So I caught this bit of arguing between Matt Taibbi and Clusterstock yesterday. Taibbi, he of GS = vampire squid fame apparently has a new article coming out about the Bear/Lehman failures of last year. According to this blog entry, some amount of the article will focus on the practice of naked short selling (and presumably, its contribution to said major bank failures).
Naked short-selling is a kind of counterfeiting scheme in which short-sellers sell shares of stock they either don’t have or won’t deliver to the buyer... The real significance of the naked short-selling issue isn’t so much the actual volume of the behavior, i.e. the concrete effect it has on the market and on individual companies — and that has been significant, don’t get me wrong — but the fact that the practice is absurdly widespread and takes place right under the noses of the regulators, and really nothing is ever done about it.
Taibbi goes on to talk about an impending (today, apparently) round table being held by the SEC to address the naked short-selling issue, and in particular, the heavy lobbying efforts being exerted by Government Sachs in advance of the round table.
Last Friday I got a call from a Senate staffer who said that Goldman had just been in his boss’s office, lobbying against restrictions on naked short-selling. The aide said Goldman had passed out a fact sheet about the issue that was so ridiculous that one of the other staffers immediately thought to send it to me. When I went to actually get the document, though, the aide had had a change of heart.
Which was weird, and I thought the matter had ended there. But the exact same situation then repeated itself with another congressional staffer, who then actually passed me Goldman’s fact sheet.
So then Clusterstock had to get all medieval on Taibbi's ass, first, on how much Taibbi doesn't understand short-selling (and, specifically, it's pro-shareholder benefits):
Much of the fear of naked shorting seems to be based on a very simple mistake. People assume that most naked short sellers are momentum traders accelerating the decline of a troubled company. That’s actually not true at all. The overwhelming amount of naked shorting takes place when companies announce abnormally positive results and contrarian traders scramble to fight the tape. They aren’t seeking to manipulate the market—they’re betting against the crowd... naked short sellers promote efficient markets by providing liquidity, risk-bearing, and selling stocks they view as overpriced.
Taibbi likely thinks that he is sticking up for the ordinary investor against manipulative hedge funds by attacking naked short selling. But again this is almost exactly wrong. Far from being a pro-shareholder move, cracking down on naked short selling would damage shareholders by making the markets less efficient and penalizing the best corporate watchdogs around. Short-sellers called the destruction of Enron, Fannie Mae and Lehman Brothers before the broader markets or regulators caught on.
And then, on how Taibbi's yet to be unveiled conspiracy w/r naked shorts and Lehman is pure delusion:
Naked short selling played no role in the downfall of Lehman Brothers. We know this is true because the government and the New York Stock Exchange measure naked shorting in order to implement a rule called Reg SHO. And Lehman never showed up on the list of stocks subject to large amounts of naked shorting... [T]here's a very good reason for this. Stocks typically only become difficult to borrow when there is heavy buying activity, which is why most naked short sales occur following good news about a company. In the final week of the life of Lehman Brothers, there was no problem locating stocks to short. Plenty of people were willing to sell to people who had shorted the stock earlier.
There was a surge in fails to deliver in the very last days of Lehman Brothers, but it didn't last long enough to wind up on the Reg SHO list. As many as 32.8 million shares in the company were sold and not delivered to buyers on time, according to data compiled by SEC. But the company's bankruptcy intervened and shares stopped trading. The bankruptcy of Lehman wasn't driven by the stock price but the fact that no one would lend to Lehman over that fateful weekend in 2008.
I dunno. First of all, I'm not sure why this is an issue. I'm willing to wait to read Taibbi's article and see if he's got any good dirt. But naked short selling is already illegal. It's (as Clusterstock points out) regulated by Reg SHO, which I can't imagine is actually effective because (1) the SEC is the regulator and (2) it is effectively a hindsight based regulation. It seems that only if you happen to be very bad at playing the naked shorting game will you get caught out, and by then, you're probably bankrupt anyways.
Furthermore, I'm kinda sick of the whole - oh yeah, these financial innovations are good for the market because they enable maximum price discovery and efficiency. Yeah, that is, until they don't anymore. Or until they have so destabilized the system that they almost cause the entire system to implode (which would actually, from a completely libertarian, free-market POV, be completely OK, since that kind of creative destruction is necessary to remove pent-up inefficiencies that come from monopolistic domination or regulatory capture or whatever - but please, don't have the taxpayers bail it out then).
I'm personally much more upset about naked CDSs. (See here for continuing coverage of this amazing saga). But hey, that's just me, and WTF do I know?
Anyways, it's also funny to me that Clusterstock doesn't hit at what Taibbi is actually talking about in his post: specifically, the apparently frantic? (I guess GS doesn't do frantic? How about deliberate persuasion?) pursuit of politicians when its interest are even mildly threatened? And mildly threatened them must be, for as we are now noting for a third time... NAKED SHORTING IS ALREADY ILLEGAL!
Whatev. It's not like I know what I'm talking about anyways.
P.S. Argh! They killed Kenny! You bastards!
