Sorry, But The Current Financial Crisis Has Nothing To Do With Naked Short Selling Or A Wikipedia Edit War
from the please dept
For quite some time, Overstock's CEO, Patrick Byrne, has been on something of a... campaign against the practice of "naked short selling." Byrne isn't known for holding back his opinions on just about anything, and his complaints about naked short selling resulted in a rather massive Wikipedia edit war -- with folks on every side pointing fingers and arguing with each other over supposed dirty tactics by folks on the other side. Now, with the whole financial collapse thing happening, The Register (one of few publications to take Byrnes' side most of the time, often due to its irrational dislike of Wikipedia) is claiming that Byrne has been "vindicated," first on the evils of naked short selling, and second on the Wikipedia edit wars.If only it were so simple. As this excellent Alex Blumberg/Planet Money podcast makes quite clear, while naked short selling may be sketchy, it's impact is minimal, if anything. And, as anyone with a most basic understanding of markets can tell you, short selling (naked or otherwise) doesn't drive down the price of a stock. The Register also suggests that Byrne was vindicated in the Wikipedia edit war, by noting proof (that is not shown, and was only provided to The Register by Byrne) that a reporter who had formerly denied taking part in the edit war, actually had been involved. That's not exactly a huge smoking gun either. It may be that this guy had a personal vendetta against Byrne, but it's got little to do with the financial crisis going on today. There are lots of things that created this mess: but naked short selling (even if the SEC came out against it, in part) is currently a minor scapegoat, not the cause.
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Filed Under: financial crisis, naked short selling, patrick byrne, short selling, vindication, wikipedia
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OMG YOU'RE IN ON IT TOO?
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Re:
Companies don't (or at least shouldn't) be trying to issue new shares constantly. So a drop in stock price might put various pressures on the board of directors, but it should not have an effect on the company's performance, should it?
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Perhaps it could do the opposite...
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And let's all ignore the New York Investment Banks that were doing magic with smoke and mirrors...the only real money was in their bonus checks.
And let's ignore the total lack of oversight by the Feds. Had they been following their own handbook (http://www.occ.treas.gov/handbook/assetsec.pdf) things never could have gotten this bad.
For those interested in a simplified explanation of what actually caused the crisis: http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1
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As with all things, this is not black and white
However, let's be honest, Mike. Your reference admits that he himself doesn't claim to understand "non-naked short selling"...
If you see a coordinated attack on a stock where everyone suddenly starts selling short (and why don't we throw in some puts, too, and start raising the insurance rates for credit default swaps), that might cause a bunch of people to panic and start selling, driving the price down. You can verify this as what happened to Bear Stearns, Lehman Brothers, and so forth. This is short selling doing what it's supposed to do, and it's a useful market function. This doesn't mean we should ignore the potential pitfalls, where short selling might drive the stock down too fast and overshoot the equilibrium price.
And for that matter, how on earth can you defend naked short selling? No matter how small an effect it might have on the market, you're still selling stock you don't own. Is it okay to steal from people if you're only taking a few pennies?
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Doesn't naked short-selling == infinite supply of shares?
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Short selling
DURRRRRRR!
Not that the effect is particularly large, nor is it likely related to the economic roles.
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Re: Short selling
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Don't blame short selling
If people want to play the blame game, how about technology? Technology helps uneducated idiots to "invest" in shares and funds like buying candy from the corner store. Technology helps idiotic media outlets to spread the panic. Technology interconnects economies which amplifies collateral damage.
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Re: Don't blame short selling
If technology wasn't here to let people invest, then the traders would have found other means to rope in the masses (call centers, door-to-door stock brokers, etc.).
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Oops
Oops.
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Blind leading the blind
A naked short usually fails to produce the stock within the settlement period, because they don't have the stock. If they were able to borrow the stock, at a margin rate, it would be a short. If the owner of the lent stock then decides to sell, the shorter has to buy to return the borrowed stock.
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Article
That's the point - not that the stock dropped to something more appropriate to it's worth, but that NO ONE WAS WILLING TO BUY THEM AT ANY PRICE, under the expectation of market failure, thus forcing the stock to drop further.
The problem wasn't short selling alone, it was the pre-emptive selling with no one wanting to buy, because you are leveraged against the stock and the more it drops, the more you make.
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Emergency Order Schmelergency Schmorder!
It would further explain why, in the wake of the carnage that followed the expiration of the earlier emergency order, the SEC's first act was to enforce the ban on naked short selling market wide, temporarily ban all shorting of 940 financial stocks, and require hedge funds disclose their short positions.
No...wait...your thesis wouldn't explain any of these things, would it?
Mike, yours is as poor an analysis of the situation as I've read yet.
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Decline of Social Networking?
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