02 October 2008
I italicize the word "any" to make the point that this isn't about "failures to deliver" or "short and distort" or any other practice that one might want to argue is an abuse of short selling. The ban is on all short selling, however completely covered, in the stock of any of a wide range of issuers.
The SEC has statutory authority for "emergency" orders (those which for example don't have to go through the normal notice-and-comment process) for a period of up to 30 days. In this case, the SEC announced its order on September 17, originally giving it a two week span. But with those two weeks up, the extension runs through October 17 -- i.e. as long as is allowed.
Short selling, of course, fulfills a variety of crucial roles in the financial system, and the SEC lists these roles even in the order announcing the extension of the ban: "contributing to efficient price discovery, mitigating market bubbles, increasing market liquidity, promoting capital formation, facilitating hedging and other risk management activities." But you can't do any of that for another couple of weeks. And how will prohibiting short selling resolve an emergency?
It won't. It'll give some of the jerks in power the warm and fuzzy feeling that they're doing something important, that's all.
Consider AMB Property Corp., a real estate investment trust, incorporated in Maryland. I take the following from the estimable folks at Dealbreaker.
It appears that AMB wasn't on the original list of financial stocks subject to the shorting ban. So it asked to be added, and the SEC, like a genie, granted that wish.
Two days later, on Wednesday, September 24, AMB slashed its earnings guidance for the remainder of the year. So if you had owned AMB stock, and had been thinking about hedging your long position with something on the short side -- two blows came in quick succession. First, you aren't allowed to hedge (pessimism ist verbotten) and -- second -- bad news! "we're not going to earn as much as we used to tell you we would!" Guess you should have hedged, huh?
Friday night, September 26, AMB said that they wanted off the no-shorting list. "It didn't feel right. We believe we're a good company and if someone wants to short us that's okay."
Except when it isn't. Well-played. If you're going to be a bastard, be upfront about your bastardy, like Edmund in King Lear.
Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.