April 14, 2009
Here is why I think shorting practice should be banned:
First of all, Hedge funds argue that they borrow stocks and sell them, and betting on lower price later on. On the surface, it appears reasonable, but in reality, it is not.
The fact is short sellers never really borrow the shorted shares from the true owners – Regular American people who have hard-earned retirements and equity investments. There are two possibilities, the first possibility is the short sellers may never borrow, which is so called naked short or uncovered short. Naked shorting is no difference from printing fake shares, because they are essentially selling non-existing shares. The second possibility is, if they happened to borrow, they did not borrow from the true owners. They borrowed from brokers. Other on hand, brokers loaned the shares to short sellers without even letting the true owners know. Because the current trading system is so set up, individual investors signed their shares to brokers, and brokers become the executive owner of the shares or manager of the shares. They can lend it out for their own interest (of course not for share holders interest).
But that is not the worst, the worst is these share managers can become Hedge funds manager themselves behind the scene, and they can easily sell American peoples assets without letting the actual share holders know. Therefore, when some investors and individuals believe it is good price to invest, and they may buy the short sold shares under the same group of brokerage firms. Brokers plus Hedge funds want the equity to go down. So they short sell the shares again from the new owners whose shares are still under these same management firms. For a specific brokerage firm, some of the same shares maybe short sold to a different brokerage firm, at the meantime, the same brokerage firm may also get some new share owners for the targeted equity. This cycle keeps going on and on, brokers plus Hedge funds accumulated huge cash by selling the same shares again and again, share holders suffer from losing value on the equity assets. Manager and Hedge funds become bigger and bigger. They accumulated billions of dollars, and they hire writers, analysts, economists, editors to publish bearish articles for their own interests. The powerful driving force from actual dollars by continuing shorting combined with powerful media destroys Americans confidence. "The bear is coming". The bear comes because someone unleashed it, so Americans leave their hard earned asset and escape.
Of course, this happened not only in equity market, it happened in commodity market and housing market as well.
Hedge funds argue that shorting stabilizes market. It holds some truth if it is done appropriately. The opposite side is that we often hear a term short squeeze. In earlier digital days, if a company had good news, and if the equity was shorted by smaller investors, short squeeze happened, stock jumped out of proportion, because short sellers rushed in and covered. So the fact is shorting actually increased volatility not stability. Today, Hedge funds, the short sellers have grown into institutions. Their assets are large enough to control a few equities completely. When good news comes out, they continue short to hold the price down. By keeping it down for an extended period of time, and publishing some analyses and target price numbers, they destroy targeted companys market equity to realize their maximum profit In many cases those published analyses and target prices are baseless. They purely served as driving force to destroy and companys equity market. Therefore, the stabilizing market theory holds some truth, only their true goal is to stabilize the targeted companies at zero share price
Among the Hedge funds and short sellers, they clearly understand which Hedge fund is the biggest, and the leader. The big hedge funds hire so called analysts, economists, and other writers publish various articles which serve as "signals" to the rest of the "hedge" world. Smaller hedge funds follow the leaders, and therefore, all hedge funds or short sellers gradually learned coordination in the past years while growing. When this coordination becomes almost seamless, any company can be shorted to lifeless. Americans experienced collapse of Bear Stern, AIG, Lehman Brothers and other world scale companies. Hedge funds definitely played roles in the processes by driving the share prices down, publishing "analyses", even spreading rumors
As you can see, there are so many bankers (including AIG) rewarded themselves by hundreds millions of dollars in salary and bonus. Does anyone actually believe these people are in fact so intelligent and created such huge assets by trading equities? No way So where did they come up with such huge assets to reward themselves? Americans dont have to doubt, look at average Americans retirement accounts or personal investment accounts, and you can figure it out. Why for years the affluence of the cash assets suddenly shrank? For sure nobody burned it or trash it. American people's assets were sysmetically sucked into a few tycoons deep pockets
SEC should have taken actions earlier, faster to prevent crisis get into today's situation. 60 days for comments is way too long Average Americans have been looted too much and waited too long by these bankers. And now they have to wait for even longer
Sincerely,
A regular American Citizen,
Jeff Wang