Tuesday, September 29th, 2009

The Great Goldman Sachs Senate-Lobbying Fail

G SAdorable! Goldman Sachs is, as always, down in D.C., lobbying Congress. Except now, unlike the quiet, dignified reception to which the GS folks are accustomed, D.C. staffers are so pissed by the ridiculous lobbying that they're leaking the lobbying materials. And these materials are actually pretty atrocious. What GS is lobbying for, actually, is for no restrictions against naked short selling, in the guise of lobbying for no restrictions on short selling. (Here, we break for a short idiot's guide. First, there is a thing called the stock market. You know that part. Now, normal stock market activity is "long," as in, holding a stock and selling it, presumably, when it gains in value. "Short selling" is when you "borrow" someone else's shares, sell them, and then buy them at a later, cheaper price-returning the same number of shares, and pocketing the price difference yourself. "Naked short selling" is when you don't do the actual borrowing. The lobbying effort is against the idea of a permanent regulation mandating "pre-borrow," which means you actually have to have an agreement from someone to borrow those shares. Got it, fellow dunces?) Now along comes Goldman Sachs, creeping through the corridors, peddling the free, unregulated market.

And here is what they want. Mr. Matt Taibbi?

Goldman here is lobbying against restrictions to naked short-selling, and in arguing that point they include a graph showing the levels of "short interest" during two time periods, September-October 2008 (when there was a temporary ban on all short-selling, naked or otherwise) and January-March 2009.

Goldman's point seems to be that short-selling declined during a period when the market fell sharply, and short-selling went up when the market rallied. I guess on some planet, perhaps not on earth but some other spherical space-boulder, this is supposed to indicate that short-selling is good for the market overall.

Mmm hmm.


Yes! This one thing happened during the time that another thing happened! Things were getting better while people were short-selling! Although also this graph fails to take into account that cookie sales were also up. And the the size of the fish catch in Indonesia.

Here are two similar views, both from the WSJ, about the time span of the temporary regulations against shorting, during that September-October period:

1. "The prohibitions didn't stop stocks from tumbling and some say hampered trading."

2. "Short-selling came under political attack after the market selloff last year, with the practice banned for financial stocks during 14 trading days. A number of studies showed the ban had a limited effect on the market."

Oh, so actually, the period during which shorting was banned maybe caused the market to keep tumbling, or also maybe had little or no effect on the market. Which is to say: again, some things were happening at the same time and may be related or not at all related!

He's right that what's outrageous about the Goldman lobbying is their conflation of shorting and naked shorting. How crazy is it? In recent days, nearly half of market activity is shorting. So you can make a nice graph that talks about the huge market success-at a time when people are seeing monster stock gains-being all because there is so much shorting going on and… therefore naked shorting must be good as well.

A little more Matt:

[T]he only way to draw conclusions about whether or not naked short-selling is a problem is to look at individual cases of individual declines in the share prices of specific companies, and then checking to see if there have been large numbers of failed trades in those stocks.

Goldman is not only not doing that here, they're taking two statistics with no relation to naked short-selling (short interest and stock prices), cherry-picked during two seemingly random time-periods, and then slapping them underneath a cover sheet full of platitudes like "The US equities market is increasingly efficient and broadly regarded as the best in the world." It's not so much that this is a bad argument, it's just… not really an argument at all.

21 Comments / Post A Comment

Abe Sauer (#148)

Well, if the fact that the market is up means the economy is improving and the recession is over (as all media are reporting as fact) then GS' reasoning seems to be sound… right? RIGHT???

Abe Sauer (#148)

Also, re: Mat's point about slapping unrelated stats together under platitudes: There has been a real uptick of this recently.. or maybe i just ee it more. On MBC news last night (williams) there was a report on teen driver safety and they outright said that "teens who have their own car are more likely to get into accidents and thus less safe drivers." Now, there is a huge missing piece of that stat but nobody seems to care.

brent_cox (#40)

I thought that all Goldman had to do to lobby was to pick up the secret Government Sachs dedicated phone line and dial? I mean, at least they have some interns ginning up a Power Point presentation to make it look legit.

Baboleen (#1,430)

I am somewhat stupid. Short sales are more stupid. Naked short sales are most stupid.

riotnrrd (#840)

There's nothing stupid or even morally gray about short selling. You are effectively making a bet that the price of something will go down, that's all.

Think of it like this: your neighbor wants a TV and is willing to pay you $1000 when you deliver it to him next week. You have a hunch there will be a TV sale this weekend, so you take his offer. If there is a sale, you buy the discounted TV for $900, deliver it on Monday and pocket the difference. If there isn't a sale, you buy the non-discounted TV for $1100 and eat the difference.

