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2008-09-19 Home Front Economy

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Posted by badanov 2008-09-19 07:06|| || Front Page|| [10326 views ] Top

#1 It depends on how long they are proposing to ban it. That may not be a totally crazy idea, Badanov.

Posted by Cornsilk Blondie 2008-09-19 08:59|| 2008-09-19 08:59|| Front Page Top

#2 No, Cornsilk Blondie at an undisclosed location. It is stupid. Any time you restrict markets you reduce efficiency. It's a way of suppressing unwanted information. The information doesn't disappear, it just takes more malignant forms. Sort of like our current drug laws. The cinematic version is "I can't hear you. Lalalalalalala."

Posted by Nimble Spemble 2008-09-19 09:13|| 2008-09-19 09:13|| Front Page Top

#3 For any or all of you Financially apt Rantburgers I have a question.

Back in 1929, it is said, that one of the major contributory causes to the crash was the practice of buying stocks with virtually no real cash so when margin calls came in there was no where to go.

Now the question. All of these leveraged derivatives I keep hearing about in the realestate mortgage market seem to be suffering from the same problem. Mortgages given with $0 down and wacky interest rates.

Should there be a regulatory tightening up of these practices? Particularly in the bundling and resale of these worthless mortgages?

Posted by AlanC 2008-09-19 09:14|| 2008-09-19 09:14|| Front Page Top

#4 NS, you are operating on the laughable assumption that the market is rational. It is not. Sometimes panics happen. The good get punished along with the bad.

A temporary freeze could allow people to catch their breath, actually research the situation and separate the lambs from the goats. Yes....it will probably, almost certainly, continue a downward slide later. That is to be expected, and not a bad thing.

A crash that locks up the financial markets is NOT a good thing for people looking to expand businesses, get college loans, that kind of thing. Yeah...you'll show those greedy bah-stahds at Lehman, et al.....but you run the risk of seriously hurting the little guy on Main Street.

If some hedge funds can't squeeze out an extra billion or so in this debacle, I ain't gonna lose any sleep over that. They got more than enough in the run-up to this present situation.

Posted by Cornsilk Blondie 2008-09-19 09:27|| 2008-09-19 09:27|| Front Page Top

#5 AlanC, there definitely needs to be some updating of the rules and regs in the banking industry. (Sorry, can't give specifics....I only ever worked on the stock side of the market.) Much of it was predicated on the idea that home values would always go up and that if someone got in over their heads they could sell at a profit.

Toss in the idea that "everyone needs to own a house", regardless of their financial situation...and it simply had to come crashing down sooner or later. I'm not sure what percentage of home ownership is optimal, but it sure isn't 100%.

(Nice comparison of the margin stocks/real estate shenanigans, BTW. Wish I would have thought of that. ;) )

Posted by Cornsilk Blondie 2008-09-19 09:33|| 2008-09-19 09:33|| Front Page Top

#6 it's a temp ban til Oct 2nd

Posted by Frank G">Frank G 2008-09-19 09:36|| 2008-09-19 09:36|| Front Page Top

#7 And you're making the laughable assumption that markets work better with less information than more. If you want to shut down the market to let the blood return to normal, fine. But don't tie one of the market's hands behind its back and let it keep operating.

Posted by Nimble Spemble 2008-09-19 09:36|| 2008-09-19 09:36|| Front Page Top

#8 With regard to short selling: the government plan which will run at least through the first week of October will force investors to purchase shares of financial companies at artificially inflated prices. It is egregious manipulation and I believe it will do more harm than good.

And it was the Community Reinvestment Act which compelled banks to lower lending standards leading to this debacle. The complexity of mortgage-based derivatives and the previously untested chain of guaranties of institutional financial solvency (Fannie Mae, Freddie Mac, etc.) aggravated the problem.

Posted by Grumenk Philalzabod0723 2008-09-19 09:41|| 2008-09-19 09:41|| Front Page Top

#9 And you're making the laughable assumption that markets work better with less information than more. If you want to shut down the market to let the blood return to normal, fine. But don't tie one of the market's hands behind its back and let it keep operating.

Call me when it becomes a market again instead of a heavily-taxpayer-subsidized hobby.

It's being kept afloat by the taxpayer, so remember the golden rule, he that has the gold, makes the rules.

Personally I think it would have been a lot better if these banker types would have found a different hobby.

Posted by Abdominal Snowman 2008-09-19 09:44|| 2008-09-19 09:44|| Front Page Top

#10 Did you even read my comment, NS? This thing is going so damn fast that the info can't keep up. That's the problem. People aren't reacting to actual information. They just see that some stock is tanking and they're jumping on it. I doubt any of them are doing a bit of research to see if the company in question actually is healthy or not.

No one is suggesting suspending all trading. That's a far more drastic step that has been done in the past when things went nuts. Doing this can possibly forestall a temporary market close. Don't you SEE that?

