Friday, September 19, 2008
Throwing Chris Cox under the bus
Larry Kudlow, whom I absolutely adore, is denouncing Chris Cox for the SEC's temporary ban on short-selling, and my instincts are to agree with him. This, however, I think is unfair, or at least misapprehends the bureaucratic dynamic:
As much as I agree with Paulson’s new RTC-type agency, which is what I call a smart regulatory move, I disagree with Cox’s action, which is an incredibly stupid regulatory move.
Sorry to say, but there is simply no way that the SEC would impose these new rules without both consultation with and concurrence of Hank Paulson and Ben Bernanke. Indeed, it is entirely possible that "Cox's action," as Kudlow puts it, was Paulson's idea and at his request. I therefore think it is unjust to tag this as a blunder of Cox's per se. By every account that I have seen, these guys are clearly (and finally) acting as a team and in close consultation with each other; if the ban on short-selling is as foolish as Kudlow says, it is Paulson's foolishness too.
CWCID: Glenn Reynolds.
14 Comments:
By 
, at
Fri Sep 19, 04:29:00 PM:
Great, why don't you loan me your car title, so I can "sell" your car, and drive down the resale value of said vehicle?
Only, in the greatest "fleece the sheep" casino in the world is it legal to sell something "you don't own"in the name of "Price Discovery."
Take your car down to the car lot, Bubba. You'll "Discover" it's price.
The world prices everything in it, very efficiently (at least, as accurately as the NYSE,) every day.
The only purpose that is served by people selling stock they don't own is to Drive "Volatility."
Volatility makes lots of money for Brokers. There, Houston, is the Answer.
By 
TigerHawk, at
Fri Sep 19, 04:36:00 PM:
Actually, rufus, volatility is an asset that can be monetized! Companies whose share price has a "high vol" can raise money at a lower cost of capital than those with a low vol (setting everything else equal).
Weird, counterintuitive, and true.
And here's another one: Short-selling often dampens volatility rather than increasing it.
The truth is, institutional brokers do not make their money from commissions any more.
By , at
Fri Sep 19, 05:16:00 PM:
The question to ask yourself is: "Are the Prices of the Brokers, today, any less "Accurate" than the prices yesterday, or a week ago?"
The answer, of course, is No.
The difference is, someone didn't have the pleasure of Selling a Stock to Me, and Then turning around and loaning my "title" to someone else so he could "short" it down, so the broker could turn around and buy it back from me at a lower price.
Rinse, Repeat.
It's a Brilliant Scam that's been going on for so long that it's "accepted."
In no other industry in the world is this legal. Not in Real Estate, not in Retail, not Anywhere else, on earth can you sell something That You Don't Own, and Not go to jail.
By , at
Fri Sep 19, 05:43:00 PM:
Of course market prices are less accurate today as compared to the day before the rule changed. Without shorts to help set the level, fewer people are participating in the market. More participants voting with their money always helps set better prices. Why would you think otherwise?
By , at
Fri Sep 19, 05:52:00 PM:
I'm no expert on shorting rules, but "shorting a stock" is not what you think. It's a "borrowing" transaction followed by a sale of those shares, except for naked shorts (which is crazy stuff in my opinion). The short has three days (I believe) to produce the shares or the cash. In the meantime the short pays for the privilege of borrowing the shares. To short a stock, an investor posts collateral and the servicing broker has a variety of administrative obligations to meet concerning know-the-investor rules before the shares can even be lent. Shorts play a crucial role in the market, though I would except naked shorts from that statement.
By , at
Fri Sep 19, 05:58:00 PM:
Why would YOU think that "Price Discovery" is, in any way, a function of algorithmic-driven, black-box selling?
By , at
Fri Sep 19, 06:06:00 PM:
Call it "borrowing," call it "renting," call it whatever you want. It's NOT "Ownership;" and, to sell what you don't own is Fraud.
It's a Scam. It turns a Market into a Casino. Casinos are fine. But, should Capital Gains Tax treatment be allowed for "Casino" Wins?
By , at
Fri Sep 19, 06:10:00 PM:
Again, Financial stocks fluctuated all day, today; as they did last friday. The difference is in velocity. The swings were more gradual, with less violence. The only loser in this scenario is the Broker. Fewer Trades - Less Money.
That's it. Nothing else to it folks. Just another way to "sheer the Sucker."
By , at
Fri Sep 19, 07:39:00 PM:
Oops, make that "shear the suckers."
By Escort81, at
Fri Sep 19, 11:30:00 PM:
TH -
Actually, rufus, volatility is an asset that can be monetized!
I am not sure I would use the term "asset," but it is certainly true that an investor can go long or short with respect to volatility -- that is, predict that price movements in a stock (or group of stocks) will be large or small, and make money if they're correct. Originally, it was used mostly as a hedging strategy.
Companies whose share price has a "high vol" can raise money at a lower cost of capital than those with a low vol (setting everything else equal).
That may in fact be true in the real world, but you should recognize that it directly contradicts classic Capital Asset Pricing Model theory, which employs a weighted average cost of capital formula (the after tax cost of debt plus the cost of equity, weighted by the existing capital structure of the firm). The cost of equity can be calculated a variety of ways, but most B School profs called to provide expert testimony in litigation relating to valuations would say that companies with less predicatable underlying businesses or more wildly swinging stock prices typically have a higher risk premium and a higher cost of capital.
Anyway, enough theory -- shorts serve a purpose, bear raids, not so much.
By Mrs. Davis, at
Sat Sep 20, 08:34:00 AM:
Call it "borrowing," call it "renting," call it whatever you want. It's NOT "Ownership;" and, to sell what you don't own is Fraud.
Do you keep your money in a bank? Do you know what they do with it? And is it fraud when everyone knows what is going on and has consented?
Consider in the bowels of your heard that you might be wrong.
By , at
Sat Sep 20, 09:46:00 AM:
rufus, I'm getting the strong impression you already have your mind made up and aren't willing to consider any facts that don't fit your entrenched opinions. Mrs. davis is right on, and this stuff really isn't as hard to understand or as controversial as you seem to want to believe.
By TigerHawk, at
Sat Sep 20, 09:52:00 AM:
Anyway, enough theory -- shorts serve a purpose, bear raids, not so much.
Correct, and excellent point besides. The trick is distinguishing between the two. Nuance, folks, nuance.
By , at
Sun Sep 21, 02:24:00 AM:
to sell what you don't own is Fraud
No, it's smart. To sell what you can't own is fraud. There's a difference. A naked short seller can enter the market and buy shares if they ever need to deliver. That may be a monstrously expensive undertaking, but that's that's life if you're a naked short seller. That's why brokerages require huge reserves if you're going to do that.
