Marketplace Video Explainers
Here are some pretty useful and quick explainers, provided by the Senior Editor of NPR’s Marketplace. (HT2MR) I only watched two of them, namely the one on short selling and the one on credit default swaps.
The CDS one seemed pretty good to me. However, I should warn you that I think the guy didn’t do a good job sealing the deal in his presentation on naked short selling. He makes it seem as if the problem is that the naked short seller won’t be able to buy 100 promised shares and deliver them, even if prices have gone down (!). But that’s no different from the original case he discussed; in both scenarios, he owes 100 shares to somebody, and he has to go into the market and buy them.
I think the thing about naked shorting that bothers people is that you can sell an unlimited number of shares. E.g. let’s say there are 100,000 shares total of a company. With naked shorting, an aggressive speculator could unload, say, 200,000 “shares” and drive the price way down. So then people think they own (collectively) 300,000 shares, even though only 100,000 actually exist. So it’s a weird situation.
In fact, even as I type this out, I’m realizing that in principle there’s nothing that weird going on here. Even with conventional shorting, you could get this outcome; you just keep borrowing and selling the same shares over and over from and to the same owner. (You might not realize you are doing this, of course, but that’s how it could play out when all is said and done.) But I guess the idea is that at least with conventional shorting, there is some friction in the process to prevent absurdities.
Anyway, I don’t think any of this would be a problem so long as contracts were enforced. If you were a naked shorter and got caught with your pants down, you’d go out of business. But people tell me that that’s not how it plays out in the real world. I have heard horror stories of, say, “owners” trying to vote on corporation matters when there are more votes being cast than outstanding shares. I have heard that CEOs of companies being targeted by short sellers will buy their own stock, only to have the brokerages tell them (even weeks after the “purchase”) they can’t locate the actual shares and the CEOs have the option of breaking the trade if they want.
