Page 1 of 2 Bush team turns to the dark side
By Julian Delasantellis
Who could have imagined that, as the candle burns down low on the most
aggressively pro free-market US administration since at least the Great
Depression, its attitudes towards financial markets regulation would make an
abrupt, 180-degree shift, from slavish obsequiousness to the market's whim to
something more akin to these sentiments expressed by pop singer Randy Newman in
his 1977 song, Short People.
Short people got no reason to live
They got little hands, little eyes
They walk around tellin' great big lies
They got little noses and tiny little teeth
They wear platform shoes on their nasty little feet
They got little baby legs that stand so low
You got to pick 'em up just to say hello
They got little cars that go beep, beep, beep
They got little voices goin' peep, peep, peep
They got grubby little fingers and dirty little minds
They're gonna get you every time
Well, I don't want no short people 'round here.
Of course,
Newman meant his song as a parody, a reductio ab
absurdo, against all the varying practices and forms of prejudice. US
Securities and Exchange Commission (SEC) chairman Christopher Cox, the man
charged with the regulation, and the maintenance of the integrity, of the
financial markets, doesn't get the joke - he's going after the short people,
or, at least, the people who short, for real.
The concept of shorting in the financial markets flummoxes even those with lots
of education and smarts. My wife, for example, a brilliant scholar who has been
published in all manner of peer-reviewed academic publications except those
dealing with the financial markets, once asked me why the shares of a company a
friend worked for were falling so fast.
"Probably it's because of all the aggressive trading by the short sellers," I
replied. I could see the wheels turning in her head. Finally, her face
reflected that she understood what I was saying.
"Oh, you mean that the short sellers can squeeze in between the legs of the
taller traders to put in more sell orders?" Well, not exactly.
Short selling can be confusing if you try to approach the issue from the
perspective of how it works, rather than the much easier to understand concept
of what it does. Most people have heard of the multi-millennium old trading
maxim advising one to "buy low and sell high". All short selling does is
reverse the order of this operation, you sell high to begin the trade, and buy
low to close it.
Obviously, orders to buy stocks, or any other traded instrument, act to support
prices, by providing an added demand for the security. Orders to sell stocks
and securities do the opposite; they provide extra supply of the particular
traded instrument, and in doing so they act to pressure prices down
For small orders to sell stocks with huge daily trading volumes, such as the
QQQQ NASDAQ 100 ETF stock basket, whose average stock volume tops 150 million
shares a day, the price impact of small lot short selling is negligible, but in
the case of big orders from aggressive traders like banks and hedge funds, in
less heavily traded securities, short selling can, and frequently does, move
prices significantly down.
Thus, America's love/hate relationship with short selling. Popular mythology
has everybody in the stock market not short-term trading their way to an easy
quick buck, but providing the necessary seed capital and investment that
improves society through private enterprise. In buying the stock of newly
emerging enterprises and industries, this line of thinking has stock market
investors financing a better American future, a future with everything from
electric cars to new cures for cancer. Also, individual stock buying ramps up
the numbers for the general market indexes, such as the Standard & Poor's
500 Index in the US, the CAC-40 in France, or the BSE Sensex in India.
For those who take pride in the appreciating values of their national stock
market in the same way as citizens of Liverpool do when the Liverpool Reds
takes soccer's UEFA Champion's League, short selling, deliberately trying to
drive prices down instead of up, is more akin to subversion than speculation,
to treason than trading. I remember callers to US right-wing radio talk shows
in the immediate aftermath of September 11, when the US Dow Jones Industrial
Average fell 17% in the first week after trading resumed following the attacks,
equating short selling with disloyalty in time of war, of providing aid and
comfort to Osama bin Laden instead of America.
But all the denunciations and approbations of the evils of short selling tend
to fade away in the heady exuberance of bull markets - to paraphrase Nora
Ephron, complaining about short selling in a bull market is like being the
proverbial "wallflower at the orgy". Overstock.com chief executive Patrick
Byrne has chosen to take the laurels of this peculiar accolade upon himself,
blaming his company's almost 90% decline in stock price since 2005 not on the
fact that the company has not had a profitable year during his nine-year
tenure, but on short sellers. He finds incontrovertible proof of this in the
fact that the stock has not rallied appreciably in the face of his confident
assertion that the company will at last turn a profit in the fourth quarter of
2008.
Early this year, conservative econopundit Ben Stein blamed the winter's
relentless stock market selling not on the deepening financial crisis but on
short sellers working in the service of Goldman Sachs. With the wisdom of time
(although I pointed out Stein's folly in
Prejudice, blame and the US way, Asia Times Online, February 6, 2008),
investing in the manner he implied would have been about as profitable as
putting money into the mega-flop documentary, Expelled, he made equating
the teaching of evolution with Nazism.
