Fool Blog: Short Selling and the Death of Satire

After Henry Kissinger received the Nobel Prize in 1973, a famous satirist remarked that "it was at that moment that satire died." Whatever life satire might have had left was finally extinguished yesterday, when the government announced plans to crack down on improper short-selling.

And who are the delicate flowers in need of government protection? Why, shrinking violets like Goldman Sachs (NYSE: GS  ) , Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , Lehman Brothers (NYSE: LEH  ) , and UBS (NYSE: UBS  ) ! Are things really so bad that the wolves need protection from ... the other wolves?

To be fair, Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) are also covered by the SEC order. Fannie and Freddie are both government-sponsored institutions, so it's perhaps understandable that the SEC would want to take some action to support those companies during the current crisis. And SEC Chairman Christopher Cox has said that he doesn't oppose legitimate short selling, only "unlawful manipulation through 'naked' short selling that threatens the stability of financial institutions."

So Cox seems to be saying that he is taking action to outlaw something that is, um, already outlawed. Do the likes of Goldman Sachs and Bank of America really need extraordinary protections provided by the federal government? No wonder a blogger for The Wall Street Journal referred to this as "Operation Stocks Go Up Always."

The story of the Feds lending a helping hand to some of Wall Street's most powerful firms is something the Motley Fool might run on April Fool's Day. Of course, such a story would have only been possible in the days before satire died. 

RIP, satire.

Any thoughts on this issue? Weigh in with a comment below.

John Reeves does not own shares in any of the companies mentioned. He wishes we could all be kinder to the gigantic health insurance companies. Bank of America is an Income Investor recommendation. The Fool has a disclosure policy.

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  • Report this Comment On July 17, 2008, at 3:04 PM, LoliaChristine wrote:

    My quick read through this piece has led me to four main errors with Mr. Reeves argument, which together are ironic in themselves. First, his article suggests that because a crime committed by someone of a particular industry against someone of that same industry it doesn’t need to be prosecuted (“wolves need protection from … the other wolves”). So then by that logic, if Pepsi stole Coke’s secret recipe, the judge would think ‘no fault done because, well … they both make soda.’ Or perhaps a better comparison: if a security guard uses his knowledge of the security systems within a store to steal from the store, a judge would think “no harm done, the store owner taught him how to do that anyway.”

    Second, Mr. Reeves seems to have misunderstood the purpose of the Fed’s actions. “Cox … is taking action to outlaw something that is, um, already outlawed”. Fed was not creating a new law with yesterday’s action. Instead, it was taking steps that will make it less likely that the original law will be broken. Kinda like every other regulation within the financial industry; well, for that matter, every regulation within any industry like say the healthcare, auto, utility, food & drug, construction … Perhaps Mr. Reeves thinks those regulations are useless. Nobody likes red tape anyway.

    Finally and most importantly, Mr. Reeves has completely ignored the impact a fall in a firms like Goldman or BofA will have on the national and global economy. The Fed’s action was in no way to protect the poor traders sitting at 85 Broad Street. No. It was to protect the new couple who want to buy their first home, and the working class construction worker who can’t afford milk as rapid inflation sweeps through the nation with the collapse of the financial system. Oh and, the 59 million BofA customers who, if lucky enough not to loose their savings, will have to go through the stress of worrying whether their money is safe. That stress alone -- added up 59 million times -- is enough to put the US economy in recession for the rest of this decade.

    Perhaps the Fed was just trying to do, oh I don’t know, its job, which is protecting the average American citizen from the negative impact a collapse (or even a stumble) in the financial system could cause, whether caused illegally or by the simple (and sometimes ugly) balance of supply and demand.

  • Report this Comment On July 18, 2008, at 1:23 PM, Stocklovr wrote:

    "...taking action to outlaw something that is, um, already outlawed."

    My take is that Mr. Cox fired a warning shot at "naked" shorts to let them know that the SEC will be monitoring and possibly punishing violators of the existing law.

    Short sellers are a necessary part of an efficient market but the NAKED shorting is gaming the system and as you said, against the law! They don't actually borrow the stock before they short it so they can actually borrow and sell more stock than exists. How is that right?

    This creates a little problem called call FTD's or Failure to Deliver. Us every day slugs have T+3 (three days from the transaction) before the transaction settles. Naked shorts go way beyond that (IF they ever settle at all!).

    The recent shorting of the financials, I believe, has prompted the SEC to take some of this seriously. They should enforce the rules for everyone, not just those shorting financials.

    Naked shorting should be eliminated. Period.

    Interesting read:

    "The Securities and Exchange Commission recently acknowledged that $6 billion in stock have failed deliveries each day. Out of 6,000 publicly traded stocks, over 300 are currently experiencing significant delivery problems. "

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