"Unbelievable"

Steve Benen may not be an economic expert, but you don't have to be to recognize when McCain is talking nonsense about economics. If he's talking on the subject, it's a pretty safe bet he has it wrong:

Fire Christopher Cox?, Political Animal: John McCain has apparently decided he has to say something different and/or unique about the crisis on Wall Street, so he's come up with a new line: he wants to see Securities and Exchange Commission Chairman Christopher Cox fired.

"The chairman of the SEC serves at the appointment of the president and has betrayed the public's trust. If I were president today, I would fire him," McCain says...

"The primary regulator of Wall Street, the Securities and Exchange Commission (SEC) kept in place trading rules that let speculators and hedge funds turn our markets into a casino," McCain says."They allowed naked short selling -- which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground."

...First, the president cannot fire an SEC chair. It's procedurally impossible. As ABC News reported, "[W]hile the president appoints and the Senate confirms the SEC chair, a commissioner of an independent regulatory commissions cannot be removed by the president." That seems like the kind of thing McCain ought to know before spouting off on the subject.

Second, the SEC did allow all kinds of short selling, but that's legal under the federal regulatory system that John McCain -- and his advisor, Phil Gramm -- helped put in place. After more than a quarter of a century in Congress, has McCain ever proposed changing these laws and imposing stricter regulations? No. Has he ever, before today, criticized Cox's oversight of existing trading rules? Not as far as I can tell.

Third, I'm not an expert, but I'm fairly certain short selling is not the underlying cause of the current crisis. The sub-prime mortgage fiasco and over-leveraged banks are. If McCain wants to make a case for firing Cox, he should at least get the cause right.

When did we start requiring the presidents to follow the law? Didn't that change eight years ago?

On the short-selling point, Barry Ritholtz is direct:

I don't have much of a problem with the uptick rule -- its pointless, and is easily worked around by hedge funds... And, I agree that rules against naked short-selling -- already illegal -- should be enforced.

But if you think the current economic, credit and financial problems are caused by shorting, you are simply a smoking too much dope.

Paul Kedrosky doesn't hold back either:

Fire the SEC's Chris Cox? Sure, Then Fire John McCain: Oh, now John McCain is suddenly swinging with both fists on capital markets? He just said he thinks SEC Chair Chris Cox should be fired because he allowed naked short-selling and that is driving the current crisis? Un-be-frickin-believable.

First, it is the height of irresponsibility for a politician to grandstand so clumsily when the market is as fragile as it is right now. It shows a remarkable lack of financial sophistication and market smarts on the part of John McCain, and I didn't have much confidence in either from him in the first place (and that does not make this an Obama endorsement, because he has done diddly to convince me he gets this either).

Second, this has nothing to do with naked short-selling. Repeat after me: The trouble is not with short-sellers. The trouble is not with short-sellers. The trouble is with an over-levered financial system built on a house of cards comprised of under-collateralized toxic paper that was applauded all the way up by "housing is the American dream" nutters who couldn't see that vast expansions in thinly-traded credit are a path to economic ruin. Focusing on the short-sellers will lead to completely wrong and counter-productive non-solutions to the current crisis.

Unbelievable. Truly.

And, continuing with Barry, there may be reasons to question SEC actions, but they are not the reasons McCain cites:

How SEC Regulatory Exemptions Helped Lead to Collapse, The Big Picture:

The losses incurred by Bear Stearns and other large broker-dealers were not caused by "rumors" or a "crisis of confidence," but rather by inadequate net capital and the lack of constraints on the incurring of debt.

--Lee Pickard, former director, SEC trading and markets division.

...As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years -- as well as the massive current unwind

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley. 

As Mr. Pickard points out that "The proof is in the pudding — three of the five broker-dealers have blown up."

So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis. 

You couldn't make this stuff up if you tried. ...

Chalk up another win for excess deregulation.

Of course, John McCain is no friend of deregulation, at least not today. Or is he? With so many flip-flops, and so much double-talk, I'm losing track.

