'Blame the Shorts' Backfires

The Wall Street Journal today has an article on the legacy of the Lehman Brothers collapse, and a detail that underlines a point I've made several times: that scapegoating short-sellers is a sure way to accomplish absolutely nothing.

. . . a study by the [SEC's] Office of Economic Analysis concluded that it was "long sellers" -- investors who had bought stocks thinking they would go up -- who were selling the most during stock declines. Short sellers, the study said, became more active when stocks rose sharply.

Credit Suisse found the ban made stock pricing less efficient, which in turn can make buying or selling a stock more costly for investors. The firm's data showed the difference between prices at which banned stocks could be bought and sold, the bid and asked prices, doubled during the ban. After the ban was lifted and short selling slowly resumed, spreads fell back to about 65% above preprohibition levels the third week of October.

It will take some courage for the SEC to face down the political pressure to act against shorts--and courage is a commodity in short supply under SEC chairperson Mary Schapiro.

© 2009 Gary Weiss. All rights reserved.