October 18, 1930: NYT on Short Selling
The following editorial on SHORT SELLING
was originally published in the New York Times on October 18, 1930. It is so relevant to the current environment, that I have decided to reproduce it here. What makes this so significant is that none of the issues have changed -- and the US Government seems to be increasingly heading down a path of "The ends justifies the means" form of intervention.
Other than the names involved, one can hardly discern that this was written 3/4 of a century ago . . .
With trade depression continuing in spite of recent assurances that it would surely end with arrival of Autumn, and with the stock market also falling below the prices reached in last Summer's drastic downward readjustment, it was not perhaps surprising that search for something peculiar and abnormal in the way of cause should have begun. The average man does not apply severe logic in his reasoning on such matters. It was at least a convenient supposition that business must be hesitating because of the bad stock market, and Wall Street itself had been reporting, every day, that "bear selling" had emphasized the market's unsettlement. Hence the demand from irritated watchers of the situation that the evil influence of such stock market operations be ended by suspension or outright prohibition of "short sales."
Such action is undoubtedly possible. Mr. Untermeyer correctly states that the Stock Exchange itself "has it within its power to prevent or restrict short selling." Yet even so hostile a critic as he has heretofore been of Stock Exchange machinery is careful to add that whether such action would be advisable "is quite another thing." The stock Exchange authorities have given public warning that the speculative seller of stocks whose purposes were shown by deliberate circulation of disturbing rumors would be severely disciplined. But they too have declared through their president that since "normal short selling is an essential part of a free market for securities," prohibition of such sales "might result in the destruction of the market," and would therefore, in any case "too high a price to pay for the elimination of the few who abuse this legitimate practice."President Hoover lately talked the matter over with the Stock Exchange authorities; but the White House version of the interview was careful to point out that the Government had no idea of interfering with policies of the Stock Exchange.
Why this unanimity of attitude against the prevention of "short selling"? The answer of any one familiar with markets probably would be that, so long as stock market valuations can be influenced on the side of rising prices by speculative buying conducted with borrowed money, equilibrium is impossible except through permitting sales conducted through deliveries made with borrowed stock. Either practice is open to abuse, which it is the duty of the Exchange authorities to restrain. The abuse of "bidding up the market" by speculation based on broker's loans is not often recognized by the public, though its evil results ought to be reasonably evident to any one who remembers 1929. Yet it is plainly impossible to abolish "buying on margin" unless by reducing all transactions to a basis of cash purchases -- which would preclude an immense part of legitimate investment business. This being true, it ought to be evident that prohibition of "short sales" would expose the market to the extreme and dangerous maladjustment which so one-side d a proviso would inevitably create. Our "rashes" would be vastly more ruinous; our recoveries with the necessary "bear repurchases" eliminated, far less emphatic. The market would have become a trap for the unwary, with no automatic safeguard.
This is not the first occasion on which "suppression of bear sales" has been vehemently urged. After the panic of 1907, under circumstances closely resembling those which now exist, demands for such action forced Governor HUGHES to appoint an impartial committee to investigate the question. This committee contained not one member of the Stock exchange; it was made up of such eminent economists, journalists, and practical business men as Mr. Horace White, Judge Samuel H. Ordway, Mr. Edward D. Page and its professor John B. Clark of Columbia.
In its unanimous report of 1909 the committee found that the greatest evil of the stock market was "pyramiding" of speculation for the rise on the basis of previous paper profits, now used as "margin" for still larger ventures.
Of "bear operations" it had this to say:
We have been strongly urged to advise the prohibition or limitation of short sales, not only on the theory that it is wrong to agree to sell what one does not possess, but that such sales reduce the market price of the securities involved. We do not think that it is wrong to agree to sell something that one does not now possess but expects to obtain later. Contracts and agreements to sell, and deliver in the future, property which one does not possess at the time of the contract are common in all kinds of business. The man who has "sold short" must some day buy in order to return the stock which he has borrowed to make the short sales. Short sellers endeavor to select times when prices seem high in order to sell, and times when prices seem low in order to buy, their action in both cases serving to lessen advances and diminish declines of price.
>
Source:
SHORT SELLING
New York Times, October 18, 1930, Saturday
Editorial, Page 12, 857 words
http://select.nytimes.com/mem/archive/pdf?res=F00E1EFD3A5C11738DDDA10994D8415B808FF1D3
Sunday, September 21, 2008 | 08:00 AM | Permalink
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Questions
If the government received about 80% of AIG equity in exchange for an $85 billion loan, is Paulson suggesting taxpayers receive nothing from bailed out banks, whose stocks would rise, to the benefit of shareholders and debt investors, including those who created the mess, who stand to reap profits from taxpayer monies?