You can still buy, you can still sell. You simply won't be able to sell what you don't have for a few days, and you're just gonna have to get your happy butt off to Vegas or Atlantic City if you want to place a wild bet. BFD.

Posted by Cornsilk Blondie 2008-09-19 09:47|| 2008-09-19 09:47|| Front Page Top

#11 the ban is being described in the seattle press as preventing the rumor mill to depress prices and allow traders to buy up what is an undervalued asset. and it only affects 799 fiancial companies. so you can still short commodities.

Posted by USN, Ret. 2008-09-19 09:48|| 2008-09-19 09:48|| Front Page Top

#12 Personally I think it would have been a lot better if these banker types would have found a different hobby.

Amen to that, AS!

Posted by Cornsilk Blondie 2008-09-19 09:52|| 2008-09-19 09:52|| Front Page Top

#13 Personally I think it would have been a lot better if these banker types would have found a different hobby.

Like my personal favorite. Landmine golf!

Posted by DarthVader 2008-09-19 10:21|| 2008-09-19 10:21|| Front Page Top

#14 The regulatory / gov't intervention problem with markets is that in our society there is a total disconnect between risk and reward.

In a world of markets you make a risky investment in the hope of a big reward. If it works, you win big, BUT, if it loses you lose big.

Our overactive Nanny state has removed most of the risk factor so that when the RISKS (mortgage I can't afford on a house that drops in price) arise......no sweat! Uncle Sugar will bail me out. That happens on the institutional level as well which is why Fannie and Freddie were so leveraged. The PEOPLE involved had no risk.

Posted by AlanC 2008-09-19 10:36|| 2008-09-19 10:36|| Front Page Top

#15 #3 For any or all of you Financially apt Rantburgers I have a question.

Back in 1929, it is said, that one of the major contributory causes to the crash was the practice of buying stocks with virtually no real cash so when margin calls came in there was no where to go.

Posted by AlanC 2008-09-19 09:14|| Front Page|| ||Comments Top

The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation.[citation needed] Some provisions such as Regulation Q that allowed the Federal Reserve to regulate interest rates in savings accounts were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999 by the Gramm-Leach-Bliley Act signed by President Bill Clinton.

Alan C., Bill Clinton repealed the laws you referred to under pressure by Citibank, and other banks that would allow them to make loans to more parties, those being parties that really could not afford those loans.

I cannot believe the republicans are not on top of this thing that Clinton did, for that is why the banks are now in trouble. We came very close to 1929 again in the past couple of weeks.

Posted by The Root Cause 2008-09-19 10:39|| 2008-09-19 10:39|| Front Page Top

#16 In other words, re-instate the The Glass-Steagall Act of 1933 that Bill Clinton repealed in 1999 and things will be stable again like they had been for 66 years until Clinton repealed that act, which led to todays banking mess.

Posted by The Root Cause 2008-09-19 10:43|| 2008-09-19 10:43|| Front Page Top

#17 The problem is that risk in lending wasn't priced properly. There are several reasons for this, but the most important was that high risk loans were channeled through F/F Mae which were perceived to wash off most of the risk because these securities were believed to have a federal government gaurantee behind them.

Today the US government has guaranteed them. Much as you may not like it, the market acted rationally and correctly. The real risk was low because the government has stepped in with gaurantees.

The stock market volatility is an effect and stopping short selling has marginal consequences.

Posted by phil_b 2008-09-19 10:48|| 2008-09-19 10:48|| Front Page Top

#18 This is a horrible idea. Shorting stock has become a one of the basics of stock trading. The issue they should address is margins/leverage.

Posted by Mike N. 2008-09-19 11:00|| 2008-09-19 11:00|| Front Page Top

#19 I think they screwed this article up. Once again, the SEC is proposing to ban *naked* short selling, which already is illegal, but still widely practiced. Which the SEC threatens to enforce every year, but never enforces.

They even deny it exists, and attack any business owner who objects to it because it is killing his business, as a favor to the big brokerage brokers who do most of the NSS.

It is a nasty business, but adds millions or billions to the big brokerage bottom line, so they turn a blind eye to it as well.

Naked short selling is the practice of selling shares you don't own, with the idea that you will eventually buy those shares. But you sell so many shares that it drives the price into the basement. This makes you "free" money, when you drive that small business into bankruptcy.

Some ruined small businesses had as many as twice their issued shares being regularly traded in NS sales.

By law, you must cover a short sale within 14 days, but this is evaded by two NSS brokers passing dying stocks back and forth between them. This is why bankrupt companies whose stock price has been knocked down to a tiny fraction of a cent each, still have trades every 14 days.

Over the years, hundreds of even thousands of small businesses were ruined, enriching a lot of brokers. In the long run it deeply hurts our economy as a whole, however.

About the only defense is to not take the company private, or to only float (make available to the public), a small fraction of shares, the rest being kept by insiders, who can quickly vote to pull them from the market, and thus stick it to the corrupt traders.

