Quote:
Originally Posted by Rickm505
Naked shorting drives down the market price of what could be a very healthy company.
If you check the CNBC website and Jim Cramer's videos, he has an opinion of shorting stocks (yeah, him of all people). He blames it for the volatility we see in the markets today. Cramer's argument is the SEC's July 15th announcement of temporarily enforcing the naked shorting rules and the stability it brought to the market. When it expired, volatility kicked in again.
Evidently the SEC agrees, hence the 'new rules' which restate what was already on the books.
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Okay, I have a little more time to write a response.
Shorting doesn't put companies out of business. Period.
First, an aside - naked shorting isn't anything special, it is simply creating a derivative of a stock and selling it, people do that kind of thing all the time, it just doesn't matter. Even countries who don't allow naked shorting STILL have huge price swings, and yes, there are even countries that don't allow shorting stocks AT ALL, and THEY still have huge price swings. People will sell if they want to sell, you can't stop them. If you outlawed selling altogether the market would react immediately to do what it had to do to adjust for that, and you wouldn't like what the new market would look like when it calculated "I can never sell this" into the price.
To the real point though, all that doesn't even matter in the first place. Pretend that it did and take that argument to it's logical conclusion. Let's say that you were right and short sellers were ganging up on companies, singling them out, and forcing their stock price down. Let's pretend it all the way and say that they could choose a company today like Cisco and sell it to 0.01$us/share, the closest thing to zero they could get it to without giving the stock away for free.
So what ? You think Cisco is going to go out of business just because it's stock price went to 0.01$us ? Who cares. It doesn't matter. What does Cisco care what it's stock price is ? That only matters to traders on Wall Street. Shares of Cisco on the market were sold to speculators LONG AGO. Cisco might say they care, but they really don't care. The only reason they even say they care is because they know that some day down the road they might want to sell more shares into the market, and they'd prefer that the stock price was good when they did it so that they can get the maximum amount of money for the shares.
And THAT is the point. Short sellers aren't putting banks out of business. What's putting banks out of business is that they are highly leveraged and now the the market is moving against them they have to bring in more money to keep their leveraged position. But from where ? Where are they going to get money ? Some are trying by raising the rates they'll pay out to customers to attract new depositors, that's good for them because they only need like 1$us for every 20$us they loaned out. Some are trying to get that money from the government. Some are trying to get that money by selling out to their competitors, or selling off assets to competitors. Some are saying forget it and going out of business, filing for protection. And yes, SOME are bitching about short sellers because their stock price is low and if their stock wasn't selling for next to nothing they'd be able to print more stock certificates and sell them into the stock market to anyone who would buy them. That is the only thing that a low stock prices has done is reduce the stock price and make it impossible for bad companies to go to equity markets for their silver bullet cure all.
It's not the fault of short sellers that banks are going out of business, it's the bank's fault for not having enough of a safety net to cover it's ass as the market demands companies get rid of bad assets.
Like I said, blaming short sellers for banks going under is like blaming the taxi driver for your wife leaving you when all he did was drive her to her mother's house.
Short sellers are easy to blame because so many people are long the market using "buy and hold" and all they see is one side of the trade, all they see is that people are selling, and some are doing it for a profit, so those people must be bad people. Nevermind that the only reason you are able to sell stock that you have been holding today when everyone wants to sell is because one of those "bad people" is on the other side of that trade willing to buy. Yes, he does it for a profit, but it's the same trader who was a short seller yesterday. That's his business, to buy and sell things and add liquidity to the market, to even it out. It isn't his fault that a bank doesn't know how to run it's own business.
Sellers are just the final nail in a coffin. By the time it gets to sellers hitting a stock the company has already got a shovel, dug a big hole, made a coffin, laid down in it, let their bond holders hammer in a bunch of nails, let their suppliers hammer a few in, etc ... and the very last nail is the short seller. And bankruptcy court throws the dirt on.
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