"SEC Displays Its Ignorance on Short-Selling"
By Jim Cramer
RealMoney.com Columnist
7/16/2008 1:59 PM EDT
"You don't like Lehman Brothers. You want to short 10,000 shares of it. You can either buy puts on it and pay a massive premium because no broker wants to sell them to you, or you sell the common short.
You tell your primary broker to see if he can locate 25,000 shares of Lehman -- you don't give the smaller amount, because you don't want to run into problems down the road, and then you wait. The broker comes back a few minutes later and says, "It is tight as a drum, it's all lent out to others, there's no stock to borrow."
And that's the end of it.
Or at least it used to be.
Now, here's what happens now. You hate Lehman. You sell 25,000 down to $14. Then another 25,000. And another and another. You don't have to wait for someone to pay more -- a plus tick. You can just keep bombing it. You don't need to pay a premium for the puts; this one's friction free.
If you sell 25,000 shares every second -- and so does everyone else, because it's falling so easily, so there must be something wrong -- you can destroy it. The company has no buyback. The value guys don't know how to support it; they are freaked out by the selling. And the stock comes tumbling down.
Now, in the old days, when it came time to settle the trade, my broker would call me and say, "You don't have the Lehman in your account that you sold." I would say, "I know. I couldn't find any." Then he would say, "Well you know we will have to buy you in." I would ask for some grace time but almost never got it if the stock were as heavily shorted as Lehman is. The next day, I would discover that I would have bought all of the stock back! Without even knowing it. Sometimes at dramatically higher prices -- the buy-in. I had shorted a stock nakedly, and now I had to pay.
The rules that I obeyed, with the exception of the uptick rule, which was eliminated because of some academic studies that knew nothing about the real world and how real trading works, are still on the books. You can't do naked shorting. You are supposed to be bought in.
But the SEC has stopped enforcing the rule. No one bothers to even look anymore. The SEC looks the other way, and then the brokers look the other way.
Yesterday, somehow, someone told SEC Chairman Chris Cox, who has probably never bought or sold a block of stock in his life, that he ought to enforce this law.
No. That wouldn't be dramatic enough. He talked about emergency powers to stop naked shorting.
He has the power.
He has just never used it.
The whole charade was repulsive and ridiculous to anyone who has ever shorted a stock in his life.
Now everyone in the papers is making a big deal of it.
I say, you have to be kidding me.
But maybe they are realizing, at last, how easy it is to crush stocks now, and that when you crush the stock, you can crush the business, at least in financials.
That's good.
But it is embarrassing how they handled this.
As embarrassing as everything else that has happened with the financials in the last 18 months.
And very depressing. "
(in
www.realmoney.com)