Today, in what seems like an endless string of 3-2 votes, the SEC moved to restrict the ability of investors to short stocks, claiming that such restrictions would restore stability and protect our financial system. The truth couldn’t be more different. Short sellers have long been the first, and often only, voice raising questions about corporate fraud and mismanagement. For instance, shorts exposed the fraud at Enron, WorldCom and other companies while the SEC largely slept.
Bush’s SEC, lead by former Congressman Chris Cox banned the shorting of various financial industry stocks during the crisis. The SEC then, as now, would have us believe that Bear, Lehman, AIG, Fannie, Freddie and others were not the victims of their own mismanagement, but rather victims of bear raids by short sellers. In another instance of Obama and his appointees reading from the Bush playbook, SEC Chair Mary Shapiro finds ever creative ways to expand Cox’s misguided policies.
Short sellers only profit if they end up being correct. Sadly Washington instead believes in punishing market mechanisms that work and throwing increasingly more money at failed agencies, like the SEC. Rather than attacking short sellers we should applaud them for doing the SEC’s job. But then if we had more short selling, providing greater incentives for investors to root out fraud, we might start to question why we even have the SEC.