Wednesday, April 15, 2009

Short Selling and Shortchanging

Some background noise in the financial meltdown has been the suspicion that shortsellers were spreading panic and capitolizing on it because they profit when shorted stocks' prices fall. Hedge funds are the main perpetrators of shortselling, which is essentially betting that a stock is about to fall in price.

Today's Dallas Morning News has a fascinating collection of comments on proposed regulation that would prohibit shorting a stock that already was falling (the 'uptick' which was instituted in the Great Depression and later abolished), and cutting off trading in any stock that already had fallen 10%. The indication this has given, that faults present in shortselling bore some responsibility for catastrophic losses, gives some financial executives pause.

Two opposing views among those presented struck me as pretty loaded;

John Standerfer, executive vice president, Austin-based S3 Matching Technologies LP

I am worried about new rules or regulations without an adequate definition of a problem.

Last July, the SEC said the reason financial stocks were going down was due to short-sellers and not fundamentals. Since then, it has become clear that the short-sellers were right and the SEC was wrong. The majority of the companies on the initial short-sell list would not exist today if they hadn't received government funding.

If there really are situations where undue short-selling pressure drove stocks down intentionally and unjustly, then by all means the SEC should do something to combat it. But if that were the case, why haven't they provided any examples of this, and why didn't they present a single proposal designed to combat that scenario?

Shad Rowe, president, Rowe & Co.

These proposals represent a belated, albeit small, recognition of the catastrophic, anything-goes financial regulatory environment over the last few years. The more speed bumps the better.

In the past, short-sellers sniffed out financial fraud and pricked speculative bubbles. This last time, they fomented financial panic for gigantic profit. That is wrong, and the least we can do is make it a little more difficult.

That the SEC, of a criminally malperforming previous executive branch, was wrong in many aspects makes modul hordes' pointing fingers at shortselling dubious in my view, as well. The cretin's SEC failed to rein in irresponsible practices in securities trading, and also accepted information from investors like Madoff without supervising their actual practices. They were partially to blame, as is former Fed chief Alan Greenspan for refusing to stop bond ratings firms acting in the interests of traders by false good ratings they gave to poor investment prospects. A public interest orientation at SEC bodes well for change to the cronyism that prevented it from performing its duties in the past eight years.

Still, shortsellers do appear to have undermined stocks they were shorting, and gained by the resulting fall in price. Regulation that would hamper this kind of theft by deceit is as needed as are laws, and punishments, that would effect regulators that do not do their job.

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Anonymous larry, dfh said...

According to an article I read (Deep Capture?), jim kramer would run down a stock, or ridicule one of its officers on the air so that he &/or his friends could short it. That sounds like manipulation to me, which I believe is illegal.
A particular brand of shorters are the naked short sellers who never even touch the stocks they bet on. In a sense what AIG was doing was selling insurance against short sellers themselves.
Akin to the short sellers are the futures traders, where the weight of a hedge fund can pervert the future prices. This has been responsible for great human suffering. Of course with mrs. phil gramm and mrs. chris dodd on the Commodity Futures Trading Board, who would expect a fair shake. It's all a big con, and we are the truly helpless victims.

7:16 PM  
Blogger Ruth said...

We were victims, because 'business friendly' attitudes were promoted as good for the economy and led to election of the worst elements for business and public alike. We have to keep the lessons we learned alive. All of our losses were avoidable by the regulations put in place after the '30's that the wingnuts destroyed to our great loss.

7:12 AM  
Anonymous Metlife Annuity said...

A lot of useful information in those links, thanks. I feel that it might even be too much for me to “digest” in just one week.

3:25 AM  

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