Are Short Sellers to Blame for the Financial Crisis?

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Are Short Sellers to Blame for the Financial Crisis?
I have heard this question asked repeatedly... I find it an insult to ones intelligence to even state this.. There has to be a scape goat... Did the short sellers make the banks give loans to speculators that were not going to live in the houses.. Did the short sellers make the banks give loans to homeowners who neither had a job or credit? Did the short sellers make the banks give companies loan to buy other companies at over valued multiples with the hope of these overvalued companies to the next guy...

It is one thing to spread false rumours ... which all know is wrong... but what is wrong about doing deep due diligence on a company...determining that their fundamentals are not in order...and taking a short position..? It is the same analysis one would do when buy stock in a company...

Short sellers borrow stock and sell it, essentially betting that the price of their target company will fall before they have to replace the borrowed shares. Now these investors are considered vultures, rumor mongers, cheats and criminals. Most have done nothing wrong but expose one of the largest frauds in our lifetime.

Bear Sterns and Lehman died because they were undercapitalized and made terrible leverage bets. Merrill's own mismanagement was the cause of it's demise. AIG is imploding due to it's credit swaps and unregulated derivatives.

The Securities and Exchange Commission halted short selling of financial companies and Futures on the Standard & Poor's 500 Index surged 2.9 percent following the announcement. U.S. equities staged the biggest rally in six years yesterday after the SEC stiffened other regulations aimed at curbing manipulative trading. The SEC said today that it will halt short selling of U.S. banks, insurance companies and securities firms through Oct. 2, while the Financial Services Authority in the U.K. banned short sales of financial shares for the rest of the year. How is this a free market???

Are markets only suppose to go...and when they fall... smart investors are not allowed to benefit.. Are we suppose to just lose money...and have the Govt bail us out???

Jim Chanos a great investor who first raised questions about Enron stated so perfectly

``We seem to have capitalism on the upside and socialism on the downside,''


That's a pretty heady brew for country that holds itself out as a free market paragon.''

Nothing changes ...short sellers were also victimized in 1929

Andrew Abraham
 
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The following is an extract from this weeks rant, I thought I might share it as an alternative to the mainstream applause the changes seem to be attracting.

The amount of damage the regulators are currently doing to the freemarket in my opinion is unprecedented. The amount they will cost regular traders is significant.

Voice your objection to the regulators.



What an amazing week, and one that has triggered enormous volatilty , applause and anger in one hit. Yes I’m referring to the international steps to ban or restrict short selling, in particular naked short selling. Now before I continue, let me ask a question. Do you think financial markets have a harmonic balance regardless of intervention? What I mean by this is, do you feel that a stock will ultimately find its true value in the market place? My personal answer to that question is yes, the reasoning behind my answer is simply that I feel oversold will always be bought, overbought will always be sold. Somewhere in the middle is the natural true value. Lets look at the financial sector, many of the events surrounding short selling have resulted from the financial sector, particularly the US mortgage sector. Yes they have been punished by the market, and yes they have attracted significant short selling all the way down. But if we go back two weeks to a previous rant which contained the charts of Fannie Mae and Freddie Mac, the charts have demonstrated long term weakness for a significant length of time, as early as 2004. The charts have also reacted to the short selling that occurred across the highs. While the short data isn’t displayed within the daily chart, the reaction to the short selling, and selling of the physical, is clearly displayed. None of the financial stocks that were sold were with the intention of manipulation, they were sold because the smart money anticipated long term events. The stocks that were subject to significant short selling were eventually exposed for mismanagement and financial distress. The actions of those sellers years ago, which have directly lead to the current actions of financial regulators, were correct. To be completely blunt, the stocks were smashed because that’s exactly what they deserved, absolutely no less. If any stock, regardless of whether it’s a bank or a company that manufactures a clothing line for gerballs, if they lose money they deserve to be punished by the market. So why have the SEC placed blame on the market decline at the short sellers? To make things worse, the US Feds have now announced a 700 billion rescue plan “to prevent financial meltdown”. In another breath the SEC state "The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,". So what is manipulation? Is it the short sellers that expose undisclosed weakness in a company, or is it the artificial support by regulators controlling our actions?

