Eat My Shorts!

The real problem isn't theft. None of us are as honest, as truthful, as good, as kind as we know we should be. No, the real problem comes when we fail to recognize theft as theft, lies as lies, meanness as such. The man who steals and knows he steals may reform himself and become an honest man; this man at least knows the truth about himself. But the man who rationalizes his theft as free-market “liberty” can never know himself, and hence can never reform.

These observations come to mind when considering the dispute over a particular market operation called “short-selling.” Many commentators, who don't seem particularly bothered by the trillion dollars taken from the taxpayers to bail out some of our sleaziest operators, currently have their knickers in a knot because the government has temporarily outlawed short-selling. This seems like an obscure issue, and it is likely that most people who do not “play” the market do not know what this means. Some explanations are in order.

There are two kinds of “short selling”: “naked” shorts, and covered shorts. In either case, one sells a shares of stock in a company not to the highest bidder, but to the lowest, in an effort to create a panic in that stock and drive the price down. Now, why would somebody sell their stock at a deliberately lower price? This makes no sense. Here's the secret: when they sell it, they don't actually own any of the stock. After driving the price down, the short-seller hopes to buy it back at the lower price and deliver it to the people who bought it from him at a higher price.

How can you sell what you do not own? To do so is a fraud, and has actually been outlawed, even though the laxity of regulation means that it happens all the time. This is “naked” shorting. But the other kind of shorting, covered shorts, means that the short-seller borrows the stock he sells and returns it to the owner at a later date. But who would lend anybody their stock for the purpose of driving down its value? The answer is, “nobody.” The sellers do not borrow it from the owners (who would never lend their assets for such a purpose) they borrow them from the brokers who are supposed to be looking after their clients' interests, but don't. The brokers collect a few from the shorters to destroy the value of their clients' stock, which they are supposed to be holding in trust.

When most of us buy stocks, we don't actually take them home with us. We leave them in the care of the broker so that we can more quickly sell them, if needs be. But we do trust that the broker is not going to misuse our property and rent it out to others to destroy its value. This is a violation of fiduciary trust, and should be actionable under the law, or at least under any sensible notion of law.
But the law, alas, is not sensible. It is quite legal for the broker to give away your property without your permission. If you borrow a cup of sugar from your neighbor, and return half a cup, you have stolen from your neighbor. But at least in this case, everybody knows what happens. If you break into your neighbor's house, steal a cup of sugar, and then leave half-a-cup on the front porch three days later, the whole thing is odd, impersonal and mysterious. But it is still stealing. And if you bribe the policeman on the beat to tell you when the owner is away from his home so that you may safely break-into his home, we would cite this as an instance of corruption. But when it is legal for you to break in and “borrow” the sugar, and legal for the cop to take a bribe, then we say the system is rotten to the core.

If you “borrow” a stock worth, say, $100, and return one worth $75, you have stolen from the owner and ought to make restitution. If you do it without his permission, you ought to go to jail. And the broker who rents out what he does not own, and rents it out for the purpose of destroying its value, ought to lose his license. It is not really necessary to ban short selling. It is only necessary to ban theft and fraud. If you can convince an owner to lend you his stock and destroy its value, then have at it. Otherwise, do not take what belongs to another, even for three days.

It is not that people are not permitted to bet that the market will go down. That can be done honestly with options. But shorting is more than making a bet, it is working to cause the disaster from which you plan to profit. When someone short-sells, there are actually two owners to each share of stock. One the real owner, and the second the owner who bought the share. Since the rules allow three days to actually deliver the shares after sale, for those three days there are twice the number of shares in the market than actually exist. And increased supply means lower price. It is one thing to bet that some particular horse will lose the race; it is quite another to go down on the track and break his leg to ensure that outcome.

Short-selling is kind of a metaphor for all that is wrong. People do all sorts of shady things to make money. This is hardly news. But when the thief feels that his rights have been violated because he is no longer free to ply his trade, when the short-seller feels that the freedom of the market is violated when he is no longer free to “borrow” other people's property, then you know that some kind of craziness is going on, that we no longer understand such terms as “freedom” and “property,” “duty” and “honesty.” When we lose the meaning of these terms, what happens in the market is hardly surprising. Indeed, it is inevitable.

I pick short-selling as a mere symbol of a greater malaise. I pick it because the people who caused this problem think that theft is perfectly normal, merely the free expression of the market. But what is really being shorted today is not any particular stock, but the entire United States of America. And with any short-sell attack, there will be a few winners and a lot of losers. In the current situation, those who profited from destroying the markets will also profit from the rescue of the markets.

And guess who the losers are, guess who will eat all of those shorts?