Good Layman's guide to the financial crisis

[Dayuhan]

You can't destroy a company by naked short selling. This has been going on a long time, it's nothing new and it's not nearly as huge a deal as the rather breathless article cited makes it out to be. Short selling is a gamble; if the company loses value you make money, if it doesn't you have to cover your short and you can get whacked. Manipulating a company's value though rumour works with small illiquid companies with small floats; it's very hard to generate enough buy/sell action to move the price of a large company, especially one with major institutional ownership. The 1.7 mil short referred to is not a major deal by Wall Street standards and nowhere nearly enough to have an impact on Companies this size. The short sellers made money because the Companies were in trouble, but the Companies weren't in trouble because of the short sellers. They were in trouble because of their own bad decisions.

If you see a Company that's in major trouble hit with a barrage of short selling, it can mean there's an insider trade involved: maybe inside the Company, or its accounting firm, or in the industry... these secrets don't stay secret. It can also just mean that someone saw it coming a little before the rest.

I don't personally think much of Tabibi's stuff; he's an axe-grinding ideologue and his articles are so full of holes that I couldn't even begin (and wouldn't even bother) to start pointing them out. Rolling Stone can be entertaining but I wouldn't call it a terribly enlightening source for financial commentary.

One thing that fascinates me about this entire economic cycle (and alas, I do know something about it) is the ease with which the whole "greedy Wall Street sank the economy" narrative has been sold to the public. Not that Wall Street had no responsibility, but the political class has used that narrative to very effectively sidestep any kind of accountability for the enormous role that administrations of both parties played in the evolution of the crisis... and the main street investment community should be taking a fair bit of responsibility as well.

Scapegoats are as useful as ever...

Schmed, some of that stuff is probably legal, enforcement is also a joke.

I have been told the hedge funds and other miscreants doing these manipulations have a dedicated fax line to their people at the cable financial new channels to spread these rumors. Email records can be subpoenaed but there is no record of the content of a fax.

You are right; a lot of this stuff is from the pump-and-dump schemes of the 1990’s. In a pump and dump manipulation however the company is usually BS and the owners are in on it. In a naked short selling manipulation the owners do not have to be in on it, and the company can be promising and in good health. The company can be destroyed for profit, or the stock manipulated for hostile a take over.

Naked short selling reared its ugly head in microcap markets in the 90’s. The penny stock shenanigans of the 1990’s evolved into the tactics that would ultimately take down Bear Sterns and Lehman brothers.