Haven't agreed w/Schmedlap much lately, but I agree on this one. Short sellers did not cost me my job - Richard Fuld and his subordinates did that.

Evidently the market did not buy that the CMBX index was worthless. At the least, it does not appear to be any less worthless than other measures of MBS value.

A good counterfactual from Buttonwood at the Economist: Why is naked shorting so bad, when going naked long never draws any approbation? Who's worse, a hedge fund manager shorting Lehman in the wake of massive losses, or the house flipper and mortgage broker doing all they can to inflate asset prices beyond all expectations? Who is more to blame for the current crisis?

A cautionary tale from the future

FINANCIAL authorities in America and Europe took sweeping powers yesterday to avert a financial crisis by imposing restrictions on markets. In their sights are a peculiar brand of speculators known as “long-buyers” who buy assets not to live off the income they generate but to profit from rising prices.


“Some of these people buy homes that they have no intention of living in,” said Lord Poohbah, chairman of Britain’s Financial Services Authority, “and others buy shares they plan to own for just days or weeks, rather than the prudent time period of several years.” Their actions force prices up above fundamental valuation levels, critics say, causing some British tabloid newspapers to call leading fund managers “greedy pigs”.


Particular criticism has been reserved for people dubbed “naked long-buyers”, those who try to buy homes without putting up a deposit. “Such people are in effect renters with a free call option on rising house prices,” said one financial analyst, “but they expect to be bailed out by taxpayers when house prices fall.”


Not only is this a clear case of moral hazard (the encouragement of irresponsible risk-taking) but their activities drive up house prices, putting them beyond the reach of hard-working families who have diligently saved up to put down a deposit. Also in the speculative category are “buy-to-letters” who buy a string of houses with borrowed money in the hope of making outsize gains.


....


Industry analysts said that some of the damage done by long-buyers might have been prevented had a now defunct practice called “short-selling” been permitted. By speculating on falling prices, short-sellers could in theory prevent bubbles from being formed. However, their scope to trade was always limited by regulations and the tactic was killed off during the crisis year of 2008. “It drove us out of business,” recalled George Soros, a former hedge-fund manager, speaking in Central Park yesterday, before adding, “Do you want some ketchup with that?”


Before that crisis, the standard rubric on financial products said “Warning: share prices may go down as well as up.” Afterwards, the clause “but not if the authorities have anything to do with it” was added at the end. The result was the decade-long boom in house and share prices that prompted the authorities to step in yesterday.


Asked if he was blaming speculators for the inadequacy of American monetary policy, the treasury secretary abruptly ended the news conference.