I will try to delineate some logic errors:
So,,, we must both agree that when the rules are made up as we go, it doesn't inspire much confidence...no?
The change may not inspire confidence to traders but it does inspire confidence to investors. More abou this later.
short sellers provide a cushion in securities that have real value because, in theory, people will cover when the stock is fairly valued, which is different than say, selling because you can't afford a loss.
Here there are two layers of error. First, the implication is that the shorter must be correct, simply because they are short. Second, that the shorter knows the true value better. Neither tenet is true. The shorter formulates an opinion about the value, as does a long. A priori neither position has an advantage wrt the outcome of that decision.
You go on to say,
In a panic, there is nobody willing to buy. This cannot be achieved with options, because they are tracking the underlying, which may not be fairly valued in a panic.
Just as the options may not be fairly valued in a panic, so too that the underlying will not be fairly valued either. However, with shorting, in the name of liquidity, the actual act of shorting inflates the float of the underlying, and negatively impacts the equilibrium price. Even if this phenomenon is only temporary, it still represents an unfair distortion of reality. The truth is, however, more sinister than that. In practice, the float is being expanded with these counterfeited shares on a permanent basis. Like our fractional reserve banking system, the same shares available for shorting are being lent over and over again. The effect of which is to expand the pool of available shares that appear to be for sale. This depresses the equilibium share price and contributes to an unfair price, in particular during a panic. Even if time corrects this kind of distortion (ie the panic passes and the shares price eventually rises back to a fair equilibrium value) there are yet even worse problems with short share accountability.
As mentioned before, it clear that counterfeit shares are being created electronically on a permanent basis. This has been made excruciatingly apparent from the Overstock case. In this case, the entire float of available shares was supposedly repurchased yet millions of shares still traded. There is no reason to expect that this only happened to overstock. It is a systemic.
When you say It still boils down to liquidity. You must ask yourself what does it mean to increase liquidity. From the discussion above, I beleive it is abundantly clear what that answer must be: An instantaneous (perhaps permanent) increase in the pool of shares available for sale. Thus the practrice of short selling, itself, directly affects the equilibrium stock price. Form this perspective, I believe it is fair to conclude that the practice of short selling contributes to a dislocation in share price, not a fairly valued transaction, as you posit.
What is the value of LEH? Zero, zip, nada. NOBODY would buy it. LEH stock is worthless paper. It is so worthless, even LEH agreed they couldn't get a loaf of bread for it. Nonetheless that assets of the company have value and so does the business.
Again, you need not have a system involving short selling shares to benefit from the above. You could construct a synthetic short position with options, which does not dilute the float, and disrupt the fair value exchange price of the underyling.
I have already told you, I don't agree with selling more shares than are available to trade. You can't sell what doesn't exist(unless you're the fed).
Again, even if the "liquidity" (ie temporary increase in share count, or "float") is not permanent, it still disrupts the equilibrium share price; especially during a panic!
I happen to come down on the side of letting the market value these things for what they are worth, rather than changing the rules trying to avert fair value, which may or may not be zero.
Just because something is done, doesn't mean it should be done. Sometimes, it takes time and a groundswell of effort to correct an egregious wrong.
I also happen to think these people who pulled this crap should be locked away, and those assisting or in their employ should get what is comming to them. The bailout is probably keeping me in a job, but it's also paying CEO's 20 million for theft.
I have spoken vociferously and at great length against the bailouts, as they are and should be viewed as a great threat to very nature of democracy and capitalism. However, Paulson's ban on shorting is the first step towards actually addressing a fix to something that is amiss, rather simply throwing other people's money at a problem. Especially when that "fix" benefits so few, for behaving exactly in a manner that should result in punishment, not reward.
I have kept large tracts of cash out of the market for several years awaiting this debt crisis. I will now look to completely expose that cash for as long as the ban on shorting is in effect. |
