An 'abomination'? Critics attack SEC's short-selling ban

Some negative reaction today to the Securities and Exchange Commission’s surprise decision to temporarily ban short selling in 799 financial stocks:

--- Eric Newman, who manages the TFS Market Neutral Fund, which has both long and short positions in stocks: "The SEC has done a fantastic job blaming short sellers for nearly every problem in the financial markets today. It’s a brilliant PR campaign that links legitimate short sellers to ‘naked’ short sellers, that assumes any stock going down is only going down because of those pesky hedge funds and their short selling.

"The irony is that SEC is doing exactly what it claims to be against -- manipulating the markets and propping up ailing financial companies that are now politically important because they are essentially backed by taxpayers" via government loans.

--- Larry Harris, a professor of finance at USC and a former SEC chief economist, as quoted by Bloomberg News: "Proposals to ban short-selling are a highly politically motivated attempts to stop reality. To ban short selling is to in effect say that the government is going to try to determine what stock prices should be."

--- Richard H. Baker, president, Managed Funds Assn., which represents hedge funds: "MFA is deeply concerned by the crisis in the global financial markets, but equally troubled by the SEC’s unprecedented actions in response to the crisis. We stand firm in opposing restrictions to short selling and maintain that short selling is an essential risk-management tool and a critical component of ensuring market stability, not a contributor to market volatility. Further, restricting short selling has not been shown to provide an ultimate benefit to the stocks it is meant to protect."

--- Jonathan Macey, securities law professor, Yale University: Banning short sales is "an abomination. Short selling is a legitimate, critical market strategy that has incredibly important functions, including ferreting out information that could not be ferreted out any other way."

--- Jim Chanos, head of well-known short-selling firm Kynikos Associates and chairman of the Coalition of Private Investment Companies: "We are very concerned that these emergency orders will not enhance long-term market integrity nor will they address the fundamental economic issues that have been afflicting our financial sector. We also believe that markets cannot withstand for long constantly changing rules in which each new regulation is announced in the middle of the night without any public comment or participation.

"Far from being the cause of the crisis, many short sellers were warning months and years ago about problems in this area. Simply put: short selling is a vital investment strategy that responds to market fundamentals and contributes to the integrity of stock prices. Investors are best served when they can hear both the reasons to buy and the reasons to sell any given security."

Comments

[Sal B]

Any method of gambling or betting in markets must be allowed. Otherwise, the Communists and Socialists have won.

[Gregg]

Folks, this is the crisis of a lifetime. When the banks start failing, there's simply not enough money in the FDIC to insure everyone's savings. I don't mean to sound alarmist here, but this is exactly what Bernanke was telling lawmakers last night in his meeting. This current economic crisis is a direct result of the Bush policy of deregulation and the emerging of the shadowy economy. Now we're privatizing profits and socializing losses while these Wall St. crooks who helped get us into this mess leave their failing institutions with $10-million severance packages. I can only imagine if his social security "overhaul" was allowed to go through.

[Retirement Plan]

Banning short selling, even for a limited time period is simply contrary to free market principles we say we believe in. Simply enforcing the current rules against "naked short selling" and re-instituting the up-tick rule will solve the problem.

[Roger Ramjet]

Now that you have run the economy in to the ground you Republican slime balls. Whats the deal! You proclaime Free Markets, Free Markets, Free Markets!!! From the party that brought us all the Saving and Loan crisis. Hey thanks, you brought us a new one.....

[oh boy]

I'd like to know if there is any redress against the US gov't for changing the rules in the middle of the game. Many individual investors such as myself lost on our short positions since effectively these stocks could not go down due to the SEC's new rule.

Short selling is a necessity to a free market to keep values in line with reality. Can you imagine what will happen if a stock cannot be pushed down in an orderly manner and negative news comes out? Straight to zero in the panic to sell. P/Es will be going through the roof.

[It's about time]

We need some common sense in the market. When it pays to short a financial institution to oblivion, greedy traders will do it. It doesn't matter if it will kill the system in the long run. Greedy short sellers are like piranhas.
they need to be regulated or exterminated.

[GEAH]

Anyone who tries to wrangle some partisan advantage out of this is idiotic. There's more than enough blame to go around for both parties.

Any of you Braniacs checked out whose campaigns Fannie and Freddie were funding? Hint: Obama, Dodd, Clinton...not the Republicans.

[Kevin]

I thought that the problem wasn't short selling, per se, but that people were shorting firms, then doing their darndest to sink those companies through whisper campaigns and the like. It is the most destructive kind of market manipulation, worse even than pump and dump. People who do this should be prosecuted. If you can't play nicely with your toys, someone is going to take them away.

