'Short sellers' boosted bets on Lehman, AIG, WaMu

Bearish "short sales" of shares of Lehman Bros. Holdings Inc. and insurance giant American International Group jumped in the first two weeks of September, leading up to the latest credit crisis that drove Lehman to file for bankruptcy protection and forced a federal rescue of AIG.

Washington Mutual Inc. also remained a big target of short sellers.

The data, in the regular biweekly short-interest report from the New York Stock Exchange released Wednesday, will give more ammo to people who believe short sellers have been trying to orchestrate the demise of major financial firms.

Of course, the numbers don’t prove that. All we know for sure from the data is that either 1) more speculators expected the stocks to go lower or 2) more investors were trying to hedge their portfolios by using short positions in Lehman, AIG and other financial issues.

But if some short sellers were in fact engaged in a "bear raid" on the stocks to drive them lower by spreading rumors that the companies might fail, regulators now have more data they can mine to try and prove that.

The Securities and Exchange Commission last week said it had launched a probe of trading in financial stocks, and would require hedge funds and other money managers to discuss their activities under oath.

The Wall Street Journal reported late Wednesday that the SEC had subpoenaed more than two dozen hedge funds about their recent trading in Lehman, AIG and other financial issues.

In a short sale, a trader borrows stock (usually from a brokerage’s inventory) and sells it, either betting on the price to fall or to provide a portfolio hedge in case that happens. If the stock does decline the trader can later buy new shares to replace the loaned ones and pocket the difference between the sale price and the repurchase price.

Short selling is legal as long as investors follow well-known rules. But as Wall Street’s bear market has worsened this year, short sellers have been vilified as market manipulators.

Legally or illegally, the shorts had it right on Lehman, whose shares now trade for 22.5 cents -- down from $16 at the end of August.

NYSE data show the number of shorted shares of Lehman Bros. soared to 108 million as of Sept. 15, or 15.7% of outstanding shares, from 76.8 million on Aug. 29.

AIG’s shorted shares rose to 96.6 millon, or 3.6% of outstanding shares, from 85.8 million in the same period.

But some financial issues were much more heavily shorted than Lehman and AIG. WaMu’s shorted shares, for example, jumped to 429.2 million as of Sept. 15, or 25% of outstanding shares, from 382 million two weeks earlier.

WaMu’s shares fell to a multiyear low of $2 on Sept. 15 after Lehman filed for bankruptcy. The stock bounced back to $4.25 by Friday, in part thanks to the SEC’s decision to temporarily suspend shorting of 800 financial stocks.

This week, even though WaMu can’t be shorted by most investors, the stock has resumed its slide on fears about the thrift’s stressed finances. On Wednesday, WaMu shares plunged 94 cents, or 29%, to $2.26.

Comments

[Alan]

As of tonight I have listened to Paulsen, Bernanke, Frank, Schumer, Dodd and now Bush explain what this $700 Billion is to be used for. Frankly, it is frightening for one key reason. Not one penny of the money is guaranteed to be paid into the FDIC to make sure the FDIC will make good on its guarantee of up to $100,000 in each deposit.

I read the economics and financial blogs. All of the "number crunchers" are saying that Washington Mutual is insolvent from an accounting and legal perspective. Washington Mutual has been "up for sale" and there are no takers, even at its depressed stock price. The chart concerning WaMu stock sales, above, makes the bloggers and my point. Washington Mutual will tank, or be sold with FDIC's assistance, and with FDIC keeping the garbage assets. Wall Street knows that fact.

Even worse say the economics and financial blogs, the FDIC does not have enough money in it to pay off all of the insured deposits at Washington Mutual. Wall Street has run the FDIC into the ground. Add the 1000 other banks predicted to fail in the next few years, and the average person with any savings is at dire risk...but not at dire risk because people will not be able to get car loans, mortgages or loans to buy inventory for a business.

