10.01.2008 0

Short on Common Sense

  • On: 10/23/2008 10:28:23
  • In: Economy
  • ALG Editor’s Note: As the economic crisis has unfolded this year, Big Government has consistently attempted to demonize Wall Street as somehow being the cause of it all. When government restricted oil supplies and pursued weak monetary policies, and traders responded by purchasing commodities, the speculators were wrongly blamed. And now, with financial stocks taking a hit as a result of overproduction in the housing market and bad credit practices, the short-sellers are being blamed. See a pattern here? As noted by the following featured editorial, the market is yet again being blamed for logically responding to economic problems created by Big Government:

    Short on Common Sense

    September 25th, 2008

    Securities and Exchange Commission Chairman Chris Cox knows what it’s like to be scapegoated after John McCain threw him under the Straight Talk Express last week. So why is Mr. Cox giving the same treatment to short sellers?

    In a series of hasty emergency orders over the past week, the SEC first clamped down on so-called naked shorting — a reasonable move under any circumstances, even if there’s no evidence of widespread naked shorting of financial stocks in this panic. But Mr. Cox didn’t stop there. The SEC has also temporarily banned any short selling of hundreds of financial stocks, a list that has grown to include the likes of General Motors. Then, when the SEC was reminded that selling a stock short is a legitimate part of many unimpeachable hedging strategies, it relaxed the prohibition for certain types of sales while continuing to expand the list of “protected” stocks.

    As troubling, the SEC ushered through yet another emergency rule requiring that large short positions to be disclosed to the SEC every week. These disclosures were at first to be made public immediately. After sleeping on it, the SEC agreed to allow a two-week lag before telling the world which stocks the hedge funds and institutional investors are selling short. This emergency order is scheduled to run for two weeks but could be extended for up to 30 days.

    Even with this delay, the order is a dubious imposition on a legal investing technique. The new rules require almost immediate disclosure of short positions, which will then be disclosed to the public without any context or explanation. Those reading the newly required reports will be left in the dark, for example, on whether a position represents a fundamental bet on a company’s future or merely a piece of a hedging strategy.

    And while the SEC dryly notes that large long positions are already reported to the SEC by many hedge funds, it omits that those are required only four times a year, and with a 45-day lag from the end of each quarter. Moreover, a long investor who believes that such disclosure could compromise his investment strategy has the option of appealing to the SEC to keep certain positions confidential.

    The short-selling rule is far more intrusive. With its weekly filing requirements and much faster disclosure, hedge funds have reason to worry that their strategies will be put on display for the world to see. More than one hedge fund manager has questioned whether this represents an un-Constitutional taking of their intellectual property, and a former SEC official told us they might well have a case. The 10-day delay before disclosing to the public mitigates that concern but doesn’t eliminate it.

    Nor has the SEC offered any explanation of why reporting of short sales should be so much stricter than that for long positions. This level of surveillance might, possibly, be justified if there were any evidence that short sellers had manipulated the stock markets in the current crisis, but there is none. Even if there were, it’s not clear what good purpose is served by publishing those positions rather than, say, monitoring them at the SEC for evidence of manipulation.

    The disclosure rule seems chiefly designed to slap a scarlet letter on short sellers as the cause of market turmoil. It is calculated, in other words, not to bring transparency to trading but to feed the political and Wall Street urge to blame someone for falling share prices. Mr. Cox has been taking an unfair beating himself of late, but robbing the market of the useful information that short sellers provide does nothing to restore confidence. If the SEC wants to help restore calm, it would stop issuing new emergency rules in the dead of night and bring some transparency and calm to its own rule-making.

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