Why was so much power given to short sellers?

It has been a while since I last posted. The economic course of events has become so complex, I simply could not keep up! There are so many unanswered questions. Why was so much power given to short sellers? How did so many market manipulators go "unnoticed" for so long? Have we learned from past history?

Here are a few of things that crossed my path tonight:

Manipulation, Short-Selling, Uptics, and Chris Cox:

Stan Yee's post on the Mad Cap Recap (Jim Cramer's Mad Money blog), discusses Cramer's dislike of the US SEC Chairman Chris Cox and his policies that "gave huge power to short-sellers -- power enough to "manipulate stocks down legally through multiple different means."

Yee goes on to say that Cox's worst decision was to eliminate the "uptick rule", a policy put in place during the 1930's to ensure that another great crash would never occur. Accoring to the post, the uptick rule "required short-sellers to wait until a buy could be found to pay an uptick, meaning a higher price, before they could short a stock."


A Brief History of Short Selling

"The first rule of investing: buy low and sell high. If you haven't actually bought anything, get someone to lend it to you first, then sell it high and buy it back once the price has dropped. That's the first rule of short-selling — sell high, buy back low, and pocket the difference — and it's a trick that has been hastening market crashes for at least 400 years." - Claire Suddath, TIME Business and Tech

TIME Covers Wall Street:
A look at some of the magazine's best cover stories on the US economy:

Bankers vs. Panic (11/4/1929)
Business in 1954 (1/10/1955)
Wall Street Bull (1958)
One Hectic Week (6/1/1962)
The Great Mogul (Article about John Kenneth Galbraith) (2/16/1968)
The Rising Risk of Recession (Article about Economist Milton Friedman) (12/19/69)
The Showdown Fight Over Inflation (Article about George Shultz and Arthur Burns)(8/16/1971)
Is the US Going Broke? (1972)
Wall Street's Super Streak (9/6/82)
Predator's Fall: The Collapse of Drexel Burnham (1990)

• "Like the abrupt fall of the Berlin Wall thousands of miles away, the collapse suddenly confirmed what everyone in the financial world could already feel in the wind: a new era had arrived."

Attack of the Data Miners (Derivatives) (4/11/1994)

• "Wall Street's new products are so complicated and interdependent that only the advanced number crunching of the quants can untangle the risks involved; without it, the market crushes you."

• "There is an almost prayerful communion with the computer. They're intense and operate to a rhythm. If you ask them a question, they turn and their eyes are glazed, coming out of whatever cyberspace they are in." In this trance, he says, "they're not really in a world of other people. They think they're in a world of pure technical manipulation, like a chemist creating a molecule. It's as though there are no social consequences."

The Three Marketeers (Rubin, Greenspan & Summers) (2/15/1999)

• "...a hedge fund blessed with two Nobel prizewinners blew up in an afternoon, nearly taking Wall Street with it."

Zap! Looking Beyond the Bear (3/26/2001)

• "Vaporized stock-market wealth is at $4 trillion and counting. The losses have engendered one of the fastest economic decelerations ever--from an annual growth rate last spring of 6% to near zero today."

Unemployment and Presidential Elections 1980-2008, via Visualizing Economics, with link to Bureau of Labor Statistics Interactive Map

Via Visualizing Economics

Bureau of Labor Statistics Interactive Map




Thanks to Catherine Mulbrandon for the screenshot and link!

Related:

The U.S. Bureau of Labor Statistics website contains a wealth of information, including interactive graphics. There are "at a glance" tables, databases & tables, maps, calculators related to inflation, location quotient, injury and illness, an area where you can create customized maps, and more.

It even has an interactive career information section for kids.


Note: Click the above picture to get to the next screen. From there, if you click on the text bubbles, you will be linked directly to additional information and resources about the specific areas of employment.

Mike Gasior: Long on one, short on the other..hedge funds, credit default swaps, and a discussion about "Rubber Band & Chewing Gum Economics"

As I trolled the web looking for financial and economic tidbits, I came across a series of video clips by Mike Gasior, via American Financial Services. It is interesting to go back a couple years in time and learn a bit about hedge funds, credit default swaps, and so forth.

I don't know Mike Gasior, or how trustworthy his information is, but it is worth taking some time to listen to what he has to say. He certainly is passionate about his topics!

November 2005 Commentary: Futures and Forwards


What are futures and forward contracts? A forward is going long - agreeing for the price of something now, for the delivery of something later. The person who sold it to you, is going short Forward contracts sell over the counter. Futures are exchange traded forward contracts. Watch the video for further clarification...

January 2006: Introduction to Mortgage Backed Securities



"They take the loans and mortgages and securitize them, the act of making these people's mortgages into a mortgage-backed security." Pass-through securities.. references the fact that ... long ago, the mortgage is sold to a pool. The bank services the mortgage... they take the home owner's loan and pass it through.. ultimately the payment lands in the hands of the owner of the mortgage-backed security."


Here is Mike Gasior's video clip about credit default swaps, May 2006:



I'm still a bit confused about this... paying for protection, paying others to take a risk...

Mike Gasior's December 2006 discussion about hedge funds sheds some light on this topic:

Introduction to Hedge Funds

"The name is a misnomer...Hedge funds typically use derivatives for speculation. And now, there is a million different strategies pursued by hedge fund managers...And they are investing some of the wildest things on Earth."

Regarding hedge fund managers: "They will do anything, anything they have to do, to get it into that profitable situation...On an average day now, 30-35% of the trading on the NY Stock Exchange is hedge-fund related... It is an enormous segment of the business."


It is now November 2008. It is interesting to watch Mike Gasior's January 26 2008 Video -- and his "Rubber Band & Chewing Gum Economics", broadcast in May 2008. These video discussions weren't Gasior's usual upbeat illuminations about financial nuts and bolts. It was his commentary about the dynamics related to the financial crisis and the dynamics of the U.S. government's involvement in the process.





January 2008: "Fed Up"

From the January video: "Everything, everything that's being done by the Federal Reserve and the US Government about this crisis is wong, dead wrong. I have been around this stuff, I've been around the markets for the past 26-27 years...nothing makes sense anymore. We have a large problem. And everything being done to take care of the problem is wrong.... In the last 7-10 years, far too many people were lent money. Homeowners, corporations, people who never should have been lent the money. And now we will have to deal with that."

....Of all things, a tax rebate? I could just vomit at the thought of it..... This 150 billion tax rebate is gross stupidity..."

May 2008:


"In a capitalist economy, things go up and down... the cycles of life....All of this debt the US government going into to fund these bailouts, to fund these tax rebates. We run a very dangerous risk of there being a loss of confidence, a loss of faith with the US government, in investing in in the United States..."

Related:

Credit Default Swaps: The Next Crisis?
(Janet Morrissey, 3/17/08 Time Business and Tech)
"As Bear Stearns careened toward its eventual fire sale to JPMorgan Chase last weekend, the cost of protecting its debt, through an instrument called a credit default swap, began to rise rapidly as investors feared that Bear would not be good for the money it promised on its bonds. Not familiar with credit default swaps? Well, we didn't know much about collateralized debt obligations (CDOs) either — until they began to undermine the economy."