Categorized | Articles, News and Politics

Economic Terrorism

Posted on 24 September 2008 by Ed Z

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
:

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.

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