Did bin Laden short stocks? [my headline]

UPI no url | 9/14/01

[jennyp]

i've said from the start (not on FR, but to friends) that round 2 is an attack on our financial markets. there is no telling how long conspirators have been accumulating short positions, i would like to see all short sales prior to september 11th frozen at market close pps on the 10th. i think we need to give investigators enough time to sort out the details. those short-sellers who are cleared after investigation, could reap their rewards at a later date and consider themselves lucky.

Hard to disagree with that idea, 'cuz I'm sure there are a bunch of people in the know who had an idea of making a killing on the killing. but I don't understand how massive short selling beforehand per se would have injured the American markets. What with the automatic clamps in place, any significant crash will take days - long enough for the SEC to build a case to freeze their assets.

Even without that, how would short selling before the tragedy hurt the market? I never completely understood short selling: Doesn't the short seller borrow shares from their broker in order to sell them to open the position? And if it's a really big order, doesn't the broker have to buy up shares to lend to the short seller? Or if it's spread over "reasonable" sized orders among several brokers, don't the trades still deplete their inventory of shares, making it more likely that they would be buying up more shares to keep their inventory stocked?

I understand how they could make a killing when they buy the shares back at the lower price, but the only way I can see this hurting the economy is if the opening sale produced an overhang of shares in the market somehow. Am I missing something?

[jennyp]

I guess my question in post 22 is for you too. Even with highly leveraged instruments, how would it destroy the markets? (Aside from the general fact of more volatility, etc.)

The only massive disruption I can think of was the Long Term Capital Management debacle, and they destroyed themselves in the process. (Then there was Nelson & Bunker Hunt, and they bankrupted themselves too, didn't they?)

[NativeNewYorker]

You are basically correct.

The fears most people have about shortselling are baseless and stem from a lack of knowledge about how it works.

The *rational* fears of regulators and coporate America works like this: Massive, concerted selling, at the right moment and in the right instruments, could trigger a cascade of stop-loss orders and options rebalancing sales creating a downward chain reaction.

Mitigating this is the sheer size of the markets, their diverse and resilient nature, the tremendous paper trail that would be left by such an effort, and the various circuit breakers built into the system after the 1987 crash.

It *would* have been rational for the bad guys to short S&P futures/buy index puts discreetly and in smallish lots through a wide network of brokers scattered around the world. That would have been profitable and hard to trace. But it would NOT in an of itself CREATE a significant amount of pressure on the markets. They were already weak for "real" reasons anyway.

[jennyp]

Thanks, that's what I thought.

Happy trading!