But that condemns the company to always being in the pink sheets (not listed by a major exchange), because to do so you are required to have exposure to the Market Makers whose legitimate purpose is to stimulate trading in your shares.

Posted by Anonymoose 2008-09-19 11:19|| 2008-09-19 11:19|| Front Page Top

#20 On a similar note, our older son is a pretty good judge of the financial markets and he says this about the AIG And Fannie/Freddie bailouts:

"I think the government has a great deal with AIG if they don't go under and slowly sell off the stocks in the future. They will actually make money out of this. I do think that is true with Fannie and Freddy as well.

Something to think about with AIG. The government gave them a loan at about 11% interest and they have 1 trillion is assests. AIG wanted a Bridge loan, but the government didn't want to do that. This is because AIG didn't have enough cash on hand for emergencies say of 80 billion dollars to handle this. They could have easily raised more capital by selling off some of the 1 trillion in assets, however it takes a long time to sell this many assests.

The government also got about 80% of the stocks in AIG. The real bad thing about this is that the stockholders of AIG got their stocks diluted they lost alot.

This is one of the sweetest deals for the government in a lifetime. With this loan they will probably make alot of money off this if they were a private company like Berkshire or something. I'm surprised Warren (Buffet) didn't do something like this.

Think of this buy is like buying assest at 10 cents on the dollar because now they have 800 Billion in assets since they own 80% of the company. This is just such a steal from that perspective.

This is the best kind of value investing I have seen in years, however sadly the government will mess this up I suppose with AIG. Too bad it was the government and taking us closer to socialism with each move..............

Well those are my thoughts.

Thanks,
S-"

he is correct that the government will probably "mess this up".

Posted by Mullah Richard 2008-09-19 11:23|| 2008-09-19 11:23|| Front Page Top

#21 What I recall reading is that they are writing in a ban on naked shorting, which is sound - you should not be able to short shares that you do not have possession of. Especially if you are doing it with borrowed money. Naked shorting is destructive, and actually "creates" shares out of thin air, which are then sold short, thus inflating the supply of a stock and reducing the price for holders of actual stock. This kind of financial legerdemain is purely destructive, and it effectively robs the corporation of control over how many shares of stock it has issued. Its cheating, its gaming the system, and its wrong. Naked shorting should be made a felony with hard time and large forfeiture and fines.

I doubt we wll get a total ban, but I believe they are going to reduce or eliminate the use of loaned money, effectively de-leveraging shorting, and if so, then that's a good move. Hedge funds and other "professionals" shorting beyond their ability to pay the money they borrowed to short is what has caused a lot of the mess. In plain English, shorting with borrowed money is going to become a LOT tougher, shorts will have to have a lot more skin in the game than before. So that is a good thing.

Posted by OldSpook 2008-09-19 11:29|| 2008-09-19 11:29|| Front Page Top

#22 The government also got about 80% of the stocks in AIG. The real bad thing about this is that the stockholders of AIG got their stocks diluted they lost alot.

When the Fed dumps 10, 50, 150 Billion into the market trying the make up the paper loses these people created, the value of our holdings in dollars devalues. The dollar is worth a lot less and as long as Nancy Inc refuse to start exploiting American resources that means even more dollars flow out further cheapening the paper. Inflation is going to bite big time, then the inflation adjustments for government pension programs and social security are going to double the pain on the working class as the government scrambles to make up the difference. It ain't over yet.

Posted by Procopius2k 2008-09-19 11:53|| 2008-09-19 11:53|| Front Page Top

#23 Blondie - My friend a Merrill told me that the short selling attacks by Hedge Funds is what drove Merrill to B of A.

Posted by GolfBravoUSMC 2008-09-19 11:54|| 2008-09-19 11:54|| Front Page Top

#24 There's nothing wrong with short selling. As for short selling stocks you don't own, that's the only way to make money selling short. You can't very well short sell stock you already own.

Heres how it works:

I think Microsoft is over-priced, so I want to profit from the price falling. I borrow shares of microsoft from my broker, sell them at the current market price, and later, when the stock prices come down, I purchase microsoft shares and pay them back to the broker I borrowed shares form.

Sell the shares and 45, buy them back at 35 and pocket 10 a share.

Sure, the act of selling the shares drives the price down, but the act of buying them back drives the price back. Sure, they buy the shares back over a longer period of time, so it doesn't offset.

However, there is risk to short selling, like if the price goes up, you take it in the shorts. Or if you get caught in a 'short squeeze', you also lose.

Posted by Mike N. 2008-09-19 12:27|| 2008-09-19 12:27|| Front Page Top

#25 ---- Naked short selling has always been illegal,no change here -- but the gov't doesn't enforce the ban. Why this failure to enforce is not headline news, I don't know.
---- Today's ban is on plain short selling of 799 entities, not on all stocks. It expires on 10/3/08 -- barring a sudden economic miracle, that ban will most likely be extended, else the stock market will go nucking futz that day. Exempt from the ban are certain market makers on the floors of stock exchanges, as short selling is almost essential to their operations.

