Economic Terrorism
On September 19, 2008, the SEC banned short sales in almost 800 financial stocks. The list is growing daily and is now pushing one thousand names.
For those of you unfamiliar, shorting a stock is when an investor sells a stock that they do not own with the intention of buying it in the future at a lower price. The basics of this strategy is you are expecting the price of the stock to go down, therefore selling it now at a higher price allows you to keep the difference when you buy it at the lower price. That is your profit. However, if the stock rises, a purchase at a higher price will leave you on the hook for the loss.
You also have to borrow the stock before selling it. Since someone on the other end of your transaction is buying, you need to have stock to deliver to them. Shorted stock with no borrow is called naked shorting.
A free market demands the ability to make money on both sides. So when the government banned shorting of particular stocks I was concerned that maybe it was an overreaction. I mean what's next, replacing all sell pads with buy pads?
But maybe it wasn't an overreaction. Maybe something else is going on behind the scenes we don't know about yet. Over the last few weeks, I've heard the term Economic Terrorism used with more frequency, specifically in relation to what eventually came to a head early afternoon Thursday, September 18. Then today I read this:
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Over the weekend, I discovered there might have been more to that decision than initially met the eye. There was chatter on the beltway that we may have been the victim of economic terrorism, a coordinated short raid that originated in London and Dubai. While the legitimacy of that remains to be seen, my source is well respected. Further, as the goals of terrorism are economic destruction and social upheaval, it makes intuitive sense. The stock market is the world's largest thermometer and breaking the capital market construct-as some would say they did last week-would effectively achieve both goals. |
Is it possible that terrorist could take advantage of our weakness? Systematically shorting financial stocks with intentions of creating panic, adding energy to a down market, and making money of their own. Possible.
Everyone remembers the stories of massive shorting of airline stocks prior to 9/11. The stories became popular enough to become a major plot element in the most recent Bond movie, Casino Royale.
The 9/11 commission has since concluded pre-9/11 trading activity to be a matter of coincidence, and if you read Alexander Rose's NRO piece from 2004, you can see that a broader market picture revealed a trend that made shorting airline stocks, among other securities, a sound strategy at the time.
I suppose I am guilty of looking for the outside villain, sinister forces planning our demise. It is much easier than blaming ourselves, but I'm not blaming our financial mess on terrorists, just considering that they're always looking to take advantage of our weaknesses and profit from our loss. It is win-win for them; we suffer and they make money. I'm curious to find out what more comes of his story.