bick2

Morgan Stanley: Exploding the Short-Seller Myth

There are a number of problems with the existing shorting structure -

Naked shorts can result in short positions that exceed the number of outstanding number of shares of the equity. There is no long equivalent to balance this, meaning that shorts have power to drive a stock down that is not balanced on the long side.

The disclosure requirements are different for shorting.

Regulators are behind the curve in their ability to enforce rules covering shorting.

Shorting can destroy a company; drive it into BK. Excessive long positions do not carry the death penalty.

And the big one, the real reason that shorts of financials are currently banned is that these companies are inter-connected. Company GS financially sound, but is connect to MS. MS is OK too, but is connected to L. L runs into some hubris, needs to raise capital but the shorties get there first. L goes into BK. This makes MS vulnerable, so the shorties take MS down. Now all that is left is GS. Investors are panicked and look to dump. GS is weakened by its relationships to other companies in the same industry. Shorties having nothing else to do feed on the panic.

At the end of the day GS goes under. MM funds are destabilized and drop under par. Main Street panics and starts $4 trillion run on MM funds. The dollar crashes. Great Depression II.

This inter-connectivity does not exist in other industries. If GM goes under TM is not dragged down with it.