Selling Short America and the Rest of the World

by: Michael Levy September 14, 2008 | about stocks: DIA / KRE / QQQQ / SPY / XLF    

Michael Levy

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"Oh, how the mighty have fallen", is a quote from the Old Testament that pertains to the collapse of past dynasties. In today's world, it deals with the downfall of the major infrastructure of capital markets in the USA and the systemic fallout all around the world.

The demise of Bear Sterns, Freddie Mac (FRE), Fannie Mae (FNM), and IndyMac are a few events that have already caused disruption, costing billions of tax payers money. Waiting in the wings of fiscal devastation are firms such as Lehman (LEH), Washington Mutual (WM), and Merrill Lynch (MER), whose shares have been devastated by speculative short sellers.

The question is, have the media unjustly helped the billionaire short sellers achieve massive profits from the demise of major investment, brokerage and banking institutions? Also, have the financial institutions, in part, been hoisted by their own petard of greed?

Last month, one of the main financial TV channels had a billionaire short seller on their morning show for one hour, explaining a very cleverly thought out plan why the shares of Freddie Mac and Fannie May should go to zero. Perhaps if a professor of economics that is not affiliated with any speculators spoke about institutions that are in dire straits, it is acceptable. However, when a billionaire speculator is given an hour to deliver his schemes, with a self declared, vested interest in his short positions, it is totally immoral if not illegal.

This practice continues unabated. On Wednesday, September 9, 2008, on a popular TV financial channel, almost every segment throughout the day had guests who were short selling speculators, talking about the demise of Lehman. The next day, the stock was cut in half from already greatly depressed levels.

The same style of erroneous intellectual propaganda that drove house prices to unsustainable levels, that thrust oil up to $147 a barrel and other commodities to unrealistic altitudes, is now being spread, bringing about the premature collapse of financial houses, whose stock book values are worth far more than the current traded price.

Top analysts have stated the prices have detached from fundamentals. It seems that the themes played out on fear-based emotions, all brought about by past greed, are driving down prices far faster than normal trading in past years, which did not have such powerful leveraged derivatives.

The medicine being doled out seems to be more of the same that ails you. The cure may work in holistic circles, but in finance, real change is required. There is no doubt that many companies in the financial arena have brought about their own destruction by their own avarice and greed. They dreamt up many derivatives and collateralized notes that were backed up with valueless assets. Many bosses who should be accountable for the collapse of their companies were paid millions of dollars when they were kicked out; yet, the common shareholders are left with zero. In one instance recently, the head of one of the government backed agencies is reported to have received $20,000,000 in severance pay. Many financial institutions are now been taken to the cleaners by the same type of derivatives they devised and traded ... Karma, maybe?

Well, maybe, however it still has not stopped the onslaught of new derivatives that arrive on the world scene on a daily basis, for more speculators to trade away corporate enterprises and commodities, with highly sophisticated leveraged financial instruments.

The government declares they are in favor of free markets and do not want to bring in the up-tick rule that would limit short sellers. It limits the short trade as the speculator can only short a stock when it has traded up. This levels the playing field, somewhat. They also do not want to stop naked short selling, although some say it is already illegal. This means that, without new regulations, the short sellers can take advantage of a bad situation and fast-track its demise with the help of the media who assigns them lots of free air space.

The founding fathers of America, built up ideas and blueprints to make it the greatest country in the world. In the past few years, sharp-witted, educated wizards have devised schemes that, first of all, over-leveraged complicated financial instruments. This in turn has fed the short selling vultures to sell America short and to hell with all who stand in their way. The greedy few get richer in money but poorer in spirit, while everyone else just becomes impoverished.

Who is to blame for the farces in a USA comedy of financial errors?

  • Is it the bosses who allowed the greed to rampantly spread?
  • Is it the short sellers who feed from avarice? 
  • Is it the media who will go to any lengths to sensationalize a story?
  • Is it the government who allows it all to happen?

Perhaps all are all equally guilty and are doing more damage than any terrorist organization can do. However, they all have one thing in common... They are all extremely well educated with financial and business accruement.

Lamentably, the education lacks wisdom or self respect that contains the real values and morals of humanity. If you want more proof of how obnoxious humans can sink to feather their nest, just follow the political campaign for president and observe how they degrade their fellow Americans from the opposite party.

The mighty have indeed fallen short of grace, compassion, kindness and generosity. Negative slants have been programmed in the brains of media reporters and programmers, and even the weather has become a vehicle for fear laden reporting. The quest for mastery by intellectual, sophisticated, power crazed people knows no decent or wholesome boundaries.

