Chanos Dislikes New SEC Short Selling Rules

Chanos’s statement reads:

“Rebuilding investor confidence should be the primary objective of any new regulatory effort and it is not clear that today’s proposals will meet that simple goal. Skeptics, independent research and critical analysis must continue to play a vibrant role for our markets to grow sustainably and with integrity. Short selling is integral to improving the efficiency of markets and enhancing market quality through narrower spreads, deeper liquidity, less volatility, and greater price discovery. In recent years, short-sellers have publicly warned the marketplace about the dangers at AIG, Lehman Brothers, and Enron, as well as sounding the alarm over the credit ratings agencies, non-bank subprime lenders, and credit insurers. Proposals to inhibit short-selling have the effect of limiting this vital market-based antidote to corporate fraud and speculative bubbles, and must be carefully weighed against the clear harm that comes from ill-conceived government intervention in basic market functions.”

How frustrating to have to agree with this jagoff. Jim Chanos is an unethical piece of crap, but the last thing we need is more government intervention in the markets. Shorting is ethical when an investor believes a company is weaker than it appears. He makes money when the stock declines. But Chanos and a few others like him don’t necessarily ascribe that definition. Chanos attacks the shit out of a stock with reports through surrogates, including Bethany McLean, to create the impression of weakness in the general public, then spreads malicious rumors through the financial system, spooking institutional investors. Then, after he’s ripped the stock to shreds, he stands back and collects billions.

So he’s right – investors should be permitted to go short on a stock without government intervention. On this one point, I will stand with Jim Chanos and say to the gov, “Step off bitch.”

Congress Doing More Harm Than Good, Says Former SEC Attorney

Bruce Hiler, a former SEC lawyer who has defended Jeff Skilling, shares his thoughts on short selling and the bailout. I found it interesting and thought you might too.

Jim Chanos: Short Sellers Keep Market Honest

Jim Chanos has written an opinion piece in the WSJextolling the virtues of the short seller. He points out something I thought interesting:

Short sellers openly warned about the problems at Enron, Tyco, Fannie Mae and Freddie Mac before their meltdowns. And when it comes to investigating corporate fraud, it’s the short sellers who are the detectives, while all too often our regulators practice archaeology. Indeed, my firm was among the first to raise red flags about Enron’s finances.

True…sort of. Chanos invented the problem then asked several economy journalists to find proof to support it. But I find it ridiculous that he says “when it comes to investigating corporate fraud, it’s the short sellers who are the detectives.”

What Jim Chanos and other short sellers do is ferret out opportunities to make money on company’s decline, and that is not synonymous with crime. A company need not be fraudulent in order to have an overvalued stock, or a stock that is about to take a hit for some reason (pharmaceutical companies spring to mind here; when a company’s drug isn’t going to be approved by the FDA, stock tanks). Chanos is very good at what he does, but its disingenuous to claim he’s doing something noble here, or discovering bad apples.

Particularly poingnent is this comment:

I believe the SEC has every right to obtain and review information about short positions for market surveillance purposes, but forcing public disclosure will have serious consequences for the market. Companies may retaliate against short sellers. Fund managers will lose their ability to manage assets without revealing their strategy. Other traders will “pile on,” and may trigger panicky selling if an investor sees that noted short sellers have shorted the stock.

Gee James, you sound a bit concerned that a company’s well-being might be compromised. Oh wait… if your scenario played out and other shorts shorted the stock, that would mean that you would have a harder time selling, and thus you’d make a smaller profit.

The whole article is interesting, if you can keep it down.

The Dumbest, Most Unintentionally Funny Explanation of Short-Selling, Ever

Dealbreaker has it, but I’ll give you some spoilers:

*It involves your ex girlfriend.
*It involves a party.
*It involves finding your clothes *behind the fridge*.

In my opinion, any time you have to drive that far for an analogy, something is very wrong with the analogy or your thinking. In this instance, I think it’s a little from Column A and a little from Column B.

Update

The explanation actually begins with the sentence: Most people understand that shorting something means you’ll make money if it goes down. I actually thought he was going for the better, dirtier analogy – but unfortunately he was not.

The Long and Short of Short Selling

Economist has a typically comprehensive article about short sellers. Naturally, Jim Chanos is quoted defending his profession.

A fun fact in the article: in 1995 Malaysia’s finance ministry reportedly proposed caning as a punishment for abusive shorting.

Awesome.

Chanos To Financial Media: Quit Making Stuff Up

Oooh this is rich.

