Shouldn’t Naked Short Selling be Made Permanently Illegal?
Zeke Zongerella asked:
dn’t Naked Short Selling Be Made Permanently Illegal?
Does the title make you uneasy? Let me assure you that it has nothing to do with any thing on sex or what is commonly perceived as indecent, however, those stock market players indulging in this practice are certainly being indecent to the rest of us innocent investors. Let me explain.
To understand naked short selling you need to understand short selling. Let me give you an analogy on short selling. Supposing your neighbour came to you and asked to borrow your ax that you keep in your garden shed and you lend it to him. The first thing he does with the ax is chop your arms off. That would be akin to short selling. In the stock market, a speculator borrows shares of a company from his broker (who lends shares belonging to another of his clients, generally without asking the owner’s permission) and sells it to a buyer with the expectation that the share price of that company would go down in the near future. The seller then, at the appropriate time, buys the shares at the reduced price and returns them to his broker. The broker gets his commission, the speculator his profit and the only loser is the actual owner as the value of his shares has gone down. Neither the speculator nor the broker see any thing wrong in making money at some one else’s expense. What is even more ugly is that this is done by thousands of short sellers and hedge funds working in cohesion to drive down share prices of certain companies purely for their own profit.
Now consider how naked short selling works. Here, the analogy I will use is that of a con man. Your neighbour comes to you and offers an ax for a lower than market price. You agree to buy and strike a deal with him. The only problem here is that he does not have the ax and he has not even contacted any seller. Further, he is now going to go out and offer more of these axes to any body who is willing to buy with out having any source or agreement on purchasing them. Eventually, the market perceives that there is a far more supply of axes than actual demand and therefore the price of the ax goes down. He then buys it at his leisure and delivers to you or occasionally he may not deliver at all. Speculators and hedge funds, before 17th September 2008, offered shares of companies they had not even bothered to borrow (as traditional short sellers do) or source. The consequence of this was that there were far more shares of certain companies sold than that company had actually issued. Can you imagine what would happen to a company’s share price if millions of non existent shares are sold at ridiculous prices? Yet, until the SEC brought in new rules on the 17th, this was standard practice. To people like me and hopefully you, naked short selling just sounds like a con game - a Ponzi scheme. Companies that were directly affected by these hedge funds and speculators were Bear Stearns, Lehman Brothers, AIG, Merrill Lynch and a thousand other less well known names. The wealth of these companies was destroyed for the enrichment of a few. Lehman Brothers, a Fortune 500 company, has disappeared in bankruptcy. The others have merged or have been nationalized by the US.
In spite of the carnage (estimated at $100 billion and 1000 companies by Robert Shapiro, former under secretary for commerce and economic affairs) that has been going on, you will still find economists and columnists telling you that shorting is good for the stock market as it balances the positive bias a poorly performing company may have in absence of shorting. This, to me, sounds like self serving logic as a poorly performing company will lose its share value the moment its quarterly results are announced. It is a matter of just 3 months and you do not need these short selling parasites to tell you that a company is not performing. Sooner rather than later, news of the company will become public as it leaks out from its employees, suppliers and investment houses that track the company.
The SEC has curbed naked short selling only for a month (by forcing naked short selling speculators to deliver the shares with in 3 days of a deal) and in its own press release has said “That rule takes effect Thursday (17th September) but was adopted on an interim basis and the SEC is seeking public comment on it for 30 days.” Why they cannot permanently outlaw not only naked short selling but also traditional short selling is beyond me. These are destructive stock market activities which put in jeopardy your investment and therefore possibly your childrens’ education and your retirement - most pension funds hold stock market investments.
In conclusion I would like to say that naked short selling is blatant stock market manipulation perpretated by unscrupulous, greedy and totally ruthless people for their own ends.
I would appreciate it if you would leave any comments on how you feel about naked short selling on my blog at http://moneyinfoblog.wordpress.com/
Zeke