Also known as: “Would a short-selling ban have saved Lehman?”
The outspoken hedgie David Einhorn would have made a killing from his bets against Lehman Bros this summer. He first announced his position in April, when Lehman’s share price was at about $40, saying he had questions about the company’s balance sheet. Lehman stock is now under $4 — giving Einhorn’s Greenlight Capital a 90 per cent return according to some estimates.
Could the role of short-sellers like Einhorn give fresh fodder to the push for a ban on certain forms of short-selling then?
The New York Times reports:
At emergency meetings over the weekend, the heads of major financial institutions urged Timothy F. Geithner, the president of the New York Fed, and Treasury Secretary Henry M. Paulson Jr., to consider having the Securities and Exchange Commission reinstate a temporary rule to limit the risky but potentially lucrative practice of betting on a firm’s falling share price, according to two people who were briefed on, but did not attend, the meetings.
They are concerned that short sellers might fix their gaze on other big financial institutions. But Wall Street may be breathing easier after one company frequently mentioned, Merrill Lynch, began advanced talks on Sunday to sell itself, and another, the insurance giant American International Group, moved toward a restructuring in an effort to strengthen its financial position.
Following Bear Stearns’ collapse, the SEC temporarily banned naked short-selling of shares in Fannie, Freddie and 17 investment banks, including Lehman Bros. Though some studies found the ban had little effect, a basic graph shows the shares reacting like this:
There’ve been rumblings from the SEC about a permanent change short-selling rules since. The IHT, in a longer version of the NYT article, quotes Jim Hardesty, of Hardesty Capital Management, demanding a return of the uptick rule requiring every short sale of a stock to be sold at a price greater than the last sale.
It’s cheaper than all-out bailouts of undercapitalised banks and mortgage lenders, that’s for sure. But an even simpler solution comes from the ever-optimistic Richard Bove of Ladenburg Thalmann:
‘Eventually,’ Bove said, ‘[short sellers] are going to hit a company that is too well-grounded and too well-capitalized. You can run a game until you reach an endpoint, and the endpoint in this case will be a company they can’t break.’
The question is, will there be a bank strong enough to withstand negative sentiment and rumour at the moment? With weakness rippling through the financial sector, it seems short-sellers have a plethora of financial institutions to choose from. Indeed, Collins Stewart is recommending shorting Barclays this morning, on the back of Lehman filing for bankruptcy.
Further reading:
Thou shalt deny me thrice before the cox crows – FT Alphaville
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