How Short-Sellers Almost Destroyed U.S. Banking [System]

CNBC ^ | Tom Brennan

[CutePuppy]

If you’re going to ban shorts then you also have to ban longs. It works both ways.

Actually, it doesn't "work both ways" for many reasons, including but not limited to:

forced sales due to margin calls (not necessarily your own, but other owners of your stock), driving the stock price even further down

"fear is stronger than greed", and while nobody makes one to buy a "spectacular stock" you can still lose money or access to capital when the stock you own goes down simply due to short selling and consequences related to that

companies who have high short interest and whose stock lost value as a result, may lose customers and/or potential suppliers due to stigma and may not be able to raise more capital to expand or acquire competitors or technology, simply lacking the power of using stock as a "currency". These business decisions should not be "dictated" by short sellers.

low stock price and company capitalization may even cause company violate its debt covenants, even if business has not been fundamentally affected, i.e. short sellers may just achieve a self-fulfilling prophecy. Killing companies is often easier than creating viable ones.

...

Capital markets (i.e. "long" positions) had existed long before the short selling in its current form was accepted; at the same time it's hard to imagine a pure "short" market so, again, it doesn't really "work both ways". At least, let's acknowledge that theoretically and practically, short selling is a bet on the destruction of capital - right or wrong, justified or not, benign (honest) or malicious. Like they say of insider sales, "There are many reasons to sell the stock, there is only one reason to buy it".

And, if you have read my posts carefully, I do not want to "ban" short selling; as I have said, it has many uses. However, the reason I posted this article (and "Anatomy of Morgan Stanley Panic") is not to propose that all short selling and short sellers are "evil", but because the articles clearly show and explain how vulnerable our financial system is to deliberate attacks using short selling (and derivatives like CDS) along with tactics designed to actually hurt institutions' business. And hopefully let people know of the dangers that exist before "financial 9/11" happened (if it had not already) and that sometimes it's not a company's or companies' fault - the problem is systemic, and we need to do something to prevent it, even if some people may not realize as much profit as they otherwise might.

Here are some sensible letters to WSJ, addressing the issue, in response to Charles Schwab article proposing to reinstate the SEC uptick rule:
Is Restoring Uptick Rule Good, Bad or Just Irrelevant?

[CutePuppy]

We should pass a law that stocks are only allowed to go up.

Yes, right next to the paragraph outlawing "climate change" and mandating constant 70 degree Fahrenheit 24/7/356 everywhere in all 57 states.

[tallyhoe]

That’s true, but these short sellers are reeking havoc when the Economy is so shaky anyway. They can cause a company to loose billions in Stock Value just buy sellers selling short!

[palmer]

Was it you who said Cox was Bush’s worst appointee?

No, but the SEC is pretty useless at this point no matter who runs it. The basic reason for the market collapse is past distortions of the market by the government (low interest rates, PPT, etc) not too much or too little regulation.

[supercat]

They can cause a company to loose billions in Stock Value just buy sellers selling short!

By "stock value" do you mean shares outstanding times share price? If so, why do you care about such a meaningless quantity?

If it would have been possible yesterday to liquidate all shares of the company for $100,000,000 but today such liquidation would only yield $50,000,000 then it would be fair to say that the company's value has lost $50,000,000. In most cases, however, only a tiny fraction of a company's stock will trade on any given day; the fact that some people are willing to buy 1,000 shares at $10 each ($10,000 total) does not mean that one would be able to collect $10,000,000 for 1,000,000 shares. Maybe a million shares would be worth $10,000,000 but unless one actually sells them one won't know for sure.

[tallyhoe]

When short sellers buy they only put up about .10 cents on the dollar betting it goes down. However if to many people short sell the same stock it creates a panic among owners of the common and preferred stock they start selling and the company can loose half its value over night!