No Shorting. That's the Rule.
A long/short hedge fund manager of my acquaintance went to short some Morgan Stanley (MS) via a B/D that clears through Wachovia:
The Trader comes back: "Wait a second -- that's on the list -- I cant short that."
The Fund Manager says: No, I don't want to Naked Short it, we have already located a borrow -- this is a clean, legitimate short sale.
Trader: Nope, we clear through Wachovia -- and its on the list - NO SHORTING THESE 19 PRIMARY DEALER NAMES -- PLUS FANNIE AND FREDDIE -- AT ALL.
Fund Manager: That's ridiculous -- how can you not execute a legitimate borrowed short?
Trader: Wachovia. Dems da rulez. You have to go elsewhere.
Fund Manager: Consider it done.
~~~
>
Postscript: FM added to his Morgan short elsewhere, and initiated a new Merrill Lynch (MER) short. I don't know what it says about Wachovia that they won't even allow shorts in those names (deep doodoo??).
I am paraphrasing Jim Grant, but "Shorting is the financial world's equivalent of free speech."
Wednesday, July 30, 2008 | 06:00 PM | Permalink
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I think it's sad we've come to this. Were was the no shorting law in the dot com bust or the oil stocks that just got hit hard? Or how about any stock in my 401k fund.
But those don't jeopardize the whole economy like the banks due. So wait who's telling me I can't short them? Oh yeah the same guys that said they wouldn't jeopardize the economy with insured risk and let the Glass-Steagall Act get removed... Who's fibbing now???
Posted by: GB | Jul 30, 2008 6:15:54 PM
Well, I have already moved most of my worthless greenbacks out of my (fully FDIC instured, cough) checking account at Wachovia.
To treasurydirect and a company credit union.
If the former fails, I only want guns and butter and potable water.
If the latter fails, I'll be surprised and pissed (and still wanting guns and butter), because they have been fairly conservative.
Posted by: sysin3 | Jul 30, 2008 6:22:50 PM
I think the FM needs to add Wachovia to his short book.
Posted by: shoeless | Jul 30, 2008 6:28:41 PM
I guess you could say 'mission accomplished'. That is exactly the intent behind the limitation - very reminiscent of what the FCC did with radio stations a few years back when they ousted Howard Stern. An environment of fear and uncertainty. Has served them well so far...
Posted by: Molecool | Jul 30, 2008 6:38:20 PM
Maybe WB isn't trusted enough to borrow things?...
Posted by: mhm | Jul 30, 2008 6:57:57 PM
No wonder why Cramer was on his show tonight calling it THE bottom - soon there won't shorting of ANY stocks allowed.
Is this even allowable under the law? The final nail in the coffin of our supposed "free markets."
Posted by: Jeff | Jul 30, 2008 7:06:40 PM
Looking at the Rule(s) on the SEC Website and the FAQ's I believe this extension (July 29) applies to Naked Short Selling-- not the procedure of when the shares are actually borrowed, and then returned (hopefully for a Profit). The extension is until August 12. Otherwise, this certainly would fly in the face of the statements Cox made in an interview with Erin Burnette regarding legitimate short selling only two weeks ago...
Posted by: John | Jul 30, 2008 7:29:18 PM
I executed a short on FRE after the rules took effect(last week) electronically and lots of shorts through options...so it is all about the inventory of your clearer.
Besides as the option market maker is excempted from the locate and reserve rule, ahead of time, there are plenty of ways of shorting through options (and single stock futures where you don't have to borrow any stock although illiquid).
By the way, what do they (SEC) think happens when you squeeze the shorts, and there are less shorts around, when bad news comes out...you have created a potential crash without any natural buying demand!!!
Posted by: pjfny | Jul 30, 2008 7:44:26 PM
Maybe I'm just talking my book here (long SKF), but my theory is that the witch hunt for short sellers will make the drop in financials WORSE and DEEPER in the long run. This is because WHEN the financials fall again (and I do think it's WHEN and not IF), there will be no one left to take the other side of the trade. Yes, short sellers can be relentless, but they also do pump liquidity in by cushioning the fall at local minimas. So as write downs come and people sell out in panic, we will see gap downs like we have yet to see in this crisis. No short sellers covering their bets (and no one to scapegoat!) and no more suckers to catch the falling knife. This means no more short covering dead cat bounce while the rule is in effect. Perhaps some dead cats will vaporize instead when they hit the floor?
HCF
Posted by: HCF | Jul 30, 2008 7:46:08 PM
I be tthe reason why Wachovia wouldn't let him do it was because their systems are so messed up that they can't pledge shares to an individual borrower. Many times, these systems will show inventory, but, since the shares don't actually have to be allocated to a particular short borrower, there is no place to tag them. I have heard anecdotally, that most of the shorting of those 19 stocks last week was done manually. Operations kept track on paper or in spreadsheets who the shares were allocated to. A friend who works in stock loan in the tech department at one big investment bank said that they put in an emergency change for the naked shorting rule such that some stocks (those with lower float) were unborrowable/sortable, and others had an amount associated with them such that you could only short a particular number. This number was arbitrary based on float and had nothing to do with the exact inventory.
So, I suspect this is a system issue, and until Wachovia programmers can get this implemented, there will be no shorting of the 19.