Posted by Anguper Hupomosing9418 2008-09-19 12:55|| 2008-09-19 12:55|| Front Page Top

#26 Mike N,

How do you respond to the arguement about creating shares out of "thin air"?

What is the difference between what you describe and "naked short selling"?

In your scenario what interest rate is the broker charging you when you "borrow" shares to sell?

Also, how is this different than buying of shares via borrowing that happened in 1920's?

I'm not trying to challenge anyone here, just trying to find out what the f*** is happening.

Thanks

Posted by AlanC 2008-09-19 13:06|| 2008-09-19 13:06|| Front Page Top

#27 Mike N - suppose there are no shares you can borrow - i.e. normal holders have marke dthem with their brokerage as to be held. So your broker cannot borrow any to sell. He instead offers them for sale via a market contract, sells them, then covers later buying back at a lower price and delivering the bought back shares to the first buyer.

THAT is what is being banned. If you read my post above, NSS is horrible economic policy, and it is dishonest in that, as I said above, it artificially creates shares that do not exist thus cheating the corporation of control over how many shares it has.

And shorting itself is destructively wrong if it is over-leveraged shorting. It allows an artificial run to be put forth on a stock, deserved or undeserved, at little risk to the person initiating the run.

If you BORROW the money to short with, then get stuck, who gets screwed? The person who lent you the money. And that is what is partly causing the collapse of many of these banks -- due to to multiple failures in the hedge funds (the largest short and derivative players) they have been unable to pay back loans, and thus when the home loan business started failing, they didnt have cash to cover, so insurers like AIG got put in the squeeze.

So yes, the SEC needs to tightly restrict the practice of short selling, to ensure that there are genuine shares there, that it is not leveraged, and that the deals are honest and open and transparent (and not deliberate manipulation, like the repeated trades to create an artificial trading "velocity").

Short selling has its place, like handguns, but that doesn't mean you can do it indiscriminately and endanger others in doing so.

Posted by OldSpook 2008-09-19 13:11|| 2008-09-19 13:11|| Front Page Top

#28 I'd like to see the McCain administration suspend COLA adjustments for all non-military federal employees for at least one year. Screw ASCFME (or whatever the hell the acronym for the federal workers union is). Then take a knife to the federal budget in a way that would make Cap Weinberger look like a big spender. If they can streamline some acquisition processes, all the better. Then we can draw back, slowly at first, but with increasing speed, from this massive entry of government into the private sector.

Posted by remoteman 2008-09-19 13:14|| 2008-09-19 13:14|| Front Page Top

#29 And lets please note the recovery in price and stability of the financial stocks due to this restriction. The shorts were creating a destructive environment by attempting to create a panic they would profit from, even on stable companies.

THAT is why the SEC stepped in. The short sellers were borrowing more money and attempting to collapse the stock of vital companies in an emotional panic driven rush. Pure greed, and they would not be around for any of the consequences for the collapse of the major bank - they'd take the money and stick us with the problems.

I'd propose that in order to short they MUST provide the certificate numbers for every share in the short play, and not be allowed to leverage the short play in any form whatsoever, no margins allowed.

Prove they have the shares, and put their own money on the line.

And allow stockholders to routinely "lock" their shares from being available for shorting - better yet, make this the DEFAULT for shares, and require permission of the stockholder that his shares can be used for shorting.

If I were a car mechanic, while your car is in my shop, I could not loan out your car to a buddy of mine to drive 1000 miles to vegas and gamble (i.e. reducing its value) and then bring it back with no consequences.

Why should stock you OWN and leave with your broker in his brokerage be any different?

That simple requirement, that stock holders must give formal and informed consent before a short sale is made using their stock, and that short trades must be backed by sufficient assets with no debt allowed, that is enough to fix things.

Posted by OldSpook 2008-09-19 13:25|| 2008-09-19 13:25|| Front Page Top

#30 GolfBravo, that's another reason I'm happy they're clamping down a little on the practice. I prefer to have smaller players in the game instead of one huge monopoly....especially one like BofA (yep, have a personal problem with them, to the point of refusing to park my car near any of their branches because of the screwing they did to my checking account...OT I know)

I do like OS's idea of getting the stock owner's consent before shares are borrowed. It always struck me as more than a little dishonest to "borrow" someone else's stock without their knowledge or consent.

Posted by Cornsilk Blondie 2008-09-19 13:46|| 2008-09-19 13:46|| Front Page Top

#31 I have not come across evidence that short-selling is causing major problems. If you thinks otherwise, please post citations and urls. The MAJOR problem is that so many financial institutions have imbibed deeply of toxic loan koolaid, and are fundamentally insolvent. Banning short selling of these losers is just delaying the inevitable. The longer the delay of the reckoning, the greater the damage done to the economy & general welfare. There may come a day on the stock market when a major financial institution's shares are offered -- and there are no bids, not even those of shorts trying to cover themselves.

