Thoughts and Observations of a Minister

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Sunday, October 5, 2008

Naked Short Selling That Toppled Wall Street

October 2nd, 2008 by Mark Mitchell
The Wall Street Journal stated in a lead editorial last week that the SEC was“reasonable” to “clamp down” on naked short selling. Well, that was progress ofsorts, though one wonders how it could have taken all these years for thenation’s most important newspaper to suggest that it might be “reasonable” toput an end to criminal activity that has eviscerated hundreds of companies anddestroyed countless lives.And now that this criminal activity has been implicated in the Humpty Dumptyingof our financial system, one grows wistful for the golden age of journalism wheneditorialists (people working for famous newspapers, not just cyber weirdos)would express a little outrage, demand that heads roll – muster something betterthan “reasonable” to describe the limpid “clamp down” of an SEC that bows inoily servitude to the very short-sellers who manhandled our markets.Alas, The Wall Street Journal is not angry about the scandal of naked shortselling. To the contrary, it devotes most of its editorial to tut-tutting theSEC for taking the mild step of requiring hedge funds to disclose their shortpositions. This, the Journal laments, means the government wants to “slap ascarlet letter on short sellers.” And (shed a tear) hedge funds will now have to“worry that their strategies will be put on display for the world to see.”Might the world like to see which hedge funds are employing the strategy ofillegal naked short selling – offloading huge chunks of stock that they do notpossess – phantom stock – in order to drive down prices? No, nothing to seethere, says the Journal. Having thoroughly investigated the matter, theeditorialist reports that there is “no evidence of widespread naked shorting offinancial stocks in this panic.” Indeed, the Journal assures us that there is noevidence that short sellers have engaged in any market manipulation whatsoever.That is a mighty bold claim. As the Wall Street Journal itself reported, the SEChas ordered two dozen hedge funds to turn over trading records as part of itsinvestigation into possible short-seller manipulation of six big financialinstitutions — American International Group, Goldman Sachs, Lehman Brothers,Morgan Stanley, Washington Mutual, and Merrill Lynch.The SEC has never in history prosecuted a major case against a short seller, andthere is no reason to believe that it is actually going to nail someone now. Butit is not difficult to see why the SEC feels that is has no choice but toinvestigate.Read the rest of this story at

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