Dropping My Shorts

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Today, the Securities and Exchange Commission, according to CNN, “bans short selling of financial stocks on U.S. markets to “strengthen investor confidence.”
Others may understand the ramifications of this better than I do, but I’ve done pretty well lately shorting financial sector stocks that I felt were going to collapse given what we saw unfolding in the subprime crisis. Short positions on stocks are ways to manage risk. I don’t see how ending a long-term practice that is not part of the complex, synthetic derivatives market that is generating problems restores market confidence in the long run.
— Steve Clemons

Comments

16 comments on “Dropping My Shorts

  1. WigWag says:

    From Paul Krugman’s blog at the NY Times:
    “September 21, 2008, 8:06 am
    Authorization for the use of financial force
    Brad DeLong beat me to it. Even if you have full faith in Henry Paulson, Intrade currently gives John McCain a 48 percent chance of being president. Are you willing to give essentially unlimited discretion over the use of $700 billion — with explicit protection against any review by Congress or the courts — to Phil Gramm?”

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  2. Sweetness says:

    I don’t think there is a time limit on a short. But when the stock
    starts going back up, you pretty much want to cover your short.
    Or else you’ll “loose your short.”

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  3. WigWag says:

    Option contracts like “puts” are price and time limited while just shorting the stock is not. As far as I know, there is no limit on the duration that you can short other than how long your broker will permit it. Does anyone know if there are any time limits on how long an individual can short a stock?

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  4. Sweetness says:

    “Puts” are a way of “shorting” a stock–that is, betting it will go
    down. It also depends on whether you’re buying or selling the
    puts.

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  5. Sweetness says:

    “Fundamentally Steve is right; taking short positions is no different
    than taking long positions. Short selling provides liquidity to the
    markets and are just as necessary for market efficiency as long
    positions.”
    For one thing, they often provide a price correction, when too many
    long positions have over-inflated the price of an unworthy stock.
    Some shorters are excellent at sniffing out the rot hidden beneath
    the rosy, and misleading, statements of the longers.

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  6. WigWag says:

    “Why is shorting a stock (not naked shorting) any more speculative than buying a stock and holding it a day or decade?”
    People take long positions for investment purposes and typically they take short positions only for trading purposes. (Of course long positions are taken for trading purposes as well.)
    In other words, millions of people invest in stocks like IBM or GE for their 401k portfolios in the hope that 5 or 10 years from now those stocks might be worth alot more. No one shorts IBM or GE because they have an intent to invest. They short the stocks because they think on a short term basis, they will make money if the stocks go down.
    Fundamentally Steve is right; taking short positions is no different than taking long positions. Short selling provides liquidity to the markets and are just as necessary for market efficiency as long positions.
    The problem is that the regulations on short selling that worked well for decades were eviscerated by the Bush Administration. Now they are being put back in place. Thank goodness.
    One thing this crisis does is give you an appreciation for Franklin Roosevelt and the people in his administration like the first Commissioner of the SEC, William O Douglas.
    Roosevelt faced the worst economic crisis in American history and his administration put policies in place that led to economic prosperity (more or less) for 75 years. All the problems we have now come from reversing the regulations Roosevelt put in place. It sure is ironic that to save capitalism, today’s republicans (who were so anxious to deregulate everything in sight) are now faced with reimplenting the policies that Roosevelt and his colleagues invented.
    Paybacks a bitch!

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  7. Kathleen says:

    oooops, I was thinking ‘”puts”…not the same thing……

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  8. Kathleen says:

    You and a friend of Das Bush at Deutche Bank, who shorted United Aiulines just prior to 9/11..”Larry Flynt, Sex, Lies and Politics”……

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  9. Dave Huntsman says:

    1) As noted, naked short selling itself should be illegal and
    prosecuted aggressively – and it hasn’t been, which is reason
    enough to agree with McCain that Chris Cox should be fired.
    Selling something that doesn’t exist is called fraud, and should
    be prosecuted as such.
    2). Shorting should only be allowed with shares that someone
    who owns the shares offers up for that use – and then gets a cut
    of the action for doing so. Right now, my broker makes my
    shares available for shorting to others – against my direct
    financial interests, and without my permission – and I don’t even
    get a cut in it. If a broker wants to explicitly ask me my
    permission to use my shares against me, they should have to do
    so – and tell me how much they are going to pay me for the
    privilege. Otherwise, he’s stealing from me, and intentionally
    trying to do me harm. And THAT should be illegal also.

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  10. Haypops says:

    Why is shorting a stock (not naked shorting) any more speculative than buying a stock and holding it a day or decade?