Should banks pay shareholder dividends with taxpayer dollars?
If hedge funds and foreign firms are not eligible to participate, what prevents them from selling or exchanging near worthless securities to eligible US banks to offload on to US taxpayers?
Is legislation stating “Decisions by the Secretary…are non-reviewable…
and may not be reviewed by any court of law or any administrative agency,”
constitutional?
Does bailing out the Banks & Wall Street revitalize the housing market, simulate consumer spending or increase Government Revenue?
If the S&L bailout cost taxpayers $125 billion
and the original estimates were somewhere between $30-50 billion
how much could a financial institution bailout cost
if initial estimates are $700 billion to 1.2 trillion?
Should the USA’s debt rating be AAA?
Posted by: harlynman | Sep 21, 2008 8:11:27 AM
Seems like the old 6 steps of project management:
1: optimism
2: uncertainty
3: fear
4: search for the guilty
5: punishment of the innocent
6: praise for the uninvolved
Posted by: sailorman | Sep 21, 2008 8:29:06 AM
See also: Efficiency and the Bear: Short Sales and Markets around the World
Arturo Bris , Yale School of Management and ECGI
William N. Goetzmann, Yale School of Management and NBER
Ning Zhu, University of California Davis
May 2005
http://faculty.gsm.ucdavis.edu/~nzhu/papers/bear.pdf
Posted by: Efficiency and the Bear: Short Sales and Markets around the World | Sep 21, 2008 8:39:34 AM
Today President Bush ordered Wall Street to place at entryways signs which read "If you can't touch this you're not tall enough to ride" in order to end the problems caused by "short sellers".
President Bush commented, "A short problem needs a tall answer."
Posted by: Winston Munn | Sep 21, 2008 8:48:57 AM
While no-one is likely to change their mind on this -- the vilification of short-sellers is more or less complete -- but let's keep working away at it. Here is some data on the role of short-sellers in Morgan Stanley's decline this week, specifically the presence that short-sellers had in Morgan Stanley stock. The numbers reflect the percentage of MS's market value sold short at the time in question (according to Data Explorers):
July 2008: 7% (peak)
Sept. 1, 2008: 2%
Sept. 16, 2008: 2.8%
Are these numbers non-zero? Yes. Are they monstrously large, as conspiracy theorists are alleging? No. Are they large in historical terms? No. And had we hit new peaks in recent weeks? No.
Next question.
Posted by: Paul Kedrosky | Sep 21, 2008 8:53:45 AM
my other favorite blogger weighs in on this stuff:
http://www.salon.com/opinion/greenwald/2008/09/20/bailout/index.html
Posted by: MikeBC | Sep 21, 2008 9:05:36 AM
http://ftalphaville.ft.com/blog/2008/09/19/16123/hbos-where-are-the-shorts/
Ft alphaville has the same exitentialism when wondering where are the shorts gone on HBOS?
Meanwhile it seems when reading the October 1930 article INTEGRITY and MORALITY were much higher placed than today, as it explains with a somehow balanced judgement the boarders lines between price, judgement, greediness and cupidity.
Posted by: Philippe | Sep 21, 2008 9:08:26 AM
'In its unanimous report of 1909 the committee found that the greatest evil of the stock market was "pyramiding" of speculation for the rise on the basis of previous paper profits, now used as "margin" for still larger ventures.'
How quaint -- that was your great granddaddy's pyramiding. But just four years later, the greatest pyramiding machine of all time -- the Federal Reserve, which can manufacture money from DEBT -- was created. And eight decades down the line, in 1994, the purblind fool Greenspan effectively eliminated all reserve requirements by approving overnight sweeps (the banker's equivalent of three-card monte), which enabled INFINITE pyramiding. The subsequent monumental Bubbles -- tech, housing, securitization -- are history.
Mark my words: there is one, and ONLY ONE way, to stop the insanity: close down the Federal Reserve, dynamite its buildings, and strew the ground with salt so that nothing will ever grow there again.
NO MORE JOHN LAWS!
NO MORE GREENSPANS!
NO MORE BERNANKES!
Posted by: Jim Haygood | Sep 21, 2008 9:17:39 AM
By the same logic an upsidedown homeowner should not be allowed to sell his house now because he orginally bought it at a higher price on borrowed money.
