Posted on 10/17/2009 6:09:52 AM PDT by Wolfie
Edited on 10/17/2009 8:54:23 AM PDT by Admin Moderator. [history]
I have to say that there is something good about the Obama administration that at least Chris "see-no-evil" Cox is no longer with the SEC and maybe some heads will be cracked.
I’m surprised this article took so long to show up on FR. It’s good and the info contained in it should be the subject of a phone call to the offices of your elected representatives. All you knee jerk lefty haters need to logically understand that once you free your brain from IDEOLOGY, you can let the facts speak for themselves rather than having your inner trained monkey spin them up into another projection room hoax.
Urges New SEC Chief to Restore Uptick Rule to Regulate Short Sales of Stocks
Congressman also receives letter supporting reinstatement of the regulation from Christopher Cox, the former SEC Chair who rescinded the rule
(Washington, DC) - U.S. Rep. Gary Ackerman (D-NY), a Senior Member of the House Financial Services Committee, today sent a letter to the new Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro – on her first day in office – that urges her to reinstate the uptick rule, the depression-era regulation that required a stock to increase in price before a short sale could be executed.
“One of the simplest but most important and effective initiatives that the SEC could undertake immediately to combat market volatility is the reinstatement of a so-called uptick rule” Ackerman wrote. “For more than 70 years, the uptick rule curbed short-selling runs until, short-sightedly, the Commission revoked it in 2007. The lack of a price test in our exchanges created an environment that provided short sellers with the ability to both exploit and accelerate the failures of a number of companies, including Bear Stearns and Lehman Brothers, the collapse of which had a devastating effect on confidence in the U.S. financial markets.”
Ackerman also received a letter from former SEC Chairman Christopher Cox dated January 20, 2009 – the day he left the agency – in which Cox said he supports the reinstatement of an uptick rule. Cox sent the correspondence despite the fact that the SEC rescinded and refused restore the regulation during his tenure as Chairman.
http://www.house.gov/list/press/ny05_ackerman/PR_012709.html
I didn’t mention that Bill Clinton removed the protections of the Glass-Steagal Act, preventing mergers of banks and brokerage firms. That was put in place in the 30s.
I think the uptick rule may have been toughened after the short but violent crash of 1987. You are right that it was first put in place in 1938. Chris Cox, of all people, removed it, presumably at the instigation of the usual suspects.
Chris Cox was the Cigar Store Indian. He never moved
RP for head of the SEC. Chickens coming home to roost.
Btw, it was a great tag team of R's & D's that passed Gramm-Leach.
CONFERENCE REPORT ON S. 900, GRAMM-LEACH-BLILEY ACT
'
I watched CSPAN the other night when they aired one of the hearings regarding the bailout and AIG bonuses. Congressman Darrell Issa is trying (against all Dim odds) to understand how it is that Timothy Geithner could not have been aware of the bonuses scheduled to be paid out -— essentially with taxpayer monies. Geithner is one corrupt little Timmy.
The stress on both banks was visible in the credit default swaps market well before their final collapse. Big put plays were made in both many times, not just on the occasions they paid. Those making such bets were basing them on intersecurity arbitrage, not mythical counterfeiting.
Every company has many securities that trade based on its value. Every position in the capital structure is represented, along with derivatives on each of them. The stock isn't going to be worth a bundle if the bonds go to zero. If the bonds are going to hold and pay off at par, then the CDS swaps that are basically puts on those bonds should have minimal value only.
Well, when the CDS contracts on these banks' bonds got to 5% a year and up front premiums to boot, it was to say the least quite probable the stock would be worth a lot less than the equity market thought. CDSs pay only if the bonds don't pay off at par. The bonds only fail to pay off at par if the company goes bankrupt and in addition there isn't enough left in the till to pay creditors - which by definition means there is nothing for common shareholders.
A situation in which the stock is trading at $68 a share but the CDSs are going begging at 5% a year plus up front premium, offered but not taken up, is not an arbitrage equilibrium. Either the CDSs are going to recover or the stock is going to zero.
A trader doesn't need to know which. All he needs to do is see the disconnect and take both sides. He buys a giant put position and writes (issues) the CDSs. If the company survives and the storm passes, he earns enough on the CDSs to cover the cost of the far out of the money puts. If the storm increases and the company fails, such that he has to pay out on the CDS contracts he wrote, he will collect so much on the puts he can cover even if the bonds go to zero, which they won't.
All that was required for this to occur was for the credit markets to be ahead of the stock market in sniffing out the danger. As soon as the pricing relationship appears, anyone active in both can see it and arb it.
It is not like Lehman would have been worth a hundred billion if not for those dastardly stock counterfeiters. That's crap.
The treasury and Fed should still have done something to keep the fall of the bank from spreading, for the creditors not the stockholders, in the case of Lehman. They did for Bear and it worked. They didn't for Lehman and the result was AIG going down and the authorities needing to issue $2 trillion in market support emergency actions by the following Friday.
That is all.
As for the whole nonsense about blaming shorts, shorts further price discovery and that is a good thing. They are the messengers and not the casual agents. Deadbeats on mainstreet not paying their mortgages caused the crash, not imaginary conspiracies of counterfeiting Gnomes of Zurich.
Are you of the opinion that the rest of us are too stupid to follow simple declarative sentences?
