Short Sellers

Reader comment on: The Wall Street Journal on For-Profit Colleges

Submitted by J.Johnson (United States), Aug 27, 2010 10:02

Future of Capitalism apparently has a real problem with short sellers of for profit educational stocks, or perhaps even short sellers in general. I wonder, has anyone at Future of Capitalism done much short selling lately ? I've been trading stocks since 1971, including numerous instances of short selling in the past, and I can say unequivocally that the brokerage industry has made short selling extremely difficult, no matter how deserving the object of the sale might be. There are very few 'sale side' analysts compared to 'buy side' analysts at the brokerages because the brokerages don't like to irritate potential (or existing) business customers for the various services they offer. The customary wisdom emparted to retail customers who might consider short sales is that the potential losses are theoretically unlimited and therefore to be avoided. If a customer nevertheless insists on selling short, he is often informed that the brokerage cannot or will not provide the stock to be sold. And, if somehow the stock is provided, the brokerage pockets the sales proceeds and collects interest on it while it is held as margin instead of crediting the interest to the customer. Of course, if a dividend payment comes due on the short-sold stock, the brokerage extracts that money from the customer's account. And, if all else fails, the brokerage will find the stock for the sale and then, after a short time, demand it be repurchased and returned, irrespective of the effect of this on the customer. Beyond the obstacles thrown up by the brokerages, the companies themselves who are short sale candidates throw up a barrage of obstacles, including threatening the brokerage and bearish analyst(s), such as happened with the analyst at Merrill Lynch who turned bearish on Enron and was quickly fired after pressure from Enron. The government has also played a role by prohibiting short sales in certain stocks from time to time, an action which would seem nothing short of outrageous to a good capitalist and was the final straw for me personally. For the most part, the only entities remaining with the clout to transact major short sales are the big hedge funds, so it should be no surprise that they do whatever they can to overcome the deck that has been stacked against short selling.

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