No Shorting. That’s the Rule.

A long/short hedge fund manager of my acquaintance went to short some Morgan Stanley (MS) via a B/D that clears through Wachovia:

The Trader comes back: "Wait a second — that’s on the list — I cant short that."

The Fund Manager says: No, I don’t want to Naked Short it, we have already located a borrow — this is a clean, legitimate short sale.

Trader: Nope, we clear through Wachovia — and its on the list – NO SHORTING THESE 19 PRIMARY DEALER NAMES — PLUS FANNIE AND FREDDIE — AT ALL.

Fund Manager: That’s ridiculous — how can you not execute a legitimate   borrowed short?

Trader: Wachovia. Dems da rulez. You have to go elsewhere.

Fund Manager: Consider it done.


Postscript:  FM added to his Morgan short elsewhere, and initiated a new Merrill Lynch (MER) short. I don’t know what it says about Wachovia that they won’t even allow shorts in those names (deep doodoo??).

I am paraphrasing Jim Grant, but "Shorting is the financial world’s equivalent of free speech."

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  1. GB commented on Jul 30

    I think it’s sad we’ve come to this. Were was the no shorting law in the dot com bust or the oil stocks that just got hit hard? Or how about any stock in my 401k fund.

    But those don’t jeopardize the whole economy like the banks due. So wait who’s telling me I can’t short them? Oh yeah the same guys that said they wouldn’t jeopardize the economy with insured risk and let the Glass-Steagall Act get removed… Who’s fibbing now???

  2. sysin3 commented on Jul 30

    Well, I have already moved most of my worthless greenbacks out of my (fully FDIC instured, cough) checking account at Wachovia.

    To treasurydirect and a company credit union.

    If the former fails, I only want guns and butter and potable water.

    If the latter fails, I’ll be surprised and pissed (and still wanting guns and butter), because they have been fairly conservative.

  3. shoeless commented on Jul 30

    I think the FM needs to add Wachovia to his short book.

  4. Molecool commented on Jul 30

    I guess you could say ‘mission accomplished’. That is exactly the intent behind the limitation – very reminiscent of what the FCC did with radio stations a few years back when they ousted Howard Stern. An environment of fear and uncertainty. Has served them well so far…

  5. mhm commented on Jul 30

    Maybe WB isn’t trusted enough to borrow things?…

  6. Jeff commented on Jul 30

    No wonder why Cramer was on his show tonight calling it THE bottom – soon there won’t shorting of ANY stocks allowed.

    Is this even allowable under the law? The final nail in the coffin of our supposed “free markets.”

  7. John commented on Jul 30

    Looking at the Rule(s) on the SEC Website and the FAQ’s I believe this extension (July 29) applies to Naked Short Selling– not the procedure of when the shares are actually borrowed, and then returned (hopefully for a Profit). The extension is until August 12. Otherwise, this certainly would fly in the face of the statements Cox made in an interview with Erin Burnette regarding legitimate short selling only two weeks ago…

  8. pjfny commented on Jul 30

    I executed a short on FRE after the rules took effect(last week) electronically and lots of shorts through options…so it is all about the inventory of your clearer.
    Besides as the option market maker is excempted from the locate and reserve rule, ahead of time, there are plenty of ways of shorting through options (and single stock futures where you don’t have to borrow any stock although illiquid).

    By the way, what do they (SEC) think happens when you squeeze the shorts, and there are less shorts around, when bad news comes out…you have created a potential crash without any natural buying demand!!!

  9. HCF commented on Jul 30

    Maybe I’m just talking my book here (long SKF), but my theory is that the witch hunt for short sellers will make the drop in financials WORSE and DEEPER in the long run. This is because WHEN the financials fall again (and I do think it’s WHEN and not IF), there will be no one left to take the other side of the trade. Yes, short sellers can be relentless, but they also do pump liquidity in by cushioning the fall at local minimas. So as write downs come and people sell out in panic, we will see gap downs like we have yet to see in this crisis. No short sellers covering their bets (and no one to scapegoat!) and no more suckers to catch the falling knife. This means no more short covering dead cat bounce while the rule is in effect. Perhaps some dead cats will vaporize instead when they hit the floor?


  10. SM commented on Jul 30

    I be tthe reason why Wachovia wouldn’t let him do it was because their systems are so messed up that they can’t pledge shares to an individual borrower. Many times, these systems will show inventory, but, since the shares don’t actually have to be allocated to a particular short borrower, there is no place to tag them. I have heard anecdotally, that most of the shorting of those 19 stocks last week was done manually. Operations kept track on paper or in spreadsheets who the shares were allocated to. A friend who works in stock loan in the tech department at one big investment bank said that they put in an emergency change for the naked shorting rule such that some stocks (those with lower float) were unborrowable/sortable, and others had an amount associated with them such that you could only short a particular number. This number was arbitrary based on float and had nothing to do with the exact inventory.

    So, I suspect this is a system issue, and until Wachovia programmers can get this implemented, there will be no shorting of the 19.

