my actual opinion is as below. in the past, i’ve sided with the short-selling is okay because of price discovery and all that bs. i have further defined my stance. i see no reason why short selling should be disallowed if stocks can be bought on margin. if margin didn’t exist, i’d have a hard time justifying short sales. companies will always be able to issue equity at a price above $0 if they are solvent, so you cannot say that short selling kills companies, and so long as it doesn’t kill companies, the long-term, diversified investor will weather that short interest. that said, short selling government bonds should be disallowed for the fact that countries cannot convert assets into cash as quickly as companies, they are limited to what they can sell, and they cannot issue equity. short selling countries could lead to the destruction of all governments creating a quasi-corporate ruling class. what happened in europe was scary and putting undue pressure on debt owned by organizations that cannot fund raise equity is essentially capitalism hanging itself. we cannot let capitalism begin to overule democracy. the fact is, those with enough cash to put countries like the PIIGS in jeopardy are the only ones who will benefit as they have the ultimate power to hang the PIIGS. and hell, after you make a few trillion killing the PIIGS, might as well head for the UK, Japan, hell, you’ll eventually make enough to kill every government in the world.
spierce Wrote: ------------------------------------------------------- > @ justin > > While securitization has been around for decades, > it significantly increased risk through complete > off-BS treatment through FAS140, increasing the > likelihood of OFF-BS through the usage of gain on > sale. > > I source, structure, close, and oversee ABCP > securitization positions. The blatant abuse of > the ABCP market by using SIVs to hide CDOs was > rampant, it hid massive amounts of leverage and > passed on risk to the ABCP markets, which did > nothing but hurt the entire CP market. Again, agree on the leverage aspect. However, the ABCP market itself was a bubble in late 2006 / early 2007. Reliance upon ABCP to fund long-term operations is a classic long-term asset / short-term liability mismatch and was known to be risky, either for a SIV or a corporation (e.g. BSC). I’ll grant that the nonsense AAAs from the ratings agencies was abuse, but how were the SIV’s assets (CDOs) “hidden”? > The “pass the trash” mentality of RMBS issuers, > which never retained any interest through CDO > leverage, made the situation horribly risky. There are two sides to every trade, and one man’s trash is another man’s castle. At the end of the day, if the assets were overpriced, I personally blame the buyers (collectively) for the mispricing. > Shorting interest is nothing compared to long > interest and can’t be entered into by “normal” > people. This only adds to the asymetrical > profitability towards the banks while putting the > asymetrical risk towards common investors and > taxpayers. Of course normal people can short. They just choose not to (this is probably a good thing imo) or don’t understand. Banks are not major short players; hedge funds are. I would bet banks are net sources of locates, though I’m not certain of this. > My point was that while shorting may have > discovered fraud, was the fraud discovered because > shorting or in spite of it? Was the discovery > inevitable? Correlation is not causation. Inevitably is irrelevant. The whole point of price discovery is that you figure out the correct value faster. Shorts definitely shed light on fraudulent companies; there is clear causality in many examples, for instance Einhorn / Lehman. > The housing market was shortable, many did it, but > it didn’t do anything. Standing on the sidelines > was equiv to shorting. However, the problem isn’t > shorting, it is the psychology of the bubble which > will occur no matter how much shorting occurs. The psychology of the bubble is unavoidable and thus bubbles are unavoidable. No one is debating this. Standing on the sidelines is not equivalent to shorting. That’s like saying standing on the sidelines is equivalent to buying. The housing markets were shortable only on a secondary basis (e.g. via the monolines like Radian). I don’t think Case-Shiller futures traded much.
Thinking that short-selling is OK because a company can still issue stock at greater than $0 and/or that a company will “weather” short-interest is basically immaterial because there are many downsides to shorting a stock. Those downsides include reduced ability to raise cash at a correct value (dilution), reduced ability to access debt markets (less equity, more risk, less willingness to lend), and runs on companies through panics. The last is probably the worst affect. Just as bubbles cause herd mentality, crashes do the same. Short selling amplify the downside and can cause far more problems than upside. It’s akin to inflation, mild inflation, or even higher inflation, isn’t a killer. However, deflation is far more destructive to an economy, mainly because it destroys the ability to repay debt, thus less credit is given, resulting in less ability to generate wealth and less ability to repay debt…etc. And, as discussed before, most short-sellers with the liquidity needed to undertake the selling are financial institutions or wealthy individuals. Those that bear the brunt of the side-effects (lack of credit and dilution) are J6P 401k investors. This is magnified with the increased systemic risk, which doubles-down on J6P (who can’t get loans which are needed to live, “rich” people or institutions don’t care about), then triples down when financial alchemy results in a financial crash and inevitable bailout. All the while, those who get the gains (institutions and wealthy) get away relatively unscathed.