Update:

Steve Benen ... erroneously claims that “the president cannot fire an SEC chair. It’s procedurally impossible.”

The question is not one of the Constitution, but rather one of statute. “The creation, composition, and powers of the SEC are found in the Securities Exchange Act of 1934. The commission consists of five members who are appointed by the President with the advice and consent of the Senate. The terms of the commissioners are staggered and the basic length of each term is five years. No more than three of the commissioners may be members of the same political party. The statute does not provide for a chairman. Until 1950, the Chairman was elected annually. Following Reorganization Plan No. 10 of 1950 (see, Reorganization Act of 1949, 5 U.S.C. §§ 901-913), the President designates the chairman. Pursuant to this Reorganization Plan, the chairman succeeded to most of the executive and administrative functions of the commission.” S.E.C. v. Blinder, Robinson & Co., Inc., 855 F.2d 677, 681 (10th Cir. 1988).

An email cautions that we should not accept Bainbridge's argument since one 10th Circuit case may be of questionable precedential value. I'll update as I find out more.

Okay, here's more - the McCain camp seems to believe it can only request that the SEC chair resign and hope the request is honored, the president cannot fire the SEC chair:

Wright asked McCain spokesman Tucker Bounds to explain how the Republican nominee would fire Cox if he were elected. "Not only is there historical precedent for SEC Chairs to be removed, the President of the United States always reserves the right to request the resignation of an appointee and maintain the customary expectation that it will be delivered," Bounds responded. Wright says the McCain camp pointed to the example of former SEC chairman Harvey Pitt, "who resigned in 2002 when it was made clear to him that he had lost the confidence of the Bush administration."

So either McCain was wrong earlier when he said that he could fire the chair, Bounds now says he doesn't have that power and can only request a resignation, or Bainbridge is correct and the McCain camp reversal - Bounds' attempt to clean up after McCain’s earlier statement - is wrong. But whichever way it turns out, the McCain reversal shows that they are confused about the president’s powers in this area. [It does appear that the use of the word "fire" was incorrect.]

Comments

[Bruce Wilder]

John McCain just forget where Spain was. Seriously, not kidding.

[BJ Feng]

It's incredible that people who are against naked short selling have been successfully portrayed as conspiracy theory wackos!

All people want is for sellers to actually have to deliver what they've sold to the buyer! This seems logical and reasonable no? I mean could I start selling cars, collect the cash, and never deliver the cars, waiting until the threat of legal action to finally go out and buy a car to give to the buyer, all the while selling more cars I don't have? This is what naked short selling is. It is evidenced by "failure to deliver". That is the buyer of the stock doesn't receive the stock because the seller hasn't given it to him (because the seller never borrowed in the first place).

Right now, SEC Regulation SHO requires brokers to list the stocks that have a high "fail to deliver" rate. Now sellers are required to give the stock to the buyer within 5 days, this is very reasonable no? Yet there are some stocks that remain on that list day after day after day for months at a time. Regulation SHO also require brokers to buy back the stock on the open market to clear out the fails, but NOTHING prevents the hedge fund or the person who failed to deliver from shorting that required cover simultaneously. That is they can maintain a perpetual shorting position without ever having to locate or borrow actual shares. In fact, they can short even more shares before they are asked to cover their failed deliveries by their brokers. So when they buy back those shares, it will be at a lower price.

I will explain in more detail later, I don't have the time now, but I suggest those who criticize enforcement of NAKED short selling start looking into the actual operational details of how stocks are bought and sold. Yes, the people who have manipulated the market through naked shorting are angry, it is up to smart people to look at the details and see what is BS and what isn't.

[Name game]

On people figuring out what is BS and what isn't, I hope they apply that to "BS" Feng.