There is no admissible truth, or acceptable wisdom, that power seeking people will correctly invest their time in, that can halt further decline into ... the slings and arrows of outrage misfortune ...

Now where have I heard that before?

Disclosure: none

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This article has 20 comments:

  •  
    Sep 14 08:09 AM
    Agree with the author. It is the norm of the wall street intellectuals to stand on their arrogant high horse criticising others for mismangagement and spouting 'free market' idealism. Actually, all they want is just to profit from it.

    These days its easy to find 'investors' abandoning ship with slightest hint of problem or challenges. In fact, not only are 'investors' abandoning ship, we get busy bodies (aka short sellers) who will not hesitate to load more burden and lead on an already sinking ship (and at the same time shouting to everyone around them that the ship was already sinking before they loaded more rubbish on it). What happened to tenacity, loyalty, grace, wisdom, trust, integrity and all these which uphold the longevity of humanity and gracious living?

    The market is a horrid place - its a wealth transfer machine that sucks from the ignorant/weak/not in the club/marginalised to give to the so called 'in the know'. And this happens not just to individuals who invest in stocks listed in the markets but also to companies who list on it. I would say to all companies and shareholders who seriously want to build a real business and want to leave the financial media to hollywood to just seriously consider privatising their company. It does not pay to be listed - you are seriously selling yourself short. The game is different now from say 30 years ago. Sadly, the difference is the arena is now filled with quite a few big time raiders and blood sucking vampires.
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  •  
    Sep 14 08:37 AM
    Yes, it is shameful. But, it is hard too feel sorry for people who got the wealth in the first place with the same scheme which they have fell victim too.
    Reply | Link to Comment
  •  
    Sep 14 08:51 AM
    The "billionaire short sellers" (as long as they're shorting the stocks in a legal fashion) perform an extremely useful function, in that they often call attention to companies that truly are overvalued, either fundamentally or because of something worse (i.e., fraud). Facts are facts, and instead of railing against "the billionaire short sellers" (which, if your name weren't "Levy", I'd swear is some kind of antisemitic code), why don't you just counter what they purport (very clearly, on live TV) to be the factual reasons for why they're taking these positions? If you're right, you'll make a lot of money, and if you're wrong, they will (although not as much as you would, because one can't make unlevered multiples of one's investment on the short side with common stock). As Buffet once said: "I have nothing against shorting stocks, but it's a tough way to make a living." Do you know why he has nothing against it? Because for his companies, the "facts" (i.e., fundamentals) are on his side, and he knows it. On the other hand, that idiot CFO woman at Lehman (now gone, thankfully) spent so much time attacking "the shorts" because she knew she didn't have "the facts".

    Again, I'm not defending naked short selling here, just the legitimate version.
    Reply | Link to Comment
  •  
    Sep 14 09:01 AM
    The 1st and ONLY article I have ever read (except for my blog that is :-) ) that finally tells the truth.

    Maybe this will help:
    www.youtube.com/watch?...
    Reply | Link to Comment
  •  
    Sep 14 09:36 AM
    It's acutally the fault of the welfare mothers who live off the dole of the government. Throw in the uneducated, lazy Americans who wont bother to get a job at Countrywide, Bear, Stearns, LTCM, Federal Reserve, Chrysler, Lehman, Freddie, Fannie, etc. Educated workers who mange our affairs can not possibly be to blame, they are too busy having jets serviced, buying trophy apartments and smuggling Cuban cigars.
    Reply | Link to Comment
  •  
    Sep 14 10:45 AM
    In aggregate, the amount of money in the hands of long-oriented investors outweighs the amount that is dedicated to the short side. So, the facts should win. If for every short seller in a stock like LEH,FNM, FRE et al there is a buyer then the shorts will not have any effect. At the end of the day, the simple fact is that the large long money - Fidelity, Buffett, American Funds, etc etc - aren't stepping in to scoop up these stocks, even at low single digit levels, because they know they are zeroes. It has nothing to do with the shorts.
    Reply | Link to Comment
  •  
    Sep 14 10:49 AM
    are the sheeples waking up?i dont think so. it may be too late.the insiders must be LOL on the way to the bank(in switzerland) by private jet.all the charts graphs & maps are not going to help as wall st is now vegas.you lose slower but nobody brings you a drink.
    Reply | Link to Comment
  •  
    Sep 14 11:14 AM
    IAGREE, THE MEDIA HAS PROVEN TO BE A MERCHANT OF FURTHER CHAOS/ MORE INTERESTED IN RATINGS AND GETTING A RISE IN VIEWERSHIP/ PERHAPS THE SHORTS SHOULD SELL THEIR PARENT COMPANIES SO THEY THE MEDIA TO CAN HELP THEMSELVES OUT OF A JOB.
    FIRST SIMPLE STEP JUST REINSTITUTE THE UP TICK SHORT SELL RULE, AND INCREASE ETHICS AND POLICY IN THAT SECTOR.
    A LOT MORE CAN BE DONE, BUT SIMPLY BY REVERSING THE DUMB CANCELLATION OF THE UPTICK RULE BY THE SEC, THAT WOULD HELP BIG TIME.
    IT WAS WRITTEN TO HELP PREVENT A SIMILAR SITIATION IN THE CRASHES OF THE 30'S.
    SO WHY WAS IT REVERSED..???

