Bloomberg News columnist Susan Antilla has a column that on the surface should appeal to free-market types. "There are lots of people watching out to be sure the financial markets are running right. They just aren't the regulators employed by the government," she writes. "It takes a village -- of private investigators, judges, short sellers, bloggers and court-ordered examiners -- to get any financial regulating done these days. Here's an idea for making things right for investors: How about shutting down the dysfunctional SEC and giving taxpayers a regulatory voucher in a new privatized world of financial policing? They can use the money to hire from the expanding list of private investigators before they pick a mutual fund, sign on with a hedge fund, or decide on the merits of their 401(k) plan. And there no longer would be any pretense that their tax dollars were paying for regulation that actually protected them."
We're all for bloggers, and there's no doubt that in some instances, such as Enron, short-sellers helped find a problem. But Ms. Antilla's headline claim that short-sellers "do the work of cops" gives at least some of the short-sellers way too much credit. Shorting, remember, is borrowing a stock in a bet that its price will go down. But some traders engage in "naked shorting," or short-selling shares that they haven't borrowed. That shows up in lists of "failures to deliver," where the short-sellers can't come up with the shares they were supposed to have borrow. Look at the Nasdaq list of "threshhold securities," those for which for five consecutive settlement days "there are aggregate fails to deliver at a registered clearing agency of 10,000 shares or more per security" and "The level of fails is equal to at least one-half of one percent of the issuer's total shares outstanding." It's a long list.
In businesses in which customer confidence is crucial, having short-sellers out there saying bad things about a company can become self-fulfilling, regardless of whether there is underlying truth to the criticisms. There are descriptive words for people who make money by selling things they don't own or possess, but "cops" isn't the first that comes to mind.