Hearing all these financial and political pundits/officials suggest that you have to stop housing from falling further. OK, if that be the case wouldn't the correct solution be to put people to work, so that they are able to afford one? Something is totally backwards in what is going on here.
How do you spell bottom? CRASH! lol
Posted by: JustinTheSkeptic | Sep 21, 2008 9:18:33 AM
Barry,
I can't email you directly so I'm posting this here. Would you please post something about the paragraph below! This is as authoritarian and anti-constitutional as anything I've ever seen in my 51 years, completely eliminating checks and balances, the very foundation of the constitution. This is a bait and switch... using the run on money markets as a proxy for financial armageddon. The run on money markets could easily have been staunched with the insurance proposal. Instead, they are using this crisis to promote a power grab of gargantuan proportions, not unlike using 911 as an excuse for attacking Iraq. Please bring this to the attention of as many as possible.
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
check this out!
http://www.foxnews.com/story/0%2C2933%2C425672%2C00.html
Posted by: Fenner | Sep 21, 2008 9:26:20 AM
Jim Haygood
Whilst I would concur with the two premises I defer on the judgement of the present FED that means I hold that Mr Bernanke has undertaken the best course of action when knowing him as the heir of the largest liabilities ever incurred by any FED governor before.
Two strategies cannot have parallels run and the alternative course i.e. to let the Banks meet with their duplicity and losses should be at least through model shown and demonstrated as the best course of action.
May be thoughts should be given in having a truly independent Central Bank out of reach of the politicians out of reach of its shareholders and the incestuous relationships existing within the administration ?
Posted by: Philippe | Sep 21, 2008 9:40:00 AM
Ditto Fenner. Please get the word out. We are getting the bum's rush here because Congress wants to adjourn at the end of the week. Congress needs to be kept in session so the process can proceed with more deliberation. They are trying to change the financial system in one week. Taleb's Black Swan's are stretching their wings.
Posted by: zell | Sep 21, 2008 10:18:21 AM
As long as we keep electing presidents/VP unfit to even run a company, this will keep repeating.
every civilization becomes irrelevant at some point.....i wonder if this is the peak of USA.
but there are still things in usa favor, no other contender to provide a stable currency.(Euro is a faction of too many different countries.....not ready yet, IMO)
Posted by: techy | Sep 21, 2008 10:25:24 AM
I do not think the Crash of 2008 has happened yet, but they are greasing the skids. At the moment, self-protection is the order of the day.
Herbert Hoover, for all his misfortune, was a vastly smarter man than the Chimp.
Posted by: wally | Sep 21, 2008 10:26:46 AM
in having a truly independent Central Bank out of reach of the politicians out of reach of its shareholders and the incestuous relationships existing within the administration ?
Posted by: Philippe | Sep 21, 2008 9:40:00 AM
Philippe,
how would that be constructed? without Political, or Financial authority, what would be the basis of said 'Bank'?
Posted by: Mark E Hoffer | Sep 21, 2008 10:33:03 AM
"...The reality is that the financial system has been operating as if it were an off-balance-sheet vehicle of the government..."
http://www.ft.com/cms/s/0/b210deec-8675-11dd-959e-0000779fd18c.html
Posted by: VennData | Sep 21, 2008 10:39:30 AM
Mark
I guess the European Central Bank legal structure is close to the definition.
The ECB is providing reports to the European parliament and has proved in many instances that politician’s gesticulations and vituperations could be brushed away.
The only unknown to its true independence is the interelationship between monetary policy and exchange rates?
Posted by: Philippe | Sep 21, 2008 10:54:39 AM
Very impressed by this site and the overall level of discourse here. So... what the hell happens in the market in the next few days, weeks, months? Does it rocket up, unfettered. Does it crash a couple thousand points? I've never been so displaced intellectually by a series of events. Any comments would be welcome.
Posted by: Lionel | Sep 21, 2008 11:12:04 AM
Great find Barry.
There are entire books written about the '20s and '30s about which one could say that you only have to change the names and terms (e.g., pools = hedge funds) and you could be talking about today.
"Once in Golconda" is a great retrospective history written in the '50s that is still in print.
"Only Yesterday" is an almost contemporary account of the '20s through 1931 by F.L. Allen and is online in its entirety at:
http://xroads.virginia.edu/~hyper/Allen/Cover.html
Anyone who thinks that we are not at significant risk of this movie ending just as it did almost 80 years ago is delusional.
