As all of my regular readers know from reading my posts over the last 12 months, the US Financial Crisis has NOTHING to do with short sellers. I thought this point was so obvious that I never bothered addressing it…but when John McCain calls for the firing of SEC Chairman Christopher Cox because he allowed short selling I have to step in.
Why? Because McCain is wrong and he knows it. This is classic misdirection for the purpose of political gain. Americans need a villain to blame the crisis on and it’s a much stronger/easier sound bite to say “short sellers” than to explain the crisis as follows (Quote from Paul Kedrosky).
“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.”
Now that I think about it, it is easier to say “short sellers” and “evil doers” afterall.
Regards,
George
Hi George:
I completely agree with you concerning legal short selling. By shutting this off, the SEC (and US government) is basically saying good-bye to free markets. They are admitting to the failure of their previous policies. The banana republic statement is on the mark – what a way to run a country! The degree of cynicism among the current leadership is unbelievable – they will do anything to try and keep the sinking ship of state going until after the election. Then they will blame everything on the next guy. What a bunch of losers!
Unfortunately, we in Canada will be significantly affected.
Ulrich, thanks for chiming in. Great comments. To be clear, I fully agree that NAKED short-selling is a major problem and that the SEC blew it by not enforcing the rules. This is especially true on the OTCBB and for other small companies that were naked shorted out of existence. It’s an illegal activity and needed to be stopped years ago. No argument there.
Legal short-selling, however, is not an issue. It is a vital part of the markets. To ban short-selling is to essentially fix the markets. True, it is good for the majority of investors that don’t sell short and have taken a beating on all of their long positions – but it is still a joke.
What really upsets me is the fact that we have idiot politicians making idiotic decisions just weeks before an election.
Barry Ritholtz said it best this evening – the United States just became a banana republic.
Regards,
George
Hi George:
I don’t think they were blaming short sellers, but rather “naked” short sellers. I also don’t think they were blaming the crisis as a whole on this issue. Naked short selling is merely one of the contributing practices in a market which seemed to be dominated by extremely risky, short sighted and sometimes illegal activities. Of course, the creation and busting up of the housing bubble has little or nothing to do with illegal short selling.
I agree that they were using this as a diversionary tactic from people focusing on the real problem – irresponsible fiscal policies. Nevertheless, I believe that the issue of naked short selling deserves to be raised since it has crushed many a small cap company practically to oblivion. The more we can do to eliminate this obnoxious practice, the better.
Keep up the good work.
Ulrich Werneburg (ozgoode)