[anne]

Beyond immediate politics, there have been serious reasons to question the SEC, and an increasingly evident regulatory de-emphasis, since 2001. Include the Comptroller of the Currency and the monitoring division of the Federal Reserve. The problem, as much as I have understood these years, has not been lack of regulatory authority but lack of regulation as such. The SEC should be seriously criticized.

[anne]

"The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms."

Right; and of signal importance.

[anne]

What I have asked about but received no answer as yet is why AIG was so limited in reserves relative to competitors. Berkshire Hathaway has a volatile asset mix, but is absurdly reserve rich and has emphasized that for many months. There was ample time for AIG to accumulate reserves, and ample reason for insurance regulators to push, but seemingly no action. Why?

[Julio]

McCain to naked short sellers:
"Put them back on! It's disgusting!"

I try to take him seriously, really, but then he comes up with stuff like this...
But OK, I'll try:

The main thing wrong is the underlying theory that firing one guy will solve the problem, because the problem is one guy, who didn't do his job.

It's of a piece with McCain's macho posturing about how when he's President he is going to clean up the whole thing, he has had to deal with much tougher guys than these, and so on.

God forbid he should stop distracting the audience from the real issues, let alone learning something and then educating them.

Do you think he would quit the campaign if we made him an Admiral? He'd be happier, and we'd be safer.

[dd]

Then Greenspan's Fed must be seriously criticized as its constant de-regulatory stance and opposition to any regulation of hedge funds and opaque structured products. Won't bother to cite the speeches and testimony as it was posted the last time this discussion came up. Greenspan's testimony supporting Gramm-Leach and the Commodities Futures Modernization Act reveals all. Don't fight the Fed and the SEC finally filled to the gills with free-market wonks did give up.

[anne]

Berkshire Hathaway is buying assets now, why the dramatic contrast with AIG when Buffett has been so openly cautious for so many months? Why has Wells Fargo been so sound through this period, and could it be paying attention to Berkshire which owns a considerable amount of Wells shares?

Again, even in terms of leverage use there are choices made that need to be assessed from here for the risks taken at Goldman were for many months conservative, evidently so, in comparison to, say, Merrill.

[anne]

http://www.nytimes.com/2008/09/19/business/19money.html?ref=business&pagewanted=print

September 18, 2008

Putnam Shuts Down a Money-Market Fund
By ASSOCIATED PRESS

Putnam Investments suddenly closed a $15 billion money-market fund after institutional clients pulled out cash despite the fund’s lack of exposure to troubled financial firms.

http://krugman.blogs.nytimes.com/2008/09/18/less-than-zero/

September 18, 2008

Less Than Zero
By Paul Krugman

Money for nothing — actually, less than nothing [Chart]

Interest rates on Treasury bills this morning: incredibly low on one-month, negative on three-month bills. This didn't even happen in the Great Depression.

Professionally, I'm fascinated. As a citizen, I'm terrified.

[S Brennan]

I've been sending Barry's post to my friends this morning..he's the best and his next post on Margin is important to clueless WSJ editorial types...but unlike you Mark, I think this news does have a down side to Barack:

"At least 100 Obama bundlers are top executives or brokers from investment firms; nearly two dozen work for Wall Street giants like Lehman Brothers, Goldman Sachs or Citigroups; about 40 others come from the real estate industry."

So although Obama will have a hard time talking about this meltdown with a straight face, the downturn in the economy helps Democrats...which is why congressional Democrats are shedding crocodile tears [and doing as little as possible] while Rome burns.

[anne]

Again, beyond the politics, I thought the McCain actually took the proper course when following the lead of Paulson in saying our economic fundamentals are sound. For all the problems I could list, I think there is a soundness and worry most about the financial crisis further harming ordinary workers. When bankers are so fearful, there is a time for reassurance.

This was so for Argentina as Paul Krugman remarked during the mounting currency crisis, and there Argentina could have allowed the Peso to float against the dollar at any time to relieve the real pressures that were building.

