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Short Selling banned for financials?
Old 09-19-2008, 08:40 AM   #1
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Short Selling banned for financials?

This is perhaps the most foolish intervention into the market that I've ever seen our government perform.

I have a few questions that the articles don't seem to answer--

What happens to people who have already shorted these stocks? Are they required to cover within a certain time? Are they grandfathered in?

The articles say 799 financial stocks are affected, but none of them say which ones. Is there a list somewhere?

This will probably benefit my networth dramatically today, since I own a number of heavily shorted financial stocks, but I can't help think that propping up the stock market is not the SECs job.

Re-instate the uptick rule? Ok, that seems reasonable.

Ban short-selling altogether? Insane.

The markets will be less efficient down the road because of this.
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Old 09-19-2008, 08:44 AM   #2
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I agree. I would support simply reinstating the uptick rule, but this is probably a silly move.
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Old 09-19-2008, 08:46 AM   #3
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Heres the list
SEC List: The 799 No-Short Stocks - Financials * US * News * Story - CNBC.com
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Old 09-19-2008, 09:11 AM   #4
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Thanks.

I'm waiting for companies that aren't on the list to start lobbying to get added.




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Old 09-19-2008, 09:19 AM   #5
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the ratings agencies in the ultimate wisdom are now using stock prices as part of their debt ratings. this is the reason for the temporary ban
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Old 09-19-2008, 10:26 AM   #6
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Are market makers exempt? If not, I would think this will raise the cost of options, especially puts.
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Old 09-19-2008, 01:52 PM   #7
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Looks like we have more questions than answers.

Let me add one more. Isn't short-selling a natural product of a free market?

And another: Didn't selling short give the market some balance?

I was afraid I would understand less and less as I got older and it's happening.
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Old 09-19-2008, 03:36 PM   #8
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Looks like we have more questions than answers.

Let me add one more. Isn't short-selling a natural product of a free market?

And another: Didn't selling short give the market some balance?

I was afraid I would understand less and less as I got older and it's happening.
I don't believe there was anything destabilizing about short selling per se. It was the elimination of the uptick rule that did more to allow institutional short sellers to quickly tank the market (and individual companies and sectors).

Frankly, merely reinstituting the uptick rule was the only significant change to short selling that was necessary. And for *all* stocks, not just the financials.
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Old 09-19-2008, 06:39 PM   #9
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OK I'll stick my neck out on this one. I've never shorted a stock in all my 30+ years of investing. Peter Lynch thought it was a dumb idea. I have no idea if shorting is really a good thing or not. I doubt the capitalist system we have is dependent on short selling.

For some reason people get all excited when the government steps in to try to restore liquidity and get economic activity going in a growth direction. I'm going to be pragmatic on this one. If it works they can do it with my blessing.

Go ahead and flame me but if you do I'm out of here .
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Old 09-19-2008, 08:26 PM   #10
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I don't believe there was anything destabilizing about short selling per se. It was the elimination of the uptick rule that did more to allow institutional short sellers to quickly tank the market (and individual companies and sectors).

Frankly, merely reinstituting the uptick rule was the only significant change to short selling that was necessary. And for *all* stocks, not just the financials.

There was an article in the Journal that uptick rule was an old wise tale and didn't really have an impact. The SEC group than spent years studying it was unanimous in its recommendation to repeal it. Especially now that stocks are decimaled. In the old days if you had $4 stock and had to wait until it went up to 4 1/8 to short it that mattered a bit, moving from $4.00 to $4.01 really has no impact.

Even though I shorted a stock today (the first in many years and it was a hedge), I think SEC did the right thing. Regardless of the reality, the perception was that shorts were bring down the financial system. Since we the taxpayer now have direct vested interested in making sure that financial firms do well, the public interest out weighs the lose of profit opportunities for short sellers. Long term short sellers provide a reasonably valuable function, but in the short term tough luck.
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Old 09-19-2008, 09:07 PM   #11
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Looks like we have more questions than answers.

Let me add one more. Isn't short-selling a natural product of a free market?

And another: Didn't selling short give the market some balance?

Wasnt the problem NAKED short selling (selling a stock short that has not been borrowed)?
I was not aware that naked short selling was a legal transaction at all.
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Old 09-19-2008, 09:51 PM   #12
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I agree (mostly) with what this former Goldman-Sachs partner has to say:

Greg Zehner: Atlas Shrugged: A Reaction to the Paulson Plan (From A Former Goldman Partner)

He advocates the 'tough love' laissez-faire approach over the gushy socialist-interventionist approach. If you can't stand the heat you shouldn't be in the kitchen. You shouldn't come whining to the SEC or taxpayers to install a free air conditioner to keep you comfortable.
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Old 09-20-2008, 11:17 AM   #13
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This is perhaps the most foolish intervention into the market that I've ever seen our government perform.
(long post, but an interesting story . . . I think)

I'm not a huge fan of government intervention and I sympathize with the argument that functioning markets need to have short sellers . . . but our markets weren't functioning. It's difficult (impossible?) to prove, but it did look like companies were being systematically targeted for extinction. A good case study would be Constellation Energy (mostly out of the major headlines except for the fact that they recently agreed to be acquired by Berkshire). This is Constellation's (CEG) story of the past week . . .

