A higher-stakes battle lurks beneath the GameStop kerfuffle and the "Rocky"-like victory of the little guy outsmarting savvy hedge fund billionaires.
This could be the start of a war on short sellers ("shorts").
Here's why it's about time:
Capitalism is optimism monetized — we invest because we believe great things can happen. Short sellers are the destroyers of investing. They trade in destruction, pessimism, and cynical hopelessness. A few of them do a great job of unearthing corporate chicanery and accounting malfeasance. Too many of them are fear-mongers and rumor-slingers, and some are outright liars, shysters, and criminals.
They operate with impunity and beyond the ken of regulators, and they will stop at nothing to damage the reputations of the companies they attack.
They use the financial news media to help them do it, as I've seen in my 30 years as a journalist.
Quick definition: short selling entails borrowing shares of stock from a brokerage firm and selling them instantly to pocket the cash. Then you wait for the stock to plunge in price, and you buy newly cheap shares to replace the ones you borrowed earlier. Pocketing the profit.
There’s the catch: you now have great incentive to bash the company and send the stock tumbling down. In my experience, the short sellers’ tactics have included planting untrue rumors that a CEO was absconding with suitcases filled with cash; spreading false whispers that a company founder had been charged as a pedophile; paying other parties to publish negative reports on a company without disclosing it; raising specious questions about positive results of new drug trials; and filing anonymous, bogus complaints about a company to the SEC and then "tipping" reporters that the company is under investigation.
The shorts have always ganged up to attack a company.
The twist now is that day traders on Robinhood are ganging up to attack the shorts. Great!
By late last week (Friday, Jan. 29), hedge funds had lost $20 billion year-to-date by selling GameStop stock short. Plus another $40 billion in losses by shorting Tesla.
Yet they are paid rich fees because they are supposed to be so good at hedging risk. Go figure. Now they are being a bunch of crybabies about it, squealing for bailouts and trading halts.
The Robinhood renegades have a potent ally in Tesla founder Elon Musk, the world’s second-richest person (net worth: $167B). On Tuesday of last week, (Jan. 26), he was on Twitter tweeting "Gamestonk!" in support of the assault on the shorts.
Last Thursday (Jan. 28) Musk tweeted in agreement with Sen. Elizabeth Warren, D-Mass., calling for an investigation. He took aim at short sellers:
"Here comes shorty apologists
Give them no respect
And five minutes later, this:
"u can’t sell houses u don’t own
u can’t sell cars u don’t own
u *can* sell stock u don't’ own!?
This is bs – shorting is a scam
Legal only for vestigial reasons"
Musk has a point.
He has battled and bested the shorts for the past year and then some, taunting them at times.
Last year, he started selling pairs of red, silk short-shorts to celebrate Tesla and smite his adversaries; the backside is emblazoned with "S3XY," for the four models in the Tesla line (the Tesla S, the 3, the X, and the Y).
Musk is seconded by Larry Ellison of Oracle fame, who joined the Tesla board in December of 2018 and a month later bought a $1 billion stake in Tesla.
He noted that his friend Elon is "landing rockets on robot drone rafts in the ocean. And you’re saying he doesn’t know what he’s doing. Well, who else is landing rockets?"
Tesla stock was at $60 back then, and it’s near $800 a share now.
Ellison’s stake now is worth $13 billion.
That enormous $12 billion net gain came out of the hides of the shorts. Some would say it serves them right.
The GameStop flap opens the way to impose reforms that can punish liars and calm a volatile whip-end of the market.
The SEC should impose stricter, reduced margin debt limits on short sales. It should mandate that short sellers disclose their short bet when it exceeds 5% of a company’s shares; just as investors must do when they acquire a 5% stake. And limit short interest in a company to no more than half of its outstanding shares; for GameStop, almost 140% of its shares were sold short.
That should be impossible and illegal to do.
Or better yet, do away with short selling entirely. You have far better chances of getting rich by betting on success. Like I said, capitalism is optimism monetized.
Dennis Kneale is a writer and media strategist in New York, after six years as anchor at CNBC and Fox Business Network and 25 years at The Wall Street Journal and Forbes. He helped write "The Trump Century: How Our President Changed the Course of History," by Lou Dobbs, published in September 2020 by HarperCollins. Read Dennis Kneale's reports — More Here.
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