Posted by Anguper Hupomosing9418 2008-09-19 14:04|| 2008-09-19 14:04|| Front Page Top

#32 From Forbes.

But those in the business think it's a short-sighted "witch hunt" that will make markets more volatile than they already are. "It weakens confidence in financial markets further," said Steve Schlemmer, head of European sales at Churchill Capital, a London-based brokerage firm that deals exclusively with hedge funds. "It might make people on the street feel more secure that Royal Bank of Scotland is up 30% or whatever, but it makes the real professional money managers less secure."

"Its the kind of thing you would expect from less developed markets," said Stephen Rothwell, a trader at Argos Capital in London. "But I guess its symptomatic of the U.S. and U.K.s way of dealing with things at the moment."

Shorting is the bread and butter of hedge funds, epitomizing the act of "hedging" against risk. A typical hedge fund will go short on half of all its trades. "It's a big problem for us," said one trader, who said the complete ban on short selling was unexpected. "It's pretty extreme."

There are a number of concerns about what the clampdown on short selling could do to equity markets. Some say short selling actually helps smooth out the market, providing more of a balance of sellers to buyers. There is also the argument that short sellers aren't entirely to blame for the recent bloodying of Wall Street institutions like Morgan Stanley and Goldman Sachs in the markets. According to dataexplorers.com, a firm that tracks short interest in companies, short sellers made up 3.9% of Morgan Stanley's outstanding shares on Sept 17, the day before the company's shares went into freefall. On the same day, they made up just 3.1% of Goldman Sachs' outstanding shares.

Again, shorting is not causing the problem. It's a convenient headline grabbing boogeyman for the press.

Posted by Mike N. 2008-09-19 14:13|| 2008-09-19 14:13|| Front Page Top

#33 What a ridiculous concept, you can only buy into the market if it will achieve the results that they want!!!

HA!!!!

Posted by bigjim-ky 2008-09-19 14:14|| 2008-09-19 14:14|| Front Page Top

#34 AC hit 2 of the 3 nails on the head. There has been a disconnect between risk and reward. I have been thinking about writing a rant on this for the opinion page on Monday. This problem goes far beyond financial markets as this kind of thinking permeates every aspect of our culture now. Including our tactics in Iraq. That is why this discussion of short selling is looking at a leaf when there is a whole forest in front of us.

Posted by Nimble Spemble 2008-09-19 14:51|| 2008-09-19 14:51|| Front Page Top

#35 Naked short selling is the practice of selling shares you don't own, with the idea that you will eventually buy those shares. But you sell so many shares that it drives the price into the basement. This makes you "free" money, when you drive that small business into bankruptcy.

How do you drive a business into bankruptcy by cratering its stock price? A publicly-traded business's books consists of elements that have nothing to do with its stock price. A rise or fall in its stock price has no effect on either assets or liabilities.

The basic problem with these financial companies is that they took on bad bets in various financial instruments while borrowing too much money to do it. Short-selling has nothing do with their problems. What they really need to stay solvent (i.e. fix the problem of liabilities > assets now valued at $0.30 on the dollar) is to issue trillions in new stock to recapitalize their balance sheets. This is what the ban on short-selling is all about. The idea is to provide breathing space to these companies so that they can issue huge amounts of new stock, thus minimizing the need for a taxpayer bailout.

The problem? Informed buyers know that the lack of short-sellers will result in inflated stock prices. Prices may go up initially, but the end result will be catastrophic. China, which has never allowed short-selling, has seen its index fall 66% from its high. Anyone who buys into this rally for anything other than short term gains is playing with fire.

Posted by Zhang Fei 2008-09-19 15:49|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-19 15:49|| Front Page Top

#36 How do you drive a business into bankruptcy by cratering its stock price?

Well...you can certainly make it more difficult for them to get loans for expansion or other business purposes. Like it or not, the stock price sometimes is seen as shorthand for the health of a company. Your fundamentals might be strong, but if your stock price is tanking, you are going to have what is politely referred to as a "challenge". You might not get the loan, or you might have to pay more in interest.

Posted by Cornsilk Blondie 2008-09-19 16:05|| 2008-09-19 16:05|| Front Page Top

#37 How do you drive a business into bankruptcy by cratering its stock price?

I'm not a financial genius. However, Merrill Lynch stock was selling at around $90 about a year or so ago. On black Friday recently, it tanked at around $10 or so. Lehman stock had already tanked and they declared bankruptcy. It would seem that not being able to attract capital would affect your assets.

Posted by JohnQC 2008-09-19 16:15|| 2008-09-19 16:15|| Front Page Top

#38 Well...you can certainly make it more difficult for them to get loans for expansion or other business purposes. Like it or not, the stock price sometimes is seen as shorthand for the health of a company. Your fundamentals might be strong, but if your stock price is tanking, you are going to have what is politely referred to as a "challenge". You might not get the loan, or you might have to pay more in interest.

