There was a time when change was all the rage. This was a time when the world was sick of debt, sick of ineffectual politicians, sick of useless financial products that benefited no one and sick of bankers who paid themselves like star quarterbacks.
That fervor hit its peak at the market low on March 9, 2009.
Now all the anger and revolution is but a distant memory and the S&P is 70 percent higher. Righteous indignation is now but a hiccup in the ascendancy of filthy lucre.
That said, the need for scapegoats still exists. But who is driving this passion for revenge and reparation? It’s not investors. They’ve had a great twelve months and feel more recuperated than after a week lying in a hammock in Hawaii.
It is, of course, the political establishment and regulators. The former needs to blame someone for the ineffectuality of the rules they had in place and the latter need to distract attention from the fact that they really didn’t understand large tranches of the system they were supposed to be policing.
Short sellers bore a large part of the blame for the plunge in asset values to the troughs hit in March last year. As such, they were the target of short-term legislation preventing them from exacerbating the falls in equities. Our guest host today was Bob Sloan, author of a new book entitled "Don’t Blame the Shorts." Guess what side of the debate he stands on?
Of course this was like a red rag to a bull for some of you and Paul was feeling especially belligerent:
“Prices should only move in direct relation to the amount of total equity bought/sold. Ironic, banks are criticized for high leverage when equity trades on far higher-leveraged markets. This is fraud and leads to small players using small amounts of equity to move markets more than they should. This discourages long-term investment and should be stopped.”
Jerzy was less absolute in his observations but echoed the call for targeted reform:
“Shorting should be restricted to indices and naked shorting banned from individual stocks. There is too much risk of collective stock shorting inducing rear trades.”
I myself, while a big fan of the concept of short selling, have had to take with a pinch of salt the defenders of the practice who say it is all about price discovery and a tool for "weeding out the bad companies." Come off it. Next you’ll be telling me it’s all part of ‘"God’s Work."
But there is something unfair about being able to pump a stock on the upside -- shock horror, yes, this happens and is legal -- and bemoaning the same practice on the downside: Roger agrees:
“I don’t remember any complaints in the dot-com boom when everyone was making lots of money from buying stock.”
And Roger points out one eensy weensy little fact that may prove a little inconvenient for the long only camp:
“The short selling of bank stocks over the crisis was for a very valid reason. They were bust! But it seems that intervention has removed that possibility creating hugely unequal market rules.”
The banks weren’t all bust Roger, but I take your point.
With apologies to Al Gore, surely there is a fundamental inconvenient truth for those that blame the short players themselves. The truth is that shorting is only possible because institutions, you know the people who run our depleted pension funds so well, lend the stock out. If they simply stopped this practice then the problem would diminish overnight.
“My sentiments exactly, Steve. Why should these pension funds lend shares to someone else to make money why don’t they do it themselves and make the money for the owners of the money in these funds?”
To conclude, we shouldn’t be premature in trying to find a workable solution to this most thorny of issues. According to Bob Sloan’s book, one of the earliest debates on shorting was in two Dutch pamphlets written a couple of years before this current crisis blew up. Er, that’s exactly 322 years ago -- 1688 to be precise.
Glad to know we’re not rushing to solve this one before we’ve had a good, long think about it.
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