When the financial world falls apart, it’s time to find a culprit. So far it appears as though it is the Rumor Mongerers and the Short Sellers. The SEC is going after both of them.
Bloomberg: The U.S. Securities and Exchange Commission subpoenaed Wall Street’s biggest firms and hedge-fund advisers in a widening effort to crack down on suspected manipulation of Lehman Brothers Holdings Inc. and Bear Stearns Cos. shares, said three people with knowledge of the matter.
The SEC is looking for evidence that Goldman Sachs played a part in fueling the speculation that Bear Stearns was screwed. If that speculation became fact and Goldman was shorting Bear, then Goldman would make a good amount of money. Short selling? A Journal blog explains:
First of all, what the heck is short-selling? A primer, for those curious: Short selling, the WSJ explains, is a legitimate trading strategy in which traders aim to profit from falling stock prices. In a short sale, a trader borrows stock and then sells it, in hopes it will later fall in price. If it does, the short seller then buys the stock in the open market at the lower price, returns what was borrowed, and pockets the difference. The SEC said Tuesday’s move aims to stop “unlawful manipulation through ‘naked’ short selling” — the practice of selling stock short without taking steps to borrow it.
The SEC’s decision to crack down on short sellers is nonsense. Short sellers are exposed to the same risk level as “long only” investors (and one could argue more since a stock can theoretically go to infinity, but cannot trade below zero). If Bear Sterns deserved to live past their $10 buyout from JPM, then Jimmy Cayne and other Bear big wigs would have started buying stock hand over fist when BSC plummeted down to $30 and below. They didn’t because there were serious liquidity problems resulting from foolish mortgage bets. They all knew how bad things really were. Stop blaming the short sellers.