Short selling has been restricted lately, with naked shorts on financials being forbidden. Short selling is when you sell a stock now, borrowing it, then buy it later (hopefully after it’s dropped in price). Naked short selling is when you don’t borrow the stock, but sell it anyway. You then have 3 days to deliver the stock.
Over the pond, in yonder Britannia, they decided to ban just not all naked shorts on financials, but all shorts on financials period. The SEC is trying to decide if it should follow suit, or if it should go all in and ban all short selling, period.
This smells of panic driven decision making. Regulators are in a cold sweat, and they haven’t thought this through. Short selling, ironically, provides market support. If you sell a stock you don’t have, that means you are now on the hook for it. As the price declines, you have to buy. You become built in support. One of the ironies of short selling is that it makes steep and precipitous declines less likely. Huge amounts of short "interest" on a stock means that it also has huge amounts of built in support on the way down.
Getting rid of short selling entirely doesn’t make market meltdowns less likely. It makes them more likely. Just as letting banks use depositor money to shore up investment banking subsidiaries is throwing good money, your money, after bad. Just as allowing banks to book "good will" as regulatory reserves doesn’t actually change how likely they are to be insolvent.
Regulators are making decisions in the grip of stark fear and their critical faculties aren’t working anymore. Desperate to stop a meltdown at all costs they are making one more likely, and by letting banks gamble with depositor money, making it more damaging if it does occur.
(Note: Original definition of a naked short was wrong. Corrected.)
Related posts:
- Limits On Short Selling Are Not Enough
- FDL Book Salon Welcomes James K. Galbraith – The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too
- Pecora in Perspective: Like the Miracle of the Loaves and Fishes
- Pecora in Perspective: A Glossary of Useful Terms
- FDL Book Salon Welcomes Barry Ritholtz – Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy
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Aloha, Ian! Wow, another post just went up minutes ago…! ;-)
I love the smell of Wall Street burning in the morning. Smells like utter failure. Good to know that Republicans really know how to deal with the economy.
Lets just ban WALL STREET alltogether…mokay?
so let’s see,, the junta has massive short positions, they will ban any new shorts sales so there will be no support to touch off an oversold rally and their short positions will do even better for them- these people are smart and are working some angle as usual so maybe this just another chapter in the calculated move to steal as much as possible from as many as possible-The US and the UK are creepy these days
So they’re in panic mode. Welcome to the reality-based economy.
By the way, a possible bamboozle alert? McCain is claiming that he called for more regulation of Fanny/Freddie two years ago. But weren’t the people who wanted to mess with the Macs wanting to do it because they wanted to get rid of them, not save them?
at least the bad economic news,hasy kept the FROZEN FLOOOOSEY off my teebee
There seems to be Widespread Panic in the room tonight. Oh, wait a minute! It’s Madness this week:
continues over yonder at huffpo
The Post keep coming fast and furiously!! Whew no time to catch your breath!!
Thanks to Thomas Mifflin Digg IS open!
Stupid.
Hey one question. Who actually loans out the stock that shorts then borrow? Seems like any self-respecting long would be crazy to loan out their stock to someone fighting against them. Is my stock that I own in a brokerage getting loaned out in a bet against me?
I’ve sung this song
But I’ll sing it again
’bout the place that I lived
On the wild windy plain………….
What’s up?
How many times ya think McCain’s people will have to tell us what he “really meant” tomorrow? I just get a feeling it’ll be a good day for ol’ John. i say just once.
I believe you can restrict your stock from being loaned out if you are not on margin — but I am not sure about that.
Other brokerages, banks, funds. I’ve shorted. It’s almost automatic, very rare that someone won’t loan it out to you. If you’re an individual, usually it’s your own brokerage that lends it to you, since they own a bunch, or have clients who own a bunch.
Tinkerbell sure is flying all over the place tonight!!! *G*
“Getting rid of short selling entirely doesn’t make market meltdowns less likely. It makes them more likely.”
