Saturday, November 22, 2008

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."

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