Shooting The Messenger

NEW YORK - SEPTEMBER 19:  A man walks across t...Image by Getty Images via Daylife

I’ve been uncomfortable with the "no shorting" rules that the gov’t put in place thursday night. I couldn’t really articulate my discomfort with them, but my buddies Howard and Roger have done it for me.

Howard wrote

I will have to adapt just like everyone else, but my initial feeling is
‘FUCK IT’, the market just put me out of business for a while. Our
leaders have spent the last few months printing money, and catering to
the thieves in the financial industry, while punishing the group of
investors whose job it is to shed early light on areas of financial
crimes. It’s sickening, but I am not getting into that conversation or
mess. It’s good for traffic, but bad for my bottom line and YOURS.

Roger said

It is very easy to dislike shorts. They profit if things go badly, and
we in this country are an optimistic lot. It seems practically
un-American to be shorting stocks, profiting at someone else’s expense.
The problem is, both ordinary citizens and those in Washington simply
don’t get it. Short-sellers keep companies honest. How many recent
examples have we seen of companies being economical with the truth in
order to prop up their stock prices and fatten the wallets of those in
the executive suite (see FNM, FRE and AIG, for starters)? It is the
shorts who sniff this out and make other investors aware in order that
they can re-calibrate their expectations, and to perhaps sell before it
is too late. This is how Enron was busted, with one of the catalysts
being that now-famous conference call when Jeff Skilling went
stark-raving mad on one of the Managing Partners at Highfields Capital
who had factually cornered him.

It’s clear that in the past month or two we’ve seen the short sellers taking on the brokerage firms here in the US the way that Soros took on the British Pound in 1992. Like Soros, the short sellers saw weakness and pounced on it. And they weren’t going to stop until they’d taken every shot that looked like a good bet.

The gov’t put an end to that trade with the ban on short selling and probably saved Morgan Stanley and possibly even Goldman Sachs from having to find a white knight to save them.

But was that a good idea? I have my doubts. As Roger points out, short sellers are using their capital to make a point, to show that something is a house of cards and it will fall if you blow hard enough on it. And they get paid handsomely to do that. As Howard points out, the brokerage firms have survived to live another day and the short sellers have been told to take their ball and go home.

We’ve shot the messenger who showed us that the brokers were playing too dangerous a game with too much leverage, a mismatch in duration between their assets and their liabilities, and balance sheets that are impossible to evaluate. So at a minimum, we’d better force the surviving brokers to fix those problems quickly with the threat that we are going to let the shorts back at them soon. Without a forcing function, nothing happens. And in this market, the shorts were the forcing function because our gov’t wasn’t paying attention.

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