What makes financial system different, and thus more vulnerable to this type of attacks and manipulations, from other industries is that banks are simply conduits of the system and are, by design and necessity, leveraged and relatively illiquid, i.e. they trade liquidity (often borrowed from other banks or Fed at lower rates of interest than they can charge for issued loans) for fixed RE assets that generally slowly appreciate, and steady interest income from mortgages.
Short selling of large financial institutions, combined with often untrue rumors, and ensued panic exploited this inherent lack of liquidity by creating what amounts to "run on the bank", which further strips the banks of liquididity and operating capital. Without additional liquidity or guarantee thereof (by credit line or loan from Fed, or equity sale) due to lack of trust from other banks and custormers, it will lead to a quick demise of financial institution under attack. What's even worse, reliance on stable banking system in all phases of commercial and personal activity, creates a downward cascading effect and shut ting down of economic activity. And since banking is system is now increasingly of global nature, it spreads like wildfire across the globe and affects entire global trade and economies, particularly of large industrial and economic centers. And we saw this play out, initially in slow motion starting in early 2008 (BSC), and then sharp acceleration in early-mid September starting with Lehman ("September / October surpise?").
P.S. As much as I liked Chris Cox when he was a Congressman, he seemed out of his depth in executive position at SEC, just like several other people on President Bush economic team.
Reference: http://www.freerepublic.com/focus/f-news/2137328/posts - Anatomy of Morgan Stanley Panic
Shouldn’t this be ‘naked’ short selling? Which has been illegal for 75 years, but nonetheless just as destructive.
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Read later ping.
I frequented the Google Finance boards in the period before the Lehman take down. It was very organized. At the end of Friday people were joking .. “oh, who’s next? WACHOVIA NEXT”. They were all short sellers. They destroyed Lehman with help from bad decisions by Ben & Hank.
He seemingly has no problem with stock manipulation.
It’s not the short sellers only. It’s much more that ruined the US economy and the banking system.
- Bankers who gambled at the wallstreet casino ignoring that financial markets should represent real values.
- You, me and John Doe. Most US citizens spent too much money on things they could not afford.
- The world who believed in the “strong” US economy ignoring the facts. If you take a look on the US balance sheet we have not only the strongest budget deficit, but also the strongest trade deficit.
- The FED which ignored and still ignores the tumble of the dollar. Instead of giving credit to banks they should give it to the real economy. Why can’t your company get a 0% loan from the FED but the bank does ?
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If shorts are outlawed then only outlaws will short.
Jim “Bubblevision” Cramer and his assorted ilk have only themselves to blame. The risk of failure is inherent within capitalism. Without those risks, people will take greater and greater risks under the mistaken assumption that all is well until everything explodes. People like Cramer believe that there should be only one direction for equities, that is up. In fact their livelihoods depend on it, for a world without buyers is a world without fees.
Goldman Sachs, Citi, etc. and all the investment banks themselves make extensive use of short selling to make money. When the shoe is on the other foot and they themselves are rightfully so the targets of a short attack due to their colossal stupidity, they will cry to mommy (Washington) to get the bad men to stop because they are “special”.
You are right in that the financial system is unique and that they are merely conduits for capital. They have no productive value in and of themselves whatsoever yet get fat off the frictional costs associated with borrowing and lending.
Almost every bank in America was insolvent at the time.
Blaming short sellers is nuts.
The problem is the criminal corruption of the currency, in defiance of the Constitution’s requirement that currency be gold based.
Yeah, it’s all fun until someone gets hurt...
This article and most of its replies are nonsense. There is nothing wrong with short selling. It is simply part of the process of finding the correct market value of a stock. Managers can prevent short selling anytime they want to by simply delivering the profit they have led their investors to expect.
Was it you who said Cox was Bush’s worst appointee?
So who initiated all the short selling? Was this a coordinated efort to wreak havoc with our financial system just before the election?
In the spring of 2001, then-Representative Cox was considered by President George W. Bush for a federal appellate judgeship on the United States Court of Appeals for the Ninth Circuit. Cox withdrew his name from consideration before a nomination could be made because one of his homestate Democratic senators, Barbara Boxer, objected to him due to his perceived conservatism
Another idiot trying to give a pass to Fannie Mae and Freddie Mac. This is where the trust was violated, not by short sellers, or the use credit default swaps. Fannie and Freddie are supposed to be guaranteed by the government which makes their securities more desirable and guarantee that they lead the mortgage market regarding lending standards. Therefore, for financial stability, it is necessary that they give loans conservatively and judiciously.
When you have irresponsible partisan idiots like Frank and Dodd using them for pay to play and to buy favor from the Democrat Constituency, that is the exact recipe for the financial crisis we are now in.
Until responsible economists and legislators start going on record as calling for Frank and Dodd's resignations, I don't think misdirecting bloviators like Cramer and and the MSM should be taken seriously.
P.S. As much as I liked Chris Cox when he was a Congressman, he seemed out of his depth in executive position at SEC, just like several other people on President Bush economic team.
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Cox was a stooge of some higger power. What it was I don’t know
Hmmm. "Larry Livingston" aka Jesse Livermore has something relevant to say about this issue:
I have done my share of trading and have kept fairly well posted on the stock market for many years and I can say that I do not recall an instance when a bear raid caused a stock to decline extensively. What was called bear raiding was nothing but selling based on accurate knowledge of real conditions. But it would not do to say that the stock declined on inside selling or on inside non-buying. Everybody would hasten to sell and when everybody sells and nobody buys there is the dickens to pay.The public ought to grasp firmly this one point: That the real reason for a protracted decline is never bear raiding. When a stock keeps on going down you can bet there is something wrong with it, either with the market for it or with the company. If the decline were unjustified the stock would soon sell below its real value and that would bring in buying that would check the decline. As a matter of fact, the only time a bear can make big money selling a stock is when that stock is too high. And you can gamble your last cent on the certainty that insiders will not proclaim that fact to the world.
This is from pages 249-250 of Edwin Lefèvre's 1923 classic, Reminiscences of a Stock Operator.
Yes, that's right, 1923.
Get rid of short selling and the market will be a soft and spoiled fat pig that will drop dead at the slightest hint of any exertion or pressure.
The govt should stop trying to be a nanny state. Investors are smart adults and have lots of $$$ to play with. Stop spoiling them like little babies.
Well, we’ve socialized risk while leaving profit private. We may as well ban the shorts and let the longs build toward another bubble that will blow up in our faces. What the hell.