Are Short Sellers to Blame for the Financial Crisis??

[myinvestorsplace]

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
www. Myinvestorsplace.com

[aquaswim47]

Without question, but it was the SEC that eliminated the uptick rule.

[myinvestorsplace]

I believe it is absolute disgrace... how is this a free market...and govt bailouts..

Andrew Abraham
My Investors Place

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[Stocktrading101]

Just posted on the SEC banning short selling for financial stocks. It seems extreme measures have been taken across the world too with Europe banning short yesterday I believe and heck Russia closed its whole stock market.

Are short sellers to blame? No, the companies themselves are to blame, and short selling is a fair act of trading, so IMO if you can't handle it dont get involved! I have been sitting in 80%+ cash since last month, why? Because I can't handle it.

This artificial support crap will end real soon though, as soon as the SEC opens the door to short selling again there will definitely be another steep decline in the market.

[myinvestorsplace]

I agree one million percent..Russia was up 25%..that is insane... we are in for some interesting times... all the best..

Andy

My Investors Place

[Fredledingue]

Short sellers are to blame, YES, because they can sell stocks without having to pay for them before, just at the cost of borrowing them, and some don't even bother borrowing.

That means that a huge quantity of stocks can be sold at a given time, causing the stocks to crash and triggering stop-loss'es of realy owned shares.
It's not the you-and-me short sellers, of course, who are to blame but the institutional ones and the "hedge funds" which short sell millions shares at a time.

We are still in a free market: you are free to sell or buy any share at any time.
What you can't do is renting a house then sell this house after ten minutes and reimbourse the owner by buying his house one month later at a much cheaper price.
Curiousely enough this was possible with stocks. Now with some stocks it's not possible teporarily.

[Airelon]

Originally Posted by Fredledingue

Short sellers are to blame, YES, because they can sell stocks without having to pay for them before, just at the cost of borrowing them, and some don't even bother borrowing.

Wrong. That's naked short selling. That's not short selling.

A true short seller reserves the shares before he enters the transaction. That's part of the process. He has the shares borrowed from his broker, and the broker reserves them. The shares are there.

That means that a huge quantity of stocks can be sold at a given time, causing the stocks to crash and triggering stop-loss'es of realy owned shares.

Again, that's not the way it works.

It's not the you-and-me short sellers, of course, who are to blame but the institutional ones and the "hedge funds" which short sell millions shares at a time.

And what of the institutional owners who are going long. This is a free and open market. There's been absolutely no indication of undue bias. None. The only thing that might 'possibly' be wrong (possibly) is naked short selling. But naked short selling provides liquidity for investors. Naked Shorting is absolutely vital for a day trader. Without it? Day trading becomes infinitely more difficult. Without day trading? We have no liquidity. Without the liquidity, we have insane volatility. With insane volatility, no investor wants to go near the market.

We are still in a free market: you are free to sell or buy any share at any time.

Unfortunately? We have no short sellers now to cushion the fall. Now if institutions start dumping what they've been buying? There are no short sellers to provide upward pressure on the bid x ask; when they take their profits. Have you ever studied those markets that do not allow short selling? Have you ever tried to get a fill in a market - that's illiquid? Instead of 5% corrections as we had last week? Congratulations, now you have a stock market crash. The data is there for all to see. There are exchanges where you can't short sell. Just look at the difference.

Think about it. What happens when you want to take profit, and the market is on a few down ticks? It's selling frenzy. This is how stock market crashes happen.

I was long CRBC this morning. Quickest $14,000 I ever saw in my life. Tried taking my profit? OMG! Put the order in when the market was at 11? Got filled at like $7.00 or something. You ever try to take profits in a falling market with no short selling? May whatever god you worship have mercy on your soul. No upwards pressure whatsoever. None. It was like the space shuttle trying to 'glide' a landing. No upward pressure from short sellers taking profits and bouncing the price back up.

What you can't do is renting a house then sell this house after ten minutes and reimbourse the owner by buying his house one month later at a much cheaper price.

Actually, that is perfectly legal, and even encouraged now in Michigan - in order to tighten up the bid x ask on real estate. It's the way Michigan got to the bottom of their housing crisis even more quickly.

To the Original Poster: I'm absolutely with you. I've never made so much money in one day? And felt absolutely sick to my stomache. My last two blog entries are on this very subject. I made money hand over fist today.

And I've never been so uncomfortable making it. Throughout this whole crisis? I've recognized the problems, and tried to be the voice of reason. But I swear to God ... as an investor? As a guy who buys and holds stocks?

Now ... now I'm freaked out.

By trying to "ease liqudity" - the SEC has actually hurt liquidity in the market. It's the most backwards move I've ever seen in my life. You can't make this crap up. It's like we're living inside of an "Atlas Shrugged" story. Cox doesn't need to finish his term at the head of the SEC. He's needs fired.

Yesterday.

[aquaswim47]

It's an absolute disgrace that they want to ban short-selling but I'm against momentum-based short selling. In other words, I like when shorts are able to help stockholders avoid a company that isn't worth being bought, but I don't want a rumor to unnecessarily cause companies problems.

Just put in the up-tick rule and require a .05 plus tick before a stock can be shorted such that there must be a buyer in the market before it can be further shorted. That provides a check and balance system.

I don't like keeping things artificially high either because that's how you make a bubble market even more severe (i.e. 1987 @ 2800, 2000 @ 11,800, and 2008 @ 14,300).