Make no mistake, there is manipulation, no doubt it does partly come from the short side, as it also does the long side. However the manipulation of those participants within the market, becomes insignificant when compared to the massive manipulation and control of the regulators. The SEC, through it’s actions, contributed nearly 1000 points to the Dow Jones in just two days, yet the companies are still in trouble, they’re still going broke and they’re still causing misery. So what’s artificial, the sellers that expose weakness, or the regulators that provide artificial support?

This is a very dangerous road, what is unfolding now has the potential to evolve to the extent that countless participants will be restricted in carrying on their normal trading activities. Personally I have numerous, effective strategies which have now, in the swipe of a pen, been removed from me. They have simply vanished into thin air.

There is one positive which has come from the changes, which is the issue of disclosure. This is one area I agree entirely with, in fact I think they could easily expand on current plans. Transparency in the markets has no disadvantages as far as I’m concerned, in Australia you may remember the push to have full level depth displaying broker transactions made available to the public. Ironically the greatest opposition to this was from the regulators that are now jumping up and down saying we need full disclosure. But in their infinite wisdom (or lack of) rather than make the markets more transparent, they decided to restrict the information available to brokers, full broker transactions are now only available after T3. Perhaps it’s time to revisit the topic of full disclosure.

CFD’s are another concern, using FMG as an example, there are currently 2.8 billion ordinary shares issued in FMG, in the CFD market, according to one source, there were also over a billion CFD’s created for this market. While these were artificial, we know CFD’s cover their positions through the physical market. THEY DO EFFECT THE PHYSICAL MARKET and as such we have a right to know how and what impact their positions will have. >

from Home - Trade Technical
 
I agree with the original poster.

IMO I see the short selling as a scape goat. Sure, it may have exacerbated the problem, but Lehman Bros didn't go bust due to short selling, it went bust cos of it had toxic debt eating into it's balance sheet.

I personally disagree with the ban as I no longer think it creates a free market.
 
We'll see what happens without the support of those shorts in a huge sell-off. The fact is they don't care if it's right or wrong, it is just to placate the public.
 
Short Sellers

Are Short Sellers to Blame for the Financial Crisis?

I believe that the same culprits are to blame as the cause of the Great Depression:
greed, over-leverage, corrupt rating agencies, corrupt or lax regulators, etc. (Teapot Dome Scandal). In other words, greed and prudence (fear) cycle. Chainos also stated that MER was brought down because BAC withdrew it's line of credit, and then bought it at a discount.

However, short sellers that spread false rumors are a different matter. The same goes for the buy-side.

Short sellers must complete both a buy and a sale, just like like the buy-siders must do to reap a profit. The market volume is way down since they banned naked short short sales beyond the 3-day settlement date.

“AIG, I think, would be doing fine now if they’d never heard of the word ‘derivatives’.”
- Warren Buffett, CNBC 9-24-8

My understanding is that derivatives are "off-book."
 
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We'll see what happens without the support of those shorts in a huge sell-off. The fact is they don't care if it's right or wrong, it is just to placate the public.

short seller provide liquidity in falling markets 'cos they will at some point want to buy back...agree with you..Once all the shorts have covered...we may see the classic 10% fall in the general market when the genuine sellers want to head for the exits at the same time.(n)

Also like many have said - interfering with the free market will bring it's own set of problems.....

(n)
 
short seller provide liquidity in falling markets 'cos they will at some point want to buy back...agree with you..Once all the shorts have covered...we may see the classic 10% fall in the general market when the genuine sellers want to head for the exits at the same time.(n)

Also like many have said - interfering with the free market will bring it's own set of problems.....

(n)

I think we're getting close to a "no bid" situation. Look at the volume on the indices since the implementation of the ban on shorting the financials.
 
Prices go down because there are no bids underneath them, just look at the chinese market, been going down rapdily worst than the US market and your not allowed to short anything and has been like that for awhile
 
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