    Reply

  11. DonS says:

    We are propping up the system to encourage another bubble.
    Who is convinced that, now that the government will virtually own large segments of the financial industry, there will be controls in place to make the industry operate for the benefit of main street?
    We are told that these bailouts are necessary, a failure of markets, after having been told for decades by these same crooks that free markets self regulate.
    Indeed, it is almost impossible for me to get my mind around the concept of the government, from the President to Congress, rushing in to make sure that the system that has functioned so corruptly is kept in tact.
    Talk about unethical! I understand the intertwining of the financial well being of the many with aspects of the financial industry. But I am convinced that under the cover of these government bailouts, additional time is granted for the culprits to run for the exits, while the public pays the price for decades.
    http://www.americablog.com/2008/09/where-are-free-market-phonies-hiding.html

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  12. Helena Cobban says:

    But Steve, short selling is speculation/usury of the kind that historically was always considered unethical (and at a system-wide level, destabilizing and unwise.) Just because “everyone’s doing it” doesn’t make it ok?

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  13. WigWag says:

    Steve Clemons, my guess is that you profited on short selling stocks in the financial sector by doing it the old fashioned way. That would be the legal way. Before you shorted the stock, you (or more likely your broker) had the borrowed stock in hand. That is to say you weren’t “naked.” Many of the hedge funds who were shorting were blatantly “naked”. That is to say they didn’t have the borrowed stock in their hands before they sold it. That’s illegal (although under Christopher Cox) the SEC turned a blind eye. Naked short sales dramatically increase downward pressure on a stock by accelerating the rate of short sales.
    To make matters worse, in July, 2007, the SEC eliminated rule 10a-1, the uptick rule. The uptick rule was put in place by the SEC in 1937 to tamp down wild market gyrations. It worked splendidly for 70 years until Mr. Cox at the urging of his hedge fund buddies decided to eliminate it.
    The rule mandates that when sold, a stock must either be sold short at a price above the price at which the immediately preceding sale was effected, or at the last sale price if it is higher than the last different price. The net effect of this is to slow down a stampede of short sales and moderate but not eliminate downward pressure on a stock.
    To make matters worse there is no requirement for disclosure of short sales on the part of hedge funds (the SEC is trying to change this now). This means that they can conspire to destroy a stock without anyone even know who is doing it. And make no mistake, Steve Clemons was just a bystander along for a profitable ride. The short sellers moving the market in Lehman, AIG, Washington Mutual, etc. were huge hedge funds out to bankrupt those companies to maximize their profits.
    The only reason that the SEC had to temporarily ban short selling on financial stocks is because they had foolishly eliminated the regulations and enforcement actions that enabled short selling to play a positive instead of a negative role. By the way, Great Britain did the same thing yesterday after shorts destroyed their largest mortgage issuer which had to be sold to Llyods (which was practically insolvent itself a few years ago).
    And in case you think none of this matters, it was unrelenting short sales that destroyed AIG. Without the short sellers, AIG would have had the time to sell assets and prevent Chapter 11 on its own. No tax payer bail out would have been necessary. Had the shorts continued their rampage, Morgan Stanley and Goldman Sachs would also have been taken out. Hundreds of billions more in tax payer money would have been required and the American financial industry would have been wiped out.
    A temporary ban on short selling seems a small price to pay to avoid further carnage. If Steve Clemons or WigWag get to have a little less fun and make a little less money, does that seem like such a large price to pay to you? It doesn’t to me.

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  14. DonS says:

    Denniger’s comment this morning address the short selling moratorium directly — and obviously shows my analogy with preventing CDS abuse by hedge funds was wrong.
    http://market-ticker.denninger.net/authors/2-Karl-Denninger

    Reply

  15. DonS says:

    I’m right with you Steve as far as limited understanding of the depth of the financial mess. This link (to a fellow named Kent Denniger), which I originally saw highlighted on “Moon of Alabama”, seems to understand a bit more.
    And, writ big, and referring to a financial instrument and/or practice called “credit default swaps” (CDS), he argues that the series of bailouts in like putting a “target on the back” of the big financial institutions for the likes of hedge funds.
    http://market-ticker.denninger.net/archives/2008/09/16.html
    You and I, I presume little investors, get not to do our own little trading (individually or through advisors) to guard against this possible abuse — I guess — at least if that is what this short sale moratorium is truly addressing. Once again the little guy gets to pay for the abuses of the big boys.
    I saw this house of cards collapse coming, as you apparently did too, and lots of others who just are interested is a closer version of reality.
    Congress is flailing: one day they’re against bailouts, the next day (when they get to participate in the process) they’re in favor of them. It’s not going to help much. The WH and exec branch are trying to act like they’ve got it under control.
    Politically, why isn’t Obama absolutely lacerating this issue on all the obvious fronts? Well, of course, he’s part of the larger system as well so, you know, he’s gotta be cautious.
    But how about the average guy and gal’s take on it. We can seem to afford multi-billion bailouts for the well off players and their structures — its more than just a slogan now, its a fact — but we can’t afford to pay for national health insurance; we can’t relieve individual mortgage foreclosures for the little guy, we can’t afford a workable transit infrastructure, we can’t afford better veteran benefits? Mind you, I am personally not in favor of everything “we can’t afford”, or even that I’m not oversimplifying, but John Q Public has his own perspective. And its that disconnect that I’m wondering why Obama isn’t pounding.

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  16. jake says:

    I caught your headline and then I remembered last week that This American Life on NPR actually did a small segment on short selling and regulation. It was pretty good.

    Reply

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