Posted by: SM | Jul 30, 2008 7:53:30 PM
You can always tell when the pirates are getting pwned....they become the world's biggest pussies and change the rules, ala RIAA.
Posted by: RatInMeKitchen | Jul 30, 2008 8:01:46 PM
next thing you know, they'll take the 19 stocks off the marginable list, move them to cash accounts and force anyone that legitimately shorted to be bought in...regardless of what happens, fundamentals always catch up, this time will be no different.
Posted by: DCM | Jul 30, 2008 8:02:59 PM
barry - what are your thoughts on this new housing bill? This should be your quote of the day from the article over on Bloomberg -
"A new FHA program, a unit of the U.S. Department of Housing and Urban Development, would insure up to $300 billion in refinanced 30-year fixed loans for about 400,000 borrowers struggling with their monthly payments after loan holders agree to cut their mortgage balance.
HUD Secretary Preston expressed misgivings when asked in a Bloomberg TV interview if he was confident that money for the program would be spent effectively with no loss to the taxpayer.
``No, I'm not,'' Preston said. ``Roughly a third of the people who get this assistance will end up in foreclosure,'' he said, citing Congress' own estimates, ``and many more, we believe, will be chronic delinquencies.'' "
So let me get this straight...for all the idiots who got into mortgages they couldn't afford, we are first going to reduce their mortgage to a more affordable level (free of charge to them of course). And then, we expect that a third will still not pay or be seriously delinquent.
where's the justice
Posted by: james | Jul 30, 2008 8:04:15 PM
Jeff, Cramer has called **THE** bottom at least three times this year, possibly more.
Posted by: Eric | Jul 30, 2008 8:21:10 PM
WTF! They're really playing with fire. This kinda thing leads to market crashes when the bid disappears.
It's kinda like we're competing with the Chinese to see who can be more communist
Posted by: Vij | Jul 30, 2008 8:47:07 PM
I had never visited the treasurydirect website before I read sysin3's comment. This question actually appears in the FAQ:
"Why does the debt sometimes decrease?"
Posted by: Ryan | Jul 30, 2008 8:48:37 PM
Where's the ACLU?!?
Wouldn't "the powers that be" LOVE to have the ACLU show up right about now.....
Posted by: Chief Tomahawk | Jul 30, 2008 8:54:24 PM
So free speech is in trouble.
Posted by: estaban | Jul 30, 2008 8:57:13 PM
Eric: I hear you and am sadly aware of that. Was being facetious but he DID call THE bottom and made a big stink about it on "Mad Money". What are the odds that he'll be denying he ever made that call 6 months from now or even sooner when the market goes much lower? Even though the video exists, I'm sure he'll somehow try to deny, deny, deny, and there will be people who believe him. Either that, or he'll blame the Fed/gov't policy. Will we ever hear a mea culpa out of him? Doubt it....
Posted by: Jeff | Jul 30, 2008 9:01:12 PM
I wouldn't keep my money in a bank that violates securities regulations. They might just decide to keep it.
Posted by: Tien Kou | Jul 30, 2008 9:01:16 PM
While the stated rules were to prevent naked short selling the intent of the rules was to prop up the prices of these 19 firms (BB even said so) and the implementation of the rules has made it more difficult to transact even legitimate shorts - which is "mission accomplished" - at least in the short run. Thats why banks rallied after reporting really bad Qs and MER was able to sell $30B of assets for pennies, issue a boatload of dilutive shares and trade up. BB,Hank & Chris are gaming the system and it's going to implode.
Posted by: JC | Jul 30, 2008 9:09:35 PM
Fund Manager: Consider it done.
almost, the flipside of " Sold to you."
people put up with way too much s**** in so many transactions, we should take a page..
and, if anybody has ever checked, co.s that lag in customer service, lag in financial performance over time.
making this:
think the FM needs to add Wachovia to his short book.
Posted by: shoeless | Jul 30, 2008 6:28:41 PM
a good call, serves as a reminder that most FMs are superfluous, too
http://www.thefreedictionary.com/superfluous
Posted by: Mark E Hoffer | Jul 30, 2008 9:39:04 PM
Why are you guys even watching Cramer?
Posted by: lunatic_fringe | Jul 30, 2008 9:42:31 PM
The imposition of the new naked short rule, selectively enforced on just nineteen companies, will one day be considered "the day the music died".
All pretense of allowing free markets to sort things out is gone. There is no longer any real sort of stock market, funneling great aggregations of capital to places where it will be most efficiently utilized.
The ultimate result of the naked short selective enforcement for these nineteen banks is that there will be a gusher down once the finger in the dyke gives.
But this rule, and its ham-handed enforcement, will one day be reviled as the real cause of the 2nd Depression. You can't pretend things are alright just by making a rule that says they are.
Posted by: Donkei | Jul 30, 2008 9:43:59 PM
Until a fund that has a massive amount of shares decides to dump the stock the truth will be hidden. The SEC rule will not be able to stop the stock from falling. The first one out the door gets the most value. I'm not recommending that action (keeping lawsuits at bay) but it may be a necessary option at some point.
Posted by: Juhuti | Jul 30, 2008 10:04:27 PM
