Wednesday, March 3, 2010

Of shorting, naked and otherwise

“You mean just like those wonderful "CDOs" that Goldman (and others) created that were in fact fully synthetic instruments and which came into being ONLY because someone wanted to SHORT your house?” Karl Denninger

Shorting (from Wikipedia):

“In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as he will pay less to buy the assets than he received on selling them”

Ellen Brown discusses naked short selling – short selling's ugly sister – in her very informative and eye-opening book “Web of Debt”, relating the following story, which she trawled from the SEC's online archives. In 2005 a gentlemen by the name of Robert Simpson purchased all remaining 1,000,000 shares of a small company and put them in the proverbial sock drawer at home. He watched in astonishment as the self-same shares traded 60 times each over the next 2 days. 60,000,000 transactions of those shares he had about his person, so to speak. To quote Brown:

“The incident substantiated allegations that a staggering number of “phantom” shares are being traded around by brokers in naked short sales.”

While in shorting there is at least the sense of borrowing in the transaction, there is something distastefully opportunistic about it, and done in great mass can shift the market down. Naked short selling is still more nefarious, with trades of shares the broker neither owns nor has use of taking place. But the legality, criminality, immorality or otherwise of such actions is, to me, of secondary importance to the obvious weighty blow such trades and market activities deal to the cherished idea of the perfect market, and to the idea that unregulated and unrestricted buying and selling, via the mythical “invisible hand,” ends up benefiting everyone, young and old, rich and poor, black and white. That tired old argument of market efficiency, trotted out by free marketeers of every stripe in a bewildering variety of forms, is not only fallacious on the face of it, it is also destroyed by the very greed which is supposed to lead to such benign efficiency.

The perfect market, only possible when every participant is perfectly rational and informed, cannot exist. The speed, complexity and enormity of market activity today makes perfectly informed market participants even more of a laughable idea than it was in days of yore. Add to that the skill and power of advertising, the increasing division of labour and automation that makes it almost impossible to judge knowledgeably the actual value (all definitions of value aside for the moment) of things like iPods and laptops, and you have an even greater gap between theoretical and actual. Consumers and buyers are adrift on a sea of shimmering manipulations while, in the background, price, value, wealth, and ultimately social integrity are the play things of the sociopathically greedy in pursuit of ever more power.

Ideally the perfect market prevents the formation of monopolistic power, which distorts the proper (or wished for) functioning of that market. Since there can be no such thing as a perfect market, we have monopolies. We always have, and always will. Unless, that is, we transcend money and its now overwhelmingly negative effects, by rendering it an unnecessary tool via abundance.

Even Adam Smith, father of The Invisible Hand, though he had no idea of the state we would be in today, nor of alternatives such as a resource-based economy, knew well the importance of human wisdom over 200 years ago:

“The violence and injustice of the rulers of mankind is an ancient evil, for which, I am afraid, the nature of human affairs can scarce admit of a remedy: but the mean rapacity, the monopolizing spirit, of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind, though it cannot, perhaps, be corrected, may very easily be prevented from disturbing the tranquility of anybody but themselves.”

Smith's warm views on intervention aside, to my mind the regulation/deregulation debate is a distraction, as are others of its ilk (such as fiat or gold backed currency). We live in a mesh of assumptions and myths about money, value, labour, efficiency, scarcity and our very natures which is strangling us to death. Applying the study and research required to break out of this mesh, and then begin the hard work of forging a new paradigm, is an obligation we all share, if the better future we are technically so capable of is to be realized. That, or more of the same tending to worse, and very possibly to collapse. It's up to us.

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