Not being able to expand is a different thing from being driven into bankruptcy, isn't it? And if the business is set up so that it can't survive for months without new funding, maybe it needs to reassess its capital structure - i.e. borrow less money and have more cash on hand. In my view, these companies are like home buyers who use Option ARMS mortgages and then complain during rate resets or mortgage recasts. They made their bed and are now casting around for people to blame when they should be looking in the mirror.

Posted by Zhang Fei 2008-09-19 16:19|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-19 16:19|| Front Page Top

#39 Not enough. They should ban stocks from declining in value.

Posted by DK70 the Scantily Clad7177 2008-09-19 16:27|| 2008-09-19 16:27|| Front Page Top

#40 ZF, if you want to play word games, fine.

The fact is, whether you like it or not, there are a lot of businesses that have plenty of assets (land, factories, royalties, patents)....but not a lot of cash sitting around.

If you choke off funding for businesses, which has basically been happening lately, then a good chunk of them won't grow. They'll stagnate. Another large chunk won't be able to take advantage of new opportunities, and might have to hold off on R&D for future products or technologies. You lose market share...and yes, you can eventually go bankrupt if you can't reverse the situation.

Besides...if banks don't loan out the cash, how are banks going to pay any kind of interest to CD holders and other people who deposit the cash with them?

NOW do you finally see the problem?

Posted by Cornsilk Blondie 2008-09-19 16:29|| 2008-09-19 16:29|| Front Page Top

#41 I doubt it, because short selling does not choke off funding for businesses.

Posted by Nimble Spemble 2008-09-19 16:37|| 2008-09-19 16:37|| Front Page Top

#42 ZF, if you want to play word games, fine.

The fact is, whether you like it or not, there are a lot of businesses that have plenty of assets (land, factories, royalties, patents)....but not a lot of cash sitting around.

If you choke off funding for businesses, which has basically been happening lately, then a good chunk of them won't grow. They'll stagnate. Another large chunk won't be able to take advantage of new opportunities, and might have to hold off on R&D for future products or technologies. You lose market share...and yes, you can eventually go bankrupt if you can't reverse the situation.

Besides...if banks don't loan out the cash, how are banks going to pay any kind of interest to CD holders and other people who deposit the cash with them?

These are not word games. If they are not keeping enough cash on their books to survive without borrowing or issuing new stock on a day-to-day basis, they have borrowed too much money, in the same way that someone who lives paycheck-to-paycheck while paying off huge credit card balances has borrowed too much money. If margins are so low that they have to borrow huge sums to stay afloat, they might simply be in the wrong business.

Posted by Zhang Fei 2008-09-19 16:44|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-19 16:44|| Front Page Top

#43 This is all to reminiscent of the great liberal Nixon's wage and price controls. What happened when they came off? What will happen when the short selling rule comes off?

Posted by Nimble Spemble 2008-09-19 16:47|| 2008-09-19 16:47|| Front Page Top

#44 This is all to reminiscent of the great liberal Nixon's wage and price controls. What happened when they came off? What will happen when the short selling rule comes off?

Ever heard of a "no bid gap down"? It's certainly a possibility, especially if the no short rule is implemented for an extended period of time. The fact is that shorts moderate stock prices on the upside by initiating short positions and on the downside by covering (i.e. buying back) to take profits. China has never allowed shorting - the result was that its markets shot up too high and now lack the buffer of shorts buying back shares to cover their positions to slow down the 66% decline it has suffered from the peak.

Posted by Zhang Fei 2008-09-19 17:01|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-19 17:01|| Front Page Top

#45 Bottom line is that companies are either solvent (assets > liabilities) or insolvent. Share prices have nothing to do with it. If a company has to borrow more money or issue new shares to stay afloat, that is the definition of insolvency. Short-sellers and long investors who sell stocks are merely responding to their perceptions of the company's solvency. The question is always - do you believe what management is saying or are they simply stalling for time in hopes of divine intervention?

Posted by Zhang Fei 2008-09-19 17:10|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-19 17:10|| Front Page Top

#46 I don't know that short selling is the problem--maybe part of the problem. There is far too much debt. Debt is O.K. as long as it is paid back. If it is not paid back; well now that is a problem.

Posted by JohnQC 2008-09-19 17:17|| 2008-09-19 17:17|| Front Page Top

#47 Amusing anecdote - some short traders have taken to using the name Golem Sachs in honor of Paulson, who is assumed to be the evil genius behind this move. Folks who had large September put positions in the financials have obviously been taken to the cleaners, given that this is a triple witching Friday, and the policy was implemented today.

Posted by Zhang Fei 2008-09-19 17:18|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-19 17:18|| Front Page Top

#48 Golem Sachs? How queer. The original golem of Eastern European Jewish tales was merely a clay statue brought to temporary life by a piece of paper with the secret name of God written on it. His brief was to protect the ghetto from non-Jews bent on pograms; the paper was removed, and with it his life, once the city folk calmed down.

Perhaps the short traders are unfamiliar with classic folk tales.