Now Chanos is taking aim at another train wreck: the financial media. In a speech yesterday, Chanos trashed the broadcast and on-line media for breathlessly reporting rumor as legitimate news and called for more regulatory investigations into whose who feed the gullible or nefarious media rabble.

Jim Chanos is pleading with the online and broadcast media for making crap up? Like, oh, say the summer of 2001, when he set off a flurry of unfounded rumours about a certain energy giant headquartered in Houston, Texas?

Also, we should assume he doesn’t include Bethany McLean in this horror show of hypocrisy since he’s working in tandem with Bethany McLean to destroy an Australian bank.

Chanos cited recent travails at a well-known New York investment bank that’s still around (yes, that one) that was the subject of repeated unsourced reports on a certain well-known business television channel (guess). The reports hammered the bank’s share price.

Chanos said he happened to be on his firm’s trading desk on that particular day, right in the thick of trader-land, where rumors are as rife as market positions.

“I run the world’s largest short-selling fund,” Chanos told the SIFMA conference. “We hear everything. That day we didn’t hear any rumors (about the bank).”

“Some of our financial journalists are MAKING the news,” said Chanos. “And blogs are saying things and reporters are reporting it as news.”

Whatever could he mean by this? [Note to self: cancel next year’s attendance at the Bears In Hibernation meeting.]

Chanos is calling for more government investigations into where journalists are getting phony tips that they foist on the market as news. “There are IM messages, email records, taped phone calls. This is not hard. Inspector Clouseau could do it.”

Hm. Chanos was friends with Spitzer; they shared Spitzer’s little prostitute – so I must assume that by “government” he means “prosecutors who will attack the companies I am shorting and therefore make me more billions of dollars. Like Spitzer.”

“A lot of this is just being manufactured to sell stories and get ratings.”

I am sick of this allegation. Not just for me [I have never been accused of manufacturing stories] but for blogs in general. There is simply no way to make up something and then have it broadcast as news. There are too many fact-checkers. Even friendly ones. If I reported something exciting, I’m sure the other right wing/ financial blogs would look into it, and either verify it or not. This allegation is one reason I always put the source link in my news posts; that way readers can see exactly where I’m getting my information. This “no editorial control” argument is silly and unfounded.  Paul Berliner, for instance, was a Wall Street trader, charged with securities fraud and market manipulation for intentionally spreading false rumours about The Blackstone Group’s acquisition of Alliance Data Systems (ADS) while selling ADS short. He spread his rumours via Instant Message – not blogs. Paul Berliner is the last rumour-monger I’ve heard about – so if there is a blogger out there manipulating markets, I don’t know about it.

I think Chanos’s complaint is not really directed at bloggers anyway; it’s a way for him to scare off the shorting competition.  He knows that bloggers will report this and see him advocating government involvement, and information will constrict, thereby giving Chanos and his short seller cronies another advantage. 

But Chanos actually is at a disadvantage when it comes to using the internet. Based on his comments, it’s clear he doesn’t really understand the internet and the fact that the great thing about it is that we can double-check each other.  We can check the mainstream media, then we can pick up the phones and call the sources ourselves to verify.   There’s really no such thing as a rumour on the blogs because as soon as somebody puts out something questionable, a thousand people jump on it and either debunk or verify.  And if its verified, it goes viral.  Beautiful.

Shortseller Charged With Spreading False Rumors

The SEC charged Paul Berliner, a short-seller, with spreading false stories about Blackstone’s acquisition of Alliance Data Systems while selling ADS shares short, according to Financial Times.

According to the complaint, Mr Berliner on November 29 sent instant messages to traders at brokerage firms and hedge funds and elsewhere suggesting that Blackstone’s agreed deal to acquire ADS for $81.75 was being renegotiated at $70 a share. The rumours were picked up by the media and caused ADS’s shares to fall 17 per cent, according to the complaint, which did not identify the media outlets.

The case comes as the SEC faces growing pressure to investigate allegations that false rumours about Bear Stearns may have had contributed to its collapse last month.

Perhaps this new scrutiny comes too late for Enron – but maybe not for Jeff Skilling. If the dirty acts of these short sellers comes to light and are accepted for the crimes that they are, it might be possible to take a new look at the activities of the Wall Street Journal, Jim Chanos, Richard Grubman, and others who consistently talked down Enron stock during the summer of 2001. If the general opinion changes to allow the possibility Dr. Lay was correct when he accused the WSJ of being malicious with their stories, it might not be too late for Jeff Skilling to win his freedom.

Stories like this will continue. It’s just a matter of the public being willing to see the truth when it’s right in front of their faces.