In my view, the pretext for this bail out, that "no credit is available" is simply crap. Just this week, Caterpillar, the tractor manufacturer borrowed $1.5 Billion at 7% per year interest. The Wall Street types are crying that a "good credit" like Caterpillar is having to pay that "high interest rate". High interest rate? How many of you are able to borrow from your bank or on a credit card for 7% interest.

Cars, houses and businesses are a nice thing to protect, but frankly I am far more concerned that the FDIC stay solvent and that the basic banking system, involving holding of funds and clearing of checks, not collapse. That's the guarantee I want, by injection of a huge amount of this $700 Billion into the FDIC's insurance reserves.

Since not a penny of this bail out is set aside for the FDIC, the horrible risk we face is that in a few weeks or few months, after all $700 Million is spent buying junk mortgage backed securities, that there will be no money to bail out the FDIC.

And why are the Republican and Democratic leadership in such a hurry to get this bill passed by Friday night.? I don't think it is because Congress is about to recess. I think they are giving us, the taxpayers, the bum's rush. I think these politicians want the bail out passed so that a dire disaster will not occur when a huge commercial bank fails. The banking bloggers say it could happen this coming weekend.

Bail out the FDIC not Wall Street!

[Richard]

There is a clear reason that the numbers do not prove that the short sellers caused the collapse of the stock. That reason is that it doesn't work that way. I believe that you may suffer from a fundamental misunderstanding of how the short market works. Don't feel bad, you are now qualified to be a politician. There are problems with naked shorting, which is not legal, and one never wants to disseminate false information. I would suggest, however, that you may suffer that disease that so many now seem to suffer in that it is not only shorts that start bad rumors. Hang around the markets a bit longer and you may find some long players sending out some bad signals. To argue that the shorts have some sort of monopoly on misinformation in the market is incredulous. God never made a bigger liar than a long player (once he was done with politicians). If the present situation has proven nothing else it is that there are a whole bunch of folks that do not understand shorts, do not understand that they are of value to markets, and that they are seldom approached with rigorous intellectual discourse. To suggest, as you do at the onset of this article, that it was the shorts that led up to this credit crisis is simply nonsense. That is like blaming the thermometer for someone having a fever. If you want to continue in this fashion you should really blame the sellers of stock. If people did not sell their stock the price would not fall, and this whole mess would have been avoided. Therefore we should suspend the selling of stock. This may sound stupid to some people, but no more stupid than blaming the legitimate shorts for what is happening now. There you have it. It is those damn stock sellers that have ruined our economy. They should be jailed immediately.

I will also tell you who the investigators will find are the evil demons in the hedge funds - - the same folks that are always caught for gouging after a spike in the price of gas. That's right, they will not find a soul. These investigations are always worthless window dressing to provide coverage to a bunch of worthless politicians who need to buy time until the crisis passes.

[martscan]

'Richard' nails it. A perfect '10'.

[Alex]

Oh my god!!! Are you telling me my deposits are not insured!? I'm going to my local WaMu bank as soon as they open to get my cash out before everybody else does. Then I'm going to a lawyer to start a class action suit against the short sellers who started rumors to create this financial meltdown.

Thank you so much Tom for providing us with some solid information and data on the reason why people shouldn't listen to rumors.

[stan derrin]

Fundamentals are what drive a stocks price and a companies value.
If wamu and aig were prospering businesses why didnt all the bulls rush in and buy up the shares at bargain basement prices?Obviously the longs knew very well that these companies were worthless and that the shorts were correct in their actions.
How come shorts havent been raiding technology or consumer staples area?Maybe because they arent fundamentally flawed like the financials were?

[Don Coyne]

The short sellers would not have had such an effect on the resulting prices of these stocks had it not been for a highly questionable decision made by the SEC under Christopher Cox in July of 2007: The elimination of the SHORT UPTICK RULE for individual stocks.

For decades, and for good reason, the shorting uptick rule was in place to prevent short sellers from pushing a stock's price down continuously, by only allowing a short sale if the last trade was a at a higher price than the previous trade, an uptick.

