Tune in to the Shorts

No more regulations. Just listen to the short sellers.

Would the ghastly global economic crisis been avoided had the regulators listened to the short sellers? Seems likely.

In July, Christopher Cox, chairman of the SEC announced a plan to curb improper (naked) short-selling to limit the activity of short-sellers. Mr Cox seems to be implicitly blaming the shorts for the unprecedented fall of bank, ­government-sponsored agency and brokerage stocks over the past year – even though they were the very group that warned of the dangerous credit cycle and its consequences.

Now for a little history on shorts. Perhaps the first case dates to 1609 when the Dutch trader, Isaac Le Maire, targeted the shares of the shipping company Vereenigde Oostindische Compagnie (the Dutch East India Company). VOC was the first multinational corporation in history and had broad powers. Nonetheless, Le Maire, concerned about threats of attack by English ships, sold VOC’s shares short. After learning about Le Maire’s tactics, the stock exchange governing VOC’s trading banned short-selling (although the ban was later revoked).

In the early 1630s, the Dutch economy fell into a depression following a speculative peak in the trading of tulips. Again, short-selling raised the ire of regulators, many of whom saw it as magnifying the effect on the Dutch economic downturn. As a result, England banned short-selling outright.

Hedge fund manager Douglas Kass thinks instead of more regulation, the chairman and investors should begin listening to what short-sellers have to say about our economy and credit markets.

What do you think?

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SEC follows reverse Robin Hood system?

David Einhorn has often asserted that because the ratings agencies are paid by the issuers, they have every incentive to rate credits in such a way to encourage more business for themselves. His solution to this problem, let users pay rating agencies.

Now he’s back asking - “weren’t ratings agencies on the job to police what was going on in the canyons of Lower Manhattan?”

Mr. Einhorn runs Greenlight Capital, a successful hedge fund. He also isn’t an infallible observer of human lapses and regulatory failures — he invested in and briefly served on the board of New Century, a subprime mortgage lender that later went bust amid accounting problems.

He smirks at the relaxation made by SEC in “Alternative Net Capital Requirements for Broker-Dealers that are part of Consolidated Supervised Entities” that significantly reduced the capital back up that had to underlie assets. After the recent collapse of Bear Stearns, he now calls it “Bear Stearns Future Insolvency Act of 2004” in retrospect.

Another of his favorite moniker referring to the Congress recommended a bail out of Bear Stearns partly by tax payer – “Private profits at socialized risk” or alternatively “reverse Robin Hood system”.

So very apt.