Yup, because the actual value of everything will dissolve down to an actual base of value…What used to be valued at $100 will be revealed to be, once they get rid of the “blue sky”, much, much lower…but at least we have a chance to re-establish some real value in commerce and economy.
It’s gonna be a bumpy ride. But I imagine the “powers that be” that are trying to shuffle it all into the closet will prevail and continue the “myth” of liquidity (that they won’t reveal) for a little while…They are trying to hide their crimes before the world sees their dirty dealings.
I hope someone blows that closet open.
Let the chips fall where they may. It is the only way out of this mess…
That is my other thought. Stop the gambling.
I think Tink is the new economics mascot since we’re now in never never land.
ha. I thought Tink represented “things being so because we do, we do believe in them.” clap clap clap
Hahahaha…You’ve nailed it ever time!!!
Tink!! Long live Tink!
Ok. help me out here. I’m not running for President so I can say this: I don’t know jack shit about any of this. What’s a good book to break me in?
Kinda like “Economics for Dummies”
Short selling is not for the squeamish.
Here I thought it was Bizarro World, what with Rabid Republican Free Market fanatics now advocating nationalization of industry.
Is short selling related to short ride
But, I thought Tinkerbell was coopted by Cheney/Addington, with all that industrial strength pixie dust they’ve strewn about…?
I don’t know if anyone has noticed, but I’ve been laughing because it frequently comes up on MSNBC and CNN that people are taking out their money and putting it “under their mattresses”; whereupon the horrified pundits warn them…no, no, no, you must leave your money in the bank…it might get burned up…or…flooded away…Ahhhhhh…..
I’m sorry, perhaps that is very good advice, but I think it is hilarious…horrified pundits (who probably have everything already under their own personal mattresses, since they get the news before we do…)….hahahahaha…
Makes me laugh anyway…what the hell is this…am I having a flashback, am I dreaming???? *g*
Thanks, Ian, for that helpful insight.
I think there’s a joke in there somewhere, but short selling is related to temperament. The question is: Are you a pessimist?
Krugman’s Peddling Prosperity is a good place to start. A bit old, but he has a knack for explaining things like inflation.
sound stoned t’ me /g
Actually I think that they have been snorting that pixie dust.
If I had money to burn…I’d play that short-selling game in a minute…sounds like a thrill…I would, I’m not kidding.
Alas, I’m way to broke to do that. Oy vey…would have been fun to be a player…sigh.
I draw the line at Tinkerbell. They may have smeared liberal, but I’m taking Tink back!
thanks. i read his column. enjoy it. that’s a good idea.
Sorry, your definition is incorrect.
Normal short selling is when you borrow the shares (agreeing to return them at a certain time and/or on demand) and then sell them. The shares are delivered to the buyer and you get the cash. At the agreed time, you return the shares to the person who lent them to you. Buying the shares at that time may cost you more than you sold them for.
Naked short selling is just selling stock that you haven’t borrowed. You have about 3 days to deliver them to the buyer. Failure to deliver is pretty serious. And it can happen if nobody is willing to sell or lend you the shares. Naked shorting invents shares out of thin air for that brief period of time and can be used to manipulate the market.
Unfortunately or not…I’m like that without that..Oy!!! *G*
Oh and if you use a brokerage account rather than holding the shares in certificate form, your brokerage is likely lending them out to short sellers on a regular basis.
With a margin account, it’s almost impossible to prevent this.
*cough* … start with “My Pet Goat” then proceed to “Brush Farmin’ For Dummies” …
I don’t think Tinkerbell would want to be called Tink. Be that as it may, she’s not worth a Tinker’s curse. She certainly has nothing on Wilma Flintstone.
Mine is in a credit union who does not do mortgages….. they have IRA’s, CD’s and your shares either checking or savings…… NO fancy stuff for me…… Keep a small amount in one of the big boys to use when I travel and need to get cash and do not want to pay ATM fees……
I know absolutely nothing about any of this but it’s interesting. When I read naked short selling I think of Danny DeVito.
