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Overstock.com (Nasdaq: OSTK ) CEO Patrick Byrne is right.
"Recent concerns about short-selling have culminated in a regulatory flurry of emergency orders and amendments. What should be of concern, however, is not short-selling per se: As its devotees frequently remind us, short-selling is a vital and legitimate market activity," Byrne recently wrote in a Forbes editorial.
So why, then, is SEC Chairman Christopher Cox pushing rules that would severely limit all shorting by money managers? Has presidential candidate John McCain's stinging yet specious rebuke of his leadership at the agency caused this mostly intelligent reformer to check his brain at the door?
A ban is a ban, no matter what you call it
I'm speaking specifically of rules that would require money managers to file a new form called "SH," describing in detail their short positions at the beginning, middle, and end of every trading day in a weekly summary, Reuters reports.
That's not all. Quoting from the SEC's website:
The disclosure requirement applies only to short sales effected after 12:01 a.m. EDT on September 22, 2008, the effective date of the Order. If a manager has a short position reflecting short sales effected prior to the effective date of the Order ("Pre-Existing Short Position" or, collectively, "Pre-Existing Short Positions"), that Pre-Existing Short Position is not required to be reported under any of the columns on Form SH or for any days throughout the calendar week-long period that must be reported in the Form SH filing. Thus, the manager is not required to add that Pre-Existing Short-Position to any new short positions created after the effective date of the Order. Transactions effected after the effective date of the Order to close out that Pre-Existing Short Position also should not be reported. [Emphasis added.]
See the takeaway here? If you're a hedge fund with existing short positions, taken before midnight on Sept. 22, you needn't disclose them. But if you sell during the disclosure period, well, sorry, we need to see your records. Who dreams up this stuff?
I'll take "people who ignore the law of unintended consequences," for $200, Alex
And think about the paperwork. It's mind boggling -- and I say that as a guy who did sideline statistics for ESPN from time to time during his six years in sports PR. Imagine what money managers think.
We know how this ends if we're honest with ourselves. Increasingly onerous regulation will eventually cause funds to stop shorting, thereby extending the ban well beyond the borders of financial conglomerates such as (ahem) AutoNation (NYSE: AN ) , IBM (NYSE: IBM ) , and H&R Block (NYSE: HRB ) . And when funds stop shorting, so will common investors. They'll go long as they watch prices rise and rise and rise and ...
Helloooooooo, Mr. Bubble. Not-so-nice to see you again.
From good intentions come unintended consequences, Mr. Chairman. Yeah, naked shorting is a problem, has been for years. But you know that. You also know that, while it's a good idea to shield bankers and brokers such as BB&T (NYSE: BBT ) , US Bancorp (NYSE: USB ) , and E*Trade Financial (Nasdaq: ETFC ) in a credit crunch, legitimate short sellers seed the ground from which long-term stock market profits sprout. They create equilibrium -- a market of give and take. Do you really want to step on the scale?
Since this is The Motley Fool, we'll close with a quote from our beloved bard, William Shakespeare, whose Dick the Butcher says this in part 2 of Henry VI, Act IV, Scene II: "The first thing we do, let's kill all the lawyers."
Lawyers are an easy mark. We decry them till we need one. It's no different with short sellers. And mark my words: We'll need them again, right about the time when the snorting bull returns to cast a massive shadow over the Street, as he always has, every few years. Now is the time to tread carefully, sir.
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