[Peter Grundy]

It's funny listening to these folks, all who make money shorting stocks, or are economic conservatives who only preach their ideology. Hedge funds can move stock prices because of their size, and borrow money 10 times or more of actual cash to magnify these bets! These hedge fund managers are pissed that they can't rule the market anymore, charging incredibly high fees! After one year most of these hedge fund managers earn enough to live the rest of their lives, they really don't have to worry about anything except their overinflated ego's! THe SEC did the correct move, though they should have been enforcing the regulations the whole time! May these whining shortsellers end up in poverty!

[bob]

I want to institute a downtick rule for long buyers. We have seen stock prices rise exponentially and those greedy speculators and hedge funds trying to make money from forcing prices up. I mean, thats unAmerican.

[RB-Chicago]

We don't live in a free market society! Whom ever invented this fairly tale has been a liar from the start. It's a rigged system and the average investor/person on the street may as well go to the window and throw their money to their neighbor!

Big money traders and institutions pay the freight for those who just trade/invent new products to trade to make them more money to do it over and over again. The average person on the street is mere by-stander...

To start, go back and study the anti-regulation philosophy of the Raygun era folks then proceed to the late 90's when Graham and his fellow 'give it all to me' clan wrote the deregulation legislation that almost drew us down the toilet bowl where Chimpy bush and his gang have hung out for decades!

Maybe gitmo can be closed soon and re-opened on chimpy's pig farm so all his 'free market' pals can be detained for good!

[Giulianni]

Short seller were working as the only effective Market regulators. Shutting them down is akin to not having any regulators in the market place period.. What the h. is that Cox doing.. he should be the first to get canned..

[mike]

I believe this rule will have the unintended consequence of actually bringing down market prices. Most investors or hedge funds with short positions are net long the market. To maintain this hedge, I believe both long and short positions will be unloaded.

My personal view is that I lost confidence in the market yesterday. It's impossible to knowwhat the rules will be tomorrow, let alone a week from now, I simply cannot put money into the market.

[Ken Davis]

GEAH posted:
"Anyone who tries to wrangle some partisan advantage out of this is idiotic. There's more than enough blame to go around for both parties.

Any of you Braniacs checked out whose campaigns Fannie and Freddie were funding? Hint: Obama, Dodd, Clinton...not the Republicans."

Such an amusing disconnect between sentences #1 and #2.

[George]

Guess which company donated more than $50,000 to McCain's "reform institute?" Yup, the fradulent and now taken over AIG was one of his top donors: http://www.thenation.com/doc/20081006/ames

[martscan]

GEAH:

As a matter of fact, I have checked it out. Your snide, disingenuous implication of graft or impropriety is typical of propagandists, i.e., liars. Of the top 25 recipients of contributions from individuals with Fannie and Freddie, 12 were REPUBLICANS, 13 were Democrats. You said, "...not the Republicans." Who the hell is Robert Bennett...if he is not a REPUBLICAN Senator from Utah? Bennet received $107,999...4th on the list and right above Spencer Bachus, REPUBLICAN Rep. from AL who received $103,3000. If YOU had checked, you would have easily seen that that John McCain...I believe he calls himself a REPUBLICAN...received more money from F & F than Harry Reid, the Democratic majority leader of the Senator. If you are not simply dumb, you are a gd LIAR. Further, how many of McCain's campaign staff, starting 18 months ago, have been LOBBYESTS for F & F or employees of F & F? I've checked that out too...c'mon, you gd liar, how many? Was it 18 or 21?

[EdwinG]

Short selling is just one of the incentives of being member of the club, they have the priviledges of tapping other people's money for their own advantage and some people call it free market. The situation here is how do you determine the abuse of priviledge especially by greedy power brokers? The economic meltdown is not only Freddie or Fannie problem, remember the Republicans controlled the Congress for almost 6 years out of 8 and Bush & Cheney for 8 years. That's command leadership. This is a contagion of forces of spending money outside of USA that limits American people access to those money. Can you tell me what do American people benefit out of 10 billion expense in Iraq? Yeah, the military profits from it, deferred benefits in terms of education, medical benefits and low pay, very often become subject of controversies when they come home. It is the friendly companies of Bush & Cheney profit from it like Halliburton, the companies that produced weaponry but the people in the market place have no direct use of those money. Iraq never paid us back so we kept on losing 10 billion a month. Next, is the outsourcing of jobs to make the Company here profitable. Where do the profits go? Well, the earning per share and option bonuses for stockholders. Where benefit do to middle class Americans? Very minimal. This is worst than getting illegal aliens or legal aliens work here and produced the goods here, at least he/she spends the money here. When jobs are outsourced to India and elsewhere, it creates unemployment in every nook of America, may close a division, department or even the company, death to community to small business, less money spent for entertainment and shopping, less investment on 401K, less taxes to Federal and State and if this is multiplied in big numbers, it resorts to a household couple of not affording to pay their mortgage. Not paying the mortgage, the bank forecloses an illiquid assets, banks delay payments of their obligation to other lenders like Merrill Lynch, Lehman, AIG and so on and on to a greater magnitude of failures. Whether this was the fault of Democrats or Republicans, it really doesn't matter, I say it is command leadership. If the people on the top are so inept, drunk with their given power that produces no more imagination, scattered brains in mixing world ambition over domestic maintenance, we need change. I don't think an old warrior like John McCain or a beauty queen Sarah can handle such magnitude of economic failures.

