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Tim Geithner, Wake Up
In the month of January as stocks continued to fall, a smart investor could make some money in the bond market. But in February, even bonds began to falter and as Warren Buffet remarked over the weekend, Treasuries may be the new bubble. So for the last 10 days the short term traders have been staging bear raids on the financials--savage capital's last easy money route.
So I am totally dumfounded that Geithner and Summers haven't seized on three things they could do today, that wouldn't cost them a dime to shore up the system and kick all the naked short sellers in the nuts.
- Suspend Mark to Market
- Restore the "uptick" rule -You can only short on an uptick in the stock.
- Ban Naked short selling
Anyone who believes that the billions of capital, being deployed in shorting the bank stocks, is all part of an orderly market of buyers and sellers being guided by an "invisible hand", probably also believes in Santa Claus and the Tooth Fairy.
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Why demonize the short sellers?
Mark-to-market accounting makes sense. If the financial institutions don't want to market them to market then they can move their debt securities to their permanent investment accounts, signaling to regulators that they plan to hold these instruments to maturity. As yet, they are unwilling to do that, meaning that bank managers want to be able to unload these securities at any time -- as an investor, short or long, I should have the right to see these securities priced at market prices, especially since the banks are leveraged and thus might be forced to sell when they don't want to.
Uptick rule? Doesn't make sense. If I can only short on an uptick, shouldn't long investors be forced to only buy on a downtick?
Ban naked short selling? That's already illegal.
March 2, 2009 11:55 AM | Reply | Permalink
Yikes, the end is near. I agree with your whole response.
March 2, 2009 5:07 PM | Reply | Permalink
Agreed, agreed and agreed. Great comment.
March 4, 2009 5:24 AM | Reply | Permalink
It looks to me like neither Geithner nor anyone else in position to do something about the economy will ever do anything that would constrain the ability of big money to multiply that money, no matter what the cost to the economy. Just remember, only a few months ago we virtually worshiped those people who became billionaires by manipulating other people's money. That devotion is hard to curtail.
March 2, 2009 12:36 PM | Reply | Permalink
Heard this morning AIG's stock is worth about 35cents a share....could that be... Why is Obama and Geithner allowing AIG, Citibank, etc. to be continually propped up by taxpayers...these investors need to get a grip on reality; start living within their means; take responsibility; and accept the consquencies of gambling off their shareholders' money.
March 2, 2009 12:57 PM | Reply | Permalink
I'm surprised by people's reactions to this. Don't the financial stocks deserve to be shorted? They might still be fundamentally over-valued.
Taplin's ideas would cause a few problems: they would constrain short-sellers from acting on what they think the true value of these stocks are and by eliminating mark to market would allow bank execs to basically hide paper losses from the investing public.
It's unusual but in this case Taplin is really carrying water for the C-levels at the big banks. I used to support ending mark to market but have since rethought that position. Bankers can't be trusted with that much latitude in valuing these securities.
March 2, 2009 1:21 PM | Reply | Permalink
I'm with Destor here. Don't blame short-sellers - they aren't disrupting the markets. There's research on that question. Secondly, there's no sign this is short-sellers moving the market. Who doesn't want to get out of bank stocks?!
And the best way to maintain zombie banks is to suspend mark to market. If on the other hand you want to bury your head in the sand, then by all means go ahead - hide the insolvency.
March 2, 2009 1:33 PM | Reply | Permalink
Here is why you are both wrong (or missing something):
Short selling is an anti-investment market tool. In a casino it might be fine, but the markets are at least ostensibly based on real economic values.
The uptick rule requires that short sellers only participate if there are value buyers out there. Without it, a string of short sales forces market makers to drop the market price indefinitely. The bias represents the fundamental purpose of the market as not a mere casino but a secondary vehicle for public participation in genuine capital gains (and losses).
Shorting market stocks does not affect the underlying fundamentals of the companies, but if stock is used as collateral for some loan, then driving down the price of the stock can trigger "credit events" on other investments. This is pure "rent seeking" of the bad kind, market manipulation if not criminal activity. This applies also to derivatives, not just to ordinary stocks and bonds.
The role of market makers is often overlooked, assumed to be transparent. A careful analysis does not overlook this.