Perhaps that is the true social utility, the benefit, of the short seller. When
the well-choreographed and financed corporate parade marches smartly by, all in
bright new uniforms with shiny brass buttons, it's the job of the short to be
the skeptic, the Doubting Thomas, the infidel, the truth teller, the
whistleblower.
But America in the era of George W Bush has been noted for neither a particular
affection for the truth, nor for its lonely evangelist, the whistleblower.
Legion are the tales of the truth tellers, the whistleblowers, telling stories
of incompetence or mendacity in the prosecution of the Iraq war being
disciplined or having their careers stifled or terminated. As the battle to
save the presidential legacy shifts from the sands of Iraq to the trading
floors of Wall Street, it was only natural that such an adversarial
relationship with those who tell the truth would follow close behind.
Very much in contrast to what it must undoubtedly wish, the Bush administration
has not yet managed to find a General David Petraeus, or a "surge", to pacify
the counterinsurgency on Wall Street as effectively as its dubious claims
regarding what it has done in Baghdad. The rot that emerged and metastasized
out of the market for subprime mortgages last year is now spreading deep into
the economies of the US and the world. As it does, the crisis is delivering
more fearsome hind-leg kicks onto the financial markets as it goes by, further
wounding a sector already pretty much beaten to a bloody pulp.
If this is not, as some observers claim, the worst financial crisis since the
Great Depression, you sure wouldn't know it by looking at shares of companies
in the financial sector. From last August to last Tuesday, shares in the
S&P 500 BIX bank and financial index have lost over two-thirds of their
value; they're down over 50% since just late April. It must have been
particularly troubling for the administration to look out, in the midst of an
economic crisis that commenced with problems in US housing, and see the shares
of Fannie Mae and Freddie Mac, the semi-government semi-private housing finance
guarantor agencies whose continued survival is crucial to the viability of the
US housing industry, down 75 and 84% respectively, just since early June to
mid-July (see Jaws
close in on Bernanke, Asia Times Online, July 16, 2008).
For the seven-and-a-half previous years of the Bush administration, its senior
officials proclaimed an unshakeable and unassailable faith in the judgment and
the wisdom of markets, particularly financial markets. Now, as their God turned
stern and judgmental, raining down fire, brimstone, and disapproval upon its
once most faithful servant, the Princes of the Bush reign, like the apocryphal
young Californian who is said to have turned to devil worship when his prayers
to Jesus went unanswered, have gone shopping for a better deal on the other
side.
On Sunday, July 13, a joint Federal Reserve/US Department of the Treasury
Fannie/Freddie rescue plan was released, to mostly tepid reviews from both
financial pundits and traders. The following Tuesday, SEC chairman Cox pitched
in with his plan to save the two mortgage guarantors. Like a petulant King
Henry VIII trying to convince Sir Thomas More that Henry was the rightful
supreme pontiff of England first through argument and then through
imprisonment, Cox in effect told the markets that if his words didn't convince
folk that Fannie, Freddie and the rest of the sector are financially sound,
maybe his club striking heads would prove more persuasive.
The quasi-acceptance of short selling as a legitimate practice of the financial
markets had always accorded it a special place in market regulation; the
government's respect for the wisdom of markets meant that the practice was
allowed, the practice's potential to drive down stock prices meant that it was,
like pornography more tightly controlled for the supposed benefit of the
society in general. This even extended to the manner in which the practice was
curbed; much like the vice police are tasked to crack down on the existence of
salacious photographs and films containing naked people, the stock police are
said to be hunting down what is called "naked short selling".
The complicated part of short selling, of selling something that you don't own,
is, of course, that you are selling something you don't own.
The way that the finance profession has found a way off this endless Mobius
Strip of illogic is to have the short seller go through a sort of public
decency boogie that involves having him initiate a fig leaf process that is
called "borrowing" from an actual owner and for a small fee the shares that he
wants to sell short. This is usually done by the short seller's stockbroker.
The benefit of this is that it keeps the number of shares that could be shorted
in any particular security in a rough alignment with the actual number of
shares outstanding. This is supposed to prevent the possibility of large
numbers of well-financed shorts joining together in what's called a "bear run"
or "bear raid", hitting the stock with so many sell orders that it has nowhere
to go but down; in effect, making the short trade's profitability something of
a self-fulfilling procedure.
It is important to note that, in and of itself, selling short without the cover
of borrowing the stock from a registered owner, otherwise known as naked
shorting, was, at least until last week, not unlawful. To meet the legal
definition of unlawful market manipulation you had to be guilty of naked
shorting and have had a seriously material negative impact on the stock price.
Taken together, the two requirements had provided a very comfortable blanket of
legal security for the short sellers. The SEC, the assigned regulator of a
stock market that essentially doubled from October 2002 to October 2007,
couldn't have seemed to care less.
But as any student of government knows, ideology among those
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