    ANDY
    Reply | Link to Comment
  •  
    Sep 14 11:19 AM
    Manya says, "In aggregate, the amount of money in the hands of long-oriented investors outweighs the amount that is dedicated to the short side." This money is tracked, "Performance Explorer data for 11th August 2008 has been published, with $16.5 trillion balance of Lendable Assets and $4.37 trillion balance "on Loan" ."
    www.dataexplorers.com/...

    Almost all the money on the long side is available to the short side should they [the short side] want to sell it short. Why the long side (the lenders) should want to buy their own stock from the shorts when their existing holdings in those stocks are diminishing in value daily I cannot think.

    The long side is party to this.


    Reply | Link to Comment
  •  
    Sep 14 11:24 AM
    Losers always talk about how "unfair" the game is or how the winning team "cheated." Sure, all you losers are just "better men" than the fleecers but I doubt they give ONE SH$T about your moral condemnation - nor should they. Play the game to win or go f'ing home.....
    Reply | Link to Comment
  •  
    Sep 14 11:40 AM
    I think the point of the above article was that this is NOT suppose to be just a game. It really is suppose to be a way to build and prosper a Nation as a whole, and NOT just a small group of clever shorts who can create enough fear and mistrust so that their 'puts' can be filled.

    "The good of the many outweighs the good of the few. Or the even one."
    Reply | Link to Comment
  •  
    Sep 14 11:40 AM
    GatorTrader, show me the 'fairness' in the game before you call anyone a loser. There are real innocent losers here (with families feed) and the likes of your type and your language is precisely the high horse arrogance that have caused so much grief.
    Reply | Link to Comment
  •  
    Sep 14 11:45 AM
    apppo, well said - the system is not meant to be a game. Its meant to be a fair capital and resource allocation system. Something has gone very wrong for this whole blow up to happen - not just in the cause of the blow up (yes, we all knew it was those few greedy investment bankers) but also by the very way it has been allowed to blow even further up to affect those who have scant understanding of what was coming their way.

    If this allocation system is not right, then, the money is only going to be put in the wrong place, opportunities will be lost, the country and economy will not prosper to its optimum.

    There are just too many 'traders' in this system and not enough real investors.
    Reply | Link to Comment
  •  
    Sep 14 12:56 PM
    Did you happen to read the following post written on 4/13/2008?

    Selling America Short

    Imagine a world in which anyone can buy any amount of fire insurance on any building, regardless of its value or ownership. Imagine that anyone can buy any amount of life insurance on any unrelated individual, without their knowledge or consent.

    The economic incentives in such a world guarantee that many buildings will burn, and many will die, to the financial benefit of those buying the insurance policies where they have no risk of actual loss.

    Wall Street and the SEC have created such a world. Credit default swaps allow a party to reap a financial reward when a company fails. Shorting the ABX index allows a party to reap a financial reward when asset values of certain financial instruments decline in value. Unlimited shorting of stocks, without restraint as price declines, magnifies both the speed and magnitude of the price decline. Purchase of puts sends a stock price lower as the option market makers sell unlimited, unregistered, un-issued shares into the market.

    Where the capital markets once functioned as a source of financing for new business ventures, Wall Street and the SEC have turned the capital markets into an unregulated, rigged casino where gambling and asset destruction are the main attractions. Economic incentives now heavily favor the destruction of investment capital, rather than the creation of additional capital.

