Quick Take: The Real Problem With Shorting

Short-selling is a hot topic these days. Certain underperforming CEOs, like Overstock.com's (Nasdaq: OSTK) Patrick Byrne, or Pegasus Wireless's Jasper Knabb, have sought to blame their falling stock prices on Wall Street sleaze.

A Business Weekarticle from the May 28 issue hints at some real sleaze from "current and former employees" at Bear Stearns (NYSE: BSC), Morgan Stanley (NYSE: MS), Goldman Sachs (NYSE: GS), and others. However, it's not likely to please those who believe that "naked shorting" is a problem. If it's a smoking gun at all, it's clearly pointing in the wrong direction.

Essentially, the article alleges that trading-desk employees at brokerage firms are referring prospective short-sellers to unnecessary "finders," who charge the borrowers and deliver a kickback to the referrer. (It sounds a lot like the bogus apartment finders in New York City, who scalp people for the pleasure of filling out a one-page form they could have penciled in on their own.) In other words, it suggests that shorting is too difficult and too expensive -- not the other way around, as the proponents of the naked short-selling (NSS) conspiracy theories would have you believe.

In that sense, it dovetails nicely with another point that the NSS crowd has never been able to fully explain. If naked shorting is as easy and pervasive as they claim, why do short-sellers have to shell out such exorbitant sums (20% in some cases) to get borrows? And why would they pay scalpers just to locate shares if they could go to Fast Eddie, the naked short provider on the corner, and get a fake borrow for free?

Maybe (gasp!) there is no fast Eddie providing all those "naked shorts"! Maybe the only people pulling a fast one here are the NSS brigade ringleaders who continue making these undocumented claims.

Seth has been telling people to stay away from Overstock since about 50% ago. At the time of publication, he had no positions in any company mentioned here. See his latest blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.