As others have mentioned, naked shorting is already illegal, but the regulations are poorly enforced.

Spiers (#12)

I think Zero Hedge might have fed Mr. Taibbi something he didn't quite understand–and as much as I like him stylistically, it wouldn't be the first time. (From this: If that sounds like something you read in Rolling Stone last July, that’s because Zero Hedge served as a key source for the infamous article on Goldman Sachs written by gonzo journalist Matt Taibbi. “I didn’t understand a word he was saying,” says Taibbi, recalling his first conversations with Ivandjiiski last spring. “I went through the tape-recorded interview trying to decipher it minute by minute.”)

Anyway, all naked shorting is illegal already. It's as restricted as it can be.

And shorting is an necessary part of the market, for basic hedging and for rooting out bad companies who *should* have lower stock prices. In fact, if anyone had listened to David Einhorn (short seller!) screaming his head off about Lehman, everyone would have seen it coming.

Rod T (#33)

I have a date with a hedge-funder coming up and would love a good 101 on stuff like this. Any recommendations?

Spiers (#12)

Michael Lewis and David Einhorn did a joint op-ed a while back on why the SEC is broken. It's one of the best things I've read all year, and sort of explains why enforcement just doesn't work right now. It's a two-parter, and you can read the first part here.

Rod T (#33)

Thank you!
Printed for subway reading.

Abe Sauer (#148)

But isn't he saying Senate staffers gave him the info on GS pursuing a rollback of the restrictions on naked short selling? The zero hedge issue is separate fro this, no?

Spiers (#12)

The GS naked shorting theory is a ZH one.

As far as I can tell, GS's memo says that the additional proposed measures to ID naked shorting won't be effective. This is quite a bit different than suggesting that naked shorting should be legal. But I don't think the Senate staffer got the distinction, either.

But then Matt conflates that with short selling generally. And he seems to think it's odd that there's a positive correlation between heavier shorting and market rallies. And oftentimes there is. On THIS ACTUAL PLANET.

Abe Sauer (#148)

But ultimately the interpretation of the GS memo is giving GS the benefit of the doubt, and assumes that ZH is behind Matt and the Senate Aids' misinterpretation, right? And, if naked short selling were already outright and unquestionably "illegal," why would GS feel the need to weigh in on any additional proposed measures?

Spiers (#12)

re: your second comment –

Because they affect regular shorting, which is problematic.

And naked shorting IS unquestionably illegal.

Abe Sauer (#148)

Yes. but again, isn't the request very murky in intent and may be interpreted as looking to convince senators that further bans on naked short selling are bad? Which, as I said, is requiring a benefit of the doubt? And, again, if it is THAT illegal the why, specifically, even bring it up. For a GS lobby effort that memo looks SHOCKINGLY guilty of being absurdly simplified, no?

Bored (#1,111)

"For a GS lobby effort that memo looks SHOCKINGLY guilty of being absurdly simplified, no?"

Consider the intended audience …

Abe Sauer (#148)

Well, indeed, yes. It's not mensa… But AGAIN, while the Senate's stupidity is legend, this GS defense seems to hinge on the assumption that GS means well, right?

Bored (#1,111)

Actually, re-reading that document, the thing that strikes me the most is not the comments on short selling. Rather it's their position that brokers should pay more for co-location (putting computers actually in the exchange to execute algorithmic trading more efficiently) and that there should be restrictions on flash orders.

Both these activities are potentially much more destabilising than short selling and restrictions on them stand to hit GS in the pocket.

Agreed that it's a simplistic piece but can't quite see the outrage

Bored (#1,111)

Last point is spot on. There are plenty of ways to express a negative view about a company (buy CDS protection, short their bonds, buy puts on their stock etc) without the need to short their stock (naked or otherwise).

If you take away the ability to short stock all you really achieve is to limit the ability to hedge accurately (specially options). People will still find a way to put the boot into the target company.

Rod T (#33)

Similarly, the amount of daylight was shorter each day in the September-October period and longer each day during January-February. It's quite obvious that restricting the market will plunge us into eternal darkness.

Ron Obvious (#351)

This whole "cause and effect" thing is so over! I think the Bush Administration proved that to the eternal satisfaction of 30% of the American populace.

chconkl (#1,758)

WAIT. Wasn't Lloyd Blankfein crying publicly about shortselling a year ago when GS was getting pummelled in the market? What f'ing gall.

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