Anyone margined should demand that your SWS not be loaned out. Read this article and see why.
Getting the Shorts
By James J. Cramer
7/31/00 8:19 AM ET
Can Irwin L. Jacobs get the old short squeeze going on Conseco (CNC:NYSE - news - boards) with these ads about taking stock out of the vault?
As a betting man I'm thinking he can do it. It's an interesting speculation. And I applaud Jacobs on his gung-ho style of getting the shorts, even as I short tons of stock every day.
Here's why. It has always amazed me how stupid people are about the process of stock loan. It's a simple issue. Brokers make a ton of money loaning your stock out to short-sellers. It's a really good business. You don't think that is right? Then what the heck did you sign the brokerage contract for, yeah, the one that says you're willing to "hypothecate" your stock? That means you're allowing brokers to take your stock out of the vault and lend it to whoever wants to beat the stuffings out of it. That's right, you gave your custody firm permission to lend your shares to people who would just as soon destroy your investment.
Jacobs is betting you don't know you gave brokers that right. You probably don't know it, either. Most of my clients didn't know it when I was a broker at Goldman Sachs, and I had some pretty savvy clients. Jacobs suggests that you take your Conseco stock out of "Street Name," the big pool where stock is held, and put it in your own name. You will still be able to sell it if you want to, but it won't be able to be lent to those who want to sell it short. All that will happen is that it can't be lent.
(Remember the rules. When you sell a stock short you still have to deliver something to the buyer. Brokerages allow short-sellers to borrow stock that is held in Street Name and owned by others and send those borrowed shares to the buyer of the shorted stock. That's how shorting works.)
Jacobs figures that with 63 million shares sold short he can start a stampede of people taking their stock out of Street Name. Of course, some brokerage houses discourage this or tell you that you can't have a margin account if you take the stock out of Street Name. That's hogwash. And Jacobs knows it. He suggests that you move your stock to another brokerage house if you get that runaround and he's right. It's your stock. The brokers should honor your request, even though you signed the hypothecation document, because they never explained that to you anyway. He says that his brokerage houses have agreed to honor his request not to loan out stock in both margin and cash accounts, and yours should too. Right again.
I know that I do the same with my TheStreet.com (TSCM:Nasdaq - news - boards) shares. I have barred Goldman Sachs from lending them out. I am not going to help plant the seeds of those who wish our stock lower.
Ironically, though, I don't think it's worth buying Conseco because of the potential short stampede. But I do think it's worth covering. I think the shorts should declare victory on this one and move on. I think it's possible that Gary Wendt could turn it around and in the meantime there's no sense in trying to turn a triple (I'm betting most of the stock was shorted three times higher) into a home run.
Of course, stocks don't go up and stay up on short squeezes. They stay up if the fundamentals turn around. I don't know if they will here. However, if Jacobs succeeds, then Wendt will have much more room to maneuver, which will make the short all the more difficult.
I was never a big Jacobs fan in his previous phase as a raider. But I like this phase simply because he's trying to teach people about how the stock loan process works-and, of course, make a buck off of it. Ironically, this man is playing the role of a playing-field leveler! Good for him and good for us.
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James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long TheStreet.com. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at jjcletters@thestreet.com.
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