March 2, 2009 4:51 PM | Reply | Permalink
Well eds, I disagree on a couple of levels:
Shorting is an investment. It's often based on a manager's fundamental analysis of a public company's strategies or strength. Ben Graham shorted stocks you know. Some very good investors who are strong advocates of corporate governance, like David Einhorn, short stocks. Some shorts are heroes in my book.
As for the Uptick rule... again, why no downtick rule. If you can buy a stock on an uptick don't you risk perpetuating a momentum driven bubble that will pop sooner or later?
March 2, 2009 5:22 PM | Reply | Permalink
No, shorting is not a fundamental investment, it is a casino move. I think you didn't read my comment which explained the difference (on both points).
You are not forced to buy, or sell. You can stay out of a given market at a given time. Shorting is selling something you don't own. Otherwise if you owned the stock you'd just sell it directly.
March 2, 2009 5:53 PM | Reply | Permalink
Shorting is the sale of a borrowed share and a contract to buy the shares back when it's time to repay your lender. It's only casino if you're relying on luck. If you fundamentally believe that a company is mismanaged or that its balance sheet has weaknesses that the market doesn't see, then you are making a fundamental investment.
I don't see what's so wrong about that.
March 2, 2009 5:57 PM | Reply | Permalink
It's not wrong. But it's a reason to treat it differently.
Gambling isn't necessarily wrong. But when it gets disconnected (fuzzily speaking) from reality, then it's a different beast and should be treated as the imaginary creature it is.
When you short a stock, you are making two imaginary moves. One, that you can repay the loan at a profit (and cover any fees along the way). The other is left to your imagination at this point since I've already outlined it in the thread!
Shorting a stock is just another way to play the "greater fool" theory of investing in an inefficient market. There is no value trade going on.
March 2, 2009 6:08 PM | Reply | Permalink
The problem is that right now, at least some shorts are selling stock that was never borrowed. In general this is done by selling stock that is never delivered, causing a "Failure To Deliver" (FTD) that is handled internally, within the DTCC, by creating "phantom shares".
The proof shows up in many cases as "overvoting". See this link, which refers to a Bloomberg report that found 341 out of 341 cases of overvoting were linked to FTDs. But there are more FTDs, including persistent ones, than there are votes that act as proof, so there is plenty of circumstantial evidence that naked shorting is still going on en masse.
RegSHO was created to cut down on the problem, with limited effectiveness due to its deliberate loopholes.
There is a scholarly article discussing the mathematics behind shorting (including naked shorting) here.
March 3, 2009 1:40 AM | Reply | Permalink
You need to study up. Destor is 100% correct on this. (I'm extremely biased, however--anyone who cites Graham gets extra points from me.) :)
March 4, 2009 5:30 AM | Reply | Permalink
Buying on margin is more like short-selling than is investing your own money. Buying with highly leveraged margin is basically what collapsed in 1929 and 2008 (some bets were at 40 to 1); I'm not up on short selling today, but it may be possible to borrow money to sell a stock short, too. Surely you can see that some limits on these are reasonable.
March 2, 2009 5:56 PM | Reply | Permalink
You can buy stock on margin as well, to much the same effect as shorting on margin. I am absolutely fine with regulating margin, by the way. On both long and short transactions.
March 2, 2009 5:58 PM | Reply | Permalink
Are you accepting my explanation for the uptick rule?
"... The bias represents the fundamental purpose of the market as not a mere casino but a secondary vehicle for public participation in genuine capital gains (and losses)."
Think of it as a parenthetical remark...
March 2, 2009 7:22 PM | Reply | Permalink
Hey eds,
I guess we fundamentally disagree. I don't think that there's anything casino-like about a short trasnaction. Nothing more casino like than a long transaction, certainly.
March 2, 2009 9:34 PM | Reply | Permalink
I think you're joking.
March 3, 2009 12:14 AM | Reply | Permalink
"Shorting market stocks does not affect the underlying fundamentals of the companies, but if stock is used as collateral for some loan, then driving down the price of the stock can trigger "credit events" on other investments. This is pure "rent seeking" of the bad kind, market manipulation if not criminal activity. This applies also to derivatives, not just to ordinary stocks and bonds."
I have read this several times but fail to make any sense out of it. It sounds like some of the the justifications I heard back in the 1990s for prohibiting short selling in Asia during the crisis in 1997-1998 to prop the markets up. It didn't work. Nor did anyone ever demonstrate how short selling "manipulates" a market. Short sellers put capital at risk. If the market goes against them, there is unlimited potential for loss (more than the capital invested). For that reason, there are special rules governing short sales.