  11. RatInMeKitchen commented on Jul 30

    You can always tell when the pirates are getting pwned….they become the world’s biggest pussies and change the rules, ala RIAA.

  12. DCM commented on Jul 30

    next thing you know, they’ll take the 19 stocks off the marginable list, move them to cash accounts and force anyone that legitimately shorted to be bought in…regardless of what happens, fundamentals always catch up, this time will be no different.

  13. james commented on Jul 30

    barry – what are your thoughts on this new housing bill? This should be your quote of the day from the article over on Bloomberg –

    “A new FHA program, a unit of the U.S. Department of Housing and Urban Development, would insure up to $300 billion in refinanced 30-year fixed loans for about 400,000 borrowers struggling with their monthly payments after loan holders agree to cut their mortgage balance.

    HUD Secretary Preston expressed misgivings when asked in a Bloomberg TV interview if he was confident that money for the program would be spent effectively with no loss to the taxpayer.

    “No, I’m not,” Preston said. “Roughly a third of the people who get this assistance will end up in foreclosure,” he said, citing Congress’ own estimates, “and many more, we believe, will be chronic delinquencies.” ”

    So let me get this straight…for all the idiots who got into mortgages they couldn’t afford, we are first going to reduce their mortgage to a more affordable level (free of charge to them of course). And then, we expect that a third will still not pay or be seriously delinquent.

    where’s the justice

  14. Eric commented on Jul 30

    Jeff, Cramer has called **THE** bottom at least three times this year, possibly more.

  15. Vij commented on Jul 30

    WTF! They’re really playing with fire. This kinda thing leads to market crashes when the bid disappears.

    It’s kinda like we’re competing with the Chinese to see who can be more communist

  16. Ryan commented on Jul 30

    I had never visited the treasurydirect website before I read sysin3’s comment. This question actually appears in the FAQ:

    “Why does the debt sometimes decrease?”

  17. Chief Tomahawk commented on Jul 30

    Where’s the ACLU?!?

    Wouldn’t “the powers that be” LOVE to have the ACLU show up right about now…..

  18. estaban commented on Jul 30

    So free speech is in trouble.

  19. Jeff commented on Jul 30

    Eric: I hear you and am sadly aware of that. Was being facetious but he DID call THE bottom and made a big stink about it on “Mad Money”. What are the odds that he’ll be denying he ever made that call 6 months from now or even sooner when the market goes much lower? Even though the video exists, I’m sure he’ll somehow try to deny, deny, deny, and there will be people who believe him. Either that, or he’ll blame the Fed/gov’t policy. Will we ever hear a mea culpa out of him? Doubt it….

  20. Tien Kou commented on Jul 30

    I wouldn’t keep my money in a bank that violates securities regulations. They might just decide to keep it.

  21. JC commented on Jul 30

    While the stated rules were to prevent naked short selling the intent of the rules was to prop up the prices of these 19 firms (BB even said so) and the implementation of the rules has made it more difficult to transact even legitimate shorts – which is “mission accomplished” – at least in the short run. Thats why banks rallied after reporting really bad Qs and MER was able to sell $30B of assets for pennies, issue a boatload of dilutive shares and trade up. BB,Hank & Chris are gaming the system and it’s going to implode.

  22. Mark E Hoffer commented on Jul 30

    Fund Manager: Consider it done.

    almost, the flipside of ” Sold to you.”

    people put up with way too much s**** in so many transactions, we should take a page..

    and, if anybody has ever checked, co.s that lag in customer service, lag in financial performance over time.

    making this:

    think the FM needs to add Wachovia to his short book.

    Posted by: shoeless | Jul 30, 2008 6:28:41 PM

    a good call, serves as a reminder that most FMs are superfluous, too

  23. lunatic_fringe commented on Jul 30

    Why are you guys even watching Cramer?

  24. Donkei commented on Jul 30

    The imposition of the new naked short rule, selectively enforced on just nineteen companies, will one day be considered “the day the music died”.

    All pretense of allowing free markets to sort things out is gone. There is no longer any real sort of stock market, funneling great aggregations of capital to places where it will be most efficiently utilized.

    The ultimate result of the naked short selective enforcement for these nineteen banks is that there will be a gusher down once the finger in the dyke gives.

    But this rule, and its ham-handed enforcement, will one day be reviled as the real cause of the 2nd Depression. You can’t pretend things are alright just by making a rule that says they are.

  25. Juhuti commented on Jul 30

    Until a fund that has a massive amount of shares decides to dump the stock the truth will be hidden. The SEC rule will not be able to stop the stock from falling. The first one out the door gets the most value. I’m not recommending that action (keeping lawsuits at bay) but it may be a necessary option at some point.

  26. CaptiousNut commented on Jul 30

    I tried to short JPM through a BoA brokerage account and was refused. According to Yahoo, JPM only has 1.5% of its float shorted. So there’s obviously a ton of stock to borrow – everywhere.