[Ex Post Facto]

The Bush Administration has essentially nationalized housing, banking and insurance.

Why are these guys still flapping their lips and pretending we have free markets in the US at this point in time?

The executives of these companies (AIG, Bear Stearns, Fannie, Freddie) must be charged with crimes and sentenced to life in prison. They have cost the taxpayers dearly; they should be investigated whatever the cost, convicted, and destroyed. Any hedge fund manager that has profited at the taxpayers expense should also be investigated, convicted and destroyed.

For example, hedge fund managers that drove FDIC-backed institutions into failure at the expense of the taxpayers must be imprisoned. Every day they walk free is an insult to the people of this country. They are enemies of the state and enemies of the people.

I suggest the following--for every $1B of taxpayer money lost, we should demand a life sentence for one investment banker, hedge fund manager, or corrupt executive. The Justice Department should be ramping up for thousands of investigations--that is one expense I am happy to cover!

[George]

You can't overstate how damaging this move is to the long term health of the market. Banning short selling in a particular sector is just as bad as a bananna republic that prohibits the stock price of companies held by the ruling junta from falling, or that sets a fixed rate of exchange for its currency.

The US seems to be infected by a belief that asset values can only rise and this latest move is a further symptom. When the government starts to meddle in markets to keep this illusion alive the long term effect is going to be to drive investers to other markets. Who bets at a casino where you know that the house's dealers are cheating?

I am not a short seller or even much of an invester, but I think that the latest moves to prop up the markets are unwise. We may have been forced to take action to protect money markets (which I am grateful for) but let's not kid ourselves about what we are doing. The reason for buying a money market is to get a higher return than treasury - and the reason that you get that return is because of the risk that you are taking. Now risk doesn't go away - it only gets transferred. Ultimately in this case (short ban and money market insurance) the risk has been transferred to the value of the dollar, and when people lose faith in that, no amount of magic from the Fed can restore it.

[Keith]

Any guesses how many zeros there will be on Bush's paycheck when he leaves office and gets a job with one of the companies he gave our billions to?

I'm sure John "Keating-5" McCain will fix everything just like he fixed everything for the rich owners of S&Ls in the 1980s.

[Paul Shaffer]

The funny thing is, the shorts are probably happy about this temporary freeze. They are hoping stock prices go up from many company historic lows and when the freeze is lifted they can start shorting these sane stocks again.

How ironic is that!

[martscan]

Vote Obama. While he takes money from the Street...they give to both parties to cover their a**...he is not beholding to them...he's not afraid of the Street..he has a better team, including Rubin, Buffett and Volcker--all Hall of Famers--and he will be the smartest, intellectually, president in history. The alternative is Dr. Strangelove, who can't say 'hello' without a cue card, who has fashioned a less than sterling career on a phony war record (as a POW he admitted to war crimes and affirmed it on '60 minutes'), and a country bumpkin econ professor, Gramm, that believes in 17th century, imperialistic, laissez-faire economics...or any system, as long as he gets his piece. What's to argue?

[Don Coyne]

The SEC under Cox has themselves caused part of the problem in that they are largely responsible for the increased volatility in the stock market. This is a copy of an email I sent to clients and friends on July 27, 2007:

"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.

Earlier this month the short uptick rule - which only allows short trades to take place when a stock trades higher than the previous trade - was eliminated by the SEC. Now any individual stock can be shorted all the way down. I don't know what they were thinking, but it does seem likely to contribute to more and greater wide-range days."

Don Coyne
Coyne Capital Management
dscoyne@hotmail.com

[stan derrin]

If short sellers are wrong about the value of a company then how come nobody came in to grab fnm,fre,leh,wm at such bargain prices?Because maybe they werent bargains at any price?Maybe the shorts were right?
When are we going to institute a downtick rule so you can only go long by buying on the bid?

