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War On Shortsellers: WaMu, Wachovia CEOs Need Another Scapegoat

From Yahoo TechTicker: The SEC is under pressure to extend its "temporary" ban on short selling, which is set to expire tomorrow. By design, the ban has reduced the level of short interest -- but has it really helped?

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Most obviously, the ban failed miserably to stem the declines of Washington Mutual and Wachovia (among others). The dismal performance of those stocks amid the ban showed the folly of CEOs blaming loses on short sellers, notes Whitney Tilson, founder and managing partner of T2 Partners and Tilson Mutual Funds.

Tilson, who publicly detailed the risks of owning Washington Mutual, Lehman Brothers and others last spring, said the ban wrongly seeks to punishes people who correctly warned about the dangers of many of the most toxic financial companies.

In addition, the ban has unleashed the law of unintended consequences, such as:

  • Removing short-covering (i.e., buying of stock) that normally occurs amid big declines. In other words, Monday's decline may have been worse because of the ban.
  • Driving up the price of put options, which traders are now using to express bearish bets (and in turn prompting market makers -- who are exempt from the ban -- to increase their short positions.)
  • Hurting the convertible bond market, a $400 billion source of liquidity for companies that has effectively dried up because of the ban, as the WSJ details.
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For the record, Tilson, who does believe reinstating the uptick rule would be better than the short-selling ban, which inexplicably encompasses decidedly non-financial names like IBM and CVS.

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