'Naked Shorting' Crackdown Exposed as Another Failed Effort to Prop Up Stocks
by Aaron Task
If the effort was primarily aimed to stem declines in Morgan Stanley and Goldman Sachs, as was widely reported, the new SEC rules to prevent "naked shorting" are shaping up to be a miserable failure. (Which may explain John McCain's calls for SEC Chairman Cox to be fired.)
After rallying Thursday morning, when the new restrictions went into effect, Morgan and Goldman shares slumped midday in concert with the broader market.
The new rules against naked shorting -- the already illegal practice of betting against a stock without a contract to borrow the shares -- will "change the structural DNA" of the capital markets, says Todd Harrison, CEO of Minyanville.com, who has no positions (long or short) in Goldman or Morgan.
But forcing hedge funds to focus more on compliance vs. trading will not solve the ongoing crisis, says Harrison, a former trader at hedge funds Galleon Group and Cramer Berkowitz.
The government is "playing a game of chicken with the underlying imbalances" created by the various and sundry efforts to keep the economy afloat after the bursting of the tech bubble and 9/11, he says. The current turmoul is a "natural and overdue" downside from those efforts and the government's efforts, no matter how well intended, can't prevent it from occurring, Harrison says. "Only time and price" can solve what's ailing the financial markets.
