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The SEC doesn’t get the short end of the stick
Posted by: Lance on Monday, September 29, 2008

If they did, then they wouldn't have banned short selling. People may have noticed that the ban hasn't helped, and today we see one of the real costs.

See, when markets collapse like today, short sellers dive into the market to cover their short positions, in these times they are often the only ones buying. They aren't there today, and the market has lost one of its stabilizers.

Frankly, this whole affair has been drenched in idiocy.
 
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I think that analysis is a bit superficial. While I do agree that short-selling can help maintain long-term stability in asset prices, this is not an instance where short-selling would help. In fact, without the uptick rule, I think we would have seen the Dow down 2,000 points today. Regardless, you can’t make the assumption that the markets would have been stabilized because of short-covering today.

While I’m a small government, low taxes, free markets conservative, I do think there is a good chance that about 5-10 $100 billion banks could fail within the next week. Wachovia had $40 billion of liquidity at the middle of last week. By the weekend, movement of jumbo CDs and deposits created an immediate liquidity crisis, resulting in the forced sale to Citi. I can name about 10 regional banks where this has likely begun today - and could fail by this Friday without the ability to exchange illiquid loans for cash. Do I like the rescue plan? No. But if it doesn’t pass very soon, I hope everyone has some money in his mattress. And I’m pretty certain even if it passes on Friday, it’s already too late for many big banks. If you don’t think that the failure of many large financial institutions will have an impact on most Americans’ daily lives, they are going to find out the truth if they have any debt (costs will rise) or assets (prices will fall). But if you rent, don’t own anything, don’t have any debt and have a ton of cash in banks (but not over $100K), then you will be fine.
 
Written By: Richie Rich
URL: http://bizblogger.blogspot.com
I agree with Richie, you got what you were asking for, the bill failed, if nothing happens in just one or two more days then you might not like what you got. As much as I don’t like government screwing in markets under normal circumstances. Emergency Situations are EXACTLY the sort of things we do need government for.
 
Written By: kyleN
URL: http://impudent.blognation.us/blog
I also disagree with the analysis. Given the rapid drop of the market, not only would I not expect shorts to cover, I would expect them to "double up" and take the market even lower.

Rick
 
Written By: Rick Caird
URL: http://
I agree with Richie, you got what you were asking for, the bill failed, if nothing happens in just one or two more days then you might not like what you got.
Maybe. Maybe not.

But you’re right - in the matter of this bill, I did get what I want. No regrets unless they repackage this pig, to borrow a very popular phrase, and try to put lipstick on it.

There’s going to be pain. And my preference is we get it over with vs. dragging it out over the next 15 or 20 years with the government being a major player in the financial market.
As much as I don’t like government screwing in markets under normal circumstances. Emergency Situations are EXACTLY the sort of things we do need government for.
There are things the government can do - see Chile’s answer to the same sort of crisis. But it doesn’t have to get hip deep in it the way Paulson et. al. want to do.

We need to take a breath and look at alternatives outside the Paulson 700B grab.

Why haven’t the Republicans offered an alternative to the Paulson bailout plan or the variations that have been offered?
 
Written By: McQ
URL: http://www.QandO.net
And I’m pretty certain even if it passes on Friday, it’s already too late for many big banks.
Uh, if that’s true, then it’s passage today wou;dn’t have helped either.

It’s not like the money would flow into the market instantly upon passage. Even if the bailout plan passed today, and was signed by the president, it’d be weeks before it got to the market.

If the problem is that time-sensitive, then we’re already screwed.
 
Written By: Dale Franks
URL: http://www.qando.net
Frankly, this whole affair has been drenched in idiocy.
That’s probably the most insightful comment on this whole mess. There hasn’t been a *good* idea floated yet. To agree with McQ - where’s the GOP counter-proposal?

While I don’t see the need to hand tons of cash to banks that made poor choices, sadly I think we’ll end up with a bailout plan worse than what was just voted down. ACORN and similar totally corrupt money-grabs are back on the table now, and I doubt we’ll get so lucky next time.

My own proposal: the government should act as a market-maker for these mortgage-backed securities. They’ve fallen below even a conservative estimate of their value, so start buying them at a discount to that estimate until the panic subsides, then turn around in a few weeks and start selling them at a fair price (for a profit). Market makers make a good profit out of situations like this, where buyer and seller are too far apart, and it’s not rocket science (though you do need to hire some experts to value these complicated securities, I hear a lot of such experts are looking for work right now).
 
Written By: Skorj
URL: http://
While I do agree that short-selling can help maintain long-term stability in asset prices, this is not an instance where short-selling would help. In fact, without the uptick rule, I think we would have seen the Dow down 2,000 points today. Regardless, you can’t make the assumption that the markets would have been stabilized because of short-covering today.
Believe what you want, but the markets have acted just as I suspected they would in short selling’s absence. Volatility has stayed high, both on the upside and downside, liquidity and volume has suffered as statistical arbitrage and other long short players have left the exchanges, bid ask spreads have widened and big down days have shown a marked lack of downside protection.

That is the theory and the market has given us the evidence. Financial firms have continued to slide without the shorts, because having short sellers in the market doesn’t cause stocks to go down. If I had a short position in JPM I cannot effect the price today, except when I cover my short. Nor does short selling effect the market any more than merely selling, in each case there is a buyer and a seller.
 
Written By: Lance
URL: http://riskandreturn.net
As for the bank failures, you are speaking to the choir. I have been pounding the table that hundreds of banks will fail eventually for over two years. This plan would likely alter that very little, and as has been pointed out, this plan would not have helped those banks for weeks, if not months.

There are better ways to deal with this, and many of them can be implemented far faster than this plan.
 
Written By: Lance
URL: http://riskandreturn.net
Rick,

Some would have doubled down, but most short positions are long-short and risk control would have many covering. That is how it has worked in the past, or maybe it is "different this time." Usually it isn’t as all who wanted to ignore history running up to this have hopefully learned. Unfortunately that would be a different outcome, and we just said usually it isn’t different
 
Written By: Lance
URL: http://riskandreturn.net
I have been pounding the table that hundreds of banks will fail eventually for over two years.


You mean like the nearly 3000 banks that failed from 1979 through about 1995? That sure turned out to be awful. No one made money on Wall Street through that period.

 
Written By: Arcs
URL: http://
Arcs,

You are right, the failure of banks is not the end of the world. In fact, we need for a bunch of these banks to be closed. In ten years I expect a similar number will fail this time.

As for stock returns in that period, well stocks were a whole lot cheaper then. In fact, if stocks were to get as cheap as they did at the trough of that period in the next year we would see the S&P 500 drop to between 350 and 560 depending on if earning next year come in as low as $50 a share or as high as consensus estimates of $80 a share. I suggest the latter number is toast.

Of course, stocks will probably not get that cheap, though they certainly could. If so, then expect a very long bull market to follow with very high returns, that is if you still have your capital in the market after an initial slaughter of that magnitude.
 
Written By: Lance
URL: http://asecondhandconjecture.com
My own proposal: the government should act as a market-maker for these mortgage-backed securities. They’ve fallen below even a conservative estimate of their value, so start buying them at a discount to that estimate until the panic subsides, then turn around in a few weeks and start selling them at a fair price (for a profit). Market makers make a good profit out of situations like this, where buyer and seller are too far apart, and it’s not rocket science (though you do need to hire some experts to value these complicated securities, I hear a lot of such experts are looking for work right now).
Why should the government be market-maker? I, for one, am skeptical that a market exists. Let people who have consented to have their money used in that way take the risks and reap the benefits, if any.
 
Written By: snuz
URL: http://

 
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