The bitter truth is that when bubbles burst there is considerable deleveraging. That causes significant social disruption. The SEC was created to prevent bubbles (read the preamble to the 1934 Act) not to prevent deleveraging. Smart action in 2002 and 2003 when the market for MBSs and CDOs took off (regulation of underwriting standards, sales, accounting) could have prevented the bubble. The market for securitized mortgages jumped from about 200 million to 1.25 trillion in just a few years. If the regulatorary mechanism had not been asleep at the switch, we could have avoided this train wreck. Heck of a job, Alan Greenspan, Chris Cox, and everyone at Treasury.
March 2, 2009 6:32 PM | Reply | Permalink
It was primarily Donaldson, not Cox, but Cox did continue the problematic program.
You seem to have skipped what I actually wrote to go off on some historical tangent. Here is the key part about short selling and market manipulation:
"if stock is used as collateral for some loan, then driving down the price of the stock can trigger "credit events" on other investments."
The manipulation target is the other investment, the stock itself is merely a tactic or means to the end of breaking the other bank, in this example.
I'm also quite clearly not defending the practice, but your historical tangent reads as if you thought I was.
March 2, 2009 7:19 PM | Reply | Permalink
How could any of these possibly change the economics of the situation? Eliminating mark to market reminds one of Springfield burning down the observatory to prevent comets from hitting the Earth.
http://en.wikipedia.org/wiki/Bart%27s_Comet
March 2, 2009 1:49 PM | Reply | Permalink
Let us make sure that this never happens again. Torch the observatory!
March 2, 2009 2:25 PM | Reply | Permalink
Zing!
March 2, 2009 3:43 PM | Reply | Permalink
http://inquiry.wustl.edu/videos/SimpsonsCausalReasoning.avi
March 2, 2009 3:51 PM | Reply | Permalink
Ummm.......Suspend mark to market?
Are you out of your ever-lovin' mind?
Mark to model is what created this crisis, and you want a return to it without any real accountability for the banks, and bank managers, who put us in a place where AAA rated securities are worth 5 cents on the dollar?
You know, that may be a way to refill the gas tank of the economy, but that car is currently ablaze refueling it is criminally stupid.
March 2, 2009 3:54 PM | Reply | Permalink
Mark to market versus mark to model, this may be a false choice.
Problems created by bad models or extreme leverage should not destroy the credibility or potential value of all models. If you reject all models, you have to reject your own expectation values, whether hope or greed, and that makes you unconscious at best. If you want to live like a zombie, that may be your prerogative even if it's objectively mindless.
March 2, 2009 4:54 PM | Reply | Permalink
The trouble with suspending mark to market is that there is no good alternative. There are no real standards for mark-to-model accounting. It becomes, in effect, "mark to fantasy". It allows companies to just make shit up.
-- ARG
March 2, 2009 5:50 PM | Reply | Permalink
Only if the companies control the model(s) and the model is not staked down to real fundamentals.
This could become a growth field! I predict a neotech model bubble in 13 +20,-2, months. :-)
March 2, 2009 6:01 PM | Reply | Permalink
Suspend Mark to Market and you'll really see Zombie Banks. What we've got now is nothing compared to what would come then.
March 2, 2009 6:35 PM | Reply | Permalink
1. Suspend Mark to Market
If phony accounting was good enough for Enron, its good enough for me. Why would anyone want to know the truth, anyway? I paid a gazillion dollars for those assets, so obviously they must be worth the price I paid, right? I mean, really, you can’t tell me that I’m supposed to admit over paying!
2. Restore the "uptick" rule -You can only short on an uptick in the stock.
Since “up” is good, and “down” is bad – just ask anyone who’s trying to sell stock – therefore, anyone who wants to sell has to wait until after those who want to buy have their chance. First come, optimists served.
3. Ban Naked short selling
More “up is good, down is bad” philosophy: If you were smart enough to figure out that the Ponzi scheme was coming to an end, and did the intelligent (and legal) thing and shorted grossly over-priced stocks, you should compensate those idiots who couldn’t see the train wreck until it was right on top of them.
Next Week: Ban bad things !
March 2, 2009 9:01 PM | Reply | Permalink
Is there a market for shorting blogs?
March 2, 2009 10:19 PM | Reply | Permalink