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I've been screaming to anyone who will listen that the SEC's ban on short selling in financial stocks is bad for the market, the economy, and the world. It's good to see that someone far more knowledgeable than I am is also speaking out. In an op-ed piece in today's Wall Street Journal, renowned short seller and fraud buster Jim Chanos traces the history of scapegoating shorts:In the 1630s, England banned short selling after tulipmania collapsed in the Netherlands to prevent a similar fallout in England. More recently in Malaysia and Pakistan, short sellers have been faulted for stock-market busts. In the U.S., we've seen how corporate executives have tried to place the blame for their failures on short sellers instead of on themselves. In the end, short sellers -- not management -- defended honesty in the pricing of shares by demanding accountability. Short sellers openly warned about the problems at Enron, Tyco, Fannie Mae and Freddie Mac before their meltdowns. . .
The huge losses and evaporation of storied companies underscores the need for short selling, not the danger of it. New rules requiring that short sellers disclose their positions cross the line, and will subject investors to harassment and "issuer retaliation" in the form of frivolous lawsuits filed by corporate executives who don't like people betting against their stocks. That's dangerous because short sellers are often the first people to warn other investors of malfeasance and excessive risk-taking at public companies.
When we look back on the current market mess with the perspective of a few years, it will be clear the short sellers had nothing to do with the current crisis.
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Reader Comments (Page 1 of 1)
9-22-2008 @ 2:46PM
Ken Landry said...
short selling combined with gossip and mis-information has ruined many a good companies...its about time.
9-22-2008 @ 2:42PM
Jay said...
The problem is not the banning or allowing of short sellers. It's the utter dishonesty and lack of transparency on Wall Street and in Washington. If Enron had fully disclosed their dealings and acted honestly, short sellers wouldn't have been necessary for the correction. Utterly, in the case of Enron, short sellers, in their capacity to "honestly value stocks", failed miserably to warn people. More disclosure and enforcement would have adequately warned people.
9-22-2008 @ 2:55PM
Chris said...
Short sellers are extremely valuable to the market price. Shorts provide liquidity when a stock heads lower. After all, shorts cover their positions by *buying*.
What we have now is artificially high prices. Since artificial prices can't last, and short-sellers out of the picture, who will provide the buying pressure when stocks turn down again?
9-22-2008 @ 3:05PM
Joe said...
Short sellers add to the volatility and casino nature of a stock market that has time and time again demonstrated that it is nothing more than a Ponzi scheme with lots of players. The Dow 30 has historically gone up because the weak dow component stocks are systematically removed from the average and replaced by better performing companies.
Dotto commodities future markets that allows participation by players who have no capacity to receive the commodity purchased, and merely act to heat up what should be stable markets between sellers and users of the commodity.
9-22-2008 @ 11:27PM
BoboTheClown said...
Zac - I think one needs to distinguish between short-sellers who do the research and identify troubled companies, versus those who spread unfounded rumors, manipulate thinly traded stocks (or derivatives) and pile-on troubled stocks (which may or may not be troubled companies). The former arguably do a public service. The latter were doing serious damage to our financial system and needed to be stopped.