[salao85]

Perhaps JK Galbraith had some insight into why McCain had nothing to say before now and then gets it so wrong:

Although only a few observers have noted the vested interest in error that accompanies speculative euphoria, it is, nonetheless, an extremely plausible phenomenon. Those involved with the speculation are experiencing an increase in wealth – getting rich or being further enriched. No one wishes to believe that this is fortuitous or undeserved; all wish to think that it is the result of their own superior insight or intuition. The very increase in values thus captures the thoughts and minds of those being rewarded. Speculation buys up, in a very practical way, the intelligence of those involved. [...] Strongly reinforcing the vested interest in euphoria is the condemnation that the reputable public and financial opinion directs at those who express doubt or dissent. It is said that they are unable because of defective imagination or other mental inadequacy to grasp the new and rewarding circumstances that sustain and secure the increase in values.

[anne]

Heck, when Goldman Sachs finished the day losing 5.7% then I have no possible idea what is happening other than lots of investors being fearful in a way we have not known for a long long time. There must have been lots of short-covering this afternoon.

[Luis Enrique]

I completely agree about the short selling ... except ... there are some circumstances where, if speculators are able to drive down a share price, it can create a self-fullfilling prophecy, for instance if a company has banking convenants that are tied to its share price.

Does anybody know if there's any way that something similar might have happened with these banks - for instance if the very fact of a falling share price causes other banks to stop lending to the bank with the wiped-out shares, and its customers to stop doing business with it, thereby turning a bank that could have survived into one that can't?

This is not to say that I necessarily credit short-sellers with the power to push shares wherever they want - I'd guess that regular selling and an absence of buyers has done for these guys.

[ken melvin]

As a card carrying Berkeley Liberal, I think it fair to ask, "where the hell was Dodd and the dems the past few months?"

[Robinia]

Anne asks:

What I have asked about but received no answer as yet is why AIG was so limited in reserves relative to competitors. Berkshire Hathaway has a volatile asset mix, but is absurdly reserve rich and has emphasized that for many months. There was ample time for AIG to accumulate reserves, and ample reason for insurance regulators to push, but seemingly no action. Why?

From my perspective, the answer to that is a NYS political/job retention one-- and the same reason that the Governor of NY rushed to waive additional cross-holding regulations (essentially allowing AIG to raid regulation-required reserves in profitable divisions) ahead of the Federal deal. And, the same reason that a Deputy Commissioner of NYS Dept. of Insurance argued tirelessly with me over the telephone several months ago about the wisdom of a new de-regulatory program bill, which they were pursuing in keeping with "The Paulson Plan".... which is not, after all, getting much traction generally.

You see, they are (were?) deathly afraid that insurance/financial services companies were about to move their jobs to London or Taiwan, if we did not accommodate them by "improving the business climate" aka more deregulation. So, the parochial, heavily-influenced-by-lobbyists' cash NYS politicians checked their campaign coffers, not the economics textbooks, and decided that deregulation, not consumer protection, was the best move. Gotta keep those high-paying hi-fi jobs, or else it will be a race which bottoms out first: their campaign funds or the NYS (and NYC) budget. So, they kept the company HQ.... but imperiled the world economy.

Think that maybe transnational insurance companies should be federally regulated?

[ken melvin]

As JFK learned from WWII and afore, Admirals and HGenerals have historically been a stupid lot. McCain is well suited to have been a WWII Admiral or General. Think back thru history to those such as he and Cheney who unnecessarily wasted the lives of tens and tens of thousands.

[ken melvin]

Then there was the problem that China was holding a sack full of worthless bundled junk that AIG had insured.

[Bitch Slapped by the Invisible Hand]

Re: Contributions from workers on Wall Street. There are many, many soldiers in Iraq who contribute to Obama's campaign, and the largest number of contributions went to Ron Paul. Just as there are economists, sane people in the mortgage industry, and econ bloggers who have disparaged the lax regulatory policys, I think if is fair to make the case that at least some of the contributors from Wall Street may agree with the case that Obama has made re stricter regulatory environment. And polls show that 80% (!!!!!) of the American public believes that this administration has headed us in the wrong direction. Eighty percent includes workers on Wall Street.

