Fri, 19 May 2006

Naked Shorts

I was forwarded this email:

Date: Wed, 17 May 2006 22:43:49 EDT
To: undisclosed-recipients: ;
Subject: If you invest in stocks, listen to this...from Bobby K.

Turn up your volume and set aside about 10 minutes to listen to this. Theres
a crack in the system whereby people can create bullshit shares of stock and
sell it, where in essense creating more shares than there should be and driving
a companies stock down and eventually destroying the company. Ive known about
this for awhile and so have politicians, however, if they tried to fix it,
the entire financial system of the U.S. would collapse.

Ive always said that the stock market crash we saw in 2000 that wiped out
alot of people would be a walk in the park compared to the next one that will
happen. I think within the next 1-3 years the topic of these bullshit "phantom"
shares will be the big one that will be the biggest hit the stock market has
ever seen. Dont paic, just be careful. The stock market is done. The crooks have
made billions in the last 60 years in the stock market and i think the shit
will hit the fan soon. Listen...

I wrote the following response before listening to the audio. I should have guessed that it was the Overstock dude.

The CEO of bitches about naked shorts a lot.  Read  Mark Cuban talks
about it on his blog sometimes too.  There was also a 60 minutes story
about it, but it wasn't very good as Leslie Stahl is about as
financially literate as a chihuahua.

While it's fraudulent to sell something that doesn't exist, the
purchaser of a share of stock is the one who would have a complaint if
he were unable to take delivery of said share.

The CEOs who bitch about it are the ones whose compensation is in the
form of stock options.  If they were speaking on behalf of the company,
they should be delighted that people are driving down the stock price.
The company can buy back its shares cheaply enriching the existing

Imagine a company that sells 1,000,000 shares at $10/share during an
IPO.  If short sellers drive down the stock to $1/share, and the company
can buy back all of its shares, it makes $9,000,000 without giving up
any equity (neglecting underwriting fees and the upward movement of the
stock price as the company starts to buy back a lot of shares).

Likewise, if you're a shareholder, and you think the stock is
undervalued at $1, you can buy more stock and wait for the profits to
come rolling in.

If your company isn't making any money, and you expect to make money on
the stock, well, too bad.


business | Permanent Link

The state is that great fiction by which everyone tries to live at the expense of everyone else. - Frederic Bastiat