Posted by trailing wife ">trailing wife 2008-09-19 17:31|| 2008-09-19 17:31|| Front Page Top

#49 I'm not a financial genius. However, Merrill Lynch stock was selling at around $90 about a year or so ago. On black Friday recently, it tanked at around $10 or so. Lehman stock had already tanked and they declared bankruptcy. It would seem that not being able to attract capital would affect your assets.

Lehman levered up $30 to each dollar of shareholder capital and made some very bad bets. If you lose more than $1 of that borrowed capital, you have wiped out your shareholders. Lehman's bad bets not only wiped out its shareholders; they have wiped out its subordinated debtholders, who will be getting nothing for their troubles.

How did Lehman end up in such big trouble? Aren't these guys rocket scientists and Masters of the Universe? Chalk it up to a bad case of "this time, it's different". They assumed that they had figured out all the risks (from looking at historical data), and thought they had everything hedged. In reality, they discarded historical standards and ratios, and went for whatever would make them the most money. They talked the talk but marked to fantasy, hoping that the next roll of the dice would save them from their mistakes.

Posted by Zhang Fei 2008-09-19 17:37|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-19 17:37|| Front Page Top

#50 ZF, for the last time....I am not referring to companies in such bad shape that they need frequent, constant infusions of cash. Obviously, they gots lotsa problems, and should be allowed to fall.

I am talking about companies that need to tap into the credit markets from time to time. If a good company is getting hammered in the market simply because other ones are screwing up, not because of their own mistakes....yes, that's a problem. Short selling exacerbates it.

If you think that a hedge fund making an extra few million at the expense of a growing concern that could actually add something to the economy long-term is a good thing, just come out and say so.

Posted by Cornsilk Blondie 2008-09-19 17:39|| 2008-09-19 17:39|| Front Page Top

#51 Shorting in and of itself is OK, but the unlimited, naked and highly margined short selling is hugely destructive of capital.

And that is why it must be banned.

Posted by OldSpook 2008-09-19 17:55|| 2008-09-19 17:55|| Front Page Top

#52 If you think that a hedge fund making an extra few million at the expense of a growing concern that could actually add something to the economy long-term is a good thing, just come out and say so.

Companies have no God-given right to capital - another word for investors' hard-earned savings. They must prove their worth in the marketplace. In a marketplace that doesn't include short sellers, too much capital will be allocated inefficiently, and the result will be the kind of thing the Chinese are getting during the bursting of their stock market bubble (and during our Great Depression) - no capital for anyone at any price.

Posted by Zhang Fei 2008-09-19 17:56|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-19 17:56|| Front Page Top

#53 Shorting in and of itself is OK, but the unlimited, naked and highly margined short selling is hugely destructive of capital.

Highly margined. That's the key.

For a company, let's say AIG, to go to 0, it takes way more than just short sellers. For a little perspective, 501,816,525 share of AIG traded hands today. No way in hell any broker is going to naked short the millions of shares in would require to flood the supply side and drive the price down.

Posted by Mike N. 2008-09-19 18:40|| 2008-09-19 18:40|| Front Page Top

#54
Brokers might not, Mike, but that's how some hedge funds make (or lose) millions. Moreover, keep in mind that in situations like this a lot of trading is triggered automatically based on technical trends, i.e. you get a destructive positive feedback loop which snowballs.

Zhang Fei, you seem to be missing the key role that cash flow financing plays in small and medium sized businesses and in some larger businesses which adopted just in time inventory management. And that financing is indeed tied to balance sheet as a whole but stock price in particular for many industries. That's what Cornsilk Blondie is getting at, among other issues. When that sort of credit dries up it slows economic activity in a potential death spiral.

The hedge funds were shorting either due to panic or trying to take advantage of panic. The SEC put a temporary halt to it and every one else in the markets took a deep breath and tentatively began sorting things out. Not a move to make lightly but absolutely necessary in this MBA's opinion.

Posted by lotp 2008-09-19 20:04|| 2008-09-19 20:04|| Front Page Top

#55 Well, lesse, If 50 hedge funds all naked shorted 1 million shares each, they would have been 10% of todays AIG sales.

Really think some hedge funds naked shorted that many shares in 1 day?

Posted by Mike N. 2008-09-19 20:51|| 2008-09-19 20:51|| Front Page Top

#56 ZF
Profitable company: stock price goes down, rating agency cuts ratings, triggers collateral defaults causing company to need to put up cash even though the underlying assets are doing fine, no one is willing to lend the company money. Company defaults on contracts, assets sold off at firesale prices - profitible company does not exist anymore. Almost happened to morgan and goldman and still might...

I agree with oldspook. Shorting:good naked shorting (and fire) bad :)

Posted by Frankenstein 2008-09-19 20:57|| 2008-09-19 20:57|| Front Page Top

#57 Several orders of magnitude more than that, Mike. Total trading on the NYSE alone was 10.3 billion shares last Thursday, 9.1 billion today. The difference is that there was massive short selling on Thursday - not an orderly market at all - and from what I'm hearing an awful lot of those sales were naked.