CEG is a hybrid electric utility, power producer, commodity trading firm. About 2/3 of the company is comprised of "hard assets" (power plants, an electric distribution company, etc.) with the balance engaged in commodity trading and risk management. Approximately one month ago CEG announced that it had botched a previous disclosure about the amount of collateral it would have to post to its trading counterparties in the event it lost its investment grade ratings. As it turned out, existing liquidity sources would be insufficient to cover a three-notch downgrade to junk. At the time, CEG was in absolutely no danger of losing its investment grade ratings. All of its businesses were doing fine. There was no speculation that the trading business had suffered losses, was sitting on bad trades, or had any exposure whatsoever to housing. Two of the three rating agencies did lower their credit ratings one notch (still 2 levels above junk) and said the outlook was stable. Moody's put the company on review for downgrade and told people privately that they didn't expect to lower the rating more than 2 notches, keeping them investment grade.

CEG responded by getting commitments for an extra $2B in bank lines and announcing intentions to sell some assets. Problem solved?

Nope . . . On Monday Sept 15th the stock was down heavily on rumors that CEG had significant exposure to Lehman’s bankruptcy. CEG released an 8-K Monday night disclosing that it didn't. On Tuesday the stock and CDS were being sold heavily again, despite the company's assurances that it wasn't exposed to LEH. Later that afternoon (9/16) another false rumor spread that UBS was pulling CEG's $2B bank loan commitment. The stock dropped from ~$35 to $16 in 30 minutes and was down as much as 70% on the day before recovering half of that.

Weds morning the company released another 8-K saying that it still had the $2B bank commitment and that it was re-affirming earnings for the 3rd quarter and full year. But the damage was done . . . Standard and Poor's issued a press release later in the day saying that they were considering multiple notch rating downgrades (from a stable outlook issued just a month before). S&P cited, among other things, the impact that equity and CDS market selling had on investor confidence and access to capital for the company.

The S&P announcement was a death sentence for the firm. A multiple notch downgrade would have been a "Material Adverse Change" under the $2B bank commitment, without which CEG would have been unable to meet the collateral calls caused by the downgrade.

In my view, short sellers deliberately targeted CEG and spread false rumors with the hope of scaring the rating agencies into downgrading an otherwise healthy company and forcing its collapse . . . mission accomplished!

(A good opportunity for BRK, btw)
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Old 09-20-2008, 09:26 PM   #14
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Good post Yrs to Go.

As a Berkshire shareholder, I have to be thankful for short sellers, enabling Warren to get another bargain. But if the vultures do kill off every thing eventually there will be nothing left to slaughter and we will all starve. I agree is that banning all short sales of financial stocks (it wouldn't have help CEG) is like using 20 mm Gatling gun to drive off the vulture, but is probably necessary under the circumstances.
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Old 09-20-2008, 10:23 PM   #15
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Especially now that stocks are decimaled. In the old days if you had $4 stock and had to wait until it went up to 4 1/8 to short it that mattered a bit, moving from $4.00 to $4.01 really has no impact.
Why couldn't you make the uptick 0.12 from the last downtick? So if the stock went from 4.00 to 3.99, the short sale would trigger at 4.11.
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Old 09-21-2008, 09:38 AM   #16
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Why couldn't you make the uptick 0.12 from the last downtick? So if the stock went from 4.00 to 3.99, the short sale would trigger at 4.11.

You could make .12 or any arbitrary value say 5%, but AFAIK they left it as just an "uptick" or $.01. Given the enforcement issue they had with naked short selling, insuring that every short sell was only transacted after an up tick, across all of the various exchanges stocks can be bought and sold seem really hard.
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Old 09-21-2008, 10:36 AM   #17
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In the old days if you had $4 stock and had to wait until it went up to 4 1/8 to short it that mattered a bit, moving from $4.00 to $4.01 really has no impact.
It's just a matter of breaking the momentum. "You can't kick them when they're down" . . . you have to wait for them to start getting up, at least.

Multiple studies have said the up-tick rule had no impact on market volatility. Seems a little hard to believe, but that is what the egg-heads say.
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