Friday, September 12, 2008

“Naked” Nothing



SEC Moves to Curb Short-Selling
By KARA SCANNELL and JENNY STRASBURG

July 16, 2008

WASHINGTON -- The Securities and Exchange Commission took unprecedented action against short sellers on Tuesday, acting on a widespread concern that negative bets against bank and brokerage stocks might be exacerbating the financial sector's woes.

In a dramatic emergency order, the SEC said it would immediately move to curb improper short selling in the stocks of struggling mortgage giants Fannie Mae and Freddie Mac, as well as those of 17 financial firms…
—The Wall Street Journal



Remember when “naked short selling” was ruining America?

Remember when the government’s move to restrict “naked short selling” was hailed as a rescue salve for America’s financial system?

We sure do. We also remember where Fannie Mae’s stock price was that day: it was $25.60 a share.

Last trade: $0.59 a share.

Turns out, maybe “naked short selling” was not the real problem at Fannie Mae.

Now, we have said many times in these virtual pages that we have never known any hedge fund investor who actually shorted stocks “naked”—that is, without properly borrowing the shares before selling them short.

And after the government's move it almost immediately became clear that the reason some stocks appeared to be shorted “naked” was not because hedge funds were improperly shorting stocks without a borrow. It turned out the problem was that the brokers themselves weren't properly locking up stock they had loaned out.

Yet we do not begrudge the government for attempting to clean up the short-selling process so that “naked short selling” can’t be done.

If it shouldn’t be done, it shouldn’t be done period, by anybody.

But the mid-summer frenzy over “naked short selling” reminded us of something Warren Buffett said when asked about the so-called problem at the Berkshire annual meeting in May, 2007, while answering dozens of questions alongside his partner, Charlie Munger.

Here's how we recorded it in these pages at the time:

Buffett begins his response with a sort of amused recap of the question for Munger, who for the first and only time of the day could not make out the question: “It’s about this so-called failure-to-deliver and naked shorting,” he tells his partner, clearly unimpressed by any supposed naked shorting crisis. He doesn’t even have a problem with legitimate short-selling.

“I do not see the problem with shorting stocks,” Buffett says, “But it’s a tough way to make a living.”


Recalling that Berkshire Hathaway made good money lending shares of US Gypsum to short-sellers when it was under siege from asbestos lawsuits, before the stock went up ten-fold, Buffett says: “If anyone wants to naked short Berkshire, they can do it until the cows come home. In fact, we’ll hold a special meeting for them,” he says, to laughter.


If the stock action in Fannie Mae following the end of "naked short selling" is any indication, Warren Buffett was dead right.

You can read more about this, and much else, in “Pilgrimage to Warren Buffett’s Omaha,” due out next month.



Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


1 comment:

Anonymous said...

Are you saying, the brokers not deregulation caused the bubble?
Are you also saying, Christopher Dodd and Barney Frank wasn't aware of this action? Wouldn't the CEOs be aware of what the broker's were doing?