You’re right, and I’m wrong. Fixing.
I think of guys in their mother’s base surrounded by Cheetos’ bags.
Ian’s Tinkerbell theory of banking: “Banks will survive only if we’ll believe that they’re solvent.” ;-)
gambling for us…A SURE THING FOR THE INSIDER/FAT CATS
we’re the PATSYs/RUBES
One day a Rooster walked into our yard…now those hens are a layin like they never did before that rooster walked into our yard.
Tinkerbell put your shorts back on.
Oh, the whole thing is all over again. Now I keep thinking of all that talk in The Godfather about going to the mattresses. And everything that’s been proposed this week, it seems corresponds to something that was known to be part of the problem in the late 1980s and early 1990s, after the banks had whined their way into getting permissions in the early 80s.
Taking IB assets onto bank balance sheets (hell, why not call them BSs) is not unlike the whines about expanding allowed balance sheet assets from the early 1980s, the kind of thing that pre-Keating 5 lobbyists tried to wring out of Congress.
Goodwill accounting was part of the 1980s solution to a lack of suitable merger partners for failing banks (arranging such mergers has always been part of the acceptable playbook for the FDIC), “needed” then because pretty much every S&L was insolvent for a couple of years. Needless to say, that move just delayed the inevitable, when it didn’t provide outright opportunities for looters to run S&Ls into the ground.
It’s as if, regardless, they’re going to keep pushing until they get that old wish list under the tree. A certain amount of laughter is entirely called for.
i did it for 8 years….and tooka 300,000 hard bounce at the end…………oy
Isn’t it that you watch micro stock movement and “buy” it and then a few minutes later when it goes up a tiny bit, you sell it, and buy something else, and that no money ever changes hands…isn’t that it? Then, because of the buying, it inflates the value of the original thing and the next “thing” that you bid on, and on and on, into something that doesn’t exist at all. Isn’t that it? A big game that has no inherent value. Sort of proof of Buddhism (i.e., there is no inherent value), if you think about it…
A giant pyramid scam.
Do you want the banks to live? Clap louder! Clap louder!
As Not Insane candidate, Papoon, always counseled, you’ve got to have confidence in the system.
John McNasty was RIGHT IN THE MIDDLE OF all this KEATING..5
Sadly…Wow…ouch!
I recommend Peddling Prosperity by Paul Krugman. In my view, and I don’t know if anyone else agrees, it’s alittle bit old, but he has a knack for explaining things like inflation.
YUP
pyramid is right
very stressful way to make a living if you are a small player
World’s largest legal crap shoot.
I personally favor Uncle Karl’s labor theory of value (which actually reinforces your point about the worthlessness of stocks).
Uh-Clem!
i tired ,…..love to yall…nite!
Night, Sadly.
BTW. If you want to do shorts, you should always do some sort of buy option to limit your downside.
If FBAR is currently trading at $10 and you think it’s going to tank, you can borrow shares and sell it. $10 in your pocket. If it goes down to $8, buy the shares cover your position and grab the $2. Most you can make is $10.
However, your downside is unlimited. FBAR could suddenly release great news and the stock could jump to $100. Now you’ve lost $90. Way more than your possible gain. And you may end up bankrupt instantly because the guy who lent you the shares is going to instantly call them back (even if they pay a penalty clause returning all your interest plus some) so he can sell and make the $90.
So when you short, you also want to find someone in a long position that will sell you an option to buy. You may pay $0.10 to somebody for the right to buy FBAR at $15. It’s cheap because the long position selling the option doesn’t think FBAR will reach $15 before the option expires.
But that $0.10 investment limits your downside to $5. If the stock jumps to $100 you exercise the option at $15 and return the shares to the lender. And there is a good chance the lender is actually the guy that sold the option.
That long position is trying to make money by lending/optioning the shares under the assumption that over a long period of time they want to own the stock, but it’s unlikely to make big gains over the short run.