    I’ve got to think this short selling ban (on financials) screws up the index arbitrageurs and the quants a bit as well.

  27. Trainwreck commented on Jul 30

    Nobody Shorts Wachovia, then who buys Wachovia?

  28. Marc commented on Jul 31

    Perhaps if there weren’t so many abuses of our financial system (everyone who made out from the easy credit conditions is now playing dumb), we wouldn’t need anti-shorting rules.

    In other words, what goes around comes around.

  29. steve commented on Jul 31

    History shows that Jesse Livermore the boy plunger came against government intervention in the markets when his mega-short positions (ex: coffee) appeared to threaten the solvency of politically connected parties. Just to say that government intervention has been going on forever, and has long been one of the risks of going short. One of many reasons that the deck is stacked against the shorts. Not fair. It is what it is.

  30. ben commented on Jul 31

    This layman is reminded of the following oldie-but-goodie:

    “We must all hang together, or assuredly we shall all hang separately.”

    It’s a shame the context has to be so different.

    In the meantime, even after ten years I’m still mystified about the strength of the reality distortion field that made the dot-com boom possible.

    NONE of those entities had half a clue, and yet…

    Of course, I suppose a lot of people are equally mystified about the present mess.

  31. Mark E Hoffer commented on Jul 31

    then who buys Wachovia?

    Posted by: Trainwreck | Jul 30, 2008 11:37:29 PM

    DODGE & COX STOCK FUND 107,365,622 5.02 $1,667,388,109 30-Jun-08
    Capital Research Global Investors 56,203,935 2.63 $1,517,506,245 31-Mar-08
    DODGE & COX BALANCED FUND 32,810,661 1.53 $509,549,565 30-Jun-08
    INVESTMENT COMPANY OF AMERICA 21,227,000 .99 $573,129,000 31-Mar-08
    FIDELITY GROWTH & INCOME PORTFOLIO 19,800,000 .93 $471,240,000 31-May-08
    VANGUARD 500 INDEX FUND 18,839,545 .88 $508,667,715 31-Mar-08
    WASHINGTON MUTUAL INVESTORS FUND 14,200,000 .66 $383,400,000 31-Mar-08
    DAVIS NEW YORK VENTURE FUND 14,135,126 .66 $412,038,922 30-Apr-08
    VANGUARD TOTAL STOCK MARKET INDEX FUND 14,052,465 .66 $379,416,555 31-Mar-08
    FIDELITY EQUITY-INCOME FUND 12,584,618 .59 $299,513,908 31-May-08

    one would have thought that MF buyers would have learned, 5 years ago, that their fiduciary interests were held in low regard

    On September 3, 2003, New York Attorney General Eliot Spitzer announced the issuance of a complaint against New Jersey hedge fund company Canary Capital Partners LLC, charging that they had engaged in “late trading” in collusion with Bank of America’s Nations Funds. Bank of America is charged with permitting Canary to purchase mutual fund shares, after the markets had closed, at the closing price for that day. Spitzer’s investigation was initiated after his office received a ten-minute June 2003 phone call from a Wall Street worker alerting them to an instance of the late trading problem.

  32. CNBC Sucks commented on Jul 31

    When Schumpeter wrote that capitalism wouldn’t be brought down by Marxists but by capitalists themselves, he wasn’t kidding! Eighty years after the last depression, we now have an oligarchy (Larry Kudlow’s “investor class”) that has enough critical mass to change laws and undermine free-market processes (such as shorting) to protect its illusion of wealth. Unfortunately for them, an illusion can only be maintained so long. You smart, honest bears are going to have to find other ways to make money.

  33. jc commented on Jul 31

    OK, so they made it exceedingly difficult to short financial shares and they can continue to hide timebombs off BS for another year – so it will be shock and awe when a big bank calls the FDIC and says “we have a problem” and we get a monday morning announcement that crashes these unshorted financials and then pulls the entire market down. All from the BushGang that couldn’t shoot straight!

  34. steve commented on Jul 31

    What are the actual mechanics of shorting a stock?

    The logistics.

    How is the price set to short a stock? How does demand affect that price?

    Just tossing this out there, but why not for every issue of stock you issue a “anti-stock” that trades on it’s own. You have short etf’s. Also, on aside, how are etf reconciled to the underlying stock? Can I take an etf & trade it in for the underlying stock at will.. if not, why not.

    Time to google

  35. JC commented on Jul 31

    Time to add GM to the “no short” list, GMAC is really a financial and adding GM to the no short list is cheaper and easier than a bailout to avoid BK

    hard to believe the GM writedown for leased vehicles was 1/3 of Ford’s writedowns since GM has several times more vehicles on lease and their product mix can’t be much better than Ford’s, maybe GMAC just has a more rosy scenario. Nice to hear them say their mortgage holdings are starting to stabilize, I’ll file that in the same folder as Thain’s comments about not needing more capital

  36. steve commented on Jul 31

    Fine. I’ll be specific.

    What’s the price setting mechanism to “borrow” a share? Is it open, transparent & available real time?

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