Posted on 09/27/2008 8:20:01 PM PDT by TigerLikesRooster
China gets the bomb
Commentary: China will attract money and rumors with initiative
By MarketWatch
Last update: 3:51 p.m. EDT Sept. 26, 2008Comments: 27
NEW YORK (MarketWatch) -- American investor Warren Buffett called derivatives weapons of mass destruction. Though some don't consider short sales to be true derivatives, they have been proven to cause some destruction in the U.S. financial markets, if American regulators are to be believed. The practice of selling borrowed stock allegedly put pressure on several U.S. financial firms including Fannie Mae (FNM: 1.83, -0.11, -5.7%) and Lehman Brothers Holdings Inc. (LEHMQ: 0.30, -0.03, -9.0%) after nasty rumors triggered massive bearish bets.
Now, China has the bomb.
Chinese authorities reportedly have given short sales and margin lending the green light to help boost trading in China's second largest stock market in Shanghai. This comes in stark contrast to U.S. regulators who have now banned short selling in more than 900 companies listed domestically. Shang Fulin, chairman of the Beijing-based securities regulator, is trying to introduce more financial tools to allow investor s to earn higher returns and hedge against investment risks, according to a Bloomberg report.
(Excerpt) Read more at marketwatch.com ...
All those hedge funds and short traders should go to Wild East in Shanghai. An aspiring overlord will welcome you with open arms.
This is really interesting, ping!
Do you think short selling caused this mess?
Do you know short selling in America has been going on for 100 years? And now it is a problem?
Do you know the Chinese market is down 60% in the last year, when short selling was not allowed. Short selling obviously couldn’t have caused this.
Are you just looking for a villain? Well, keep looking.
Ping.
Someone set up China the Bomb!
ok...agree with you there.
I hear that they allowed not just ordinary short but naked short as well.
What you say!!
Make your time...
They wouldn’t have allowed naked short selling.
Several of the comments at Market Watch stated that it was not short selling that was the problem, but it was NAKED short selling. Now if I only knew the difference I would know what to be against.
ping-a-ling
Yeah; short sales have nothing to do with this and it’s a very legitmate and important market activity—without short sales, it would be very difficult to build an effective, efficient hedge against downturns.
I suppose it’s theoretically possible that a large enough group with enough capital could deliberately try to cause a crash of one or two banks by shorting, but that would only increase their risk of being caught in a squeeze.
Also, it’s not accurate for the article to say that only “some” people don’t think short sales are a derivative. Futures and puts are market-traded derivatives (i.e., contracts to buy or sell in the future), but simple shorting (selling stock that is borrowed at a certain price and repurchased later at a lower price) is not derivative by any definition AFAIK.
Few banks can survive a run on its deposits. But a few well placed rumors by a large holder of default swaps knows how to play the game. And they have enough assets to keep selling enough long enough until the rumor comes true. Bingo, they have a big insurance payout on cheap derivatives when the bank goes bust.
yitbos
I also am curious if you think that the ban on short sales may actually be contributing to the current problem now. As I understand it, if there is a sufficient percentage of a stock held short, there is a risk to the short sellers that a small uptick in the stock could lead to a short squeeze, and a small uptick turns into a big gain because the short sellers have to scramble to cover their positions. In other words, no short sales, no possibility of a short squeeze. Of course, I am an amateur at such things and could be wrong.
that’s true.
naked means not covering.
it’s illegal.
how anyone with common sense would allow them not to be covered, is anyone’s guess.
It is well past time for America to rediscover the righteous nationalism of our Founding Fathers.
I don’t think legal short sales are a huge factor here. Naked short sales(illegal) I have concerns about. But ultimately, declining home values are the root of the problem and will continue to be.
Chris Cox of the SEC looked into naked short selling a year and a half ago and said there was no evidence for it. I don’t believe him. A year and a half ago, Goldman Sachs and all the brokerage firms were profiting handsomely from their hedge fund clients who where probably doing this. Its only when their stocks(GS, MS) were being shorted, did they scream blue murder.
Throughout Aug/Sept, I noticed 25% of the NYSE traded in the last 15 mins. of trading...which makes me think this is naked short selling. Kinda like kiting a cheque.
short selling is important. It’s like the the wolf or fox. you kill off all the predators and the system is overrun with rats and rabbits and then everything collapses.
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