“Based upon my limited knowledge of the current financial markets, this guy appears to be full of crap. He talks a lot about hedge funds and always refers to IOU’s and never “short selling”. He says that if called to deliver on the IOU’s the funds simple issue another IOU. I may be wrong but if a particular small stock is removed from the approved list, the fund has to go out and buy the stock to “cover” his short. If the fund has driven the price down with his short selling, the market will drive the price of the stock back up as he attempts to cover or close out his position. This guy sees a crime and I don’t see it the way his facts and similes are presented.”
No, portcall, you’re missing it. This is ALL about naked short selling and failure to “cover” as you call it. It is technically known as “failure to deliver” or FTD.
When a hedge fund or group of hedge funds starts to naked short, they are not be held accountable to deliver. therefore they can continue to short sell the stock, driving the price down until a mass panic ensues (along with phony rumors propogated by the financial media).
Often time there are more shares shorted THAN THE ACTUAL TOTAL NUMBER OF OUTSTANDING SHARES OF THE SMALL CAP COMPANY!
No investor can sit idly by and watch the value of his investment plummet indefinitely, especially after hearing the financial press whisper about “SEC investigations” or “accounting irregularities” or worst of all, “delisting.” So he sells, usually at a terrible loss, and further drives the price of the stock down.
If the company goes bankrupt because of the ensuing run on it’s “currency” all the better. Then nobody even ASKS them if they can cover the short sales.
I urge you to drop your skepticism for as long as it takes you to digest this.
So a hedge fund can short an infinite number of shares of a company, indefinitely, and never cover the short sale?
Are there examples of this? It seems like it would be so profitable that it would eventually move up to larger and larger companies. Is this a new phenomenon?
Thanks so much for the education that wasn’t included in the original piece.