[anne]

Ken Melvin:

"I think it fair to ask, 'where the hell was Dodd and the Dems the past few months?' "

Robinia:

"You see, they are (were?) deathly afraid that insurance/financial services companies were about to move their jobs to London or Taiwan, if we did not accommodate them by 'improving the business climate' aka more deregulation."

[anne]

"----- Slapped"

Enough, enough of this, get it?

[BJ Feng]

Berkshire deliberately limited its exposure to derivatives. Warren Buffet didn't like the risk/reward proposition, the following was from May of 2007!

"Earlier Saturday, Mr. Buffet repeated his warning on the dangers of derivatives, saying that excessive borrowing by traders, investors and corporations will eventually lead to significant dislocation in the financial markets.

In fielding a question about derivatives, which he once referred to as "financial weapons of mass destruction," Mr. Buffett told shareholders that he expects derivatives and borrowing, or leverage, would inevitably end in huge losses for many financial participants."

Berkshire was responsible, prudent, and wise to limit their derivative risk. They did pass up short term profits, but Warren Buffet is so legendary, that he can shake off any short term criticism and pretty much do whatever he thinks is best for the company. For any shareholder group to pressure Buffet to change his investing style or step down for someone who will, is unthinkable. Buffet has earned the trust of investors, though to be fair, most CEOs are given pretty wide latitude, only after years of poor performance will there be any pressure on the CEO.

[don]

Ah. So why we know why AIG and not Lehman Bro's.

[Cynthia]

Sounds to me like McCain plans to use short-sellers as scapegoats so that his wolf-friends on Wall Street can continue to roam free sucking up tax dollars.

[KThomas]

Gotta love that Sage from Omaha. I can't think of a more respected American in the world right now.

BJ, thanks for the spiel, I learned something! (not kidding)

"When did we start requiring the presidents to follow the law? Didn't that change eight years ago?"...LOL!
Indeed, sir, indeed.

Boy, the Dems are gonna have fun in November. And get ready for the Mother of All Tax Increases, ye greedy bastardes! If ye don't like it, move your arse to Bermuda!

[anne]

"So why we know why AIG and not Lehman Bro's."

No spider web reach. *

* http://economistsview.typepad.com/economistsview/2008/09/connectedness.html

[BJ Feng]

I don't think people understand the extent of naked short selling and how much people have abused the shorting mechanism. When you short a stock, you are in fact, creating a share out of thin air. Legally, the person who bought the shorted share is entitled to vote, and will receive the declared dividend. That's why short sellers are required to pay the dividend out of their own pockets if they are still short on payment day. And the person who, in theory, loaned out his share, still owns that share and also receives the right to vote for the board of directors along with dividends. We allow short selling to create liquidity for the market, in theory, these created shares will disappear as soon as the short seller covers and buys back the stock on the market.

But what if the short seller NEVER covers? What if he continues to short more and more of the stock? Anytime he is asked to make actual delivery to a buyer, he simply shorts the same amount of stock simultaneously, creating a new short position to offset the short position he will cover by buying. So in effect, there are now more shares outstanding than the company has issued! When you increase the supply, the price will fall given the same demand. So you see how this can be called manipulative behavior.

