My earlier post commenting on the strange sight of supposedly hard-core free-market types banning naked shorts prompted reactions that focused on the "naked" rather than the "short." This misses the point. Going naked in a short is a convenience. Typically, the short-seller has to have an account that can offset any possible losses on the transaction, even if she has not actually contracted to borrow the stock being shorted. A naked short is comparable to purchasing stock on the margin, with the dealer loaning the buyer much of the value of a stock purchase. Back in the stock bubble days, many of us urged Greenspan to raise margin requirements as a tool for reining in irrational exuberance. Greenspan rightly pointed out that most buyers could and would arrange other financing. However, the value in raising margin requirements would have been to have a clear statement from the Fed that it viewed the market as over-valued. (I would have actually preferred numerous clear statements from the Fed, backed up by charts and tables that explained to every moron millionaire exactly why the stock market was hugely over-valued.) In a similar vein, the restriction on naked shorts (for just 19 financial firms) is a statement by the SEC that it doesn't want to see the stock prices of these firms driven down further. Of course, the SEC's ability to assess the fundamental value of stocks is questionable, given that they have been caught by surprise at almost every point in this crisis. Anyhow, in terms of the winners and losers from this government intervention, count any of the folks who were long in these companies as big winners. Their shares all rallied big-time in response to the SEC's intervention. This list presumably includes most of the top management who likely have shares or options that can now be cashed in at a considerably higher price. The big losers were the folks who had short commitments that may now have to be honored at a price that leads to substantial losses. If the shares in these companies subsequently fall back to the levels that were at prior to the restrictions, then the SEC will have effectively redistributed a huge amount of money from the shorters (who correctly assessed the value of these companies) to shareholders who were clueless. This handout from the SEC can be real money. For example, Vikram Pandit, the current CEO of Citigroup was reported by the Wall Street Journal to be holding more than 1 million shares of the company as of January 1, 2008. If he still holds over a million shares, then the 5 point rise in Citi's share price following the SEC's action effectively handed Mr. Pandit more than $5 million. That's about 1000 times as much as the average annual TANF check, and Mr. Pandit didn't even have to meet a work requirement. That's welfare as we know it now.
--Dean Baker
