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Short selling sounds un-American -- hey, it's about making money when securities fall. Yet, it has been a part of markets for centuries. But when markets undergo periods of extreme stress, then people look for villains. Of course, short selling is an easy target.
It should not be surprising then that the Securities and Exchange Commission recently banned short selling for hundreds of financial stocks. Somehow, the hope was that it would stem the market slide.
Well, the markets have continued to crash.
Interestingly enough, one of the top investors in the world -- Pershing Square's William Ackman, speaking at Value Investing Congress in New York – thinks that the ban was one of the main factors for the loss of investor confidence.
Keep in mind that hedge funds have become a dominant player in the financial markets. They have come to rely on short selling and without the ability to make such trades, hedge funds got squeezed. As a result, there was a massive unwinding of positions.
Although, there is a silver lining. The plunge has resulted in a disconnection between fundamentals and pricing. In other words, there appear to be some compelling opportunities in the markets.
In fact, it looks like Ackman is already capitalizing on his savvy purchase of 180 million shares of Wachovia (NYSE: WB) when it got an offer from Citigroup (NYSE: C) last week. It was one of his first longs on financials in the past five years.
Tom Taulli is the author of various books, including The Complete M&A Handbook
and The Edgar Online Guide to Decoding Financial Statements
. He is also the founder of BizEquity, a valuation website
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Reader Comments (Page 1 of 1)
10-07-2008 @ 11:48AM
beanspants said...
It is of my opinion that the majority of small time investors aren't even aware of what short selling is; therefore, to call it a major factor in this particular downturn is quite a strech.
However, I do agree that the ban was not an intelligent move by Cox and may have caused as much damage as it was supposed to avoid.
10-07-2008 @ 12:31PM
Iridium said...
Well you can blame the hedge funds for all of our problems. A ban on hedge funds would be the best way to bring the market back to a fair and realistic playing field.
Even though you can make a lot of money selling stocks short it still is a very dirty way to make a buck becuase you don't actually own the stocks you are selling. You are just selling borrowed stock and profiting the difference when you buy the shares back.
The ban on short selling was neccesary because short sellers were drving share prices down to the point that any bank would be worth less on paper than the gruond they stood on.
10-07-2008 @ 1:27PM
M Morris said...
The ban on shorting will only prolong the agony by making it take much longer for us to get to the bottom of this market.
Everyone seems surprised that we keep getting these false bottom alarms and I feel the reason for it is the ban on shorting. I dont personally engae in shorting because i really only understand how to bet on what i perceive as a good company, but i respect the need for the shorters.
Unfortunately its the shorts that have regulated the stock market while the official regulators have been in the pocket of the dodgy and non-viable companies. Einhorn actually did the regulators job for them by exposing the BS coming from Lehman about their liquidity and their exposure.
Banning the shorts is akin to shooting the messenger and it will make the journey to the bottom of this market all the more painful and time consuming.
10-07-2008 @ 9:23PM
bill said...
To hell with the hedge funds !!!! Sure if you have been in one, or work for one, the returns WERE fantastic.
BUT WHAT REAL ECONOMIC VALUE DID THEY ADD? None, thank you.
Sure, sing about open markets, and capitalism, and the rest that the hedgers worked under, they just played the system better and smarter than most.
Now, they will pay the piper and cover those bets.
REST IN PEACE, hedge funds.
10-09-2008 @ 1:32PM
hammer said...
short selling is like blow off valve, keep the underlying equities reasonably priced.
10-09-2008 @ 5:58PM
mike said...
SCREW THE HEDGE FUNDS AND THE LIMOS THEY RODE IN ON....IT'S ALL OVER NOW, BABY BLUE.
10-11-2008 @ 10:00AM
the worldly philosopher said...
I would expect Bill Ackman to be an apologist for short sellers. I suspect as well he would not hesitate to apologize for vigilantes either.
Frankly the SEC ban did not work simply because it was not comprehensive enough to tackle the problem. For starters the SEC has been apathetic at best in ferreting out and eliminating naked shorts sales -- that is, selling a stock which you have not borrowed. Second, the SEC has not vigorously pursued forcing public disclosure of short selling activity, naked or not. It comes as a surprise to many to discover a buyer must disclose his position in the shares of a company but a short seller does not. This is the reason why short position in excess of 20, 30 or 40 percent of a stock's free float can be accumulated without any scrutiny by the SEC. Examples? Lehman, WAMU, MBIA (a firm familar to Mr. Ackman) are just the tip of the proverbial iceberg.
Before it was valuations as the justification, now it is liquidity? Please spare us the self justification for greed.
Just remember vigilantism ends badly whether on Wall Street or Main Street. Spreading rumor and innuendo destros companies and destroys lives. I recommend "The Ox-Bow Incident" to Mr. Ackman. Just maybe it will provide a needed refresher in ethics.