Posted by: fred | Sep 21, 2008 11:15:21 AM
Philippe,
I hear ya, but the ECB has, been, in conjunction w/ the FedRes, BOE, BOJ, et al.
manipulating the Financial markets at a torrid pace.
Understanding the existence of the BIS, and the G-groups(7, 8, 20...), it's impossible for me to believe that the ECB, beyond their PRs, is independent.
I think we'd better served by keeping it simple, the whole notion that "A modern economy needs an elastic currency..." is made of whole cloth, born of the 'convienent' events of 1907 (in the U.S., anyway).
History, for ages, has taught us the effects of uncorking the 'Central Banking'-genie. We, the U.S., were Best, without it, we'd be better, now, losing the one, the third one, we have.
Simply, organizing Debt into Currency, is a malevolent act. It would be, without the shield provided by Gov't, a simply proved Fraud.
It debases us All, to our, net, detriment.
Posted by: Mark E Hoffer | Sep 21, 2008 11:23:58 AM
The problem is not short selling per se, but naked short selling, i.e., fails to deliver.
The problem is also an abdication of fiduciary responsibility of institutions who are supposed to provide an orderly market.
For example, in one instance, the DTC (main stock clearing entity for US markets) accepted counterfeit stock certificates from a phony transfer agent without even doing the most minor of due diligence to see if that transfer agent was, indeed, the proper transfer agent for the company involved. The DTC just accepted and sold the counterfeit certs into the market¹.
Now, to cover its error, it looks like the DTC is preventing that stock from trading ("global lock") because it would cause much agnst when those hundreds of million of air shares have to be covered.
The problem is not just short selling. the problem goes much, much deeper than that, deep into an organization (the DTC) that is responsible to no one.
Footnote
¹ http://www.sec.gov/litigation/litreleases/2008/lr20466.htm
Posted by: Bob | Sep 21, 2008 11:29:57 AM
This whole mess is fascinating in a historical sense. It's like being at the charge of the Light Brigade or witnessing the last helicopter lifting off the roof of the u.s. embassy in vietnam.
I have to say though, I'm getting a little sick of wall street's saliva trickling down at the prospect of this ungodly and unnecessary bailout. This "No Banker Left Behind Act" is like the country being raped "for its own good". Btw, there was a similar transfer of wealth upward to the nasty class during GD1 yes?
Does anyone else think "The bailout will pay for itself!" sounds suspiciously like "The Iraq war will pay for itself!"?
as Numbnuts said, "Fool me once, duuuuuh, caint fool me agin"
As a wise man said, there is something inherently wrong with a system that is "Too big to fail".
We NEED our coming crash imo. With pain comes memory, with catastrophe comes vigilance, malfeasance brings vengeance and people LEARN (or in this case re-learn) great lessons on Prudential living. This bailout will stop nothing. It will simply allow the pigmen to re-assemble post calamity and pig up where they left off. Fucking vampires.
Posted by: brion | Sep 21, 2008 11:31:05 AM
HEY EVERYBODY!!!!!
This idea is going to work!! I was skeptical at first, but I just read an article on CNBC.com and the "bottom line" is that it was all CRAMER'S IDEA. Apparently, if the government boyz had just listened to CRAMER this whole mess would have been avoided-see the article! But now, they are finally listening! Here is the last paragraph of the article:
"The bottom line: Cramer fully endorses Paulson’s plan to save this market and he gives the Treasury secretary credit for taking action – even if the idea did start right here on Mad Money."
The bottom line: Cramer is NEVER WRONG! LISTEN TO CRAMER!
Ebadiebadieabadi thats all folks....
Sorry Barry...... We now return you to our regular program.
Posted by: Rich Shinnick | Sep 21, 2008 11:32:41 AM
Sorry, forgot the link to the Cramer article...just in case you thought I made this up:
http://www.cnbc.com/id/26793410
Posted by: Rich Shinnick | Sep 21, 2008 11:34:45 AM
By all accounts, strenuous exercise is great for building a strong heart, not unlike the role non-abusive short-selling plays in a strong market. But when doctors are desperately trying to treat a person who's undergoing cardiac arrest, they don't say "Hey, let's put him on a treadmill...it's great for his heart." Rather, they take drastic measures to prevent the patient from dying, trying to eliminate all variables that can interfere with that singular purpose. Healthy short-selling will be back in due time...abusive short-selling needs to be permanently eliminated.
Posted by: Frank | Sep 21, 2008 11:41:55 AM
