Joined Nov 11, 2007
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Great article on the folly of European short sale bans

Read it all here:

Some believe that in times of crisis, little angels come down from heaven to rescue the few who would only try to hear them.

These mysterious beings are called shorts.

You might conclude that shorts are indeed of celestial origin when you consider the people who revile them the most: bankers, CEOs, beholden politicians and delusional investors caught unaware in a financial calamity that has so obviously been brewing for years.

“When I find a short seller, I want to tear his heart out and eat it before his eyes while he’s still alive,” is what one Wall Street chieftain said in 2008. You may remember him. You may not. His name was Richard Fuld. He was CEO of what used to be called … um, Lehman Brothers.

Fuld was certain that pesky short sellers had conspired to spread false rumors and bet against Lehman’s stock.

One of them was hedge-fund manager David Einhorn, who publicly argued that Lehman’s books were rife with accounting gimmicks and that the firm didn’t have enough capital to cover its exposure to dicey real-estate loans.

Lehman’s subsequent bankruptcy liquidation proved that sometimes “false rumors” are true. And anyone who listened to Einhorn rather than Fuld avoided certain perils of financial hell.

It’s hard to forget the witch hunt over short-sellers in 2008 as Lehman and other firms unthinkably slid toward the abyss.

“We’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down,” then-Morgan Stanley (MS – News) CEO John Mack complained in a memo.

Mack led a parade of desperate Wall Street bankers to Washington, where they successfully lobbied for a temporary ban on the short selling of 799 U.S. financial companies, including well-known toxic-debt waste dumps, such as Washington Mutual, and companies that didn’t need it at all, like Berkshire Hathaway Inc. (BRK-A – News).

“We were concerned about the possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions,” the Securities and Exchange Commission explained in its Sept. 18, 2008, emergency order.

Banks even got then-New York Attorney General Andrew Cuomo to launch an investigation.

“I want the short sellers to know today that I am watching,” Cuomo menaced.

See, when people buy a stock long and spread happy rumors about its upside, that’s the free market. But if you go short, Cuomo’s gonna get you.

Never mind that shorting is just as essential to many institutional trading strategies as buying long. Or that a healthy market is one that rewards people for being right.

It’s difficult to find any evidence that 2008 attack on shorts was little more than a reflection of the desperation, folly and hypocrisy of certain Wall Street players accustomed to rigging the world’s biggest casino in their favor. What followed was the inevitable collapse that we are still slogging through today.

Nevertheless, panicked regulators in some European countries have now instituted temporary bans on short selling, and they want short-selling bans of their stocks in U.S. markets, too.

“Only this way can destructive speculation be countered convincingly,” said German Finance Ministry spokesman Martin Kotthaus on Friday.

Destructive speculation? Sound familiar?

It’s as if confidence can be regulated. It’s as if the euro (EURUSD – News) would come roaring back if we simply outlaw what the little angels are telling us. It is yet another ominous sign.

“I will hurt the shorts — and that is my goal,” Fuld boasted to his shareholders in 2008.

Fuld was one of the best things that ever happened to the shorts.

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One comment

  1. cronkite

    Nice read….so true about crucifying ss while nobody does anything about pump and dumpers…

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