[Yolanda]

Please ask Mr. Bernanke, Mr. Paulsen, Mr. Geithner and Ms. Pelosi to consider temporarily lowering all mortgage fixed interest rates to 3%, 4% or lower as a feature to their Wall Street / Economic Bailout Plan. This would help Middle Americans to refinance their mortgages. The question will be asked "Where will the money come from to pay for all of this?" - The same place the money is coming from to bail out Wall Street. Please consider help for Main Street and not just Wall Street.

Mr. Bernanke, Mr. Paulsen and Mr. Geithner seem to represent Wall Street so it is difficult to see them actually do something to help Main Street.

[Andreas]

Short sellers are Cox's weapons of mass destruction. It's a propaganda ploy to mask his own incompetence and failure. Short selling is not the cause it's a symptom. Why is it illegal to bet that a stock is going down (at high risk), but it's perfectly okay for the head of Bear Sterns to declare on Friday that all is well and on Monday his company is no more. Who's trying to manipulate the market here? All the while Cox is asleep at the wheel. He should be fired on the spot for incompentence!

[Stephen Stone]

I'll let them socialize the financial system as soon as they socialize medicine and drug companies too. It's been 10 years of hands off government causing a huge amount of suffering to families who can't afford basic health care, and now they're bending over backwards to bail out billionaires that made bets they couldn't cover? Come on everyone and see the sham.

[Erpgle]

I am an average investor. I lost my shirt in the tech bubble burst most of my 401k was gone. I was in my mid 20 something. I screamed "never again".

Prior to 9/11 I saw the weakness of the market and pulled out and stayed in cash for a few years. Five years ago I was sitting in a a Coffeehouse in Winter Park Florida and found a Stan Wienstein book on the lending library shelf.

I have been using my short positions for insurance against another catastrophic event while keeping my other money in the market.

The market was happy to take my cash when DJX went to 12,000, When it went to 13,000, and ouch, when it went to 14,000.

I have been positioning myself for this right sizing of the market for years now, paying premium to do so. After taking so much from me for so long and now when it benefits them, changing the rules.

People call short sellers greedy, no just dark people with a realistic apocalyptic view of the future. The real greed is with the people changing the rules mid way, driving up the market and cashing in prior to the real crash that they have created in the first place.

See you all at 8,000, who will you blame then.

[Keith]

As a brainless "No New Taxes Republican" and long term fan of Fox News, the solution to this financial crisis is obvious - cut taxes and eliminate all regulation of anything. If we got rid of all the rules, then banks could just make their own money and bail themselves out. Then the government wouldn't have to get involved, and they could cut my taxes. Because the only thing I care about is cutting my taxes. I don't know who is supposed to pay for Republican bailouts of Republicans, or who is supposed to pay for Republican Wars, but I also don't care. So cut my taxes and I will vote Republican.

[EdwinG]

Henry Paulson was so convincing when he went almost to all Sunday TV media shows about the importance of bailing out those companies with toxic assets. The most common question from a common man, "whose fault is it?" The common answer by our leaders and faultless politicians, "we'll do that some other day, we have to save you now". Remember that neon light at the sidewalk in Manhattan, NY, it reminds people the obligation of Uncle Sam to our grandchilden by viewing the ever-increasing federal debts? Well folks, after this week, it just balooned by another 10% more to cover the ineptitude of our leaders that is from $ 10.6 trillion to $11.3T. If it is unimaginable to count $ 11.3 trillion, what more if the common man is asked to pay for it without any questions?

[ray]

i love to see the shorts finally get it where they have been giving it

shorting should stay outlawed

enjoy it boys

[martscan]