But we can go further because investor behaviors and market psychology. For financial companies, short sellers know that at a certain point, investors will lose confidence in the stock, and lenders will lose faith in the company causing the company to declare bankruptcy. All they have to do is drive down the price to a certain point and the rest will be reinforcing. Once there is doubt in the market, then everyone has the motivation to play it safe and not lend anymore to that institution which is leveraged and cannot survive without those loans. This is very similar to an old fashioned bank run like the one seen in the classic, "It's A Wonderful Life". No bank, no matter how sound or prudent, or honest, or well run, can survive a bank run because it is leveraged and has made long term loans. Same here. It doesn't matter how "sound" Goldman Sachs is or any of these financial institutions are, if shares drop to a certain price, lenders will get nervous and stop lending. The low share price also makes it nearly impossible to raise additional equity through share issuance, thus the short seller has destroyed one potential countermove. And as prices move even lower, lending terms become so onerous and expensive that they end up destroying the company anyway. A company cannot survive if it gives mortgages at 6%, but it costs 10% for the company to borrow. Again, it's a win for short sellers, all they have to do is make sure everyone is on the same page and short the stock relentlessly. There is no collusion needed, at certain times, it becomes crystal clear who should be shorted next. We all knew that Merrill would be next after Lehman, and then Morgan Stanley, and then finally Goldman. We KNOW this and so does every single short seller in the market.

So they can create shares and increase supply of the shares outstanding by creating a perpetual short position. This is market manipulation and is illegal, but was never enforced, or enforced only rarely and with minimal penalties.

The ironic thing is that these investment banks were the biggest abusers of the tactic I outlined above. They would routinely do this to small, no-name companies, who never were able to attract much attention other than a few on the blogosphere. Of course, the know-nothing media doesn't understand the complex issues here, so they publish two quotes. One is from a no-name company executive whose stock has dropped 90%, another is from a well respected investment bank like Goldman who everyone knows. Gee, which person are you more likely to believe? Humm, will the people who abuse the system admit it, or will they call those who point out the abuse, whiners and crazy conspiracy theorists? I hope you now have at least some information on how the system works and that you will do your own research so that you can make an informed judgment on naked short selling.

[anne]

Ken Melvin:

"I think it fair to ask, 'where the hell was Dodd and the Dems the past few months?' "

Barney Frank was always there.

[anne]

BJ Feng:

Berkshire deliberately limited its exposure to derivatives. Warren Buffet didn't like the risk/reward proposition, the following was from May of 2007!

"Earlier Saturday, Mr. Buffet repeated his warning on the dangers of derivatives, saying that excessive borrowing by traders, investors and corporations will eventually lead to significant dislocation in the financial markets." *

* http://seekingalpha.com/article/34606-buffett-on-derivatives-a-fool-s-game

[ken melvin]

Derivatives: Speculating on derivatives as in calculus would have made more sense

[ken melvin]

Anne - They weren't on the take? You sure?

[don]

Anne: "So why we know why AIG and not Lehman Bro's."
No spider web reach. *
My thought was much simpler. I meant to say "Ah. So now we know why AIG and not Lehman Bro's." This in reference to Ken Melvin: "Then there was the problem that China was holding a sack full of worthless bundled junk that AIG had insured."

[Dickeylee]

Let's see, we've already given the financial segment of Wall Street close to $900,000,000,000.00 already by

- $200 billion for Fannie Mae [FNM 0.42 -0.061 (-12.68%) ] and Freddie Mac [FRE 0.26 --- UNCH (0) ]. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.

- $300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.

- $4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.

- $85 billion loan for AIG [AIG 2.06 -1.69 (-45.07%) ], which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.

- At least $87 billion in repayments to JPMorgan Chase [JPM 38.12 -2.62 (-6.43%) ] for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers [LEH 0.11 -0.19 (-62.37%) ]. U.S. Treasury Secretary Henry Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.

- $29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.

- At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.

And now we need another Federal Agency to (Resolution Financial Trust) to take all the bad paper off Wall Streets hands?!?
Oh, and the SEC wants to ban all short sells. Gee, wonder what the big boys know about Goldman we don't?

[dd]

Goldman is the facilitator of the connectivity web; Morgan was the originator and Drexel the inventor. Talk about connections!

[asia]

Global crackdown on short selling intensifies

http://www.iht.com/articles/reuters/2008/09/18/business/OUKBS-UK-FSA.php

At current market trend, short sales may pose some risk, but disrupting the short sale will solve the problem? I'd like to hear comments from Economists.

