Wednesday, July 23, 2008

Debunking the SEC's Fear Mongering on Naked Short Selling

Media coverage of SEC chairman Chris Cox's "naked short selling" publicity stunt has suffered from the usual shortcomings of SEC coverage: naiveté, credulousness, and a tendency to accept pronouncements from our toothless watchdogs at face value. Nothing really terrible, just mediocrity and lack of skepticism.

There have been, however, some reassuring exceptions over the past couple of days.

In a commentary today, Jonathan Weil of Bloomberg expertly dissects Cox's emergency order for the fear-mongering fraud that it is:

"Forget naked short sellers. The fellow who isn't wearing any clothes is Securities and Exchange Commission Chairman Christopher Cox," he said.

Weil notes that Cox's order is filled with contradictions and only serves to "deflect public attention from the government's own failures in the subprime-mortgage debacle." In an op-ed piece, Cox spoke of "distort and short" schemes while at the same time saying that the 19 stocks affected by his order have not actually been hit by naked shorting.

In other words: Boo! The SEC has presented no facts suggesting that anything like this has happened at these 19 companies, or at any other major financial firm. Meanwhile, the SEC is spreading unsubstantiated rumors that gangs of undressed, short-selling bogeymen might conspire to hurt the investing public, if left unchecked.

This isn't inspiring confidence. It's fear-mongering.
Holman Jenkins made a similar point in the Wall Street Journal today, also noting the vacuousness of Cox's action. Naked shorting, he said, involves "technical concerns -- unless you imagine that naked shorts just take the money and run and never deliver any shares at all, flooding the brokerage accounts of innocent investors with 'phantom' shares.'"
That devil theory, popular among a few conspiratorialists, was not endorsed by Chris Cox, the SEC chief who enacted this week's new rules saying that naked short selling, which was already a violation, is now . . . a violation. Instead, what we have here is an exercise in symbolic confidence-building.
As I previously noted, Joe Nocera was first on the case, and in a recent CNBC appearance set out the issues clearly: "The technical term for that [Cox's emergency order], it's 'a joke.' It's an attempt to show that they're doing something without actually doing anything."

Charlie Gasparino, in the same appearance and elsewhere, has taken the lead in denouncing the fatuous theory, being pushed by respectable commentators as well as the usual Patrick Byrne nutjobs, that CNBC was responsible for bringing down Bear Stearns.

I'm still waiting for someone to quote Cox's comment in December 1989 at a hearing on short selling abuses. It was reported in Barron's at the time, and I quoted it in Wall Street Versus America. After hearing the sorry pedigree of the CEOs blaming their misfortunes on shorting. Cox said, "Is this subcommittee being snowed?"

Today, in his desperate effort to divert attention from the SEC's crummy record in the housing crisis, Cox is the snow-er, not the snow-ee. It's time for the financial press to show a bit more historical depth and initiative in reporting the SEC's abysmal handling of this issue.

© 2008 Gary Weiss. All rights reserved.

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