When you hear the group of conspiracy theorists that Gary Weiss so aptly named "The Baloney Brigade" talking about naked short selling, you get the idea that unscrupulous short sellers are driving down the prices of some stocks far below the price they would fetch in a fair market.

A fair accusation perhaps: but where are the buyouts? In the decade or so since naked short selling became the red herring for underperformance, we’ve seen dozens of companies complain loudly about market manipulation: from penny stock pump and dump Universal Express to subprime blowup Novastar Financial, to the perpetual money losing but still solvent Overstock.com OSTK).

Here’s what I don’t understand: if markets are reasonably efficient when they aren’t being manipulated, which most people would agree is true, then surely widespread naked short selling would drive stocks down below their intrinsic values. If it didn’t, what would be the problem? And if it does, then why aren’t we seeing purported naked short selling targets popping up as buyout targets.

Even highly-respected investors like Marty Whitman have accused short sellers of conducting a "bear raid" on companies like MBIA (MBI) and Ambac (ABK): MBIA has gone from $68 to $5 per share in the past year, with nary a rumor of a private equity, sovereign wealth, or strategic buyer being interested. Given that, it seems likely that the stock was wildly overvalued at $68, and investors have the short-sellers to thank for bringing them back into line.

The ability of companies to make bids for public companies should place a floor on the ability of market manipulators to drive down stocks: beat it up enough and it’ll get bought out at a premium. The fact that that almost never happens indicates that the whole naked short selling scandal is a farce. But we already knew that.

Zac Bissonnette

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