April 23, 2009
Please reinstate the uptick rule, as it should have never been repealed.
It was put into place as a result of the destructive Bear Raids of the 1930's. In July 2007 the rule was repealed because (according to the SEC) it had become ineffectual. Using results from a very flawed test period, (put together by those who lobbied for the repeal the Exchanges, large broker-dealers, and hedge funds) the SEC allowed the repeal of the rule that would then enable aggressive, manipulative short selling.
Immediately following the repeal we witnessed a sharp increase in this aggressive short selling, a sharp decline in the stocks of the banks and financials and then ultimately a repeat of the 1930's financial crisis. Since the repeal volatility in the markets has exploded, as intraday swings often now exceed 5% several times during a single day, the VIX index has set record highs, and individual investors have seen the value of their retirement plans cut in half. As the investors have been fleeing the markets, cash has piled up to record levels and our once proud capitalist financial system has ground to a halt as no one desires to participate in the now casino like market. Companies that announce they need to issue new shares of stock are attacked by the short sellers, who then rob them of this opportunity as the share prices are driven down sharply in just a few days.
Thousands of lives have been destroyed at the hand of this sort of financial terrorism. The resulting manipulative short selling drove some of our strongest financial institutions out of existence. This has been the tragic result of this repeal. The fear and panic that resulted from the sharp share price declines was the major contributing factor in the quick demise of Bear Stearns, Lehman Bros., AIG, FNMA, FRE, NatCity, WaMu, and countless others. The cost to tax payers will be in the Trillions. The loss of wealth and the resulting destroyed lives is unfathomable.
As an unintended consequence of the uptick rule repeal, the incidence of Naked Shorting increased dramatically during this period, as the lucrative profits of the bear raids caused institutions to sell short shares they could not borrow nor deliver. These shares sold short without being able to deliver should have resulted in busted trades and fines for the illegal actions and ultimate destruction of the target companies. The evidence is clear as over 30 million shares had failed to be delivered on Lehman alone during the final week, yet no action as yet has come and the illegal gains remain in the hands of the thieves.
Strict rules must be put back into place to prevent this from ever happening again. The uptick rule or a rule to prevent short selling into a bid must be enacted.
The repeal of the uptick rule was of course not the only cause of this crisis. Other factors include the change to mark to market accounting for the banks, this after allowing the banks to lever up their balance sheets with suspect CMO's then the non-enforcement of a sharp increase in naked shorting, and then unregulated oversight of the trillions in credit default swaps all were contributors to this financial meltdown.
Before mark to market accounting was forced on the Banks in Nov 2007, the Banks had weathered far worse over the prior 75 plus years. (another depression era rule that was changed by the SEC). The foreign debt crisis of the 1980's for example would have easily rendered the majority of our largest banks insolvent had the mark to market rule been in effect back then. Instead banks were able to work through those crisis periods without forced capital raises that mark to market accounting has caused. This rule came (suspiciously) shortly after the repeal of the uptick rule as it then gave powerful ammunition to the shorts, and the credit default swap traders. As banks needed to sell stock to raise capital, the short sellers easily crushed their stocks, and the results were further asset sales at fire sale prices. This created a spiral of mark downs, and reserve requirement raises that rendered the banks technically insolvent. The fear and panic that resulted from the collapsing stock prices then created effective runs on the banks, driving these companies out of business. The final solution has been a socialistic government intervention as Congress has became the lenders of last resort,(by design?) and then to cost the taxpayers trillions and ownership over to the government. All because the powers that be wanted no uptick rule and the mark to market accounting rules forced on the banks.
You have heard the arguments for having no uptick rule. They have no basis and are only supported by those who desire manipulative shorting and increased volatility.
The repeal was based upon a flawed SEC study that concluded it was ineffective. Oddly, if it was so ineffective (of just symbolic) why repeal? What harm was it doing? And if it was so ineffective back then, then why are you now considering a modified version that would require a 10% decline before this ineffective rule kicks in??? The circuit breaker proposals (of course recommended by the profit driven exchanges and hedge funds) are a joke, and would not slow the manipulation or reduce the volatility. Short Sellers should never be allowed to hit a bid and thus drive down a price. Selling short to combat over-exuberance is done easily on the ask and has worked fine for 70 years.
Price discovery to determine fair value comes from buyers and sellers of any item....but when you have additional sellers of shares that don't exist, price discovery becomes biased to the sell side and is simply not fair.
Another silly argument regarding the uptick rule is that we should then have a down tick rule too. This of course makes zero sense as there is no uptick rule for those selling shares they actually own, thus the buyers of the shares should on equal footing with those sellers. A short seller on the other hand is not equal as they are in effect just piling on.
Short Selling in general is dilutive and destructive to price discovery. Short selling does have some redeeming qualities such as improved liquidity and can be useful when it is not used to increase volatility and cause manipulation.
Please do not fall victim to the influence of the exchanges, broker-dealers and hedge funds as their profit motives have been destructive. The repeal of the rule has opened the door to financial terrorism, and nearly destroyed are banking system. Do what is right. Reinstate the uptick rule, ban naked short selling and calm the markets, so that it will be safe for investors to return, and our capital markets to function properly again.
Thank you for reading,
JKS
Investment Manager