What is wrong with this mother of bailouts? I have several issues with what I have read, granted that the specifics have yet to be finalized. For openers, when the government says something is going to cost X # of dollars, you can automatically figure 5 to 10 times their initial cost estimate will be the reality. The S & L debacle was to cost $20B, it actually cost closer to $130B. On the basis of that experience, we can reasonably expect this deal to run to $4 TRILLION. Unlike the S & L clean up, I see no quid pro quo in the latest scheme. Other than the taxpayers' equity in AIG and Freddie and Fannie, this broad purchase of junk from every financial screw up in the country is a one way deal...in their favor. The plan is to apply only to U.S. based, headquartered, companies....much to the consternation of foreign banks that have a huge financial presence in this country...but I suspect there will be loopholes wherein U.S. companies will buy the crap assets of foreign entities at big discounts and resell them to the U.S. government, with the government's tacit OK, at a premium to their purchase price for a nifty profit. Hank Paulson, who is undergoing an apotheosis of sorts, even though for the past 6 months he has spent most of his time reassuring the financially unwashed, us, of the strength of the markets, is demanding the perks of a czar, for himself and his successors (oh my god, Gramm as Rasputin?!), by being immune from any incrimination from any government entity or public lawsuit (Hank is smart enough to realize he is going to make mistakes). While the need for a life saving transfusion, and its speedy application, is obvious...we shouldn't forget the lessons of rash, emotional responses in the past that were not publicly debated and cooly considered. In my view, from a political standpoint, McCain just doesn't have the depth of intellectual capacity to deal with problems of this magnitude, and would rely on his econ mentor...Phil Gramm...and that is akin to having the wolf guard the hen house. When I see Obama huddling with the likes of Warren Buffett, Bob Rubin and Paul Volcker, I know we can climb out of this financial morass...provided Obama gets elected.

[Maggie Knowles]

The story of "We've Been Had...", I found it here:
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Three Times is Enemy Action
Daily Kos by Devilstower 9-21-08 - The story begins in 1982, “…the same year John McCain entered the Senate, a bill was put forward that would substantially deregulate the Savings and Loan industry…”
http://www.dailykos.com/storyonly/2008/9/21/9322/74248/245/602838
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
martscan, I agree with you: "When I see Obama huddling with the likes of Warren Buffett, Bob Rubin and Paul Volcker, I know we can climb out of this financial morass...provided Obama gets elected."

[RickM]

Not all short selling is evil. A lot of traders who own long stock positions hedge those positions with shorts to avoid losing all their money when long stock share prices go down. The governement is beyond stupid! By banning shorts, the prices of all finnacial stocks may fall as investors dump loads of stock on the market because it is no longer safe to own the shares without protective short hedges. This will cause stock prices to freeefall. Stocks could be driven to zero as traders dump financial stock shares on the market because they can no longer protect the stock by shorts.

[martscan]

Ray:

What are your thoughts on the short squeeze pulled today in the oil mkt? You gotta love all those short specs getting reamed. Your attitude concerning short sellers, that drive the price of commodities down, resulting in cheaper gasoline, cheaper meat, cheaper bread, milk and all foodstuffs, are that they are bad guys, outlaws as you put it, right? Or have I missed something in the premise of your treatse on free market functioning?

[Michael F. Perlis]

Quick or "Short"-Fixes Won't Avert Financial Crisis. We Must Look at the Financial System as a Whole.

As the former Assistant Director of Enforcement at the SEC, I have seen first hand how rampant short-selling can affect the market; although, I do not agree with the notion of regulating short-sells by stopping them altogether. This idea is short-sighted and does not address the underlying issues of how we encourage short selling not as a tool for greedy traders but as a way to rekindle interest in a very cautious market. The SEC's move to ban short-selling, something that goes against market principles, does indicate that an earnest reevaluation of the entire financial system is in order. For this we need a team of regulators, and economic experts from a broad cross-section of institutions, willing to come to the table to find answers to the problems therein. We have heard from Secretary Paulson and Fed Chairman Bernanke, but the other players like SEC Chairman Chris Cox, the International Monetary Fund, the World Bank and other global institutions that are important to managing this crisis remain on the sidelines.

Questions need to be raised as the Congress and Bush administration debate this bailout plan such as what is the true size of potential losses on sub-prime mortgages and other loans. Some estimates put the total at over $1.5 trillion. The failure of Bear Stearns, Lehman Brothers has raised the question of whether US regulators now consider the remaining banks and bank holding companies at risk. Who could be next and are there checks and balances in place to address those failures? These large institutions play a much larger role than ever before in our financial system by issuing securities, packaging mortgage and credit-card loans, and other financial packages. The preparation for this can only come through a comprehensive economic strike force that can offer the leadership that is currently lacking within our federal institutions.

Michael F. Perlis
Partner
Stroock & Stroock & Lavan, LLP

[Jaded Consumer]

Halting short-trading is a panic move, and makes one question the integrity of the markets. Where short-selling is not possible, only optimists participate in markets, and pricing can be irrational; compare Chinese and American prices for firms listed in both countries.

The real fix is to enforce the basic rule of markets: sellers deliver to buyers what is promised for delivery. The so-called enhanced delivery rules aren't causing delivery, and the solution is very simple.
http://jadedconsumer.blogspot.com/2008/09/naked-shorts-alive-and-well.html

When we get markets that follow the most basic expectations of participants, the possibility they will produce the output people expect will improve, and problems in the market will have a superior opportunity to be corrected by the market itself.