Actually McCain made the Keating 5 possible…… He was the one who abused his office… he was the one who pushed the regulators to back off….. he and John Glenn are the two who were cleared in the ethics probe…..
Hopefully when wingnuts Google the question: “Isn’t Regulation always bad for Business” they will get the PRO-regulation post I wrote in July of this year.
Yeah me! Regulation is always bad for business.
How do I get a job as a regulator in the new Obama administration?
Oh, don’t I know! This man’s book is open on my desk right now.
And wife said honey we ain’t makin no money no eggs did those chickens lay…see my 44
Isn’t stopping short selling until the end of the year what Britain has done? Seemed to have helped there.
Senator Dennis DeConcini (D-AZ) was on our local radio and said that McCain threw him under the bus during this probe……. Did not have a lot of nice things to say about McCain……
Does anyone with half a brain and a memory longer than yesterday?
OT: FiveThirtyEight.com has done a complete flip on their projections today:
Electoral vote: 284.8 to 253.2, Obama
Win percentatage: 61.2% to 38.8%, Obama
Popular vote: 49.5% to 49%, Obama (very slim consider the two previous lines)
As I recall that’s exactly what McC did. It was really a huge scandal at the time. Probably wouldn’t look like much today since the entire gov’t is a criminal enterprise.
You can make yourself crazy following the dailies. Trend line is the thing to follow.
Banned Thursday, effective midnight, caused a rally, probably another Friday. Not surprising, since it releases all the current shorts in one go – lots of people suddenly have to buy, now. Longer term? We’ll see, though with all the noise, we’ll probably never be entirely sure, though economists will dig through the data 10 years from now or such, and try to figure it out.
Sadly – if you’re still here,
The Coon Hound was going nuts outside, so I went to see what was up. Big Surprise. Coons!
Three gorgeous ones on my wall — I have grapes that they love.
Well, well.
Then, of course, he was mad at me, ’cause he thought I was the one who chased them away.
Beautiful creatures.
In many neighborhoods here, it would have been black bears. Got to be careful going out to check on that stuff (not in my neighborhood, however).
‘Pyramid.’ Huh. Tombs of their creators, weren’t they originally?
just checked back before shutting down putter…such a cute story,how ya feelin? go to bed and cure that flu!!!!”g”
Sorry for the OT — just wanted to tell sadly.
Tes but if you are a hedge fund or investment bank you can make the market with the huge volume you control. You buy a postion and drive price up or sell it down. if you do it incoordination you control the market. That’s how they been doin it for many decades.
hahahhahahahaa
here too,im skeeeeeeeeerd to go out to the car at night…”g”
It turns out that 538 is a complex projection based on trends. It is a projection of what the result will be in November, not of what the result would be if the election were held today. Nate Silver the proprietor of 538.com is well regarded for projecting outcomes of sporting events and has some notable successes on this year’s primaries. (See wiki entry.)
Thanks. Interesting. Very complex.
Well, I live in the foothills. No bears. Deers once in a while. Mostly just coyotes. But the grapes are inviting the raccoons.
Plot Hounds or Coon Hounds were however bred to hunt bears.
I will be careful, tho. Thanks.
Speaking of getting scared, this explains sooooooo very much.
i always said,and it was my trading style to follow,the big boys,cause they moved markets…unfortunately,we were always the last to know ,when they pulled out…rigged,and tooooo stressful
What this Bail-Out says to me is:
The Goopers actually drove the Economic Bus off the Cliff.
Just like We All said they would.
And they were screaming at US, “It’s my way or the highway…You’re either with us, or against us…Greed is Good…Stop Whining” as they irrationally accelerated towards the Precipice.
And now – with the whole contraption airborne – they want a “Do Over” – at Our Expense – without owning their mistake.
Wake Up, America!
Thanks for the link.
Thanks so much Ian. I hope someone is reading your stuff.
