the rating agencies and these companies have their ratings cut and increased cost of borrowing.

Since not everyone can trade CDS (only larger institutions and hedge funds), they get the benefit of synthetically “shorting” the company, while everyone else is locked out. This policy is discriminatory against small investors and should be rescinded.

It’s Un-American; it’s anti-capitalistic.

SEC should ban all selling of all stocks.

According to Buffet the Wall Street bankers used the promise of not lending money to get the government to give them 700 billion dollars tax free which they are converting to euros as we speak. Paulson has already without the House permission started hand out the money.

Buffet also said that 700 billion is no where near enough and that it will take about 50 trillion dollars in bribe money for the Wall Street bankers to start loaning again.

WOW have we all been taken in by Paulson. the SEC should freeze all stock trades for at least ten years.

The short selling ban is a terrible idea. There is no proof that short selling brought down any of the financial stocks. They were shorted because it was obvious to many that they were heading south in a big way, and they were right.

Yes, short selling is a wall street gambling tool that has severe consequences to the average retirement investor. This is just step one in regulation that should return stock markets to a balance sheet base rather than the speculative base that is present now.

The entire SEC is a joke.

The securities markets are about as regulated these days as the drivers in a Mad Max movie. It’s a free for all and whoever gets to the gas tanker truck wins.

The regulations aren’t the problem. It’s the agency enforcing, or, rather, not enforcing the regulations that’s the problem.