spierce Wrote: ------------------------------------------------------- > Thinking that short-selling is OK because a > company can still issue stock at greater than $0 > and/or that a company will “weather” > short-interest is basically immaterial because > there are many downsides to shorting a stock. every company that is at risk of default/bankruptcy doesn’t need short-selling to force the stock price down. thats why we have short sale restrictions on low-dollar-value stocks. moot point. > Those downsides include reduced ability to raise > cash at a correct value (dilution) what is a correct value? there is no such thing. similar social/market inefficiencies exist whether you raise capital at under- or over-priced valuations. raising cash at deflated values, will reward those who bought at that level and punish who were short, ala economic returns on money raised was higher than the shorts expected. if the shorts are shorting companies that are going concerns and those that turn a growth expectation into a growth realization, they will get clobbered. shorts can lose and when they do, they get timid about shorting good companies. , reduced > ability to access debt markets (less equity, more > risk, less willingness to lend) shorts keep the debt/equity in balance. the only companies that truly get hurt by short sellers are those who are tiptoeing bankruptcy, and those companies, like i said, are generally protected by short-sale restrictions. , and runs on > companies through panics. most shortable companies have a decent cushion to land on in the midst of a panic. we learned that banks were undercapitalized in the last bout and it brought reform. if you shorted BAC below $5, you’re feeling some pain right now. any company that can be “destroyed” through short-selling was likely to die in due course anyway. unless you are cash-poor or debt heavy, you will be able to raise cash based on your asset values. any company that is shorted to their cash value, but has the ability to turn a huge returns on that cash will absolutely destroy the shorts. thus, shorts only kill companies that were going to die anyway. > > The last is probably the worst affect. Just as > bubbles cause herd mentality, crashes do the same. > Short selling amplify the downside and can cause > far more problems than upside. see: a long-term investor who slowly transitions out of equity is free of these risks as he/she is never caught selling all of his/her assets at a bottom. short-selling allows traders to do what they do, so it makes sense that they should take all of the risk involved in it as well (i.e. if the market drops 99% tomorrow and then rebounds 10,000% the next day, its not Ma and Pa Kettle who are affected, its the traders who just blew up). > > It’s akin to inflation, mild inflation, or even > higher inflation, isn’t a killer. However, > deflation is far more destructive to an economy, > mainly because it destroys the ability to repay > debt, thus less credit is given, resulting in less > ability to generate wealth and less ability to > repay debt…etc. i don’t really know how to reply to this without making fun of it in someway. i’ll just say that comparing short-selling in anyway to inflation is ridiculous. if you’re assets have value over your debtlevels, you can raise capital. there will always be someone willing to pay you for your assets or for a part of what those assets can yield. > > And, as discussed before, most short-sellers with > the liquidity needed to undertake the selling are > financial institutions or wealthy individuals. > Those that bear the brunt of the side-effects > (lack of credit and dilution) are J6P 401k > investors. This is magnified with the increased > systemic risk, which doubles-down on J6P (who > can’t get loans which are needed to live, “rich” > people or institutions don’t care about), then > triples down when financial alchemy results in a > financial crash and inevitable bailout. > > All the while, those who get the gains > (institutions and wealthy) get away relatively > unscathed. the wealthy can lose too. just because it hasn’t happened in 80 years doesn’t mean it won’t. if we see deflation of 90%, the wealthy will be destroyed, whereas the common folk will be just fine. they will own nothing just like they do now. and to cap it all off. the difference between countries and corporations is that so long as a corporation has $0.01 in assets on its balance sheet, there will be an equity investor, or a bondholder who can be converted into an equity investor. therefore, so long as a corporation has an asset, they can issue or reorganize into equity. a country cannot do that and therefore it shouldn’t be susceptible to the same speculation. most countries are likely running at huge levels of negative equity (when considering physical assets that can be privatized/sold). heck, a country wouldn’t even be able to calculate their expected tax revenue stream as an asset as its possible that all inhabitants would up and leave on the day when they would most need to quantify such a figure. there are absolutely no positives to short-selling sovereign debt, yet it has many negatives, with the most prominent being that it could be seen as an act of war. short-selling country bonds will only end in war, famine, crisis, etc.