Much better today.
Sleepy well, you.
Yeah, and now, at the end of Bushco, should we be so lucky…., they are creating an entity to hide their financial crimes…or some of the lingering crimes, in a “secret” (they didn’t even tell Boner, that is a problem right there)….
They are in a secret process of covering their tracks…now is the time to pounce…now…now..unfortunately, I suspect that the Dems in power are in on it….why else would Pelosi be involved today…hide the evidence, they’ll all do all of this in “secret”…so that the constituents remain uninformed, as usual, to what they are up to….
How dare those that work for us, hide from us, what they are doing???? Because we let them do it!!!!! They have no right to hide what they are doing from the people. There is NO national security reason….no reason for “states’s secrets”…no reason..
It is treasonous. They are determining what to do with “our” money. Is that just???
key words
TOO BIG TO FAIL
they knew at the BEGINNING they would be bailed out
ESSENTIALLY they had NO RISK
I am well familiar with Coon Hounds from living in eastern Oklahoma. Red ticks, blue ticks, black and tans. Beautiful animals.
ok puter going off now…nity nite …again
That was exactly my thought this evening.
I don’t believe it. Especially on matters of gun control.
Which is really why we had all those regulations preventing consolidation. Needed to prevent industries from getting that concentrated and companies from getting too big to fail.
David Neiwert is upstairs!
Is Sarah Palin A Closet John Bircher?
This one is actually a Plott Hound and a Brindle. He got to meet Token last summer when we visited Suzanne. They did the nose to nose thing and were okey dokey.
He’s a big love. But, a really Loud Bark.
Welp, I hate to poke the fear button myself, but if you look at it from a certain probably highly unlikely angle, then it might have been not a giant cock-up, but rather wholly deliberate. Recall that a bad enough economic emergency would satisfy the preconditions for declaring martial law including but not limited to suspending the election. I have long noted that the Rs have been behaving exactly as though it doesn’t matter how extremely lame the McCain campaign is, while simultaneously conspicuously not looking like they’re the least bit worried about losing power, nor about being prosecuted for their many crimes including but not limited to frickin’ war crimes. Maybe they even had a pact to do the war crimes specifically so that all their bridges would be burned, and they’d all personally have no choice but to go ahead with their coup.
Or maybe I just need a nap.
Do they bay like the coon hounds? Used to hear them sometimes at night when they were running the coons.
Another trick is they delay your buy order a few minutes and shave the points picking up a little on the trade beside the comish. They use their own shares too. Merrill Lynch did it and I hated it so I quit playing their game. If your in Funds or the long haul they pick up a little extra and noones the wiser.
A friened son has a fund he manages for 1%. The volitility is probably killing him he has 50 brokers.
Well, I don’t know, ’cause I’ve never taken him hunting. I only know the high energy, excited short, but deep and loud. Like, maybe when he’s found something.
But, baying…I don’t know.
Off to bed. Back to the trenches tomorrow corrupting young minds.
He also talks to me, like Scooby Doo.
Rhooa rhor rhoaw rhoaw.
That mean’s Mom, I need more water. I think.
Sweet non-corrupting dreams to you dear doc.
Duh, that was for you know who.
I guess I should go to bed now too.
Gotta admit, I’ve always felt there’s something sleazy about borrowing stock from someone else to sell, then keeping the proceeds for yourself, even though you then wait until the stock hits rock bottom or thereabouts, buy the amount you sold back and replace the stock to the original owner. Seems like ill-gotten gains to me. Maybe if you were to split the proceeds with the original owner it would seem less yucky.
“Tell ‘em the good news, Mortimer…”
No ‘fraid not. This is still a free country and we need a place like the markets where Rich people can show their utter incompetence (at times) and fail as big as they want.
Ya know they would’ve made and kept more money in their pockets if the markets had been better regulated and if Gramm had never been a senator than they’ve made from all the Bush taxcuts.
Ya know it’s true!