Of course hedge fund managers say "the FSA and SEC actions could hurt markets and throw them into disarray."

I wonder how much of the crackdown is politicians trying to do something to show off, how much is from solid knowledge and expertise.

[ddt]

Short-sellers stabilize markets and reduce volatility. When everyone is selling in a panic, who do you think is buying? Short-sellers buying to cover. What happens when no one is allowed to short? The stock drops, and there is absolutely no one buying, so it drops even further than it would have if there were short sellers needing to cover. The same thing happens in reverse: when everyone is buying, short-sellers are selling and keeping the price from spiking.

Banning short-selling decreases liquidity and increases volatility. bad, bad idea

[BJ Feng]

Boy this reminds me of the illegal immigration debate. Look, no one is banning short selling, the rules will now require people who short sell to actually locate and borrow those shares to sell, like what they should have been doing in the first place.

Naked short selling is illegal and already was illegal before today, this only makes it easier for the SEC to catch naked short sellers. No one I've heard wants to ban short selling, there is a difference between short selling and naked short selling. This is exactly what the media does with illegal immigration too. We're not talking about prohibiting all immigration, just illegal immigration which is already illegal. All we're asking for is enforcement of existing laws! Same thing in both cases.

Again I encourage you to look into the details of what has been happening for years now. Look at this giant loophole with the shorting rules...

# Selling stock short and failing to deliver shares at the time of settlement. This activity doesn't necessarily violate any rules. There are legitimate reasons why a seller may fail to deliver on the scheduled settlement date.

# Selling stock short and failing to deliver shares at the time of settlement with the purpose of driving down the security's price. This manipulative activity, in general, would violate various securities laws, including Rule 10b-5 under the Exchange Act. Regulation SHO does not address this issue.

You can see that it is almost impossible to enforce the second because the government needs to prove the intent of the short seller. We all know that is very difficult to do.

And finally, market makers are exempt from naked shorting rules for liquidity purposes. So the registered market makers of a particular stock can short all they want without having to borrow. DDT, momentum strategies are what is in vogue right now. Studies show momentum trading carries a positive expectation, that means if a stock goes down, you should short more and wait to cover, not buy. Only after the stock stops dropping do you cover. The same on the other side with buying stocks that are moving up. The people who buy stocks when they go down tend to be value investors, who have been burned very badly if they've purchased financials recently. The rule is never catch a falling knife.

[ddt]

BJ Feng... do some reading
England just banned short selling, not naked short selling, short selling.

The SEC is considering the same. we are about 5 miles ahead of you. you are the one who is behind.

[ddt]

Regulator bans short-selling in financial stocks
9 hours ago
http://afp.google.com/article/ALeqM5jYzUOkK_upjsXKHbXA4D_pD5oxRw

Source: SEC weighs broad move on short-selling
By MARCY GORDON – 1 hour ago
http://ap.google.com/article/ALeqM5j1qYpENSJmaTaTiLWSUFodScpFTwD939GVPG0

[ddt]

ps.. I don't care about naked short selling... never should have been allowed in the first place, but banning short-selling full-stop is idiotic

[ddt]

more:

Peak Insanity: SEC Plans to Temporarily Ban Short-Selling

http://globaleconomicanalysis.blogspot.com/2008/09/peak-insanity-sec-plans-to-temporarily.html

[BJ Feng]

I just read a story that the SEC is considering temporarily banning all short selling. Now if this is true, that's going too far and deserves a lot of criticism. It's amazing how incompetent the SEC has shown itself to be. So finally after all these years they finally get serious about enforcing the law, but they also want to go overboard, maybe to show that they're "tough". What a joke. And for those who don't know, the SEC is the regulator for the investment banks including Lehman and Bear Sterns. They were responsible for oversight. Can we say, oops? It was only a couple of years ago that they were caught with their pants down over the "pump and dump" scandals and the deliberate lying of analysts in published reports on the internet companies they had business with.