Is it all made up?
Namecalling is the last refuge of the truly clueless megalomaniacs.
Useless as the author might seem in your eyes, I learned more from that article about how the scam was made possible than all the name calling doofuses can neutralize.
Now, there's a useless statement if I ever saw one.
And a non sequitur to boot.
The marxist mindset always conjures up lots of heat, but very little light.
I suppose it all depends on your definition of "ruling class".
At one time, it would have been silly to assume all in the "Wall Street" complex were criminals.
Granted, today it may not be that far-fetched.
If, however, you are referring to politicians and the current US administration, you'll get no argument from me.
He's nuts.
Glass Steagal wouldn't have prevented this mess. The problem was mortgages.
Glass Steagal would have prevented the rescue of Bear Stearns and Merrill.
You *do* understand...I take it...that with BSC trading IIRC in the 60’s immediately pre-blowup, that several whole new series of puts were created at the 5 and 10 and 15 even (again IIRC) at the 2.5 strike? Right in the middle of the trading month. That is beyond extremely unusual, to create options strikes 50 points OTM on a $60 stock in the middle of a month stock mere days before OE.
Let’s look at some other stocks trading at around 60. HES. $60.66. No puts available below 40 this month, 35 next month, 12.50 January.
JNJ. $60.46. No puts available struck below 30, 50, 20 (Nov, Dec Jan)
CAT $54.57 an odd case, but CAT *WAS* $24 in March. There are $25 puts for Nov, freaking $7.50 ones for Dec!, and $15 puts for January.
Now, we have all seen brand new strikes created for stocks the day after they took massive dumps on earnings or disaster news. Absolutely. Any under-$100 stock that takes a maybe a $10 but certianly a $15 poop will induce the creation of new strikes.
But the BSC case occurred *before* the stock price had moved so drastically, though it was down from $100-$85 (again, this is from memory) I find that unusual, very smoking gunnish.
If anyone wants to write a strike the market makers will create one. They don't care, they can delta-hedge in the cash and cover themselves readily. The demand was created by the fact Bear CDS contracts were trading at default levels. Yes the equity market was oblivious - it often is. There is practically always smarter money in credit and smarter money still in the derivatives than in the cash, in all markets.
The whole premise that the bank would have been sound if only it hadn't been sold is false start to finish. The CDS market correctly saw significant risk of default because people asked to take a company's debt *if and only if it defaults* are hyper-sensitive to the actual probability of default. Common stockholders who are there because it has some index position or the PE looks low compared to other banks in classic "value trap" fashion, are not. Guess who was right?
If for current purposes we exclude buying and holding a stock for LT purposes of collecting dividends or experiencing LT capital gains, to profit from a stock (or any) “transaction”, one really has to perform *two* separate transactions. A buy, and a sell.
In essence, short-selling is not really different from “buy low-sell high”; it’s just that the “sell-high” event occurs *first*: before the “buy-low”. The two separate events that mark the endpoints of the buy-sell exercise are just reversed in time.
But the mechanics are a little squirrely, because you can’t sell something you don’t own. However, you can sell something you *borrowed* with the intention of being able to buy that something later and return what you borrowed to the rightful owner with you (hopefully) being able to buy that borrowed thing in the open market at a lower price than what you originally sold it for. You, yourself do not go out and post want ads “want to borrow 500 shares of GE” with your telephone number. Your stockbroker, though, DOES have to find those shares, somewhere...either in the account of one of its’ customers (who isn’t “using” them right now) or in the account of another brokerage somewhere. That “borrow” indeed HAS to occur, and your broker has to have reasonable expectations of being able to borrow them from somewhere before he lets you sell those shares short. It’s called a “borrow”. If he allows your short sale, yet cannot locate those shares within three days of your short sale, then he has to notify you, and you may be forced to extinguish your “negative share” position by buying the shares then and there...at a time NOT of your choosing, when the share price may not have declined as you expected, or worse, is higher than you borrowed them for. That’s called a “forced buy-in” and if you’re away from your phone, the broker can buy them “without your permission” but it is really *with* your permission because it’s among the possible outcomes you consent to when you short-sell in the first place.
There are times when a stock is “hard to locate” or “hard to borrow” and your broker may well prohibit the short sale in the first place OR, charge you for holding the short shares overnight. This can change day to day. I’ve shorted shares all day long Monday and was not permitted to short them Tuesday but could short them again Wednesday.
So there are several conclusions:
Short selling is inherently more “dangerous” because you may be forced to buy-in at a time not of your choosing. Let’s be very clear, that forced buy-in is 99.9% of cases going to occur at a time of *scarcity* of those shares, which means high demand for the shares which means the price is going to be high which means you are probably very uncomfortably in a “forced-to-lose-money” situation. It’s not exactly common for this to happen, but it DOES happen, and it is NEVER comfortable and NEVER convenient.
Mathematically, shorting can “only” produce a profit of the amount of the share price when you sold it going to zero; eg; 100% whereas a stock can double or triple more going long.
Shorting is a rather sophisticated strategy that has a number of complications over going long. The recent market is probably one of history’s greatest examples, with shorts, who started to come in fairly heavy came in circa SP 875 have universally had their faces ripped off for the past 200 SP points as the market has ground up almost relentlessly in the fastest, largest, most logic-defying move in stock market history.
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