Posted by lotp 2008-09-19 20:57|| 2008-09-19 20:57|| Front Page Top

#58 OK, geniuses, show us all the industrials getting clobbered right now. Who's been forced out of business? Just over leveraged financials. Maybe GM and Ford end up in trouble, but it's not like they weren't in trouble before.

It's a panic. The weak will die. That's the way capitalism works. If you can't weather a month of heavy weather, maybe you should go under. Sorry, but it's a cruel world.

Posted by Nimble Spemble 2008-09-19 21:09|| 2008-09-19 21:09|| Front Page Top

#59 Profitable company: stock price goes down, rating agency cuts ratings,

Ratings agencies do not cut credit ratings because of stock price drops. They cut them because of earnings problems, asset problems or debt problems.

Posted by Zhang Fei 2008-09-19 21:18|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-19 21:18|| Front Page Top

#60 from what I'm hearing an awful lot of those sales were naked.

So what? That just means there is a lot of potential demand. With shorts illegal, there is a lot of potential sales pressure building up. When they remove the short prohibition, watch out. The bears will sink the market worse than what we've seen so far. Thanks.

Posted by Nimble Spemble 2008-09-19 21:36|| 2008-09-19 21:36|| Front Page Top

#61 ZF
Rating agencies rational? Hah! Who do you think rated CDO's of subprime mortgages AAA in the first place (one of the big causes of this mess). You think those ratings were rational? Now they have gone the other way by threatening to downgrade companies for any reason they feel (including stock price drops) because they are trying to stay relevant in the world.

Posted by Frankenstein 2008-09-19 21:41|| 2008-09-19 21:41|| Front Page Top

#62 Nimble
If you want naked shortselling you should have the ability of buyers to take shares "off" the market as well in order for it to be a level playing field (I have no idea how to accomplish that btw).

I mostly agree with you but what was happening to goldman and morgan was crazy, they would have gone out of business for no good reason I can see (and still might btw), and if you think that that would not have affected industrials and workers who had no business being affected, you are sadly mistaken.

What is funny (sad really) is the Fed is preventing buyout shops from buying financials because the controlling shareholder rule starts at 9.9%, severely restricting the ability of buyout shops to operate. Perhaps they should up this to a higher level. Private equity wants in but cant right now. Talk about bad regulation...

Posted by Frankenstein 2008-09-19 21:56|| 2008-09-19 21:56|| Front Page Top

#63 Several orders of magnitude more than that, Mike. Total trading on the NYSE alone was 10.3 billion shares last Thursday, 9.1 billion today.

That's an entire exchange. I'm talking about one stock. Do you think funds naked shorted 50 million shares of one stock in one day?

Posted by Mike N. 2008-09-19 22:06|| 2008-09-19 22:06|| Front Page Top

#64 Please distinguish between "naked short selling" -- always has been illegal -- and "short selling" rendered illegal by the SEC order of 18 Sept 2008 which expires 2359 2 Oct 2008. Much of this discussion has been confusing apples & oranges.

Posted by Anguper Hupomosing9418 2008-09-19 22:15|| 2008-09-19 22:15|| Front Page Top

#65 Bloomberg: Unintended consequences: "Options market makers would have been prohibited from making short sales starting next week under the ban adopted today to keep speculators from driving down stock prices. The Options Clearing Corp., which guarantees all trades exchange- listed options, said a ban would have proved ``disastrous.''"

Posted by Anguper Hupomosing9418 2008-09-19 22:18|| 2008-09-19 22:18|| Front Page Top

#66 Frank, you can take shares off the market by demanding the actual certificates, which slows your ability to liquidate them if you need to - you have to reregister and validate them with a broker, and then you'll be able to trade them again.

That's why I beleive the must track cert numbers, and reconcile cert numbers on every trade. And pass securities laws requiring expressed and formal consent before shares are allowedto be used for shorting. Consent must be explicit and voluntary, the brokerage must not be able to demand their availability as a condition for any services, the default mode of stock with any broker must be "unavailable for short trading".

If they do that and disallow margin, completely, then the destructive shorting will stop, and only truly speculative shorts will be in the game, putting as much on the line as longs do.

We've lost the balance, and the risk, on the short side due to cheap credit and low margins, as well as loose bookkeeping and poor regulation.

It needs to be reinstated, and the above will do it.

Posted by OldSpook 2008-09-19 22:22|| 2008-09-19 22:22|| Front Page Top

#67 Frank? I had to look back and see if the longass week and cocktails were commenting for me....thankfully, no

/this time

Posted by Frank G">Frank G 2008-09-19 22:54|| 2008-09-19 22:54|| Front Page Top

#68 OS, short actually put more on the line than longs. Stocks can only go as low as zero, but there is no limit to how high.

Posted by Mike N. 2008-09-19 23:12|| 2008-09-19 23:12|| Front Page Top