And this happened under the Clinton administration which is why I have little faith in government institutions no matter who is in charge.

[kthomas]

BJ, thou art American now.

[hari]

ddt - The reason why short selling - in current downturn - is dangerous was illustrated by the run on AIG before Paulson intervened.

Me thinks, it's time to consider the following policy changes or institutional rewind:

* Hedge Funds to be terminated - until further notice.

* Naked + Short selling outlawed - for the interim period.

* Non-Commerical parties off punting or short selling in futures market on commodities, including oil.

* Transparency of balance sheets of what's left of Investment Banks and Hedge Funds - no more leverage.

[paine]

i like the air pirate

he thinks he knows
as much economics
as TR
and he goes south from there

so what
why bother to tilt

which ever party nom wins
he's headed for hell fire

we are about to elect
either the next h hoover '28
or
the next g cleveland '92

[paine]

obama
with larry summers at his elbow
will never be as bold and big
as the problems the globe faces

the air pirate ???

hey at least he's got side arm sarah

[ken melvin]

BJ, thou art American now.

First? No. Second? Maybe. Third? Yes.

[ken melvin]

This should put it in the can for the dems, but ...

[Michael F. Perlis]

SEC Ruling Proves the Need for Novel Leadership Through the U.S. Banking Crisis

As the former Assistant Director of Enforcement at the SEC, I applaud the fact that the SEC is at least doing something. Short-selling has, in fact, been a significant contributor to the recent downward spiral of U.S. banks, but there are so many other factors to consider. It’s high time our regulators begin to think a bit out of the box. This is what I’ve been saying all along: We need more ‘CEO type’ leadership from our federal institutions, and by that I mean that we need more innovative leadership willing to come to the table to find a way to go beyond the initial individual efforts to pump funds into the system. Our nation's leaders must form a team from all of the major financial regulatory institutions to find answers to the inherent problems in system.

Most banks are now having trouble raising new capital from investors, a key step to maintaining solvency when loan losses are rising. To add to this crisis, a weak economy is adding to loan defaults due to the enormous loan activity during the recent housing boom. This crisis may dwarf what happened in the early 1990's when savings and loans were also under-capitalized and the federal government had to bail out these private institutions.

Important issues need to be raised, such as what is the true size of potential losses on sub-prime mortgages and other loans. Some estimates put the total at about $1 trillion. Questions need to be asked about the next big unknown -- the large investment banks, are they too big to fail? The failure of Bear Stearns, Lehman Brothers has raised the question of whether US regulators now consider the largest investment banks at risk. Who could be next and are there systems in place to address the failure of a major investment bank? 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 high level management team that can offer the leadership that is currently lacking within our federal institutions.

We must also ask what level of taxpayer dollars may or may not be needed before the crisis is over. The Federal Reserve has been loaning banks money with the expectation of repayment, taking collateral as a way to protect itself. There is discussion of creating another Resolution Trust Corporation, but we don't really know the extent to which this will continue. So, we must hope that a new and focused leadership will drive trust in the system and begin to define the limits of exposure for all of us. I am suggesting that we look at creating three fundamental strategies/approaches in order to restore confidence, build greater strength in the market and propel new growth. They are:

 Federal Economic Task Force: Rather than having all the various financial regulators, such as the Federal Reserve, SEC, Treasury and others all acting individually, we need to pull together all these organizations and have them act in unison, much the way President Franklin Roosevelt unified or created these organizations to dig out of the depression of the 1930's.

 Transparency: We still need to know the real depth of this crisis, who is at risk, and where the next big problem may be, and the public must be educated as to the risks.

 Leadership: Lastly, we need new fresh leadership. We must look beyond the ranks of the financial industry and the traditional economic advisory panels to find new ideas and individuals willing to make hard decisions.

These are elements of a transition towards solving this deepening crisis and defining how our financial markets will and must be structured in the future. We cannot afford business as usual, we need to act now.

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