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Thank You for Your Support of Bailouts-R-Us!
Welcome, Shareholders!
Have you ever been in the midst of a dreadfully bad day and indulged yourself in a quick daydream about being God or at least King for a day, so that you could say Presto! and instantly change the Rules Of The Game to your advantage?
Yea, nice daydream for sure. We've all had one like it and we all know it's pure fantasy...
...That is, unless you're the government, and people keep panicking no matter how many times you say "Don't panic." In that case they really can say "Presto" and the Rules Of The Game really will change. As in, they declare "NO short-selling on these 799 financial stocks!" They said and it was so. Instantly.
In case you're curious, the Securities and Exchange Commission made this announcement in a press release dated September 19, declaring "The action is immediately effective." It went on to say,
"The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets."
Let's see -- "weapon," "arsenal," "combat," "threatens." Sounds like the SEC is "committed" all right, but language like that makes me wonder if bureaucrats are up to the task. Perhaps the Department of Homeland Security should do the enforcement dirtywork, or for that matter a brigade of Marines. Killing all the short sellers is easier with executioners who won't point the business end of the weapon at their own feet.
Most of that remark above is a joke, but if you've read this page the past two days you know that the SEC is now trying to stop a crisis that it absolutely helped create -- i.e., the regulators shot themselves in the foot by allowing Wall Street's big five investment banks to unilaterally price assets that had no market, label those assets as "securities," and place those assets on the "capital" side of the accounting ledger. Then there's the matter of the SEC allowing leverage ratios to rise from 12-to-1 to as high as 40-to-1.
Those facts didn't make it into the press release. I guess the regulators needed to identify who the enemies are and declare war against them. Moral ambiguity only messes up a good story anyway. The government is launching Bailouts-R-Us, and it needs to get all the taxpayers... ummm, shareholders that is, on the same page.
So let's be clear: To forbid short-selling is more than a means of protecting financial stocks. It's a shamelessly public invitation to buy them, because for now the game is rigged. When the media says today's stock market gains came on "the SEC's action," they don't know how right they are.
Short sellers do perform an important and unique service, but you needn't take my word for it. I'll conclude with a quote from an essay that ran in the New York Times (Oct. 6, 2006), by a former SEC lawyer who had actually studied short sellers and their trades:
"As an enforcement lawyer at the S.E.C., I received from short sellers early warnings on certain companies that led to the capture and return to investors of hundreds of millions of dollars taken by stock frauds. Such information came from no other source — certainly not from institutional stock analysts, whose failures of objectivity were made notorious by the Attorney General Eliot Spitzer of New York. Representing short-biased hedge funds as a part of my practice as a private lawyer, I continued to be impressed by their ability to spot stock frauds in the early stages.
"But if short sellers are friends to the S.E.C., the commission has been no friend to short sellers. The agency has saddled short sellers with trading restrictions and has looked the other way when companies have taken potentially illegal actions to silence short sellers’ criticism."
Thanks for reading. Bob Prechter also has an opinion on this week's events, and has includes them in a just-published special issue of The Elliott Wave Theorst. Click here for more information.