There are two compelling arguments against suspending short selling completely, even if it is for only a brief period. The first is that a free market allows investors to make money by betting that stocks will go down. Why should the bulls be allowed to make all of the profits unchecked by those willing to take the other side of the gamble?
The second argument is that a hiatus on short selling could cost shorts billions of dollars as investors see stocks rise after putting good money into the proposition that they will fall.
The government has not had a problem with ending or temporarily amending a number of rules in the hope that it can save the financial system.
The SEC has already said that naked short selling will be ferreted out and punished. It makes no mention of the fact that naked shorting has always been illegal. What was bad before is still bad. Repeating the admonition does not make a difference.
Earlier this year, the SEC was willing to curtail short activity in some financial stocks for a period of time.
John Mack, who has had the good fortune of running almost every company on Wall St., said from his office at Morgan Stanley (MS) that panic and rumors from short sellers where driving his stock down. It was clearly a self-serving statement, but that does not make it any less less true.
A number of regulators and financial executives believe that rumors from short sellers helped bring down Lehman Brothers (LEH) and damage the share price of AIG (AIG).
The federal government has already made the decision to go beyond anything it has done in 80 years to insure that the US financial system does not dissolve into a miasma. Some traders believe that the actions are draconian and perhaps illegal. But, the body that makes the laws would argue that it cannot break them.
If the SEC, the Fed, and Treasury want to act in concert to arrest the attacks on the shares of financial companies, they can suspend short selling for a predetermined period. Investors can still sell the stocks, but they cannot bet ahead that they will go down.
If the government is going to effectively seize control of certain free market systems, it might as well go all the way.
Douglas A. McIntyre
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