    What can we expect to be the logical result of the past 8 years of SEC and Wall Street corruption of our capital markets?
    Reply | Link to Comment
  •  
    Sep 14 02:34 PM
    The only problem is that the bailout only helps the rich and the well-informed. I read a hedge fund was ahead by more than $1 billion for buying FRE and FNM bonds just a day or two before the announcement while a "retail" customer, reading the reassuring words from the Fed, bought 25,000 shares of FRE stock at $5, which was duly reduced to less than a dollar a couple of days later.
    Reply | Link to Comment
  •  
    Sep 14 05:39 PM
    Levy? I thought you folks were supposed to know something about money yet here you write that it's all the evil short sellers bringing us down when in truth it was incredible leverage to the LONG side that is now unwinding which is killing the banks. The great credit expansion and the fake "great moderation" imposed upon us over the last decade by Alan "The Traitor" Greenspan is the one and only cause of all the carnage. The fiat currency imposed upon us by the Rothschilds, Kuhns, Loebs, Lehmans, and other money men who started the federal reserve and it's fictional reserve banking system are the original culprits, and the Bernankes and Paulsons that try to keep it afloat by nationalizing private losses are scoundrels and thieves of the highest order.

    So get off your soap box and go buy a clue. The whole stock market is nothing but a Ponzi scheme gone bad due to ridiculous leverage by greedy banks. The short sellers will simply help decompse the rotting wood at a quicker rate thus dealing with more of the problem TODAY rather than kicking the can down the road of time for our children to suffer with.
    Reply | Link to Comment
  •  
    Sep 14 11:42 PM
    I'm with Ponzi and Gator... the financials are melting down under the weight of their obscene leverage, arrogance and greed, not because short sellers are recognizing the problem and taking legal advantage of it.

    If there are some people here who have been stubbornly riding these financial stocks down into the ground, taking 40, 50, 70, even 90% plus losses, did you ever hear of having the humility to admit you were wrong, sell and preserve capital for a possible buying opportunity down the road?

    People seem to think that they have some bizarre kind of constitutional right to unlimited profits in stocks just as in real estate and tulips... WRONG.
    Reply | Link to Comment
  •  
    Sep 15 03:37 AM
    We elected the politicians who long ago knew the CDO's and other types of debt multiplication schemes were time bombs. We elected the President and indirectly all his men such as Greenspan. We elected the House and the Senate.

    These voters by and large depend on the government to protect their retirement investments from "ponzi" schemes, 'ownership societies' unwise trading practices, naked short selling, poorly managed lenders like F and F. From hedge funds and private equity firms gone wild. The SEC, the FBI the Justice Department, the inspector generals of the various agencies have not done their job to protect the average citizen investor who does not have a PhD in stealth investing from Harvard, or maybe and MBA from Chicago specializing in computer programs to determine just how much shorting is required to destroy a good corporation. Or, on a grander scale, who is protecting the average citizen from a mushrooming government debt that some smart people think is going to destroy the dollar? So John Q investor the little guy who buys a stock or a mutual fund or an index and hopes it will be higher in a decade or two is getting his life blood drained out of him by he government debt on one side and in a variety of opaque stock manipulations on the other - both of which are beyond the keen of the little guy who might be a physician or a chemist or an electrician or a teacher or an assembly line worker at some plant (if any are left that have not been shipped to China). You cannot expect the little guy investor to understand what is being done to him/her and those doings it just love these circumstances. Did anybody notice the put activity in Bear just before the public announcement by Paulson? These potentially criminal activities happens with such regularity it makes Michael Douglas actually look like a financial saint.

    Agencies and elected officials have not instituted a regulatory capability to discourage the substantial undermining of the American financial system which we have seen in the last few years. Even little investor's access to the courts have been greatly undermined by mandatory arbitration 'agreements.' And the reason for all this could be that the corporations and the rich (including the foreign rich) have bought the former democracy that was America. The politicians are owned by the corporations and lobbyists. Every single law enforcement or regulatory agency suffers from politicization which is a corollary of bought and paid for executive and legislative branchs. The country as a whole thinks America is on the wrong track. One likely reason is that what they think the country is, isn't.
    Reply | Link to Comment
  •  
    Sep 15 04:30 AM
    Capitalism is about efficient allocation of resources. If that means prices "correcting" upwards nobody seems to bother. If that means prices "correcting" downward after an excessive upward move, the ones who correctly expected that should be vilified and stigmatized? Gimme a break...
    Reply | Link to Comment
  •  
    Sep 15 01:24 PM
    Thank you all for taking the time to express your views ...
    Nero fiddled while Rome burnt. In today's world, the media fan the flames of ignorance while the fiddlers spark intellectual derived flames of financial mayhem....It is said, truth cures all. Since there seems to be no cures in sight, it points to a society, in many walks of life, that lives outside the realms of truth
    Reply | Link to Comment
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