On July 27, 2007, to note the likely problematic effect of the SEC's decision, I sent this in an email to friends and clients:

"NO TICKIE, MUCH SICKIE by Don Coyne

The powers that be seem excessively cruel;
They've abolished the required uptick rule.
And so the market seems more of a beast
Since daily ranges have now increased.
As shorting traders go to town
And push the market further down,
They'll also help each rally extend
As covering comes in to help the trend.
It now will test most traders' ability
To cope with the increased volatility.

Don Coyne
Coyne Capital Management
dscoyne@hotmail.com

[Gregg]

If Wall St. is subject to a full blown meltdown, can they take their annoying advertisements with them?

For the last couple of decades it's been consumerism of the Nth degree - the sense that we have to buy everything regardless if we have to increasingly borrow to buy it. Sell sell sell -- buy buy buy! What we"ve seen in this country over the last 20 years is the rise of a debt industry that has saturated the country with advertising everywhere we look. This is what has made the financial sector what it is today.

Seriously, take a second to look around you and count the number of corporate logos you're promoting just within your own house. The T.V., stove, microwave, coffee maker, stereo, clock, computer, printer, the clothes you wear, and the countless number of other products and gadgets lying around branded with corporate identity. How about inside your purse or wallet? These guys are good -- they've penetrated right into your home and even onto your body. Let's not even discuss what's on the T.V. or outside our front doors.

Perhaps this meltdown is precisely what we need: a little house cleaning. Perhaps it's a small drop of sanity, amidst an ocean of collective conscience gone mad.

[OilyGasMiner]

The whole notion that shorters are “out to get” the financial companies are absurd. From an average investors perspective, it simply appears to be easy pickings. Anyone who has been tracking the news for the past week would admit its more probably that the financials will go down rather then up in the short term given the state of their balance sheets and liquidity concerns. The key issue is that shorters were borrowing stock that they didn’t have the proper collateral for in the first place. We need to examine this and treat this as the root for the large plunges in the financial sector. A more efficient system of shorting approval has to be properly developed to ensure this never happens again. Ian Campbell from Canada explains that in his perspective that “What is required is careful analysis of the important reasons the U.S. economy is in the place it is, where those reasons are then addressed in the Bill as best they can be…” http://www.stockresearchportalblog.com This is simply a lesson in learning for the US Gov, and one can only hope this will only make them stronger. Irrational decision making must come to and end. Just my 2 cents.

[fran]

While claiming to supervise IndyMac Bank, the FDIC in fact did not but allowed IndyMac to continue to issue subprime loans right up to the last moment of their takeover - when they could have stopped it.

Ongoing erroneous practices: Since the takeover, the FDIC-owned IndyMac has been putting out print bank statements.
These identify the 50% of cash removed which they have restored to your account an "advance dividend."
Per the Taxpayer Advocacy Unit, which I contacted, this nomenclature is WRONG and can trigger audits and problems for the 10,000 depositors affected. I have also provided this information to the FDIC - no answer.

Where was Congress in its oversight of the FDIC, which, to speak the plain
truth, only was setting up an entrenched system of allowing member banks to do subprime lending and fail? Why did my Congress person not require the FDIC to require its member banks to alert depositors, the same way as is done on credit card and mileage plus statements? This is the simplest thing - and I hope one that gets talked up, because not to have it is inane.

"Dear Depositor: You have one or multiple accounts under one Tax ID that exceed FDIC insurance limits ($100,000 for personal and $250,000 for IRA accounts). Please call our customer service number "1-800-customer service" for immediate attention."

www.fdicbusinessalert.com

[stan derrin]

Hoiw many people actually believe that bear stearns,lehman,merrill,indymac,aig,fannie/freddie,countrywide wouldnt have gone belly up had people not been shorting the stock?
Absolutely ludicrous.
These financial companies gambled wrecklessly in a fools game and lost.They alone are to blame for their collapse.Shorts had nothing to do with their demise.Nada.