Securities and Exchange Commission Chairman Christopher Cox, who earlier this summer called most short sellers "healthy and necessary," today temporarily banned short selling in 799 U.S. financial stocks.
"The SEC is manipulating the markets with its restrictions, artificially propping up these companies," says Richard Gates, cofounder and portfolio manager at $450 million-asset TFS Capital and its TFS Market Neutral Fund in West Chester.
Short sellers borrow shares from other investors, sell them, and keep the difference when share prices fall, paying the lenders a small fee. It's a common practice -- especially when stocks are rising, Gates says. But shorts and the hedge funds who use them aren't the real problem, he added.
"It isn't the fault of short sellers that Morgan Stanley was over-leveraged," Gates says. "It isn't their fault that Golden West (now part of Wachovia) issued mortgages to people where the amount owed increases every month. And it isn't the faul of short sellers that AIG assumed home prices would rise forever," and insured them that way.
Gates doesn't blame the SEC for acting. "Their hand was forced" by events. "The situation is very dire. Paulson and Bernanke are doing what's in the best interest of the country... McCain and Obama, I don't think they fully grasp the problems in the market. (Senate president Harry) Reid (D-Nev.) said they don't know what to do, and I believe him."
But look who's getting saved. "It's ironic that Goldman and Morgan are getting the benefit of this unprecedented restriction. These companies based their existence on pure raw capitalism. Their proprietary trading desks shorted companies until they went to zero."
The investment banks borrowed heavily on overpriced loans and securities. "They should be punished. The market was punishing them." Instead, "the government is socializing the losses. To help the man on the street, they are subsidizing the millionaires who have come out of Goldman Sachs and Morgan Stanley the last few years. It's disgusting. It shouldn't sit well with anyone. But it's probably in the best interest of the world."