Excellent point.
Consider this:
You look at the market or a stock and you wonder whether it’s going to go up or down.
If you think it’s going to go up, then you’d buy it.
But, if you think it’s going to go down, what can you do to make that bet?
The answer is short selling.
But, as the market demands that you only sell what you own, there is some fancy footwork wherein you borrow the stock and sell it. If it’s price goes down, then you buy it back low — thereby having achieved the “buy low, sell high” in reverse “sell high (short), buy low” and make a profit on the difference between the low & high.
Naked shorting, despite sounding like Danny DeVito hawking something on t.v., is selling WITHOUT borrowing the stock first. As was said above, this creates new stock out of thin air (see borrowing money from the Fed to create new money or credit).
Naked shorting thus has somewhat different effects, if done in large amounts, than ordinary trading or shorting.
Now, for today’s situation: why would they ban shorting? I’d guess there’s some malfeasance afoot, despite not having evidence of it. After all, consider who’s involved. What do they want to do? Usually when you’re selling you want the price to go down, so you can buy it back lower. So, what can they do to scare the market into falling? Well, they seized F&F and AIG and let Lehman fall. One could argue they started a war in Georgia. They’ve tried a lot. What happens now? What if there isn’t a crash? How long can the shorters maintain vigilance before losing on their bet that the market will crash?
The answer is somewhat like wondering how long banks & others can hold empty houses before having to sell them for 10 cents to the dollar or let the market evaluate them at worthless. The stronger will survive, but many will sell and lose money and many will stupidly hang on and lose everything. I suggest house owners refi with the Housing Law provisions and end their worries.
On Wall Street it’s not like that. They’ve got to hold on or even push the market up to force the shorters off the cliff.
Too big to fail means, in actuality, just too big (and in need of being shrunk).
Any company that is considered “too big to fail” must be broken up into many “too small to matter” companies so that one or several can tank without having any overarching effect on the economy.
Why would you think that this is a panic response?
Your problem is that you’re looking at this from a narrowly economic point of view. Yes, from that point of view, banning short selling is likely to heighten the market crisis.
So what? Markets don’t vote. The electorate decides who will win the next election. And the electorate is moved by narratives.
The narrative that is out there right now is forming a huge bull’s eye right on their fat asses, and that with an election just 6 weeks away. Their wanton, deliberate, legalized-bribe-driven, complete failure to regulate the shadow banking system, is leading to a major market meltdown. That narrative cannot stand. But it will stand unless they replace it with another.
The new narrative is going to be that it’s all the short-traders’ fault. Obama and his namby-bamby good old boy network insider friends will tell you that bold action like guillotining short-sellers on the Mall would not really help the market situation, that it would violate people’s rights, etc., etc. All just weak ACLU crap designed to cover for Obama’s insider friends. Only John McCain will take bold action to save us and, more importantly, punish the guilty, in this time of crisis.
Look, even if this particular line doesn’t emerge as their narrative, the wider point is that you should not be misled by the analogy to the Great Depression to the comfortable belief that, surely, such an epic fail in the markets that the other side has aided, abetted and enabled to the hilt, will inevitably lead the electorate to turn on the enablers and facilitators. The other side thrives on fear and terror in the electorate. They are infinitely more ruthless than our side at exploiting narratives that will turn that fear to their electoral advantage.
And if the actions that they take to feed the narrative that successully shifts the blame happens to make the underlying reality worse, well, that’s life. As long as the blame is shifted successfully, the magnitude of the disaster doesn’t hurt them, in fact, is better for them if they have shifted blame to the political opposition. Sure, it’s possible that the blame shift won’t work, and they will be left with that much bigger a price tag. But this market meltdown already carries a Wrath of God price tag. Might as well drown in sixty feet of water as in six…
Followers of Karl Marx call it heightening the contradictions. Followers of Karl Rove call it taking care of business.
Yes, and remember Norquist’s bathtub. The far right WANT to bankrupt government.